Enron Flashcards
Characters
Skilling’s Daughter
Lawyer
Reporters
Senator
Congresswoman
Employees/ Traders
The Board
Raptors
Kenneth Lay
a convivial man in his 60s
Ken Lay, one of the most powerful businessmen in Texas, served as ENRON Chairman and CEO from 1986 until his resignation in 2002. He was friends with George W. Bush and Dick Cheney. Bush affectionately referred to him as “Kenny Boy.”
Between 1989 and 2001, he reportedly unloaded more than $300 million of his ENRON stock – all this while encouraging his employees to continue buying the stock which was rapidly decreasing in value.
Lay was charged with and found guilty on six counts of conspiracy and fraud. In another separate trial, he was also found guilty of four counts of fraud and false statements. It was expected that he would be given between 20 to 30 years in prison. Before he was sentenced, Lay died of a heart attack in a remote community in Colorado on July 5, 2006, at the age of 64.
Jeffrey Skilling
a 40-something single accountant
Skilling began his career with ENRON in 1990 when Ken Lay offered him the position of chairman and chief executive officer of the ENRON Finance Corp. By 1997, he rose to the very top of ENRON by becoming its President and Chief Operating Officer, answering only to Ken Lay. His meteoric rise is attributed to his groundbreaking idea that ENRON did not actually have to produce energy, but rather they should focus on energy trading and finance. He also introduced “mark to market accounting” which enabled ENRON to immediately, upon signing any new contract, enter the expected profits into their books. Through this method of accounting, it appeared to all that ENRON was making huge continuous profits and the value of ENRON stocks soared. By February, 2001, Skilling was earning $132 million a year.
Skilling resigned from ENRON in August of 2001 for “personal reasons” and within a month sold off $60 million of his ENRON shares.
Skilling was charged in February, 2004, with 35 counts of fraud, insider trading and various over crimes. Two months later, he was arrested for public intoxication after harassing passersby thinking they were undercover FBI agents. In 2006, he was found guilty of numerous charges and sentenced to 24 years and four months in prison and fined $45 million dollars. His case has since been the subject of court appeals and in 2013 federal prosecutors announced a deal that cut 10 years off his sentence and makes him eligible for release in 2017.
Andy Fastow
Fastow was promoted in 1998 by Jeffrey Skilling to the position of Chief Financial Officer. It was Fastow who engineered the company’s practice of creating shadow companies to hide ENRON’s massive losses. This ensured that the books continued to show increased profits and made the ENRON stocks attractive to investors.
In 2002, he was charged with 78 counts ranging from fraud to money laundering. Two years later, he made a deal whereby he would plead guilty to two charges of wire and securities fraud in exchange for his testimony against other ENRON executives. Because he was so cooperative, he received a six-year prison sentence and was released in December, 2011. He now works at a law firm in Houston as a document review clerk.
Claudia Roe
Executive in charge of ENRON’s International Division
a high-powered and short skirt wearing executive in her 40s
While this character is invented by Playwright Lucy Prebble, she represents an amalgamation of several women who played a key role in the ENRON story, most significantly Rebecca Mark, head of ENRON’s International Division from 1991 until her resignation in 2000.
Ramsay & Hewitt
Law Firm
Arthur Andersen
Once one of the “Big Five” American accounting firms. Found guilty of criminal charges relating to ENRON’s financial auditing, including witness tampering and destruction of documents. As a result, the firm surrendered their licenses and right to practice.
Sheryl Sloman
Analyst, Citigroup - the third largest bank in the United States.
J.P. Morgan
The largest U.S. bank by assets and market capitalization.
Lehman Brothers
Global financial services firm. Before declaring bankruptcy in 2008, Lehman Brothers was the fourth largest investment bank in the USA.
Timeline and historical Context
1985
Houston Natural Gas merges with InterNorth to form ENRON - the world’s largest gas pipe-line company. The new company has a workforce of 200 people and revenues of $2 billion.
1986
In recognition of his work in the merger of the two companies, Ken Lay becomes Chairman and CEO of ENRON.
1989
Jeff Skilling joins ENRON.
1990
Andrew Fastow is hired by Skilling to serve as a manager of the ENRON Finance Corporation.
