ENRON SCANDAL

PRESENTATIONPresented by

Celine Israel, Conrad Pereira, Edward Charfauros, and Tawnya Tunudra

-------Business Law BUS/415

January 10, 2012Moanikeala Colon

2001

1985

2007

AGENDA

1. Introduction/About Enron2. Background Facts3. Legal Issues4. Risk Assessment5. Protection from Future Liability6. Conclusion7. References8. Questions and Answers

INTRODUCTIONINTRODUCTION/ABOUT ENRON

• Enron was an energy, commodities, and communications trading company

• based in Houston, Texas • Employed around 22,000 people • Was one of the world's leading pulp and paper,

electricity, natural gas, and communications companies

• Claimed revenues of nearly $101 billion• Became the seventh largest company in the

United States• Invested interests in communications, power, and

weather assets • Became largest failure in corporate history before

Worldcom in June 2002 .

1985 1990 2001 2007

BACKGROUND FACTS

• Kenneth Lay - former CEO of Houston Natural Gas, chairman and CEO of Enron

• Jeffrey Skilling - Enron president and Chief Operating Officer• Andrew Fascow - Enron finance chief. Chewco founder and LJM partner• Richard Causey - Chief accounting officer • Sherron Watkins - Finance executive• Arthur Andersen, LLP. - Enron auditor

1985 1990 2001 2007

BACKGROUND FACTS

• 1985 - Houston Natural Gas company merges with InterNorth. Attempting to develop a natural gas national pipeline system. Enron is announced!

• 1986 - former CEO of Houston Natural Gas, Kenneth Lay, becomes chairman and CEO of Enron.

• 1996 - Jeffrey Skilling becomes president and Chief Operating Officer.• 1997 - Fastow creates Chewco, a partnership to buy the University of

California pension fund's stake in another joint venture dubbed JEDI, but Chewco doesn't meet requirements to be kept off Enron's balance sheet.

• 1998 - Fastow named finance chief.• 1999 - Causey named chief accounting officer. Fastow creates first

partnership, LJM, help Enron hide debt ($30 billion through “structured finance” model) and inflate profits through director approval.

BACKGROUND FACTS

1985 1990 2001 2007

• 2000 - total revenues reach $100 billion (doubling 1999 revenues) becoming world’s sixth largest energy company.

• 2000 - Jeffrey Skilling succeeds as new CEO with Kenneth Lay remaining as chairman.

• 2001 – Skilling resigns and Lay resumes as CEO again.• Enron’s bankruptcy resulted with 25,000 employees losing their jobs

and medical insurance. • The average severance pay was $4,500, and top executives were

paid bonuses totaling $55 million. • 2001 - employees lost $1.2 billion in retirement funds.

• Retirees lost $2 billion in pension funds. • Enron’s top executives cashed in $116 million in stock. • Criminal charges resulted with fifteen guilty pleas, six convictions, one

acquittal, and eleven pending cases. • Three California traders pled guilty to wire fraud• four Merrill Lynch executives convicted of fraud in the Nigerian barge

case.

LEGAL ISSUES

1985 1990 2001 2007

• Elements of Tort• Intentional Misrepresentation (Fraud)• Negligence

• Professional malpractice• Breach of fiduciary duty

• Liability- mass complicity across the board• Enron executives and traders• Arthur Anderson• Investment banks

• Damages• Largest corporate bankruptcy in American history• More than 20,000 employees lose their jobs and medical insurance• Over $2 billion loss retirement and pension funds

RISK ASSESSMENT

1985 1990 2001 2007

• Enron was the second largest company to declared bankrupt• Causes of Enron’s fall

• Enron former CEO and former CFO implemented ideas that led to the problem

• Crisis that was initiated could not be legally fixed.• Performance of Enron’s risk management team was scanty

• The idea of creating asset-light company backfired• Trading skills to the asset-facilities owned by third parties• The expansion of expertise in the energy-trading sector

1985 1990 2001 2007

RISK ASSESSMENT

a. Enron’s Financial risk management tools1. Effectiveness in business planning2. Regulated competition in the environment

b. Establishment of long-term operations to hedge risk1. Cushion the organization against any instability in energy prices2. Hedging the organization’s risks with the distinct purpose

subsidiariesc. Complex transactions were not considered

1. Ignore ineffective support or enforcement of an entity’s values2. Or ethical standard in performing its activities

d. Determination of risk strategy Vital

PROTECTION FROM FUTURE LIABILITY

1985 1990 2001 2007

• Enron scandal further exposed corrupt business practices accepted by the United States• Insider trading, false reports & shady accounting

• The Enron scandal tarnished American business practices forever• The public does not trust big corporations

• Enron inflated their earnings to fool investors

• Their accounting firm, Andersen validated the data• Two of the top firms in their field are guilty of misconception• Their employees and shareholders lose millions• A multitude of lawsuits follow

1985 1990 2001 2007

• Serbanes-Oxley Act• Passed on July 30, 2002• Public Accounting Oversight board is established• Developed to uphold standards in audit reports• Audits Committee members, Executives and the businesses they deal

with

PROTECTION FROM FUTURE LIABILITY

INTRODUCTIONCONCLUSION

• Skilling was found guilty on 19 counts of conspiracy, fraud, false statements, and insider trading.• Not guilty on nine counts of insider trading.

• Lay was found guilty on six counts of conspiracy and fraud.• In a separate bench trial, Judge Sim Lake ruled Lay was guilty of

four counts of fraud and false statements.• Lay’s prison sentence: Maximum of 45 years and 4 months.• Lay died prior to the sentence hearing.

• Skilling’s prison sentence: maximum of 24 years.

REFERENCES• Government Printing Office. (2012). II. History of the company. U. S.

Government Printing Office. Retrieved from www.gpo.gov/congress/joint/jcs-3-03/vol1/056-058.pdf

• Cheeseman, H. R. (2010). The legal environment of business and online commerce: Business ethics, e-commerce, regulatory, and international issues. (6th ed.) Upper Saddle River, NJ: Pearson Prentice Hall.

• Madura, J. (2009). Financial Markets and Institutions. London: Cengage Learning• Gibney, A. (Producer). (2005). Enron: the smartest guys in the room [DVD].

Available from Magnolia Pictures.• Healy, P. M., & Palepu, K. G. (2003). The fall of Enron. Retrieved from

http://www-personal.umich.edu/~kathrynd/JEP.FallofEnron.pdf• Jickling, M. (2002). The Enron Collapse: An Overview of Financial Issues.

Retrieved from http://fpc.state.gov/documents/organization/9267.pdf• Sargent, M. A. (2002). The Real Scandal: Enron’s ’crimes’ were legal- legality of

Enron’s business practices is examined. Retrieved from http://findarticles.com/p/articles/mi_m1252/is_5_129/ai_84817523/

JOB OPENINGS

1985 1990 2001

QUESTIONSAND

ANSWERS