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The Fall of…

Enron and Arthur


Andersen

http://money.cnn.com/ne
ws/specials/enron/
Categories of Information
you must know
1. History of Enron and Andersen
2. Key Players in Scandal
3. How investors were scammed
 Types of white-collar crime
4. How scandal was discovered
5. Verdicts in Court
6. Effects on the financial industry:
 New legislation
What was Enron?
 Enron (former NYSE ticker symbol:
ENE)
 world's leading electricity, natural gas,
and energy company
 based in Houston, Texas,
 21,000 employees in over 30 countries
 stated revenues of more than $100
billion in the 1990s
The Smartest Guys in the
Room - California and Traders
 http://www.youtube.com/watch?v=dvLZBv8HsO4&feature=related
What was Arthur Andersen
Accounting?
 one of the Big Five accounting
firms for public and private
companies around the world
 over $9 billion in sales during
2001.
 85,000 employees working in 84
countries
Who were some of Enron’s
clients?
 Teeside
 Bahia Las Minas
 Puerto Quetzal Power Project
 PQP LLC
 Empresa Energetica Corinto
 EcoElectrica
 Puerto Plata Power Project
 Modesto Maranzana Power Plant
 Cuiaba Integrated Project
 Nowa Sarznya Power Plant
 And many more…
Key Events

1.) In early July 2001,


Enron surprised its investors by
saying it would post a large loss in its
quarterly statement.
The company blamed losses on the
California energy crisis, poor results
from its investments in India and
South America, and a moribund
broadband Internet market.
Key Events Continued…
2.) Sometime between July and October
2001, the SEC began an inquiry into
Enron's troubling losses.

3.) In October, Enron said it would reduce


shareholder value by $1.2 billion.
 The company now blamed the losses on
Andrew Fastow, the CFO, for allegedly
arranging deceptive and failing partnerships
what were being used to hide millions of
dollars in Enron losses.
 Falsifying Sales
Key Events Continued…
4.) During this time, the SEC publicly
upgraded its inquiry into a formal
investigation of Enron's suspected
fraudulent financial statements.

5.) In early November, Enron conceded it


had overstated its profits by nearly 16
percent, or $600 million, since 1997.
 Enron's auditors, Arthur Andersen,
also alerted shareholders that they
should not trust any financial reports
issued before June 30, 2001.
 Enron's market value plunged, as
shareholders and investors sold their
shares as fast as they could.
Key Events Continued…

6.) Faced with paying back millions of dollars in


debt, Enron's executives and company board
agreed to seek Chapter 11 bankruptcy
protection in early December of 2001.

•The breathtaking speed of the energy


giant's collapse became the subject of
multiple investigations, including a criminal
investigation into the company's allegedly
fraudulent accounting methods.
•On paper, it took Enron 24 days to go
bankrupt !
Key people
1.) Kenneth Lay
 Enron's CEO and chairman
from 1986 to January 2002.
Key people:
http://www.youtube.com/watch?v=hPqH3DrWEEU

2.)Jeffrey Skilling
 President of Enron, heading Enron's
North American operations.
Key people
3.)Andrew Fastow
 CFO: from May 1998 until October 2001.
 Fastow, who was promoted to CFO in his
mid-thirties, earned accolades for
diminishing Enron's debt and
restructuring the company's finances to
allow Enron to diversify its business.
 Created false business partnerships with
fictional companies throughout the world
in order to hide debt
Key people

4.) Arthur Andersen


 Andersen served as Enron's sole
internal auditor throughout the
energy giant's sixteen years, also
performing internal audits and
consulting services.
 In 2002 the firm voluntarily surrendered its
licenses to practice as Certified Public
Accountants in the U.S. pending the result of
prosecution by the Department of Justice
over the firm's handling of the auditing of
Enron

 From a high of 28,000 employees in


the US and 85,000 worldwide, the firm
is now down to around 200 people
based primarily in Chicago.

