Enron Corporation Essay

I  Ã‚   The Beginning When Enron Corporation declared a Chapter 11 bankruptcy in December 2001, it left the public especially its investors and stockholders reeling from such financial scandal and collapse.   Enron had allegedly overstated its profits by $586 million since 1997 in order to protect the firm’s balance sheet and practiced insider trading as well fraud and conspiracy. Enron had been the seventh largest company in the United States and had been one of the largest financial contributors to the Presidential elections, especially the Bush family. To the outside world, Enron portrayed a picture of success.   However, upon closure inspection on the inside, Enron was on the brink of collapse. When Enron’s stock price hit its highest at $90, the executives who allegedly knew of the offshore accounts of Enron started selling their respective shares and to encouraged the public to continue buying the said stocks.   However, the executives knew that the stock prices would not increase anymore but still reassured the public and its investors that the prices of stock would reach a high $130-140 per share. By August 2001, Enron’s stock prices had dropped from $90 to a measly $42. It became evident that the company had fraudulently induced and fooled the public, investors and stockholders to buying the company’s stocks and shares. Amidst all these, Enron founder and former chairman Kenneth Lay continued to reassure the public to remain calm, and asked the investors to buy the company’s shares as the company will regain its profits in the succeeding months. Nonetheless, in October of 2001, the stocks plunged to $15 but the investors saw this as an opportunity to buy Enron stocks at such low prices. But the truth about the company’s financial standing became public and the stock price finally hit rock bottom at $1 per share. II   Basis of the Charges Stockholders and investors gathered and instituted a class-action suit against Enron and its officers in order to recover the millions of investment they made on Enron as result of the false representation and fraud by the company. Enron top executives specifically its Chief Executive Officers, Kenneth Lay and Jeffrey Skilling were charged and convicted with the collapse of the energy giant. Kenneth Lay faced seven counts of fraud and conspiracy while Skilling faced 31 counts of fraud, conspiracy, insider trading and lying to auditors about Enron’s financial position. In 1987, Enron auditors found out a billion-dollar oil trading scandal in its New York offices.   Traders had been engaged in this kind of practice – falsifying transactions in order to boost their volume and profit thereby fattening their bonuses as well. Although CEO Kenneth Lay knew of this, he did not fire the traders nor contacted the authorities in order to cover up their problems. But this incident did not deter the traders and six months later, competitors began to grow suspicious because if word got out, Enron’s trading partners could have demanded that the company cover its positions with cash, which the company did not have (Fowler).   Thus, the traders were fired and charged but not until they were able to transfer million of dollars into their personal accounts.   Enron for its part was able to get away by bluffing the market and reported $85 million in loss but sources claim that the loss totalled to at least $135 million. CEO Jeffrey Skilling, who joined Enron in 1990, did not care much about the expenses incurred by the company as long as the margins looked good.   He was also more concerned with the revenues increases and widening profit margins instead of the cash flows which was practiced by his predecessor. So enamoured were the top executives in increasing business profit that when a deal failed or fell apart, more effort was placed into hiding the consequences instead of rectifying and owning up to the problem.   After taking over as chief operating officer, he renewed the almost non-existent post of chief financial officer and delegated many of the management responsibilities. In theory, Enron had mechanisms that would assess risk and accurately report financial numbers. These mechanisms required that deals should be strictly analyzed which included review by the legal department of the originating unit, the corporate legal department, chief risk officer and chief accounting officer.   However, due to the insidious practice of the company, auditors and accountants were bullied to over ride the system and departments were able to determine the total value of their proposals by manipulating the long-term price of whatever product was sold or bought.   The company also used a â€Å"mark-to-market† accounting system pushed by Skilling which allows a company to report as current revenue the total value of a deal over its projected lifetime (Fowler). This system made earning appear good which in turn pumped up the stock prices and increased the value of stocks which executives received as bonuses. III Trial As the stunned investors witnessed Enron’s stock prices plunged, the government began a massive crackdown on the executives who were responsible for the collapse of the company, and would end up in the conclusion of convincing and proving to the jury that Lay and Skilling, the two top executives of the company, where guilty of massive fraud and were thus guilty. Government prosecutors were at first overwhelmed with the girth of the corporate fraud.   Nevertheless, they began to take measures to respond to these kinds of crimes and a barrage of criminal and civil investigations and prosecutions began to surface.   Thus, in 2002, the Presidential Corporate Fraud Task Force filed criminal charges against more than 900 defendants, of which 60 are chief executive or president level and successfully prosecuted or convicted 500 of them. The case against Lay and Skilling were heard by US District Judge Sim Lake and lasted nearly four months while the jury deliberated for six days.   The defense counsel initially attempted to persuade the judge to move the trial away from Houston, Enron’s hometown as they were afraid that the jury might be influenced by anger due to the resulting loss of jobs and money and would see them as a way of revenge. Kenneth Lay faced seven counts of fraud and conspiracy fraud and conspiracy while Skilling on the other hand, faced 31 counts of fraud, conspiracy, insider trading and lying to auditors about Enron’s financial position.   Although both asserted their innocence of the charges against them, they were convicted for a total of 29 criminal counts as well as conspiracy to hide the failing health of the company by selling boosterich optimism to Wall Street and the public (MSNBC). Lay, who was convicted to 6 counts of conspiracy, securities and wire fraud in the corporate trial and 4 counts on separate personal banking trial, surrendered his passport and posted a $5 million bond secured by the family.   His sentence also carried a maximum penalty of 45 years in prison for the corporate trial while 120 years in personal trial respectively.   Ã‚  Skilling on the other hand, was convicted by 19 counts out of the 28 charged as well as one count of insider trading while being acquitted with the remaining charges. The charges against   these Enron top executives prospered as other executives turned the table and plead guilty in their respective charges in order to receive lower sentences than that prescribed.   