Enron Corporation

I

Introduction

Enron Corporation, energy and commodities trading company that in 2001 became one of the largest bankruptcies in United States history and the focus of a major scandal due to accounting fraud. The U.S. Department of Justice opened a criminal investigation that targeted top Enron executives and the accounting firm of Arthur Andersen & Company, while committees in the U.S. Senate and House of Representatives began separate probes into the company’s conduct. The scandal led to reforms in accounting practices and in regulations governing 401(k) retirement plans through passage of the Sarbanes-Oxley Act of 2002. By July 2004 the federal government had indicted the company’s top three executives and had secured guilty pleas from ten former top officials of the company, including its former chief financial officer. In May 2006 a federal jury found the company’s two top executives, Kenneth Lay and Jeffrey Skilling, guilty of fraud and conspiracy. See also Enron Scandal.

II

Enron’s Origins

Enron was formed in 1985 by the merger of InterNorth, a gas pipeline company based in Omaha, Nebraska, and Houston Natural Gas, a Texas-based gas pipeline company. The merger created the largest natural gas pipeline system in the United States. Between them the two companies owned about 60,000 km (37,000 mi) of natural gas pipeline. Kenneth Lay became the chief executive officer (CEO) of the newly merged company, which was headquartered in Houston and renamed Enron Corporation in 1986.

III

Rapid Growth of Enron

Under Lay’s leadership, Enron began to transform itself from a gas pipeline company into a global energy trader. It began trading natural gas commodities in 1989 and electricity in 1994 following passage of the Energy Act of 1992. This new law deregulated the wholesale electricity market and required public utilities to carry privately marketed electricity, such as Enron’s, over their wires. Enron also benefited from a federal regulatory decision in January 1993 to exempt energy contracts, such as those negotiated between Enron and public utilities, from oversight by the Commodity Futures Trading Commission (CFTC). The chairperson of the CFTC soon resigned and a month later accepted a position as a member of Enron’s board of directors.

Enron eventually became the largest marketer of natural gas in North America and the United Kingdom and the largest marketer of electricity in the United States. Enron branched into other areas of commodities trading, including chemicals, coal, fiber-optic bandwidth, metals, and paper. It also continued to acquire physical assets, such as a pipeline in Argentina and an electric utility, Portland General Electric, which supplied electricity to 750,000 customers in Oregon.

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Enron also branched into international markets. It purchased outright or had a major interest in power plants in Brazil, China, the Dominican Republic, Guatemala, India, Nicaragua, Panama, the Philippines, and Turkey.

Enron enjoyed enormous success during the 1990s and into 2000. Its stock price climbed from less than $10 a share in 1991 to a high of $90 in 2000. From 1998 to 2000 its reported revenues increased from $31 billion to more than $100 billion, earning it a place as the seventh-largest company on the Fortune 500 list of the 500 largest companies in the United States. By March 2000 Enron was regarded as the sixth-largest energy company in the world.

IV

Enron Scandal

A

Basis of the Enron Scandal

Enron’s fortunes, however, began to unravel in 2001. Enron’s president and chief operating officer, Jeffrey Skilling, took over as CEO in February, replacing Lay, who remained chairman of the company. By August, however, Skilling had resigned, and Lay resumed the CEO position. In October the company reported a $638 million third-quarter loss and a $1.2 billion reduction in shareholder equity related to partnerships that had been set up and run by chief financial officer Andrew Fastow. The same month the Securities and Exchange Commission (SEC) began an inquiry into possible conflicts of interest between Enron executives and the company’s partnerships, and Enron removed Fastow from his position.

In November 2001 the company acknowledged that its financial statements for nearly five previous years were erroneous and failed to follow generally accepted accounting practices. Instead of the massive profits it had reported, the company said it had actually lost $586 million since 1997, most of which had been kept off the accounting books and hidden by the partnerships that Fastow had formed. The same month the company revealed that it needed to find financing for a $690 million debt due at the month’s end. Enron’s stock had begun the year at $83 a share, but by late November it had fallen below $1. In early December Enron filed for Chapter 11 bankruptcy protection. At the time of its filing, Enron listed assets of $63.4 billion.

In January 2002 the Justice Department announced a criminal investigation of Enron. The same month the auditing firm Arthur Andersen revealed that some of its employees had shredded Enron documents as far back as October 2001. Enron’s stock was delisted (removed) from the New York Stock Exchange in January 2002, and the same month a former vice chairman of the company reportedly committed suicide. In February the Senate Commerce Committee and the House Energy and Commerce Committee called top Enron executives to testify, nearly all of whom declined to testify by exercising their Fifth Amendment rights under the Constitution.

In March 2002 a grand jury convened by the Justice Department indicted Andersen as a firm, rather than simply indicting individual employees or officers of the accounting company. The grand jury charged the company with destroying “tons of paper” at its offices worldwide and with deleting vast numbers of computer files relating to Enron audits. The case went to trial in May, and in June a jury found Andersen guilty of obstructing justice.

The Enron scandal led to the introduction of several bills in Congress to regulate 401(k) plans in light of the retirement savings lost by thousands of Enron’s 20,000 employees. Enron matched employee contributions to their 401(k) retirement plans with Enron stock and prevented employees from selling the stock until they reached the age of 50. Further, while Enron’s stock plummeted, the 401(k) plan was “locked down,” prohibiting those over 50 from selling their shares. Enron employees could only watch as the stock plummeted and their retirement savings lost value. By the time some were able to sell, the value of the stock had plunged to 26 cents. About 11,000 Enron employees lost nearly $800 million in retirement savings. In the meantime, however, Enron executives who had other forms of compensation encouraged employees to continue investing in Enron while they sold shares of Enron stock when it was still high, earning more than a billion dollars.

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