Enron: The Smartest Guys in the Room

What was Enron?

• At one point the 7th largest business in the US

• Created a platform where energy could be traded like a stock

• Was going to “reshape the energy business”

• Fixated on creating a public persona of being a stable company

The Main Players

• Kenneth Lay → CEO & Founder; proponent of Free Market energy

• Jeff Skilling → Took over as CEO; the real perpetrator

• Andy Fastow → Created LJM and other special purpose entities; the main scapegoat

• Arther Anderson → The accountants for Enron; used to be most trusted

• Vincent & Elkins → The lawyers for Enron

• Bethany McClean & Sharon Wilson → The ones who uncovered everything

• Ken Rice & Cliff Baxter (Dead) → Major insiders

The Fraud

AT LARGE

• Enron was using Mark-at-Market accounting; reported expected profits, not actual profits

• Fastow was selling ‘Special Purpose Entities’ (like the Nigerian ships to Merrill Lynch) but was really receiving loans with the promise of reimbursement through Enron stock; also did this with his businesses (LJM & Raptor)

• Insiders were selling off their stock while making everyone else believe that the company was thriving so they would continue to sell stock

CALIFORNIA

• Unregulated energy market made it easy for Enron to profit

• Created blackouts to raise prices of energy in order to raise the stock price

• Arbitrage (abnormal) profits were encouraged

• Federal Energy Regulation Committee (FERC) allowed continued deregulation

• Bush & Schwarzenegger in power facilitated continued deregulation because they were friends of Enron

THEN → Skillinger resigns as CEO and Lay takes back over

The Fallout

• 4 months later Enron was bankrupt

• Skilling, Lay, Arthur Anderson, & others were indicted for fraud

  • 11 guilty pleas; 6 convictions; 1 acquittal; 11 pending cases

• Major financial losses

  • $1.2 bn in retirement; $2 bn in pension

  • Enron execs cashed out $116 mil in stocks

• Arthur Anderson goes out of business too

• 29 million out of their jobs