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?

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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.

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• 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

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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

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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

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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

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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.”

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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”

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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.

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• 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..)

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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

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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.

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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.

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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.

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(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..)

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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.

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• 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..)

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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