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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. 2. 3. History of Enron and Andersen Key Players in Scandal How investors were scammed n 4. 5. 6. Types of white-collar crime How scandal was discovered Verdicts in Court Effects on the financial industry: n New legislation
What was Enron? n n n 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 1990 s
The Smartest Guys in the Room - California and Traders n http: //www. youtube. com/watch? v=dv. LZBv 8 Hs. O 4&feature=related
What was Arthur Andersen Accounting? one of the Big Five accounting firms for public and private companies around the world n over $9 billion in sales during 2001. n 85, 000 employees working in 84 countries n
Who were some of Enron’s clients? n n n Teeside Bahia Las Minas Puerto Quetzal Power Project PQP LLC Empresa Energetica Corinto Eco. Electrica 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. l l 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. n Enron's auditors, Arthur Andersen, also alerted shareholders that they should not trust any financial reports issued before June 30, 2001. n 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=h. Pq. H 3 Dr. WEEU 2. )Jeffrey Skilling § President of Enron, heading Enron's North American operations.
Key people 3. )Andrew Fastow n n n 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 n Andersen served as Enron's sole internal auditor throughout the energy giant's sixteen years, also performing internal audits and consulting services.
n 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 n 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. l Most of their attention is on handling the lawsuits and presiding over the orderly dissolution of the company.
Key people 5. ) Harvey Pitt n Chairman of the SEC who prosecuted the Enron/Andersen court case
White Collar Crimes that the SEC investigates and prosecutes n Insider trading l n Securities fraud l n providing false or misleading information about financial statements to motivate people to buy or sell stock Conspiracy l n Tipping off investors/friends/family of confidential financial info motivating them to either buy or sell a stock A secret plan by a group to do something unlawful or harmful Money Laundering l Changing the source of income
Sarbanes-Oxley Act n The Sarbanes-Oxley Act of 2002 l l 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 n n n 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
Wall Street dumps Enron, January 15, 2002 n n n 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 l l l 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 l l Manages and invests state’s retirement funds Purchased debt securities at inflated prices
Lead Plaintiffs 3. San Francisco City and County Employees‘ Retirement System l l Provides benefits for retired employees Purchased equity securities at inflated prices 4. Teamsters Nos. 175 & 505 Pension Trust Fund l l Oversees retirement savings Purchased debt securities at inflated prices 5. Hawaii Laborers Pension Plan l l Administers retirement savings Purchased debt securities at inflated prices
Defendants 1. Enron l l Kenneth Lay, Jeffrey Skilling, Andrew Fastow, and various other Executives Accused of illegal insider trading 2. “Andersen” l consisted of Arthur Andersen LLP and Andersen Worldwide S. C. 3. Law Firms l Vinsin & Elkins, Kirkland & Ellis 4. Investment Banks J. P. Morgan & Chase, Citi. Group, Bank of America, etc. l
Involvement of the Banks n n n 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” n WITHOUT asking why they needed the $$
The Verdicts… n http: //www. youtube. com/watch? v=di 2 XVJljad. A&NR=1&feature=f vwp
What happened to Kenneth Lay? n On July 7, 2004, Lay was indicted and found guilty by a grand jury on 11 counts of conspiracy, securities fraud and related charges. n Lay could have faced 20 to 30 years in prison. n 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? n n n 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 l n 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? n 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 n http: //www. nytimes. com/learning /teachers/featured_articles/2002 0117 thursday. html