Among the former employees who testified against Lay and Skilling was Ben Glisan who is now serving a 5-year prison sentence after pleading guilty to a charge of conspiracy.   According to Glisan, both Lay and Skilling knew that the company was in deep financial trouble but tried to hide it instead. Ultimately, the jury rejected Skilling’s defense that no fraud happened at Enron save for those committed by a number of executives skimming millions in secret side deals, while bad publicity and poor market confidence resulted in the collapse of the energy giant. III. Effects of the Enron Collapse As the jurors found that these once-wealthy and powerful executives repeatedly lied to cover up the real position of the company by covering up accounting and auditing failures which eventually led to its collapse in 2001, the left a devastating effect in the business world as well as the lives of the investors and shareholders.   The demise of Enron wiped out more than $60 billion in market value, almost $2.1 billion in retirement savings and costs more than 5,600 to lose their jobs. The anger of the public over the recent corporate scandals led to the passing of the Sarbanes-Oxley Act, which was designed to make company executives more accountable. Although public distrust for white-collar trial could not actually reverse the damage done to investor confidence, the Lay and Skilling trial however has become a start of a healing process for public-investor relations to be righted again. IV Timothy Belden    Apart from the other key witnesses who were former Enron employees and who testified against the top two Enron officials, Timothy Belden particularly made the charges against Lay and Skilling stick, ending in their conviction.   Belden who was the first person to be charged in the manipulation of Western Energy markets, initially engaged in lengthy dance with federal officials over his plea and eventual cooperation in testifying against Lay and Skilling.   He pleaded guilty in 2002 to conspiracy and admitted that he gave false information to California’s electrical grid operators.   Belden is also said to be the â€Å"mastermind behind the strategies described† in memos that spelled out how Enron manipulated the California market (Schreiber). Beginning in the mid-nineties, California was among the first states to deregulate electricity.   The deregulation occurred just as when companies were leaving the state in numbers thereby creating a recession. The deregulation was supposed to reduce the ten percent of the tax payers’ bill while breaking the old methods of greedy companies.   As California deregulated the wholesale side of its energy markets, it also kept price caps in the retail side. It coincided with the State’s decision to bar utilities from signing long-term cheap fixed prices which forced them to into an unpredictable market.   Thus, the utilities were made to pay exorbitant prices but were not able to pass on to their consumers the prices they incurred.   Enron promised to deliver power more efficiently and build new plants that can run on cheaper fuels. Commencing in 1998 until 2001, Belden as well as other executives from Enron devised a fraudulent scheme in order to obtain increased revenue for Enron from wholesale electricity consumers and other market participants in the State of California. The schemes perpetrated by Belden and the other Enron executives required them to submit false information to the companies supplied by Enron and misrepresented the nature of electricity which the company was supposed to supply. Despite being paid to relieve congestion, the company however, did not do so and instead imported as well as exported electricity in order to receive higher prices from the companies they supply. Of particular interest in the course of the trial is a transcript of conversation between Belden and one of the operators of the power plant wherein the two discussed shutting down one of Reliant’s power plants in California to create a shortage in order for the prices to skyrocket. As the scheme worked, causing the power prices to arrive at high and unjust levels in California, it thereby became illegal under the Federal Energy Policy Act. In his testimony, he called California’s post-deregulation power market dysfunctional and said his company bought cheap electricity in the Northwest to sell in California at a profit (Baker). This practice created the appearance among consumers that there was shortage of electricity, thereby having the need to jack up the prices. Enron was able to pocket off almost $1 billion in a period of nine months in 2000 and 2001. Belden admitted however, that he only met with Lay and Skilling once during a colleague’s party.   But nevertheless, Belden’s testimony proved to be a very crucial one as it confirmed and proved that Lay and Skilling knew of what was happening in California but turned to hide it instead. As company vice-president and head of Enron’s West Coast trading operation, Belden supervised a staff of 120 that went from $50 million in earnings in 1999 to $800 million in 2001, while California’s power markets disintegrated into panic and sky-high prices. When one of Enron’s lawyers started investigating these â€Å"irregularities† as a response to the investigation conducted by the California Public Utility Commission. The lawyers found out of Enron’s tactic of using advantage of the energy crisis and revealed through a memo that Enron created false congestion lines, transferred energy in and out of state to avoid price caps and charged for services the company never actually provided (Swartz).   And yet, inspite of the information the lawyer gave to the top executives, and traders have been told to return the money made on improper trading, the executives at Enron still decided against it despite knowing that the practice was illegal.   For Belden and the other traders, sending the money back would mean that the other companies will know what Enron was doing.   Nevertheless, Belden and Enron continued on with the practice.   Skilling, on the other hand, fully knew well of the said practice by the company in 2001 as he was already tipped by one of the executives who learned of the previous investigation. During examination, Belden admitted to US District Judge Martin Jenkins that he did it because he was trying to maximize profit for Enron. Belden claimed that he was only following Enron’s instructions as he handled his trades (CBS News).   According to Belden’s counsel, Enron knew fully well of Belden’s action but was never disciplined nor sanctioned at all. In fact, Belden may have reaped bonus for such practice as revenues from his trading unit climbed from $50 million in 1999 to $500 million in 2000 to $800 million in 2001.     When he was charged with conspiracy, Belden after a long time of dealing and negotiating with the federal government, decided to turn against Kenneth Lay and Jeffrey Skilling, claiming that the two top executives knew of the practice he and other traders did as indicated by the internal company memos which described how Enron took power out of California at a time of rolling blackouts and shortages and how it sold out of state to elude price caps (CBS News).