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Enron Fraud InfoCenterIt is the most talked about collapse in recent years. When Enron filed for bankruptcy in December of 2002, thousands of people lost their jobs and savings. The road to financial disaster was complex, however, and marked by fraud. Some convictions of former Enron executives and associates have already occurred, while more lawsuits are pending. Brief History of Enron In 1985, Enron began its business as a company that shipped natural gas through pipelines. Its role changed rapidly over the next 16 years, making it one of the nation’s most dominant energy traders. As the company grew in size, power, and prestige, Enron began engaging in ever more complicated contracts and undertakings. But alleged illegal, off-the-balance-sheet transactions and partnerships were helping to conceal Enron’s growing debt problem. By the time investors, employees, and the public learned of the company’s crisis, the downward spiral was virtually unstoppable. When was the fraud discovered? Insiders and high-level executives at Enron may have known about the company’s financial secrets and woes for some time. In August of 2001, former VP for Corporate Development Sherron Watkins warned Enron’s CEO of impending financial problems based on “a wave of accounting scandals.” Two months later, in October 2001, Enron officials announced that the company was actually worth $1.2 billion less than had previously been reported. The difference was due to both inflated estimates of income and the failure to include all the company’s debts in reports to investors. In December, Enron filed for bankruptcy amid a barrage of questions and accusations. Both Enron’s top managers and its accounting firm, Arthur Anderson, LLP, have come under extreme scrutiny as investigators try to piece together how secret dealings may have come to destroy the energy giant. While some convictions have been made, other trials are forthcoming. What type of fraud was committed? A number of top Enron executives have been charged with fraud, including securities, wire, and mail fraud. There have also been accusations of money laundering and conspiracy. In addition to Enron employees, Arthur Anderson, LLP, the accounting firm responsible for auditing Enron, was convicted of obstruction of justice. Three British bank workers have also been indicted on charges of wire fraud. Michael Kopper was the first former Enron executive to be convicted. After pleading guilty to charges of money laundering and wire fraud, Kopper began to help investigators uncover other people involved in the Enron scandal. Kopper’s confessions, along with evidence gathered by authorities, points to an elaborate system that concealed Enron’s debt and made millions for insiders like CFO Fastow, Kopper, and Kopper’s domestic partner. LJM One of Enron’s biggest problems was a group of partnerships called LJM. In 1999, Enron invested in an Internet start-up company called Rhythm NetConnections. Although its Rhythm stock was worth a large amount on paper, Enron was not allowed to sell it until later that fall. Then-CEO Jeffrey Skilling wanted to be able to put the profit on paper, even though it was vulnerable to market fluctuation. His solution, allegedly devised by CFO Andrew Fastow, was to create a partnership with a company in the Cayman Islands, which they named LJM. They funded LJM not only with the money of outsiders investors and bankers but also with Enron’s own stock. LJM took on many risky deals. In the Rhythm NetConnections case, it created a subsidiary, Swap Sub, funded by cash and Enron stock. Swap Sub agreed to buy Rhythm NetConnections stock from Enron at a set price, even if it was worth less than that at the time of sale. The partnership was especially risky because of the possibility that both Rhythm and Enron’s stock could fall simultaneously. But partnerships like LJM allowed Enron to keep debts and liability off their financial statements, and so they continued. Chewco Enron executives formed Chewco in 1997. CFO Andrew Fastow wanted to run Chewco, but CEO Skilling refused to allow this because Fastow’s conflict of interest would be publicly known. Instead, Fastow had one of his employees, Michael Kopper, control Chewco. To hide the connection, Kopper’s investment in Chewco was made in his domestic partner’s name. When Enron decided to buy out Chewco, Fastow drove up the price, making huge profits for Kopper and his partner. Kopper was also given $1.5 million in management fees and other payments, which reports claim were of dubious legality. He shared these with Fastow. What is the current status of the Enron case? Because of the complexity of the Enron case and because of the number of people and partnerships being investigated, probes by the SEC and Department of Justice are ongoing. In addition, a class action lawsuit on behalf on Enron shareholders is in its early stages. Convictions As mentioned, the first to be convicted was former Enron executive Michael Kopper. Kopper worked closely with Andrew Fastow, the former chief financial officer, who has been indicted on 78 counts of conspiracy. In August 2002, Kopper was convicted to charges of money laundering and wire fraud. He had pled guilty to the charges. In addition, Enron’s accounting firm, Arthur Anderson, LLP, has been convicted of obstruction of justice. Employees were involved in a massive destruction of files pertaining to Enron, preventing the court from seeing past financial records, transactions, emails, memos, and other potentially relevant documents. Anderson was responsible for auditing Enron and for ensuring that its accounting practices adhered to regulations. Arthur Anderson was also fined $500,000 and was placed on five years probation. Indictments, Defendants, and Investigations There are more than 29 defendants listed in a case filed by the federal government against Enron and its executives. Some of those suspected of wrongdoing are: · Jeffrey Skilling, former Enron president who served as CEO from February to August 2001 · Andrew Fastow, former chief financial officer who was in charge of LJM and has been indicted on 78 counts of conspiracy (he has pleaded not guilty on all counts) · Richard Causey, former chief accounting officer · Jeffrey McMahon, former treasurer · Ben Glisan Jr., former treasurer · Kenneth L. Lay, founder, former chairman, and former CEO of Enron · J. Clifford Baxter, former vice chairman, died of apparent suicide in January 2002 · Wendy L. Gramm, member of Enron’s Board of Directors and its audit committee · Gary Mulgrew, Greenwich Nat West bank employee, accused of defrauding his company through the LJM investment · Giles Robert Hugh Darby, Greenwich Nat West bank employee, accused of defrauding his company through the LJM investment · David John Bermingham, Greenwich Nat West bank employee, accused of defrauding his company through the LJM investment J.P. Morgan Chase & Co. officials have been interrogated regarding their role in dealings with former Enron executives, but no criminal charges have been filed. In addition, a lawsuit has been filed against Enron’s law firm, Vinson & Elkins LLP. Timothy Belden, a former Enron energy trader pleaded guilty to charges of conspiracy regarding illegal dealings that took advantage of the California energy crisis. In essence, he explained, Enron took energy out of California to avoid price caps, sent it elsewhere to make a profit, and then sold it back to California at higher prices. |