In less than 20 years, Enron Corp. became the king of the Houston, but the energy giant crumbled under charges of insider trading, securities fraud and a host of other federal charges in 2001. It was 10 years ago this week that it all happened. (Dean Rohrer / www.newsart.com)
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In 1998, Enron had made it. The company that formed from the merger between Houston Natural Gas and InterNorth was set to have its name plastered on the brand new Astros stadium. Enron Field was scheduled to open in 2000 with a 30-year lease agreement. That same year, Andrew Fastow was named the chief financial officer for Enron. (DAVID J. PHILLIP / AP)
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Enron field opened for business in April 2000. (Smiley N. Pool / Houston Chronicle)
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The scoreboard lights up after Daryle Ward's game winning home run in the 8th inning of the inaugural game at Enron Field between the Houston Astros and the New York Yankees. (James Nielsen / Special to the Chronicle)
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In four months, shares for the energy giant would hit an all-time high of $90 per share. In a little more than 15 months, Enron would go from its high to its low. (THAO NGUYEN)
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In December 2000, Enron CEO Ken Lay announced plans to step down as CEO in February 2001. He would remain as chairman of the board, but president and chief operating officer Jeff Skilling would take over as CEO. (Andrew Innerarity / Houston Chronicle)
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The year 2001 was supposed to Enron's year. The company was having a new Enron building built. The company stock reached a high in the fall of 2000, and Enron President Jeff Skilling was going to take over as the new CEO of the company. (Karl Stolleis / Houston Chronicle)
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In 2001, Jeff Skilling is named CEO of Enron. Six months later, Skilling resigns and Lay is named CEO of the company again. (Steve Ueckert / Houston Chronicle)
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Enron's Vice President of corporate development Sherron Watkins, left, meets with CEO Ken Lay in August 2001 to talk about the financially murky waters the company is in. (Mark Wilson / Getty Images)
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In October, the company announced $638 million in third-quarter losses and a $1.2 billion reduction in shareholder equity. (James Nielsen / Getty Images)
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Three days after Enron posted its third-quarter earnings, the Securities and Exchange Commission begins looking into Enron's finances. (Paul Lachine / Newsart.com)
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Enron CFO Andrew Fastow, center, becomes the center of the collapse. Enron says the SEC inquiry is looking into possible conflicts of interest with Fastow's partnerships. Despite the growing concerns, Lay backs Fastow to analysts. Fastow is ousted from his job days before Halloween. (James Nielsen / Houston Chronicle)
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Enron treasurer Ben Glisan Jr. and attorney Kristina Mordaunt are fired for investing in Fastow's partnerships. According to records, Glisan and Mordaunt received a $1 million return a few weeks after investing $5,800 in 2001. (Steve Ueckert / Houston Chronicle)
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Enron revised documents with the SEC in early November to show $586 million in loses over the past five years. The company would revise its third-quarter earnings a few days later to account for $690 million debt that's due Nov. 27. Enron seemed destined for bankruptcy. (Karl Stolleis / Houston Chronicle)
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A little more than a month later Enron would fold, and Dynegy Inc., a once fierce competitor, agrees to buy the company for $8 billion. Two weeks later, Dynegy forfeits its plan as Enron stock falls to $1 per share. (DAVID J. PHILLIP / AP)
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Less than two months after the SEC began its inquiry, Enron declares bankruptcy. Thousands of employees with the company are laid off. (Steve Ueckert / Houston Chronicle)
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Even Christmas lights couldn't brighten the mood at Enron. Employees began moving out of the building as the company declares bankruptcy. (Steve Ueckert / Houston Chronicle)
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Laid-off Enron employee Mary Garza holds up a sign that says 'Moron, What were you thinking?' during a gathering of former workers across the street from the Enron Headquarters building in December 2001. (Buster Dean / Houston Chronicle)
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The Justice Department opens a criminal investigation of Enron. (Dave Rossman / special to the chronicle)
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J. Clifford Baxter had been promoted to vice chairman of Enron Corp. He resigned in May 2001 -- months before the financial meltdown. A month after Enron's bankruptcy, Baxter committed suicide.