1994
ENRON’s efforts to lobby Congress succeed and the California electricity market is deregulated.
1996
Skilling is named President and Chief Operating Officer of ENRON.
The company now employs over 2000 people and revenues are estimated at $7 billion.
1998
Andrew Fastow is named ENRON’s Chief Financial Officer.
ENRON suffers huge loses with their water business project and their expansion into Brazil.
1999
The ENRON board approves Fastow’s plan to create shadow companies (special purpose entities) that will buy ENRON’s debts, thereby creating the illusion that the company is still making huge profits.
2000
There is an energy crisis in California. Electricity prices soar and ENRON enjoys enormous profits. The media and the public at large accuse ENRON of manipulating the system to profit from the shortages.
Dec.
2000
ENRON is now the 7th most valuable company in the U.S.
They employ 22 000 employees and share prices reach their highest level - $84.87.
Mar. 5 2001
Fortune magazine publishes Bethany McLean’s article “Is Enron overpriced?”
This investigative piece suggests that ENRON is a house of cards and ready to topple. Investor confidence in the company begins to wane. Fortune had named ENRON as “America’s Most Innovative Company” for six consecutive years - 1996 to 2001.
Aug. 14
2001
Jeffrey Skilling resigns from ENRON.
Ken Lay resumes his former position as CEO.
Oct. 2001
ENRON’s third-quarter financial report reveals a loss of $618 million.
Nov. 2001
ENRON’s revised five year financial statements reveal that instead of being profitable during that period, they had actually lost $586 million
Dec.
2001
ENRON files for bankruptcy protection.
2004 to
2006
ENRON executives are indicted for numerous charges. Andrew Fastow gets a mere six year sentence in return for testimony against other executives.
A total of 17 Enron executives plead guilty to charges against them.
Ken Lay is found guilty on the six charges. He dies of a heart attack before he is sentenced.
Jeffrey Skilling is fined $45 million and sentenced to 24 years and four months after he is found guilty for 19 of the 28 charges against him. He is currently appealing the conviction.
Background
from Theatre Calgary’s Audience Enrichment Guide by Dom Saliani and Shari Wattling
If there is one single event that began to reveal ENRON for what it really was, it would have to be the March 5, 2001 publication in Fortune Magazine of Bethany McLean’s article “Is ENRON overpriced?” (You can read the original article here.) This article was the first to question ENRON’s stock valuation and it raised serious concerns about why it was so difficult to get financial information about the company’s earnings and assets. Once the article appeared in print, it was only a matter of time before the whole house of cards came tumbling down – which it did nine months later in December, 2001.
With co-author and Fortune colleague, Peter Elkind, Bethany McLean wrote The Smartest Guys in the Room which told the full story of the ENRON scandal. In 2006, their book was developed into a feature documentary film which was nominated for an Academy Award.
Founding of Enron and its rise
Enron was founded in 1985 by Kenneth Lay in the merger of two natural-gas-transmission companies, Houston Natural Gas Corporation and InterNorth, Inc.; the merged company, HNG InterNorth, was renamed Enron in 1986. After the U.S. Congress adopted a series of laws to deregulate the sale of natural gas in the early 1990s, the company lost its exclusive right to operate its pipelines. With the help of Jeffrey Skilling, who was initially a consultant and later became the company’s chief operating officer, Enron transformed itself into a trader of energy derivative contracts, acting as an intermediary between natural-gas producers and their customers. The trades allowed the producers to mitigate the risk of energy-price fluctuations by fixing the selling price of their products through a contract negotiated by Enron for a fee. Under Skilling’s leadership, Enron soon dominated the market for natural-gas contracts, and the company started to generate huge profits on its trades.
Skilling also gradually changed the culture of the company to emphasize aggressive trading. He hired top candidates from MBA programs around the country and created an intensely competitive environment within the company, in which the focus was increasingly on closing as many cash-generating trades as possible in the shortest amount of time. One of his brightest recruits was Andrew Fastow, who quickly rose through the ranks to become Enron’s chief financial officer. Fastow oversaw the financing of the company through investments in increasingly complex instruments, while Skilling oversaw the building of its vast trading operation.
