scandal scandal revealed october eventually led bankruptcy american energy company based houston texas facto dissolution largest partnerships world addition largest bankruptcy reorganization american history time cited biggest failure formed merging years later hired developed staff executives use accounting special purpose entities poor financial reporting able hide dollars debt failed deals projects chief financial officer executives board directors committee high risk accounting practices pressured ignore issues shareholders filed billion lawsuit company stock price achieved high share end november sec began investigation rival houston competitor offered purchase company low price deal failed december filed bankruptcy chapter united_states bankruptcy code billion assets largest corporate bankruptcy history bankruptcy year executives indicted variety charges later sentenced prison found guilty united_states illegally destroying documents relevant sec investigation license public companies effectively closing business time ruling overturned company lost majority customers ceased operating employees shareholders received limited returns lawsuits despite losing stock prices consequence scandal new regulations legislation enacted expand accuracy financial reporting public companies piece legislation act increased penalties destroying altering records federal investigations attempting shareholders act increased firms remain independent clients rise merged natural gas pipeline companies form early 1990s helped initiate selling electricity market prices soon united_states congress approved legislation sale natural gas resulting markets possible traders sell energy higher prices significantly increasing revenue producers local governments resultant price asked increased regulation strong lobbying prevented regulation largest seller natural gas north_america trading gas contracts earned million interest taxes second largest contributor company net income november creation trading website allowed company better manage contracts trading business attempt achieve growth pursued strategy company owned operated variety assets including gas electricity plants pulp paper plants water plants services globe corporation gained additional revenue trading contracts array products services involved stock increased start 1990s year end higher average rate growth standard poor index stock increased compared increase decrease index years december stock priced market exceeded billion times earnings times book value indication stock market high expectations future prospects addition rated innovative large company america fortune admired companies survey causes downfall complex financial statements confusing shareholders analysts addition complex business model practices required company use accounting limitations earnings modify balance sheet indicate favorable performance combination issues later resulted bankruptcy company majority indirect knowledge direct actions lay executives lay served chairman company years approved actions details constantly focused meeting wall street expectations advocated use mark market accounting accounting based market value inflated pressured executives find new ways hide debt executives created balance sheet vehicles complex financing structures deals people understand revenue recognition energy suppliers earned profits providing services wholesale trading risk management addition building maintaining electric power plants natural gas storage processing facilities accepting risk buying selling products merchants allowed report selling price revenues products costs cost goods sold contrast agent provides service customer risks merchants buying selling service providers classified agents able report trading fees revenue value transaction trading companies conventional agent model reporting revenue trading fee reported revenue instead selected report entire value trades revenue merchant model considered aggressive accounting interpretation agent model method reporting inflated trading revenue later adopted companies energy trading industry attempt stay competitive company large increase revenue energy companies joined wealthiest fortune mainly adoption trading revenue accounting revenues increased rising billion billion extensive expansion year unprecedented industry including energy industry typically considered growth year respectable months reported billion revenues placed company sixth position fortune global mark market accounting natural gas business accounting fairly straightforward time period company listed actual costs supplying gas actual revenues received selling joined company demanded trading business adopt mark market accounting citing represent true economic value non financial company use method account complex long term contracts mark market accounting requires long term contract signed income estimated present value net future cash flow viability contracts related costs difficult estimate large attempting match profits cash investors typically given false misleading reports method income projects recorded received money turn increasing financial earnings books future years profits included new additional income included projects develop additional growth investors competitor stated accelerate income deals rising income despite potential sec approved accounting method trading natural gas contracts january later expanded use areas company help meet wall street projections contract july signed year agreement introduce demand entertainment cities year end pilot projects recognized estimated profits million deal analysts questioned technical viability market demand service network failed work blockbuster withdrew contract continued recognize future profits deal resulted loss special purpose entities special purpose entities limited partnerships companies created fulfill temporary specific purpose fund manage risks associated specific assets company elected disclose minimal details use special purpose entities shell companies created sponsor funded independent equity investors debt financing financial reporting purposes series rules special purpose entity separate entity sponsor total hundreds special purpose entities hide debt number special purpose entities partnerships thomas tax shelters financial asset investment deal real estate mortgage investment deal real estate investment deal special purpose entities accounting