The Enron Fiasco

The Enron Corporation came into being during the 1980s when Omaha- and Nebraska-based Northern Natural Gas Company created a holding company by the name of InterNorth, which then merged with the Houston Natural Gas to establish the now-defunct Enron.  Initially engaged in the electricity business, the company became a major success also in the fields of natural gas, communications, pulp and paper in the years to come.  The Fortune magazine named Enron “America’s Most Innovative Company” for six years consecutively.  In the year 2000, the company was said to have made profits worth $111.  By the end of the following year, however, it was revealed to the public that Enron Corporation’s strong financial position had been mostly maintained via accounting fraud.  Consequently, some of the richest businessmen of Enron were indicted, and the Enron trial became a history lesson for businessmen of the present and the future.[1]

     The leaders of the Enron Corporation were charged with a wide variety of crimes when their trial began in January 2006.  These “financial crimes” included, but were not limited to “bank fraud,” false statements, “securities fraud,” “money laundering,” “wire fraud,” “conspiracy” in addition to “insider trading.”  Their company as a whole was discovered to have shown inflated profits as well as assets to stakeholders.  Banks and auditors had been lied to, and the company’s slogan “Ask Why?” did not appear to help when it was time for the stakeholders of Enron to demand accountability.[2]  Enron had been cheating its stakeholders throughout its history, perhaps.  Analogously, subsequent to the discovery of the Enron fraud, the government began its series of discoveries of the corporate fraud in question.  Only May 1, 2003, Linda Chatman Thomsen, Deputy Director, Division of Enforcement at the U.S. Securities and Exchange Commission reported the following about the case:

        Today, the Securities and Exchange Commission amended its March 12th Complaint to add charges against five former executives of Enron’s broadband subsidiary. In its Amended Complaint, the Commission charges these five individuals with orchestrating a fraudulent scheme to inflate the price of Enron’s stock through, among other things, a series of false and misleading public statements. The Commission also alleges that each defendant personally traded in Enron securities while in possession of material nonpublic information concerning the true nature of this business. The Commission is seeking disgorgement of ill-gotten gains, civil penalties, injunctive relief, and an order permanently barring each of them from serving as an officer or director of a publicly traded company. Pursuant to the Sarbanes-Oxley Act, the Commission is seeking an order providing that any civil penalties will be added to other monies recovered, which will then be distributed to the victims of the alleged violations.[3]

Enron Corporation used to be recognized as one of the world’s leading companies before it entered bankruptcy proceedings.  As the Enron fiasco turned into a spectacle for the entire world of business, one of the most serious crimes that the company had engaged in, i.e. insider trading, was analyzed in great depth.  According to the SEC, insider trading may be either legal or illegal in nature.  The latter is generally described as the buying or selling of a security “in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.”[4]  In other words, even the presentation of false information to sell securities that are truly not worth the price, is insider trading that Enron had deliberately engaged in to fool its investors.

     As a matter of fact, Enron Corporation had begun insider trading very early in its career.  Shortly after Enron was born, during the 1980s, it was rumored that important Enron officers were moving millions of dollars into their personal accounts without accounting for the sums in the financial statements of the company.  The officers were also reported to have “inside information” on the functioning of OPEC.  Nevertheless, the government failed to catch fraud in the beginning of Enron.  Moreover, the auditors of the company were advised by the chiefs of Enron to stop the investigations altogether.[5]

     The illegal insider trading of Enron Corporation was brought into light once again in the year 2001, when it was discovered that the company had established offshore business units to avoid taxation and also to hide the losses of the company behind those units.  This deceptive practice had made Enron appear highly profitable, thereby allowing the company’s stock price to sky rocket.  Enron is guilty also of making false financial statements to show inflated revenues.  In addition, when the company’s stock price was driven up, Enron’s executives are said to have begun their “work on insider information” to “trade millions of dollars worth of Enron stock.”  This “insider information” was the existence of Enron’s offshore business units that served to hide the actual losses of the company from the investors.  By hiding its true financial position from its investors, Enron was guilty of illegal insider trading.[6]

     The company continued to dupe the investors through August 2000 when Enron’s stock reached its highest price of $90.  Inflated profits on false financial statements, besides the company’s founder’s deceptive claims in the media about the future success of Enron, had led the stock price to sky rocket.  The price was not allowed to reach any higher, though, despite the fact that Enron was once again telling its investors that the price would continue to climb.  The price actually began to drop after August 2000 because the executives of Enron Corporation had begun to secretly sell their own Enron stocks to make the highest personal profits.  As the shares continued to be sold, Enron’s share price dropped to $42, and eventually to $15 in October 2000.  Because Enron had an extremely good reputation, investors were urged to buy its stock even after the price of stock had sunk to $15.[7]

     The fact that Enron Corporation was a loss rather than a profitable business, was revealed to the public when the European operations of the company filed for bankruptcy at the end of November 2001.  Two days later, on 2 December 2001, Enron was also declared bankrupt in the United States.[8]

     Today, Enron Corporation is called the Enron Creditors Recovery Corporation, and its website (www.enron.com) publishes its status as a bankrupt entity without business.[9]  All of the people involved in the Enron fraud are languishing in prisons.  It is important, therefore, to ask: Was it worth their time of lives to engage in elaborate forms of insider trading and other kinds of corporate fraud, only to enjoy huge sums of money for some years?  Indeed, the Enron debacle is surrounded by such questions on ethics and principles of living, while the only resounding answer to these questions appears to be the following: Corporate fraud in any form is a very serious crime.

Bibliography

“Enron,” Answers (15 May 2007), http://www.answers.com/topic/enron-corporation, Accessed

15 May 2007.

“Insider Trading,” U.S. Securities and Exchange Commission (19 April 2001),

http://www.sec.gov/answers/insider.htm, Accessed 15 May 2007.

Thomsen, Linda Chatman, “Speech by SEC Staff: Regarding Fraud, Insider Trading Charges

Relating to Enron’s Broadband Subsidiary,” U.S. Securities and Exchange Commission (1 May 2003), http://sec.gov/news/speech/spch050103lct.htm, Accessed 15 May 2007.

[1] “Enron,” Answers (2007), http://www.answers.com/topic/enron-corporation, Accessed 15 May 2007.

[2] Ibid.

[3] Linda Chatman Thomsen, “Speech by SEC Staff: Regarding Fraud, Insider Trading Charges Relating to Enron’s Broadband Subsidiary,” U.S. Securities and Exchange Commission (1 May 2003), http://sec.gov/news/speech/spch050103lct.htm, Accessed 15 May 2007.

[4] “Insider Trading,” U.S. Securities and Exchange Commission (19 April 2001), http://www.sec.gov/answers/insider.htm, Accessed 15 May 2007.

[5] “Enron.”

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Ibid.