The bull market of the 1990s helped to fuel Enron’s ambitions and contributed to its rapid growth. There were deals to be made everywhere, and the company was ready to create a market for anything that anyone was willing to trade. It thus traded derivative contracts for a wide variety of commodities—including electricity, coal, paper, and steel—and even for the weather. An online trading division, Enron Online, was launched during the dot-com boom, and by 2001 it was executing online trades worth about $2.5 billion a day. Enron also invested in building a broadband telecommunications network to facilitate high-speed trading.
Downfall and bankruptcy
As the boom years came to an end and as Enron faced increased competition in the energy-trading business, the company’s profits shrank rapidly. Under pressure from shareholders, company executives began to rely on dubious accounting practices, including a technique known as “mark-to-market accounting,” to hide the troubles. Mark-to-market accounting allowed the company to write unrealized future gains from some trading contracts into current income statements, thus giving the illusion of higher current profits. Furthermore, the troubled operations of the company were transferred to so-called special purpose entities (SPEs), which are essentially limited partnerships created with outside parties. Although many companies distributed assets to SPEs, Enron abused the practice by using SPEs as dump sites for its troubled assets. Transferring those assets to SPEs meant that they were kept off Enron’s books, making its losses look less severe than they really were. Ironically, some of those SPEs were run by Fastow himself. Throughout these years, Arthur Andersen served not only as Enron’s auditor but also as a consultant for the company.
In February 2001 Skilling took over as Enron’s chief executive officer, while Lay stayed on as chairman. In August, however, Skilling abruptly resigned, and Lay resumed the CEO role. By this point Lay had received an anonymous memo from Sherron Watkins, an Enron vice president who had become worried about the Fastow partnerships and who warned of possible accounting scandals.
The severity of the situation began to become apparent in mid-2001 as a number of analysts began to dig into the details of Enron’s publicly released financial statements. In October Enron shocked investors when it announced that it was going to post a $638 million loss for the third quarter and take a $1.2 billion reduction in shareholder equity owing in part to Fastow’s partnerships. Shortly thereafter the Securities and Exchange Commission (SEC) began investigating the transactions between Enron and Fastow’s SPEs. Some officials at Arthur Andersen then began shredding documents related to Enron audits.
As the details of the accounting frauds emerged, Enron went into free fall. Fastow was fired, and the company’s stock price plummeted from a high of $90 per share in mid-2000 to less than $12 by the beginning of November 2001. That month Enron attempted to avoid disaster by agreeing to be acquired by Dynegy. However, weeks later Dynegy backed out of the deal. The news caused Enron’s stock to drop to under $1 per share, taking with it the value of Enron employees’ 401(k) pensions, which were mainly tied to the company stock. On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection.
Aftermath: lawsuits and legislation
Many Enron executives were indicted on a variety of charges and were later sentenced to prison. Notably, in 2006 both Skilling and Lay were convicted on various charges of conspiracy and fraud. Skilling was initially sentenced to more than 24 years but ultimately served only 12. Lay, who was facing more than 45 years in prison, died before he was sentenced. In addition, Fastow pleaded guilty in 2006 and was sentenced to six years in prison; he was released in 2011.
Arthur Andersen also came under intense scrutiny, and in March 2002 the U.S. Department of Justice indicted the firm for obstruction of justice. Clients wanting to assure investors that their financial statements could meet the highest accounting standards abandoned Andersen for its competitors. They were soon followed by Andersen employees and entire offices. In addition, thousands of employees were laid off. On June 15, 2002, Arthur Andersen was found guilty of shredding evidence and lost its license to engage in public accounting. Three years later, Andersen lawyers successfully persuaded the U.S. Supreme Court to unanimously overturn the obstruction of justice verdict on the basis of faulty jury instructions. But by then there was nothing left of the firm beyond 200 employees managing its lawsuits.
In addition, hundreds of civil suits were filed by shareholders against both Enron and Andersen. While a number of suits were successful, most investors did not recoup their money, and employees received only a fraction of their 401(k)s.
The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of financial reporting for publicly traded companies. The most important of those measures, the Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.
Brian Cruver, an Enron employee, wrote Anatomy of Greed: The Unshredded Truth from an Enron Insider (2002), which was adapted as the TV movie The Crooked E (2003). Enron: The Smartest Guys in the Room (2005) is a documentary film about Enron’s rise and fall.
