Enron – blueprint for corruption

Introduction

Enron Logo “He was a supporter of Ann Richards in my run in 1994, and she did name him the head of the Governor’s Business Council, and I decided to leave him in place just for the sake of continuity. And that’s when I first got to know Ken and worked with Ken, and he supported my candidacy.” This is how President George Bush explained away his relationship to Enron CEO, Kenneth Lay. Enron, the single largest contributor to the George Bush campaign, donated over $550,000 to further Bush’s political goals.

Enron Business History

Enron is an energy/utilities company last based in Houston, Texas. It was originally founded in 1930 as Northern Natural Gas Company, a consortium of Northern American Power and Light Company, Lone Star Gas Company, and United Lights and Railways Corporation and was based in Omaha, Nebraska. In 1979, Northern Natural Gas was restructured under a new holding company – InterNorth, Inc. In 1985, InterNorth acquired competitor Houston Natural Gas Company, who was at that time, run by future Enron CEO Kenneth Lay. Strangely, even though Houston Natural Gas was the company being acquired, Lay himself orchestrated the acquisition and even stranger, after the acquisition, the company was renamed Enron and its headquarters moved to Houston, Texas. As a curious sidenote, the company was originally to be named Enteron, a combination of the words “enter” and “on”, until company owners discovered that the term “enteron” meant “intestine”.

At its peak, Enron employed over 21,000 people and was involved with the transmission and distribution of electricity and gas throughout the United States. Enron also controlled operations that dealt with the construction and operation of power plants, pipelines, and other infrastructure. Other products that Enron produced or distributed included broadband services, forest products, freight services, metals, petrochemicals, plastics, wind energy, fertilizer, wastewater treatment, coal, and advertising risk management services.

In 1998 Enron realized one of its first major failures when they attempted to enter the water sector, creating Azurix Corporation. After Azurix proved to be a colossal money loser, Enron broke the company up in 2001 and sold the assets of the company.

Enron was considered an extremely inventive company and was named “America’s Most Innovative Company” by Forbes magazine for six consecutive years (1996 through 2001). Their knack for creating highly exotic “fuzzy” financial derivatives such as communications and bandwidth commodities and weather derivatives (bets against certain weather conditions) were world renowned. Another prominent characteristic of Enron was the lavishness of its corporate offices.

Enron Innovations

Enron also acquired a reputation for its imaginative political maneuvers through its active involvement in domestic and worldwide politics. Rumors persisted of Enron’s attempts to exert pressure on political figures, including the Bush and Clinton administration, by providing huge political contributions to their campaign efforts. Bribery attempts were also rumored to have occurred in attempts to secure contracts in Central and South America, Africa, and the Philippines. As early as 1987, Enron was rumored to have consorted with rulers of Saudi Arabia and Kuwait, gaining insider knowledge of the workings of OPEC, which Enron used to profit with insider like trading of oil commodities. Enron was the corporate equivalent of a superpower and was involved in almost a quarter of all energy deals made throughout the world. Enough hard evidence of dubious maneuvers was discovered to prompt the Justice Department to pursue a criminal investigation of Enron in January 2002.

One of the most promising innovations was the creation of EnronOnline in November 1999. Just years after the Internet became a household name and years before online business activities took hold, Enron created the EnronOnline business to allow buyers and sellers to trade commodity products online.

Early Corporate Misdeeds

Enron’s flair for getting in trouble was demonstrated as early as 1987. Two Enron auditors, David Woytek and John Beard, discovered bank records showing millions of dollars had been moved from Enron’s corporate accounts to the personal accounts of Louis Borget and Thomas Mastroeni. As mentioned above, both Borget and Mastroeni dealt intimately with the rulers of Saudi Arabia and Kuwait and learnt the innermost workings of OPEC. The insider knowledge gained from these excursions was used to pursue lucrative oil dealings – much of the profit transferred to their own private accounts. Enron CEO Kenneth Lay was informed of the discovery and instructed the auditors to go ahead and continue the investigation but to only make sure the money was put back like it was – no further action was to be taken.

The continuing investigation revealed bank statements that showed cash flows that were not recorded in the company’s corporate records. They also discovered copies of altered statements that Borget and Mastroeni had filed through Enron. When even more damning evidence was presented a second time to Enron executives, including CEO Kenneth Lay, Enron President Mick Seidl, and Chief Financial Officer Keith Kern, the auditors were told to drop the investigation against Borget and Mastroeni immediately. As it stood, Borget and Mastroeni were considered jewels of the company and had brought tens of millions of dollars to Enron through their dealings. The lesson learned demonstrated early on that Enron’s focus on annual profits far outweighed its resolve to maintain proper legal and moral practices.

