Enron: What Really Happened?

Enron: What Really Happened?

Enron: What Really Happened?

Enron was founded in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. The company grew aggressively from a 10 billion dollar company to over 65 billion dollars in 15 years; however this energy behemoth collapsed in just 24 days making it one of the largest bankruptcies in US history. So what was the catalyst for this now legendary fall?

The scandal grew and grew and as events unfolded it became clear the circumstances which led to the companies decline were far reaching. At the time of the utility giant's bankruptcy hearing it was exposed that a number of key managers sold large amounts of their shares held in the company, amounting to hundreds of millions of dollars in the months leading up to the collapse. Even more frustrating is the fact over 20,000 employees lost their jobs and over 2 billion dollars in pensions and retirement funds disappeared in a matter of days.

Kenneth Lay the founder of Enron came from humble beginnings a Baptist Ministers son he was no stranger to poverty. Obviously coming from such a modest background he wanted more for himself and his family. He went on to receive a PhD in Economics and took an interest in the energy industry and in particular the de-regulation of the Natural Gas sector. He later went on to lobby for greater de-regulation to enable businessmen like him to de-shackle the energy industry.

When Jeff Skilling joined the company he came with the vision and ambition that Kenneth Lay wanted for his company. He came up with the idea that Enron would become a stock broker for the natural gas industry so that energy could be traded. When Mr Skilling joined the company he imposed Mark to Market accounting treatment, which is subjective and easily manipulated to allow companies to artificially value themselves.

However before the meteoric crash Enron was part of the biggest bull market the world had ever seen while internet stocks were rising dramatically so were Enron's, it seemed the company could do no wrong. It reported quarterly profit increases of 30% boosted by web sales of its wholesale gas. However, the share increases were used as a vehicle to make the managers of the company rich not the shareholders, once the shares reached a high they would sell and cash in their own options for a profit. The share price had in many ways been artificially pushed up. Enron had invested billions into Natural Gas supply around the world with most of them losing money by the bucket load.

After a series of failed projects including a partnership with Blockbuster to provide on-demand online movies and another project trading un-used bandwidth the company was running out of ways to cover up its losses. Speculation started to spread when a reporter at Fortune wrote an article called 'Is Enron Overpriced' which threw up lots of unanswered questions and led to a further investigation by other high profile news publications.

The California energy crisis which caused electricity blackouts on many occasions often brought the economy to its knees. These mini disasters enabled many energy companies to inflate the price of electricity for profit. As a result Enron was able to successfully bet that the price of electricity would go up this delivered profits of over 2 billion dollars.

The beginning of the end really appeared when CEO Jeff Skilling without warning resigned in 2001 sending a wave of negative speculation. The day after Skilling resigned Sharon Watkins an accountant for the firm sent a letter to Ken Lay detailing her concerns; she later would become a whistleblower, which led to Enron's demise. She exposed the company's creative accounting and irregular practices.

The scandal culminated in an executive Cliff Baxter committing suicide and another being sentenced to 10 years in prison for fraud. Former CEO Jeff Skilling and founder Ken Lay were indicted for insider trading and fraud. Even Enron's accounting firm Arthur Andersen was convicted for obstructing justice. Arthur Andersen later collapsed with a total of 29,000 people losing their jobs. Enron's shareholders would later go on to sue the company for over 20 billion dollars.

Commercial scandals of this magnitude are rare but far reaching and devastating.

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