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Enron CEO Ken Lay resigns as chairman of the board and CEO within a month of the Justice Department opening its criminal investigation of Enron. (Steve Ueckert / Houston Chronicle)
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Michael Kopper, former managing director of Enron Global Finance, President Jeff Skilling and Andrew Fastow appear before Congress. Fastow and Kopper both invoke their fifth amendment rights during the hearing. (AP)
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Four months after Enron declares bankruptcy, the Enron signs start to come down at the Astros stadium. (Carlos Antonio Rios / Houston Chronicle)
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Todd Norris, upper left, of Neon Electric Corp. watches as the "E" from the Enron Field sign is lowered to the ground. (Steve Campbell / Houston Chronicle)
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Workers began removing the letters spelling "Enron Field" from the centerfield scoreboard of Astros Field in March 2002. All references to the bankrupt corporation were removed before opening day. (Buster Dean / Houston Chronicle)
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Arthur Andersen, Enron's independent auditor, is indicted for destroying Enron documents. The company would be convicted in June 2002, but the conviction would be overturned by the Supreme Court years later. (Carlos Antonio Rios / Houston Chronicle)
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Arthur Andersen auditor David B. Duncan, left, pleads guilty to obstruction of justice after he instructed his staff to destroy documents. (MICHAEL STRAVATO / AP)
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Michael J. Kopper, former Enron executive and managing director of Enron Global Finance, is the first ex-Enron employee to enter a plea deal with prosecutors. Kopper later identifies several partnerships that were designed to make the company appear financial healthy. (Carlos Antonio Rios / Houston Chronicle)
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David Bermingham and two other former National Westminster Bank bankers were indicted for wire fraud for siphoning off millions of dollars in income intended for their employer through investments in a Fastow partnership. They fought extradition. (KAREN WARREN / Houston Chronicle)
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Fastow is indicted on 78 charges of conspiracy, fraud, money laundering and other counts in October 2002. The charges will increase to 98 by the spring of 2003. (TIM JOHNSON / REUTERS)
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Richard Causey, (left) the former Enron chief accounting officer, pleads innocent in July 2004 to conspiracy and fraud charges after being dubbed the "principal architect" of widespread schemes to mislead investors in the scandal-ridden energy company. (James Nielsen / Houston Chronicle)
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In Feburary 2004, Skilling is added to Causey's indictment. He pleads innocent to more than 30 counts including conspiracy, fraud and insider trading. Causey is now facing more than 30 charges himself. (DAVID J. PHILLIP / AP)
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On July 8th, 2004, Lay surrenders to FBI after he is indicted on charges that he conspired to manipulate Enron's quarterly financial results, making false and misleading public statements about the company's financial performance and omitting facts necessary to make financial statements accurate and fair. Lay pleads innocent. (Steve Ueckert / Houston Chronicle)
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In July 2004, U.S. Bankruptcy Judge Arthur Gonzalez confirms Enron's reorganization plan in which most creditors will receive about one-fifth of the approximate $63 million they're owed in cash and stock. (Pat Sullivan / AP)
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Mark Koenig, left, a former Enron head of investor relations, pleads guilty on August 25, 2004, to aiding and abetting securities fraud. Koenig helped present falsified financial reports to investors. (Sharon Steinmann / Houston Chronicle)
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Timothy DeSpain, former Enron assistant treasurer, pleads guilty to conspiracy and agrees to cooperate with prosecutors in October 2004. He'll later accept a sentence of four years on probation. (BRETT COOMER / HOUSTON CHRONICLE)
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In October 2004, a federal judge grants Lay a trial separate from Skilling and Causey on charges of bank fraud and lying to banks about using loans to buy Enron stock on margin, but rules the men will be tried together on other charges. (Dave Einsel / Getty Images)
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Trials for former Enron CEO Jeff Skilling and Ken Lay begin in January 2006. (BRETT COOMER / HOUSTON CHRONICLE)
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John Nelson, center, testifies in the fraud and conspiracy trial of former Enron executives Jeffrey Skilling, left, and Kenneth Lay in this courtroom sketch from March 14, 2006, in Houston. (PAT LOPEZ / AP)
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A newspaper vendor holds up a paper with a banner headline outside the federal courthouse after Enron founder Ken Lay and former CEO Jeff Skilling were convicted in Houston May 25, 2006. Lay is convicted in a separate bank fraud case. (TIM JOHNSON / REUTERS)