conventions result violation balance sheet understated equity earnings disclosed shareholders risk investments special purpose entities investors oblivious fact special purpose entities actually company stock financial guarantees finance prevented protected risk notable examples special purpose entities employed established joint venture energy investments california state pension fund called serving chief operating officer asked join separate investment interested idea terminated partner want debt assuming stake balance sheet chief financial officer developed special purpose entity limited partnership raised debt guaranteed acquire joint venture stake million organization losses kept balance sheet autumn arrangement discovered required prior accounting method disqualification revealed reported earnings need reduced million company increase million special purpose entity financing method december funding million provided million outside investor formed years later entity arrangement changed longer consolidated counted company balance sheet purchase assets including stakes power plants stocks investments bought assets worth billion stock transactions approved board asset transfers true sales treated instead loans formulated limited partnerships purpose buying poorly performing stocks stakes improve financial statements created solely serve outside equity investor needed special purpose entities board directors receive exemption code ethics title order manage companies partnerships funded million provided investors marketed equity contributed million fund entities transferred related special purpose entities named billion assets including millions shares common stock long term rights purchase millions shares plus million notes disclosed company financial statement special purpose entities pay entities debt instruments declared instruments face totaled billion entities billion enter derivative contracts capitalized manner similar accounting employed company issues stock public offering booked notes issued assets balance sheet increasing shareholders equity treatment later issue removing balance sheet resulted billion decrease net shareholders equity eventually derivative contracts worth billion lost significant value established time stock price achieved maximum ensuing year value portfolio fell billion stock prices decreased loss value meant special purpose entities technically owed billion contracts mark market accounting method claimed million gain swap contracts annual report gain responsible stock portfolio losses attributed nearly earnings properly corporate governance paper model board directors comprising predominantly outsiders significant ownership stakes talented committee review best corporate boards chief executive included best boards complex corporate governance network able attract large sums capital fund questionable business model conceal true performance series accounting financing maneuvers hype stock levels executive compensation compensation performance management system designed retain reward valuable employees system contributed dysfunctional corporate culture obsessed short term earnings maximize bonuses employees constantly tried start deals quality cash flow profits order better rating performance review additionally accounting results recorded soon possible company stock price practice helped ensure deal makers executives received large cash bonuses stock options company constantly emphasizing stock price management compensated extensively stock options similar companies policy stock option awards caused management create expectations rapid growth efforts appearance reported earnings meet wall street expectations stock located elevators company computers budget meetings develop target earnings asking earnings need stock price number feasible december million shares outstanding stock option plans approximately common shares outstanding statement stated years awards expected exercised january stock price directors beneficial ownership reported value director stock ownership million lay million believed employees constantly worried cost hinder original thinking result extravagant spending rampant company especially executives employees large expense accounts executives paid twice competitors highest paid employees received million salaries bonuses stock years later figure jumped billion risk management scandal lauded sophisticated financial risk management tools risk management crucial regulatory environment business plan established long term fixed commitments needed prepare future energy prices bankruptcy downfall attributed reckless use derivatives special purpose entities risks special purpose entities owned retained risks associated transactions arrangement implementing aggressive accounting practices hidden board directors later learned senate board informed rationale transactions approving received status updates entities operations widespread improper accounting practices revealed board practices dependent board decisions extensively relied derivatives business company board experience derivatives understand told senate argued detailed understanding derivatives organized board prevented use financial firm accused applying reckless standards conflict interest significant consulting fees generated earned million fees million consulting fees accounted roughly fees public clients houston office methods questioned completed solely receive annual fees lack expertise properly reviewing revenue recognition special entities derivatives accounting practices hired numerous worked developing accounting rules searched new ways save company money including found accounting industry standards revealed tried aggressively use literature advantage rules create opportunities got exploited weakness pressured management recognizing charges special purpose entities credit risks known entities return profit accounting guidelines required write value entity removed balance sheet loss pressure meeting earnings expectations occasionally allow accounting companies complete accounting tasks create illusion hiring new company replace equipped internal controls protect conflicted incentives local partners failed prevent conflict interest case houston office performed able critical reviews accounting decisions chicago partner addition news sec investigations public later tons relevant documents nearly computer files causing accusations cover