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A PRESENTATION ON SCAM
“ENRON”
Presented To:
Prof. Dipti Bhatt
Presented By:
Sonali Patel(10mba05)
Ami Joshi(10mba09)
Vinita Patel(10mba11)
Sapna Patel(10mba22)
Rupal Patel(10mba46)
FLOW OF PRESENTATION
• Introduction• Global Assets• Enron Products• Personalities behind the Enron scandal• What happened?• Role of Andersen• Role of Investment & Commercial Banks• Role of Law Firms• More Complications for Enron• The Beginning of the End• What were the results?
1
Introduction
• Enron Corporation was an American energy company based in
Houston, Texas.
• Before its bankruptcy in late 2001, Enron employed approximately
22,000 and was one of the world's leading electricity, natural gas,
pulp, paper, and communications companies, with claimed
revenues of nearly $101 billion in 2000.
• Fortune named Enron "America's Most Innovative Company" for six
consecutive years.
• Enron was originally involved in transmitting and distributing
electricity and natural gas throughout the United States.
2
• The company developed, built, and operated power plants and
pipelines while dealing with rules of law and other infrastructures
worldwide.
• In just 15 years, Enron grew into one of America's largest
companies, but its success was based on artificially inflated profits,
dubious accounting practices, and – some say – fraud.
• Enron divided its business into three main areas :
I. Enron Wholesale Services
II. Enron Energy Services
III. Enron's Global Assets
3
Global Assets
• Enron Transportation Services:
oversees Enron's regulated, interstate natural gas pipelines.
• Enron had assets spread across :
Central America and the Caribbean
South America
Europe
Asia Pacific
4
Enron Products
• Enron traded in more than 30 different products, including the
following:
a. Products traded on Enron Online:
Petrochemical, Plastics, Power, Pulp & Paper, Steel, Weather Risk
Management.
b. Oil & LNG Transportation
c. Broadband
d. Principal Investments
e. Risk Management for Commodities
5
Enron Products ( Conti..)
• Shipping / Freight
• Streaming Media
• Water & Wastewater
• Energy and commodities services
• Capital and risk management services
• Commercial and industrial outsourcing services
• Project development and management services
• Energy transportation and upstream services
6
Personalities behind the Enron scandal
Ken Lay, Chairman and CEO
• Big picture; optimistic; tended to avoid
controversy
“Ken gravitates toward good news”
Jeffrey Skilling, President
• Proponent of big ideas; less interested in
details
“Skilling is a designer of ditches, not a digger of
ditches.”
7
Personalities behind the Enron scandal (Conti..)
Andrew Fastow, CFO
• Ambitious; unwilling to let the rules get in the
way
“I don’t know that he ever had a moral compass”
8
What happened?
• Enron morphed from a sleepy gas pipeline into a rogue trading
company.
• Enron officers used their political clout affect policy, e.g.,
electricity deregulation.
• pressure on Indian officials to push development of expensive
power plant.
• Enron traders caused California’s energy crisis.
• Enron’s profits were the product of accounting fraud.
• Enron used SPEs to hide billions of dollars of debt.
9
• Skilling left before the collapse because he “knew something”.
• Top management, auditors, and banks were all part of the
conspiracy.
• The Board and regulators were asleep at the wheel.
• Lay sold his shares while touting the company to employees and
investors.
• Executives were dumping their shares while employees, not allowed
to sell from their 401(k)s, saw their retirements wiped out.
• The Enron collapse was the (inevitable?) result of management
greed.
What happened? (Conti..)
10
Role of Andersen
• He Was paid $52 million in 2000, the majority for non-audit related
consulting services.
• Failed to spot many of Enron’s losses.
• Should have assessed Enron management’s internal controls on
derivatives trading—expressed approval of internal controls during
1998 through 2000.
• Kept a whole floor of auditors assigned at Enron year around.
• Enron was Andersen’s second largest client.
• Provided both external and internal audits.
• CFOs and controllers were former Andersen executives.
• Accused of document destruction—was criminally indicted.
• Went out of business11
Role of Investment & Commercial Banks
• Enron paid several hundred million in fees, including fees for
derivatives transactions.
• None of these firms alerted investors about derivatives problems at
Enron.
• In October, 2001, 16 of 17 security analysts covering Enron still
rated it a “strong buy” or “buy.”
• Example: One investment advisor purchased 7,583,900 shares of
Enron for a state retirement fund, much of it in September and
October, 2001
12
Role of Law Firms
• Enron’s outside law firm was paid substantial fees and had
previously employed Enron’s general counsel.
• Failed to correct or disclose problems related to derivatives and
special purpose entities.
• Helped draft the legal documentation for the SPEs.
13
More Complications for Enron
• Barclay’s Bank begins to doubt the strength of the new companies
Big River and Little River.
• It requires a cash reserve to be deposited (as security) for the
$11.4 million dollar loans.
• This cash reserve is paid by JEDI, whose net worth by this time
consists solely of Enron stock, putting Enron in the at-risk position
for this amount.
14
The Beginning of the End
• On July 13, 2001, Skilling resigned as CEO. He claimed it was for
personal reasons. The real reason was that Enron was heading for
trouble, and he didn’t want to face the music. There were at least five
reasons that could foresee ably lead to disaster:
(i) The firm’s stock was down about 40% for the year. If it kept falling,
several of Fastow’s SPEs – those primarily financed with Enron stock
– would be under water.
(ii) India had stopped making payments for electricity generated by the
Dabhol plant. Enron had shuttered the plant in May and, despite the
Bush administration pressuring India on Enron’s behalf, was facing
the prospect of writing off its entire $900 million investment.
15
(iii) The company had recently spent $326 million to buy back shares of
the failed Azurix water company.
(iv) Severe shortages of electricity in California had led to rolling
blackouts and accusations that Enron had manipulated prices.
(v) The venture in bandwidth trading failed lamentably, and ventures in
metals and pulp trading were racking up losses.
• The company was in a cash crunch and was trying to sell assets to
raise cash. Skilling could see the writing on the wall, but so could
most of Enron’s senior management. Many had been liquidating
their holdings in Enron stock for months.
The Beginning of the End (Conti..)
16
What were the results?
• Many people suffered from Enron’s failure, but employees were hit
especially hard. Thousands were laid off with just $4,500 in
severance pay.
• Enron had encouraged employees to invest their pension assets in
the company’s stock. Employees who had foolishly done so lost
pension savings as well as their jobs.
• In June 2002, Arthur Andersen was convicted of obstruction of
justice for its destruction of Enron documents. Andersen, which was
once the largest accounting firm in the U.S., was barred from
auditing clients.
17
• The government nearly had a scandal on its hands, as many
politicians had Enron as a major contributor to their campaigns.
• The energy industry went through a crisis, since other companies in
the industry were Enron copycats and had very similar deals and
trading positions in place when Enron went down. And investors
took a big hit.
• Finally, even with its downfall, some good has come – regulators
are seeking to improve standards and practices in accounting,
corporate governance, risk control, and pension fund administration,
to ensure that another Enron does not emerge.
What were the results? (Conti..)
18
19
Bibliography
• http://www.lawyershop.com/practice-areas/criminal-law/white-collar-
crimes/securities-fraud/lawsuits/enron
• http://ezinearticles.com/?How-Poor-Business-Ethics-Led-To-The-
Collape-Of-Enron-Ethics&id=951763
• http://whatreallyhappened.com/WRHARTICLES/enron.html