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Members of the media look at a copy of the program handed out at the memorial service for Ken Lay at the First United Methodist Church of Houston, Wednesday. Lay, the former chairman of Enron, was convicted May 25, 2006 in a fraud and conspiracy trial stemming from the collapse of the former Fortune 500 company as well as in a separate bank fraud bench trial. Lay died in July 2006 in Aspen, Colo. (Steve Ueckert / Houston Chronicle)
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This 2004 handout photo provided by the Harris family shows former Enron Chairman Kenneth Lay, right, pictured at the Woody Creek Tavern in Woody Creek, Colo., with owners Shep, left, and Mary Harris with a jar that was setup at the tavern for the Ken Lay relief fund. The jar reads "Ken Lay Relief Fund. Please Help a Fellow Neighbor." Lay, the founder of Enron Corp. who ascended to the pinnacle of American business only to tumble into disgrace, died of a heart attack in 2006. He was 64. (AP)
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(For the Chronicle/Gary Fountain, March 27, 2008)
Lara McDermott, center, sitting at computer, answers questions from Enron shareholders who stayed after meeting to get help filling out forms and to get answers. The meetings were at the Four Seasons Hotel, 1300 Lamar Street. (Gary Fountain / For the Chronicle)
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(For the Chronicle/Gary Fountain, March 27, 2008)
One of the rooms for people who are Enron shareholders get help filling out forms and finding answers for a class-action lawsuit settlement. The large size of the crowd, which would not fit into one room, caused two separate rooms to be used for the session. One room was at the Four Seasons Hotel, 1300 Lamar Street. (Gary Fountain / For the Chronicle)
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The Supreme Court dealt Enron investors a defeat on Jan. 22, 2008, rejecting their lawsuit alleging securities fraud by Wall Street investment banks that did business with the Texas energy company. (Pat Sullivan / AP)
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Former Enron CEO Jeff Skilling, left, leaves the federal courthouse in 2006 with his attorney Daniel Petrocelli, right, after being sentenced to 292 months in federal prison. He later appeals the verdicts, hoping to get a new trial. (DAVID J. PHILLIP / AP)
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Daniel Petrocelli, right, lead lawyer for former Enron CEO Jeffrey Skilling, speaks to reporters outside the Supreme Court in Washington, in March 2010, after appearing before the high court as Skilling appeals his 2006 convictions on 19 counts of conspiracy, securities fraud, insider trading and lying to auditors. (Manuel Balce Ceneta / AP)
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Brian Durbin, a manager and salesman at a Stafford-based engineering and manufacturing company, wrote a book titled "The Kingdom of Norne." The book uses the downfall of Enron to teach children about ethics.
(Johnny Hanson for the Houston Chronicle)
(Durbin: 281-565-3524) (Johnny Hanson / For the Chronicle)
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Former Enron CEO Jeff Skilling, left, and attorney Daniel Petrocelli leave the Bob Casey Federal Court House surrounded by the media Oct. 23, 2006, in Houston. Skilling was sentenced to more than 24 years but is out pending an appeal. (Kevin Fujii / Chronicle) (Kevin Fujii / Houston Chronicle)
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Joe Hirko, the former head of Enron's broadband business, walks out of the Bob Casey Federal Courthouse after receiving his sentence to 16 months on Sept. 28, 2009, in Houston. He pled guilty to one count of sending out press releases with false information. (Mayra Beltran / Houston Chronicle) (Mayra Beltran / Houston Chronicle)
The collapse of Enron was a closely watched and thoroughly documented corporate event, a slow-motion cataclysm chronicled in thousands of articles, dozens of case studies, movies and even a play.
Despite that coverage, corporate America and lawmakers have missed or ignored a number of key lessons, in the view of several people who know the case well.
Exhibit No. 1 on the lessons unlearned: the 2008 financial collapse.
“It had the same ingredients as Enron’s demise, namely excessive leveraging, funding long term commitments with short term borrowing, and a lack of transparency,” said Vince Kaminski, the former managing director of research at Enron. “If we had learned better the lessons of Enron we might not have had the current financial crisis.”
Sam Buell, one of the first prosecutors on the federal government’s Enron Task Force and now a law professor at Duke University, says he’s been “dumbfounded” by the extent to which Enron’s lessons have been lost.
“We thought Enron was the 9/11 of the financial markets, that it was a cataclysm that would change the world,” Buell said. “The financial collapse of 2008 is evidence that it didn’t. Enron was the canary in a coal mine warning about the systemic problems that we needed to look at, particularly where it comes to risk management.”
Enron’s collapse came fast and furious in the fall of 2001 – culminating in its bankruptcy on Dec. 2 – 10 years ago Friday.
The company was showing some signs of distress early in the year, with layoffs in some divisions in the spring and efforts to conserve cash started in the summer. But momentum picked up when the company reported a surprising loss during its third-quarter earnings call on Oct. 16.
Fastow’s partnerships
About the same time, investment partnerships created by Chief Financial Officer Andrew Fastow began drawing attention.
