The Enron Scandal 2001
Enron, an entity now found as a "dba" or a “doing business as" company, working from a seedy mailbox in a dusty central-Texas town, was once, prior to 2001 a giant energy corporation based in "big-oil" Huston, Texas. The company was started by Kenneth Lay, who in 1985 by merged Huston Natural Gas with Inter North two pipeline companies. (See http://en.wikipedia.org/wiki/Enron, from which most of this data was gleaned). Soon afterward the US Congress deregulated natural gas prices (and it is likely given his political background and connections that Lay was aware of this). The result was a volatile pricing market, and an environment in which Enron found many opportunities for profitability. When variation in pricing and resulting hardship to natural-gas-users caused a public outcry in the halls of Congress for a to return to regulated pricing, Enron invested a good portion of its profits to effectively lobby Congress in opposition. Enron was successful. Its efforts (and those of others) kept the unfettered market in natural gas in place. By 1992 Enron had become the largest purveyor of natural gas in the US. The widely dispersed company needed a rapid means of controlling its varied operations and the new electronic technology and the internet met that need. From its innovative use of this system it developed an “on line trading model” which increased its effectiveness in managing its far-flung business interests. With successes in that field, it soon pursued a diversification strategy to adapt its innovative methods, from strictly natural gas, to other forms of energy and related businesses (wood pulp, paper, oil and gas pipelines, windmills, electricity plants) so by the late 1990s it had become one of the first “energy conglomerates” in the nation. And by 2000, it employed over 17, 000 and was one of the world’s leading electricity, natural gas, pulp and paper, pipeline and communications companies in the world. Its revenues were nearly 101 billion dollars in 2000.
Under the direction of founder, and CEO Kenneth Lay; company president, Jeffrey Skilling, (also chief operations officer); and Andrew Fastow (chief financial officer) the company’s stock price, and reputation grew. Fortune Magazine named Enron “America’s Most Innovative Company” for six consecutive years (See http://en.wikipedia.org/wiki/Enron). At its zenith, Enron owned or operated, 38 electric power plants world-wide, from gas fired plants in the UK, coal fired plants in Poland, and oil fired plants in the Phillipines; it operated wind farms in Iowa, Minnesota, California and Pennsylvania; generated electricity by means of hydroelectric power in Oregon, and by a “combined power” plant in Dabhol, India which burned naptha when the sources of natural gas were interrupted. It owned and operated natural gas and oil pipelines in South America, Florida, and many states in western USA. It owned and operated electric utilities in the USA, Brazil and Venezuela. It operated natural gas storage facilities in South Korea, Brazil, Jamaica, Puerto Rico and Venezuela. It operated timber and pulp paper companies in Quebec, Canada; and a paper company in New Jersey. It manufactured wind turbines, explored for gas and oil in the Gulf of Mexico, and manufactured pipe valves, thermostats, and electrical controls for appliances. By 2000, it ranked 18th on the Fortune 500 list. In 2000, Fortune 500 listed its revenues at $40 billion dollars, on assets claimed at $33 billion and its profits at nearly one billion ($893 million) and its earnings per share in 1998 was 2 dollars while in 1999 it had dropped to one dollars per share. In 2000, its stock hit a high of $90.00 a share. [For the same year, Fortune 500 ranked WalMart Corporation as number 2 (below General Motors). It listed revenues of nearly $167 billion, assets of $70 billion and profits of 5.4 billion, stockholder equity of $26 billion and market value of 213 billion. Its 1998 earnings per share was about 2 dollars (1.98) while its 1999 earnings were 1.2 dollars. Its ten year growth rate was 17.6%. See: http://money.cnn.com/magazines/fortune/fortune500_archive/snapshots/2000/1551.html] .
These figures, even with comparison to giant WalMart looked good in 2000, but less than a year later, as rumors of scandal hit, the company's stock value tumbled to $60.00 per share.
The “Enron Scandal” revealed that the company’s financial situation was fraudulent and was sustained by “institutionalized, systematic and creatively planned accounting fraud” initiated the subsequent government investigations and the company’s final collapse and failure culminating in a Chapter 11 bankruptcy protection filing. Enmeshed in the scandal was the Arthur Andersen Accounting firm-whose accountants were responsible for oversight. They"looked the other way" over Enron's cooked books. Arthur Andersen one of the five largest accounting businesses in the world was dissolved, when it lost its clients and as a result 85,000 jobs were lost, sending waves through the wider business world.
As a result of the dissolution of the Enron company “more than 20,000 Enron employees lost their jobs, pension funds and other compensation. A 2004 settlement provided $85 million out of a $2 billion dollar pension fund that was lost (or a little more than 4 cents on the dollar). Each employee received $3,100 dollars. In 2005 investors received a $4.2 billion dollar settlement. In 2008 a $7.2 billion dollar settlement was reached for a $40 billion dollar law-suit on behalf of shareholders ( See: http://en.wikipedia.org/wiki/Enron_scandal#Aftermath). That amount was distributed among the 1.5 million individual plaintiffs and U California (lead plaintiff). University of California’s law firm, Coughlin, Geller, Rudman and Robbins received $688 million dollars in fees---the highest in any securities fraud case.
Soon afterward the Sarbanes-Oxley Act was passed by Congress. The main provisions of the act (passed July 3, 2002) establishes a “Public Company Accounting Oversight Board to “develop standards for the preparation of audit reports.
In addition, on February 13, 2002 the SEC enacted changes in regulations for the NY Stock Exchange relative to the Enran debacle: The new rules stated: All firms must have a majority of independent directors (See defiition below). The compensation committee, nominating committee, and audit committee must be composed of independent directors. Audit committee members “should be” financially literate and one member is required to have accounting expertise. Finally besides regular sessions boards should hold additional sessions without management present.
According to the American Heritage Dictionary of Business Terms (http://www.yourdictionary.com/business/independent-director) An independent director is a corporate director who has no material relationship with the company in which he or she serves as director. For example, an independent director cannot be employed or have a family member employed by the company.
The Enron scandal did not alter the business world's taste for deregulation...it prospered and "advanced" over the next turbulent seven years under the younger Bush..a close friend of Ken Lay and culminated in the Bernie Madoff scandal the collapse of the Stock Market, the dissolution of Leahman Brothers, and the economic crisis we face today. When will we learn?
Get the picture?
rjk
To read about the Great Depression and other scalywags go on to read about "Ivar Kreuger the original Madoff"-- http://news.bbc.co.uk/2/hi/business/7939403.stm Kreuger was the owner of the original Enron...the response to the Kreuger Crash was a series of worthy regulations which were only abandoned in 1992.
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