 Most of their attention is on handling the


lawsuits and presiding over the orderly
dissolution of the company.
Key people
5.) Harvey Pitt
 Chairman of the SEC who prosecuted the
Enron/Andersen court case
White Collar Crimes that the SEC
investigates and prosecutes
 Insider trading
 Tipping off investors/friends/family of
confidential financial info motivating them to
either buy or sell a stock
 Securities fraud
 providing false or misleading information about
financial statements to motivate people to buy or
sell stock
 Conspiracy
 A secret plan by a group to do something
unlawful or harmful
 Money Laundering
 Changing the source of income
Sarbanes-Oxley Act

 The Sarbanes-Oxley Act of 2002


 commonly called SOX
 is a United States federal law signed
into law on July 30, 2002 in response
to a number of major corporate and
accounting scandals, primarily
led by Enron/Andersen
Effects of the Sarbanes-Oxley Act

 Increased Efforts by Audit


Committees on public
companies
 Increase in Accounting and Audit
Costs
 Salary Increases
 Demand for Accounting/Finance
majors
 Influence on SEC Sanctions and
regulations
 Change in the Audit Process
Enron’s Stock Price from
Jan 2001- Jan 2002
90
80 Jan. 25
70 Aug. 14
60 Oct. 16
Oct. 22
50
Oct. 29
40
Nov. 8
30
Nov. 12
20 Dec. 2
10 Jan. 15
0
Wall Street dumps
Enron, January 15, 2002

 The New York Stock Exchange


suspended trading of Enron stock
 moved to formally de-list the firm,
whose shares once were priced at
$90 each but now trade for less
than $1.
Lead Plaintiffs

1. The University of California


 155,000 employees retirement funds tied to
Enron stock
 Purchased over 2 million shares at inflated
prices
 Suffered damages of over $144 million

2. Washington State Investment Board


 Manages and invests state’s retirement funds
 Purchased debt securities at inflated prices
Lead Plaintiffs
3. San Francisco City and County
Employees‘
Retirement System
 Provides benefits for retired employees
 Purchased equity securities at inflated prices

4. Teamsters Nos.175 & 505 Pension Trust


Fund
 Oversees retirement savings
 Purchased debt securities at inflated prices

5. Hawaii Laborers Pension Plan


 Administers retirement savings
 Purchased debt securities at inflated prices
Defendants
1. Enron
 Kenneth Lay, Jeffrey Skilling, Andrew Fastow, and
various other Executives
 Accused of illegal insider trading

2. “Andersen”
 consisted of Arthur Andersen LLP and Andersen
Worldwide S.C.

3. Law Firms
 Vinsin & Elkins, Kirkland & Ellis

4. Investment Banks
 J.P. Morgan & Chase, CitiGroup,
Bank of America, etc.
Involvement of the Banks
 Banks lent Enron money often without
collateral
 Banks “were pivotal players in the mysterious
offshore partnerships that ultimately brought
Enron down
 “Citigroup and J.P. Morgan served as lead
manager on more than $20 billion in
syndicated bank loans to Enron”
 WITHOUT asking why they needed the $$
The Verdicts…

 http://www.youtube.com/watch?
v=di2XVJljadA&NR=1&feature=f
vwp
What happened to Kenneth Lay?

 On July 7, 2004, Lay was indicted and


found guilty by a grand jury on 11 counts of
conspiracy, securities fraud and related
charges.

 Lay could have faced 20 to 30 years in


prison.

 However, he died while vacationing in


Snowmass, Colorado on July 5, 2006,
about three and a half months before his
scheduled October 23 sentencing.
What happened to Jeffery
Skilling?
 Skilling was indicted on 35 counts of
fraud, insider trading, and other crimes
related to the collapse of Enron.
 pleaded not guilty to all charges.
 About a month after quitting Enron,
Skilling sold almost $60 million of his
stake in the company
 leading to the prosecutors' allegation that he
sold those shares with inside information
of Enron's impending bankruptcy.
 On October 23, 2006, Skilling was
sentenced to 24 years and 4 months in
prison, and fined $45 million.
What happened to Andrew
Fastow?
 Despite entering into a plea agreement to
serve 10 years in prison, on 26 September
2006, Fastow was sentenced to six years,
followed by two years of probation.
Enron Assignment

 http://www.nytimes.com/learning
/teachers/featured_articles/2002
0117thursday.html