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ENRON : THE CORPORATE FRAUDULENT

About Enron :
In 1985 Enron was born from the merger of Houston Natural Gas and InterNorth. Started trading futures in Gas Contracts. Soon got the control of over 25% of the all Gas business.
Mid 1980s: Enron business entirely in the USA, focused on gas pipelines and power

Goes Global:
Entered into the derivatives business.
Began trading in commodities like steel, coal, weather risk etc. By 2000, even stepped into the .com business.
2001: Enron trading in hundreds of commodities Interests in: USA, South America, Europe, Asia and Australia

Jack Of All Trades:


Entered into the derivatives business.
Began trading in commodities like steel, coal, weather risk etc. By 2000, even stepped into the .com business.
2001: Enron trading in hundreds of commodities Interests in: USA, South America, Europe, Asia and Australia

Profit making formula


5

ENRO N

4 3

Special Purpose Entity (SPE)

Account In Profit

2 1 Partnership

1. Enron sets up partnership using stock as funding 2. Partnership sets up SPE 3. SPE agrees contract to pay Enron if its investment declines in value 4. Payment made as investment declines 5. Payment posted as profit, even though it is Enrons own money

A huge hole had opened in the accounts. -BBC

J.P. Morgan Chase & Co. ("Chase") aided and abetted Enron Corp.'s ("Enron") manipulation of its reported financial results through a series of complex structured-finance transactions, called "prepays," over a period of several years preceding Enron's bankruptcy. These transactions were used by Enron to report loans from Chase as cash from operating activities. Indeed, the structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans from Chase to Enron.

One such case:

In the books of ENRON

The Downfall
Between December 1997 and September 2001, Chase effectively loaned Enron a total of approximately $2.6 billion in the form of seven prepay transactions. Chase was willing to engage in the transactions because they generated substantial fees and as an accommodation to an important client. Enron materially overstated its reported net cash flow from operating activities, materially understated its reported net cash flow from financing activities, and misrepresented the amount it borrowed.

The Risk Factors:


Commodity Price Risk
o In effect, the seller bets that the market price of the subject commodity would be lower at the time of delivery than at the time the contract is made. The purchaser bets the opposite way: that the market price of the commodity at the time of delivery will exceed the price it paid at the time of contracting. In a typical prepay transaction, therefore, each side assumes commodity price risk.

Cont.
Credit Risk
o In the seven prepay transactions with Chase, Enron received large, upfront payments from Chase via Mahonia; Enron was obligated to make periodic payments to Chase to repay principal and interest; the interest was calculated with reference to LIBOR, and all price risk and, in certain transactions, even the obligation to transport a commodity were eliminated. The only risk in the transactions was Chase's risk that Enron would not make its payments when due, i.e., credit risk. In short, these prepays were in substance loans.

Cont.
Legal Risk
o As Chase knew, because prepays were disguised loans, Enron not only overstated its cash flow from operating activities, but it understated its cash flow from financing activities and understated debt on its balance sheet. Chase knew that, as a result, analysts and credit rating agencies were being misled.

Partners in crime..!!

Masterminds: (left to right): founder Ken Lay; Jeff Skilling; Andy Fastow; and Lou Pai

Stock heading South

8th Nov, 2001 Told investors that they were restating earnings for past 4 and years.

By end of Nov, 2001 stock reached $0.3 falling from its peak price $90 in just 8 months.
2nd Dec, 2001 Filed Bankruptcy.

Enrons top management gave its managers a blank order to just do it.

Thank You..