revelations concerning overall performance led break firm following assessment appointed board look firm accounting october evidence available suggests fulfill professional responsibilities connection financial statements obligation bring attention board concerns internal contracts related party transactions committee corporate committees usually meet times year members typically modest experience accounting finance committee expertise included stanford_university widely respected accounting professor dean president center president ceo brazil united_kingdom secretary energy hong_kong businessman committee later criticized brief meetings cover large amounts material meeting february committee met hour half committee technical knowledge question properly accounting issues related company special purpose entities committee unable question company management pressures committee united_states report accused board members allowing conflicts interest duties monitoring company accounting practices scandal public committee conflicts interest regarded suspicion ethical political analyses commentators attributed fall variety ethical political economic causes ethical explanations centered executive greed lack corporate social responsibility situation ethics business political economic explanations cited inadequate staff funding regulatory oversight analysis maintained collapse resulted company reliance political lobbying rent seeking gaming regulations accounting issues habit booking costs cancelled projects assets rationale official letter stated project cancelled method known initially dictated practices projects worth million later increased million analysts given tour office impressed employees working vigorously reality moved employees office departments instructing pretend work hard create appearance division larger ruse times fool analysts progress different areas help improve stock price timeline downfall february chief accounting officer told budget managers accounting standpoint easiest year got bag march fortune article questioned maintain high stock value trading times earnings argued analysts investors know exactly earning income drawn company situation analyst suggested view company report found strange transactions erratic cash flow huge debt discuss findings prior publishing article called properly researching company cited fortune reporters reveal earnings details company trading books want know books don want tell making money conference april chief executive officer ceo verbally attacked wall street analyst questioned unusual accounting practice recorded conference complained company release balance sheet earnings statements replied thank appreciate inside joke employees mocking perceived ask variation official slogan ask comment met dismay press public previously criticism late 1990s stock trading share concern company financial mid july reported revenues billion triple year date beating analysts estimates cents share despite profit margin stayed modest average share price decreased quarter time passed number concerns confronted company recently faced operational challenges logistical difficulties operating new communications trading unit losses constructing project large power plant india increasing criticism company role subsidiary california electricity crisis august announced resigning position ceo months long served president promoted ceo cited personal reasons leaving company observers noted months exit sold minimum shares value million owned million shares date departure lay serving chairman assured surprised market change performance outlook company going forward departure lay announced assume position chief executive officer day admitted significant reason departure price stock market economist asserted new_york_times column illustration consequences occur things energy days later letter editor defended philosophy company broader goal latest attack appears discredit free market system system people choices enjoy fruits labor skill intellect heart apparently rely system controlled sponsored government choices people disagree finding integrity good faith institutions leaders example cites run electricity market california product exactly kind system active government intervention step winners california government owned utilities los_angeles pacific_northwest british_columbia disaster wealth california born regulation markets august vice president corporate development sent anonymous letter lay warning company accounting practices statement letter said incredibly nervous wave accounting scandals contacted friend worked drafted memorandum partners points raised august met individually lay gave page letter explaining accounting issues lay questioned told outside company vowed company law firm review issues argued law firm present conflict interest lay consulted executives wanted dismiss texas law protect company decided prevent lawsuit october announced wrong accounting practices approved issue investors confidence declines end august company stock value falling lay named president positions chairman office observers suggested investors significant need company business difficult understand difficult properly describe company financial statements analyst stated hard analysts determine making money given quarter losing money lay accepted business complex asserted analysts information want satisfy curiosity explained complexity business largely tax strategies position lay efforts meet limited success september prominent fund manager noted stock trading cloud sudden departure combined accounting books proper assessment difficult wall street addition company admitted repeatedly related party transactions feared easily transfer losses appear balance sheet particularly aspect technique related party entities controlled september attacks media attention shifted away company troubles little month later announced intention begin process selling lower margin assets favor core businesses gas electricity trading policy included selling oregon utility billion cash stock possibly selling stake project india restructuring losses sec investigation october announced financial statements years necessary correct accounting violations period reduced earnings million reported profits period increased end million reported reported equity reduced equity end billion reported equity additionally january jeff asserted unit worth billion claim analyst said