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October 25, 2006

My first MGT 645 assignment... very lame subject matter

Enron Executives- Flight of Fancy

There are several distinct tipping points throughout history for people to learn from: military strategists have Vietnam, archaeologists have Lucy, and managers have Enron. Enron will forever go down in the annals of managerial and accounting practices as the single most costly scam to affect thousands of people, even the economy itself! Enron has been compared to a classic Greek tragedy of historical proportions. Some people claim the Enron scandal was born out of the constructs of good old fashioned American capitalism or from the deregulation of California’s energy policies. In reality, the whole despicable scandal can be boiled down to one thing- greed.

Enron was a company that dealt less with substance than with reputation. It sold energy, a commodity it did not produce but bought and then sold. Enron actually traded in more than 800 commodities, ranging from lumber and steel to bandwidth and weather risk management. California legislature deregulated the energy industry in hopes that the law of supply and demand would create fair prices for both gas and electricity. Instead, it gave Enron free reign to a market in high demand and very soon Enron was involved in one of the most blatant forms of manipulation to include asking electric companies to “unexpectedly” take their power plants off line.

From 1995-2000 Fortune Magazine named Enron the “most innovative company in corporate America”. Evidently they were a little too innovative. Having the state of California’s energy supply in the palms of their hands wasn’t good enough for Enron executives. Blinded by the same driving force that causes people to buy lottery tickets, Enron executives setup fake companies overseas, cooking their financial books to extract every last bit of profit from the company. Coincidentally, none of those companies showed up on the books but bought off much of Enron’s piling debt.

Enron executives went about their day like nothing was going on, shaking hands, making small talk to employees, even urging them to buy more of Enron’s stock. Even when wind of dubious accounting practices made it to Enron employees upper management assured worried employees that their stock and 401K’s would be fine. In fact, Enron passed company policy stating no employee under the age of 54 could sell their stock.

Kenneth Lay, Jeffery Skilling, and Andrew Fastow concocted a complex web of schemes to keep Enron’s stock high but in the end they just slowed the inevitable. They spent the better part of 2001 selling off their stock all the while telling their employees to hold onto theirs and even going so far as to lie about the company buying more stock. In the beginning of 2001 Enron’s stock sold for $80 a share. By the time Enron executives were caught with their pants down, Enron’s stock was on the floor too at only 30 cents a share.

Total monetary loss was $600 billion and big investors and pension funds bore the brunt of the losses. Surprisingly, it was the big investor fraud that landed the executives in the courtrooms and not the loss of thousands of pension funds of former Enron employees. An employee that worked for Enron for 15 years at the beginning of 2001 held about $100k of company stock. By the end of the year the stock was worth $80.

Lay and Skilling were not found guilty of the most heinous of their actions- destroying thousands of retirements, price gouging California residents billions in utilities, or even looting Third World companies. They weren’t found guilty because they were never convicted of those charges. It is generally not regarded as a crime by our judicial system and courts allow companies to ditch employee pension plans (deferred wages) with no consequences.

Trying to swindle big banks is another story and is punishable by law. Sixteen Enron executives have plead guilty to fraud including Michael Kopper who plead guilty to charges of money laundering and wire fraud and will have to pay back more than $12M in assets. In March of 2005 Bernie Ebbert’s honest idiot defense failed and he was convicted of fraud. In fact there are several key executives in the Enron scandal facing many many years in prison. Kenneth Lay, the former CEO and Chairman of Enron, was convicted of 6 counts conspiracy. It was Lay’s ego that got him convicted and Divine Justice, perhaps, that got to him before his sentencing. Lay died of a heart attack early July 2006 while he was vacationing in Aspen. Skilling was just convicted of little more than 2 years in prison- not a very encouraging message the courts are sending out to the masses.

The white collar community has always looked the other way when it comes to a little fraud or deception, hardly horrified by the action of the guilty. But Enron’s scandal reached far deeper than most newsworthy matchstick men games and even the ruling elite wanted justice served for the billions of dollars lost through the greed of a few people.

3 comments:

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  2. Having lived over there, I was interested in the story behind Enron's $1-billion projection of power into India and the creation of the Dabhol Power Company - a hard-ball political effort that was sponsored by Clinton and ryun by now-deceased Commerce Secty. Ron Brown (funny about that) and may have speeded Enron's collapse.

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  3. I alkso htought it wqas interesting how much time Lay spent with GWB. There are a lot of images of those two together.

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