Irregular Account Practices, Dirty Dealings, and Leading Accounting Firm, Arthur Anderson
The diversity of dealings that Enron was involved in, along with the shuttering of several cash flow jewels, resulted in a huge accumulation of debt. As with modern consumers, massive debt combined with limited cash flow is a recipe for disaster. Rather than succumb to the burden that they had brought upon themselves, Enron chose to create innovative but fraudulent accounting practices to conceal their errors and in turn, increase earnings and profits for Enron executives. In order to maintain the apparent worth of the company, they also chose to conceal the massive debt from shareholders through partnerships with other companies, complex off-shore holdings, and the implementation of illegal loans.

All of these dealings were specially created agendas with the sole purpose of deceiving the financial markets by inflating profits and hiding true debt. By conducting business through offshore entities and limited partnerships that Enron controlled, the Enron books were manipulated to ensure that losses were hidden from the Enron shareholders. The offshore entities provided Enron with a mechanism to freely move currency under full anonymity. Enron executives fully knew that these offshore entities were hiding losses that the general public was unaware of.

Enron Executives Begin to Sell

Enron employee leaving the building carrying boxes Only Enron insiders knew about the offshore accounts that had been created to hide the massive losses that Enron was incurring. While Enron used public relational comments to drive the stock price higher, insiders traded the stock away, while fully knowing that Enron’s business model was on the verge of collapse.

In August 2000, Enron’s stock hit 90.00 a share and while telling the public that stock prices would soon climb to over $140.00 a share, Enron insiders began dumping their shares. One year later, as word began to leak that something was up at Enron and rumors persisted that Enron was seeking additional financing to “shore up” investor confidence, stock prices had sunk to $15.00 a share. Kenneth Lay, who had recently sold over 90 million dollars worth of stock, continued making frequent appearances and telling the public that the business was fine and a rebound in the stock’s price was inevitable. A month later, in November 2001, the public was informed of the offshore accounts deception and the losses that Enron was actually taking – the stock sank below $1.00. Shortly before the announcement and admission of Enron’s financial troubles, Key Lay’s wife, Linda Lay, sold a half a million shares totaling 1.2 million dollars.

One month later, in December 2001, Enron filed for Chapter 11 bankruptcy. The public was outraged when they learnt that just prior to the filing, Enron had paid over $55 million in bonuses to its executives. It was to be the largest bankruptcy filing in United States history.

How mammoth accounting firm Arthur Anderson was involved and to what degree is somewhat up in the air. What is known is that Arthur Anderson was responsible for the auditing of Enron. During the subsequent Enron crisis, Arthur Anderson chose to cover their tracks. They were eventually found guilty of obstruction of justice after finding that they had begun rapidly shredding critical documents related to the Enron scandal. Additionally, the subsequent trial exposed cases of accounting fraud that had occurred with WorldCom.

The “innovative’” Enron Corporation’s dirty dealings went far beyond its ripping off of shareholders and employees. Accusations of dirty dealings in the Dabhol Power Plant in India flew about during 2001. It was believed that Vice President Dick Cheney had stepped in to help Enron when the Indian government began exerting pressure on Enron to repay a massive debt that came about during Enron’s investment and construction involvement with the Dabhol Power Plant. In addition, a special National Security Council (NSC) working group was created specifically to service discussions between Enron CEO Ken Lay and India’s national security advisor. Robert Zoellick, a former Enron paid advisor, acting as a US Trade Representative, was sent to India on behalf of the NSC working group in September 2001. Not surprisingly, these questionable political assignments and dealings only scratched the surface of what Enron had previously been accused of doing in India.

Early on in the project, local Indian villagers had protested the construction of the Dabhol Power Plant citing an intrusion on their livelihood and environment. To counter, Enron paid “abusive state forces for the security they provided the company”. What resulted was a strategy of harassment meant to dissuade the protestors from demonstrating discontent. According to Human Rights Watch, “Dabhol Power Corporation benefited directly from an official policy of suppressing dissent through misuse of the law, harassment of anti-Enron protest leaders and prominent environmental activists, and police practices ranging from arbitrary to brutal. The company did not speak out about human rights violations and, when questioned about them, chose to dismiss them altogether.”