don think knows operation worth management team claimed losses investment losses charges million money spent restructuring company troubled trading unit statement lay revealed thorough review businesses decided charges clear away issues performance earnings potential core energy businesses analysts analyst termed previously company strongest supporters asserted management lost credibility need convince investors earnings real company real growth realized disclosed board directors october earned million compensation arrangements managing limited partnerships day share price decreased day announcement sec investigating suspicious deals struck transactions seen attempting explain billion dollar charge calm investors spoke share settled collar arrangements derivative instruments eliminated contingent nature existing restricted forward contracts strategies served certain merchant investments assets left analysts feeling ignorant managed business sec investigation chairman ceo lay said cooperate fully look forward opportunity concern transactions rest days later october despite days earlier lay dismissed position citing continued discussions financial community clear restoring investor confidence require replace andy departed analysts feared revealing company practices difficult stock trading having lost half value little week october company began buying commercial paper valued billion effort calm investor fears supply cash financed purchase lines credit banks company debt rating considered investment grade bonds trading levels slightly making future sales problematic month came close concerns raised observers possible manipulation accepted accounting rules analysis claimed impossible based incomplete information provided industry analysts feared new fund bankruptcy threatened failure international financial markets tremendous presence worried consequences company possible bankruptcy executives accepted questions written form credit rating main short term danger survival end october credit rating reported time moody biggest credit rating agencies slated review possible force issue millions shares stock cover loans guaranteed decrease value existing stock additionally manner companies began reviewing existing contracts especially long term event rating lowered investment grade possible future transactions analysts observers continued complaints difficulty properly assessing company financial statements cryptic feared apart completely explain years mysterious transactions getting way head said lay late august response detailed questions business reaction worried analysts october responding growing concerns insufficient cash hand news spread seeking billion financing banks day feared moody lowered credit rating levels status lowered rating equivalent moody rating moody warned commercial paper rating consequence likely prevent company finding financing sought november began disclosure sec pursuing formal investigation prompted questions related dealings related parties board announced commission special committee investigate transactions directed dean law school day editorial new_york_times demanded aggressive investigation matter able secure additional billion financing cross town rival november news universally admired debt secured assets company valuable proposed sources claimed planning explain business practices fully coming days confidence building gesture stock trading investors worried company able find buyer received wide spectrum management apparently found buyer board energy trader based houston voted late night november acquire low price billion stock time owned quarter agreed provide billion cash specifically billion rest deal completed required assume nearly billion debt plus debt hitherto management secretive business practices possibly billion hidden debt confirmed deal november commentators remarked different corporate cultures straight talking personality ceo wondered troubles simply result innocent accounting errors november asserting billion plus time charges disclosed october reality million rest simply dormant accounting mistakes feared mistakes revealed major correction earnings announced november reduction million stated revenue years charges said come largely special purpose partnerships resulted virtual elimination profit fiscal year significant reductions years despite disclosure declared intended purchase companies said anxious receive official assessment proposed sale presumably understand effect completion transaction credit rating addition concerns raised regulatory restrictions resulting possible observers radically different corporate cultures companies promoted deal aggressively observers hopeful watson praised attempting create largest company energy market time watson said feel solid company plenty capacity withstand happens months analyst called deal good deal financially certainly good deal strategically provides immediate balance sheet credit issues critical time public reduced rating notch status company rating fall investment grade ability trade severely limited reduction elimination credit lines competitors conference affirmed bought reduce rating low high ratings noted status additionally traders limited involvement stopped business altogether fearing bad news watson attempted assure presentation investors wrong business acknowledged steps form stock options taken animosity employees management revealed lay officials sold hundreds millions dollars worth stock months prior crisis situation helped disclosure lay reputation stood receive payment million change control fee subsequent acquisition employees seen retirement accounts based largely stock ravaged price decreased year official company owned stated married couples worked lost pretty wiped employee savings plan watson assured investors true nature business apparent comfort shoe drop shoe good transaction watson asserted energy trading worth price paying company mid november announced planning sell billion worth assets general plan reduce scale sake financial stability november disclosed public evidence critical state affairs company debt obligations range billion end debts vastly excess available cash success measures preserve guaranteed specifically regarded asset sales debt statement revealed adverse outcome respect matters likely material adverse impact ability continue going concern days later november wall street expressed doubts proceed deal seek