The LJM partnerships – which had the approval of Enron’s board – were formed using Enron equity and outside capital as a way to hedge against the risks involved in some of the company’s new lines of business and investments.
Fastow’s dual roles as a company executive and managing director of the LJMs prompted a Securities and Exchange Commission investigation as well as an internal Enron investigation that led the company to cut its officially reported earnings over the previous 4½ years by nearly $600 million.
Those problems shook investor and trading partner confidence in Enron, leading to a sharp drop in its stock price and cuts in its credit rating. The falling stock price triggered defaults in some of the off-books partnerships, which deepened the financial problems.
A takeover attempt by rival Dynegy Corp. fell apart in late November when that company realized the depth of Enron’s financial woes. With no White Knight and lenders unwilling to help the company further, Enron filed for bankruptcy.
Just as the LJM partnerships were an effort to move risky assets off Enron’s balance sheet, financial institutions a few years later thought they were removing the risks of shaky home mortgages through similar off-books partnerships, Kaminski said.
“The idea was that if they were out of sight, they weren’t a threat,” Kaminski said. “But they were highly misleading, not just to outside investors but to the management of the financial firms, too.”
The new financial rules that followed Enron’s downfall, the Sarbanes-Oxley Act, increased the penalties for wrongdoing and put greater emphasis on the role of auditors, but didn’t create a broader system of controls to monitor and prevent overly risky decisions, Kaminski said.
The new legislation introduced following the 2008 financial crisis, the Dodd-Frank Act, tries to address the systemic risk issue by requiring greater transparency of exotic financial instruments and advanced warning systems that watch for risks. But Congress already is working to undermine some provisions of Dodd-Frank, while companies are studying ways around its rules.
Sees a cycle
The reaction to major events like the collapse of Enron and the 2008 meltdown is usually a legislative over-reaction, which is then followed by overly strong counter-reaction, said Leslie Caldwell, the first director of the Enron Task Force who is now a partner with the law firm Morgan Lewis.
Changes in internal corporate behavior – with priorities set at the top of the organization – will go a lot further than onerous legislation, Caldwell said.
“People are motivated by what they think they’re rewarded for,” she said.
Cindy Olson, a former human resources manager at Enron, agreed that its demise demonstrated the need for proper systems of motivation and reward.
In the late 1990s Enron followed the trend of many companies by making options a larger part of executive pay, including options with relatively short vesting periods.
“I don’t believe anyone had fraudulent intent, but no one realized the kinds of risks people were motivated to take to keep our stock price going up,” Olson said. “It made them wealthy, but it maybe didn’t support the best long-term decisions.”
1) We interviewed an Enron guy the summer before the collapse. he told us about the off balance sheet financing because he wanted to do the same at our company.
We walked out of the meeting scratching our heads and saying “Can they do that? When we found out,No we didn’t even consider the guy.
2) I didn’t trade my own company stock because it might, might be considered “insider” trading. (avoid the very appearance of evil) But I did trade Enron stock because it definitely was range bound and volatile about a year before collapse.
But I did notice that every director, manager was selling clearly a year before collapse.
I think it was very clear and public that there were problems well before it became a “news” item.
So I never really thought Insider trading was the real issue.
The SOX rules were more about putting Arthur Anderson accountants back to work by doubling the audit costs giving an illusion of protection from financial failure.
Frank-Dodd offers nothing special in this regard either. One of the sponsors (Frank) is closely aligned with one of the contributing components of the collapse – which was a systemic mandate that housing loans be made available to those that were not capable of repaying.
1) We interviewed an Enron guy the summer before the collapse. he told us about the off balance sheet financing because he wanted to do the same at our company.
We walked out of the meeting scratching our heads and saying “Can they do that? When we found out,No we didn’t even consider the guy.
2) I didn’t trade my own company stock because it might, might be considered “insider” trading. (avoid the very appearance of evil) But I did trade Enron stock because it definitely was range bound and volatile about a year before collapse.
But I did notice that every director, manager was selling clearly a year before collapse.
I think it was very clear and public that there were problems well before it became a “news” item.
So I never really thought Insider trading was the real issue.
If Enron’s fall foreshadowed the 2008 crash it is rather apparent that business people don’t learn from their own mistakes.
What could possibly be worse than that?
::
GP
The SOX rules were more about putting Arthur Anderson accountants back to work by doubling the audit costs giving an illusion of protection from financial failure.
Frank-Dodd offers nothing special in this regard either. One of the sponsors (Frank) is closely aligned with one of the contributing components of the collapse – which was a systemic mandate that housing loans be made available to those that were not capable of repaying.