Profits by Corporate Heads

Details of how deep the corruption in Enron had taken root surprised most everyone. For example, the public learned that Enron executives formed a conglomerate of entities called RADR. These entities were secretly seeded with money from Enron accounts and used to buy electricity generating windmills from Enron at a very low cost. In this initial “sale”, which in effect had been Enron selling the windmills back to itself, both companies had ended up even. In the next step, RADR then sold the windmills back to Enron generating a huge profit, which in turn, went directly to Enron officials and their families.

The Collapse Begins

In December 2001, Enron began laying off employees. Over 4,000 employees were to be let go. To compound this event, these unemployed personnel began to realize that their entire life savings, mostly invested in Enron stock, was worthless. A lawsuit was subsequently filed on behalf of Enron employees, against the 29 directors and executives, accusing them of insider trading and misleading the public.

Jeffrey Skilling being sworn in As a result, in January 2002, Kenneth Lay resigned as CEO of Enron just as the Justice Department announced it had begun a criminal investigation of Enron. During the same month, John Clifford Baxter committed suicide in his car. The following month, Ken Lay resigned from the Board of Directors – all of Lay’s ties with the company were now severed.

On April 9, 2004, At 4:00 a.m., New York police officers responding to a complaint that an emotionally disturbed person was “pulling on people’s clothes and shouting aloud with intent to annoy”, found themselves face to face with none other than the former Enron CEO, Jeffery Skilling. Skilling was standing on the corner of Park Avenue and East 73rd Street: highly intoxicated, uncooperative, and making accusations at passers-by. “You’re an FBI agent and you’re following me,” he was reported as shrieking. He ran up to several patrons in a Manhattan bar and “pulled open” their clothes. Police took Skilling to the New York Presbyterian Hospital for observation.

Turn About is Fair Play

Enron began attempts to restructure after the Chapter 11 filing, in hopes of compensating creditors. During 2002, a merger with arch-rival Dynegy Corp was planned. Dynegy offered a rescue plan for Enron which would include Dynegy purchasing $10 million in Enron stock and agreeing to pay back more than $13 billion in Enron debt. Only two weeks later Dynegy backed out of the deal after Standard and Poor downgraded Enron’s debt status to “junk”.

In return, Enron filed a $10 billion dollar lawsuit, which most considered frivolous, in a last-ditch effort to wring any cash they could out of Dynegy. Dynegy filed a counter suit and began attempts to hostilely take over Northern Natural Gas Pipeline, one of Enron’s first companies. On January 4, 2002, Enron and Dynegy settled their disagreement. Enron lost the legal battle and turned over ownership of Northern Natural Gas Pipleline to Dynegy within the month.

Enron Executives Begin Ratting Each Other Out

Puala Rieker, former Managing Director of Investor Relations, plead guilty in Federal Court to insider trading and agreed to provide testimony against other Enron executives. As part of her punishment, Rieker agreed to never again serve as an officer or director of a public company.

Former CFO Andrew Fastow, the mastermind behind the offshore strategies, was indicted on 78 counts including fraud, money laundering, and conspiracy. He and his wife plead guilty on January 14, 2004. Andrew Fastow will serve a 10 year prison sentence while his wife will serve a 5 year sentence. In return, both will provide testimony against other Enron officers.

Timothy Belden and Jeffery Richter both plead guilty to wire fraud and are aiding prosecutors.

On December 28, 2005, Chief Accounting Officer Richard Causey, plead guilty to securities fraud. He was sentenced to 7 years in prison and fined $1.25 million. Causey will have his sentence reduced to 5 years when he provides testimony against CEO Ken Lay and former CEO Jeff Skilling.

Enron Gets the Last Laugh

In 1999, Enron paid over $100 million to gain the naming rights for the Houston Astros elaborate new ballpark. When the Enron debacle reached full steam, the Atros renamed Enron Field in Houston Texas to Astros Field (and later Minute Made Park) in order to avoid negative publicity. The Astros were forced to pay Enron $5 million dollars to get out of the original deal.

Salon.com summarized the corporate situation in America the best: “Enron was the peerless darling of the all those who believed that free markets were the acme of existence. Its wreckage is as good a place as any to sit down and take stock of the deregulated, privatized state into which we’ve been so rudely hustled over the last decade. And here is what it looks like: Top management walking off with hundreds of millions of dollars while employees lose their jobs, investors lose millions and customers get to look forward to more rolling blackouts. Profiteering. Bought politicians. Stock market bubbles that eventually burst. Workers thrown out on the streets. Left to its own devices, this is what the free market does.”

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