radically furthermore revealed filing money recently borrowed purposes including buying commercial paper billion exhausted days analysts revelation especially reported unaware rate cash use order end proposed need legally demonstrate material change circumstances transaction late november sources close skeptical latest revelations constituted sufficient grounds sec announced filed civil fraud complaints days later sources claimed terms arrangement demanded agree bought billion previous billion observers reporting difficulties operations profitable reports described shift business competitors sake risk exposure reduction bankruptcy november worst possible outcomes came true proposed acquisition company credit rating reduced status watson later said end couldn company little cash operate let satisfy enormous debts stock price fell end day trading editorial observer wrote perfect financial storm consequences felt creditors energy trading companies suffered loss percentage points analysts felt failure indicated risks post september economy encouraged traders lock profits question determine total exposure markets traders failure early calculations estimated billion adviser stated don know exposed credit telling clients prepare worst estimated billion debt outstanding guaranteed loans morgan chase particular appeared significant amounts lose bankruptcy additionally major assets pledged order secure loans causing doubt creditors eventually receive bankruptcy proceedings european operations filed bankruptcy november sought chapter protection days later december largest bankruptcy history surpassed bankruptcy year resulted lost jobs day filed bankruptcy employees told pack belongings given minutes vacate building nearly employees savings plans relied stock purchased early practically worthless january dismissed citing accounting advice destruction documents countered ended relationship company bankrupt trials wife pleaded guilty charges initially charged counts fraud money insider trading conspiracy crimes pleaded guilty charges conspiracy sentenced years parole plea bargain testify lay indicted counts prosecutors later dismissed favor single tax charge sentenced year helping husband hide income government lay went trial scandal january count page indictment covers broad range financial crimes including bank fraud making false statements banks fraud wire fraud money conspiracy insider trading united_states district judge previously denied motions defendants separate trials relocate case houston defendants argued negative publicity concerning demise impossible fair trial jury lay trial returned convicted counts fraud wire fraud acquitted remaining including charges insider trading sentenced years months prison reached deal resulted years cut sentence lay pleaded guilty criminal charges claimed attributed main cause company demise lay convicted counts wire fraud tried subject maximum total sentence years prison sentencing scheduled lay died july time death sec seeking million lay addition civil fines case lay wife difficult sold roughly shares minutes thirty minutes information collapsing went public november charged events related worked seven years lay know company bankruptcy able anonymous entire affair executive guilty chief accounting officer indicted charges financial condition tenure pleading guilty later switched guilty sentenced seven years prison told sixteen people pleaded guilty crimes committed company including employees found guilty executives testified main witness lay bosses chief high speed internet unit testimony helped convict lay june received month sentence accused acquitted charges related scandal represented acquitted federal criminal fraud charges month long jury trial charged found guilty justice thousands documents company files tied firm small number employees involved scandal firm effectively business sec allowed accept convicted company surrendered license august employees lost jobs conviction later overturned jury properly instructed charge supreme_court ruling theoretically left free resume operations damage great returned viable business limited scale worked british men worked special purpose entity started called swap sub investigated sec men met november discuss interactions june issued arrest seven counts wire fraud july potential witness scheduled found dead park london death eventually ruled suicide case alleged plea bargain november trio guilty count wire fraud counts dismissed sentenced months prison august retracted confessions aftermath employees shareholders shareholders lost billion years company bankruptcy billion attributed fraud nearly billion owed creditors employees shareholders received limited assistance aside pay creditors held sell assets including art photographs logo signs employees won suit million compensation billion lost settlement employees received year investors received settlement banks billion september billion settlement billion lawsuit reached behalf shareholders settlement distributed main million individuals groups law firm received million fees highest fraud case distribution announced press release extremely pleased returning funds members class getting required long challenging effort results investors unprecedented act december april held multiple hearings scandal related accounting investor protection issues hearings corporate scandals followed led passage july act nearly mirror image company perceived corporate governance matched virtually point point principal provisions act main provisions included establishment develop standards preparation reports restriction public accounting companies providing non services provisions independence committee members executives required sign financial reports certain executives bonuses case financial expanded financial disclosure companies relationships entities february instances corporate accounting violations sec recommended changes stock exchanges regulations june announced new governance proposal approved sec november main provisions final proposal include companies majority independent directors independent directors comply elaborate definition independent directors compensation committee committee committee shall consist independent directors committee members financially addition member committee required accounting related financial management expertise addition regular sessions board hold additional sessions management
Enron scandal