From Wall Street to Behind Bars the untold story of

Kenneth Lay

Doctor Campelo

Business Ethics for MBA s

Enron’s Code of Ethics … was it a joke?

“We know Enron enjoys a reputation for fairness and honesty that is respected. Enron's reputation finally depends on its people, you and me.” (apud Michael Miller). The Code is based on several values, such as respect, integrity and communication.

Enron, “a provider of products and services related to natural gas, electricity and communications to wholesale and retail costumers” (Chary, 112) represented one of the largest fraud scandals in history. As a result of the fraud investigations, the company was forced to file for bankruptcy in December 2001. Up to end of 2000, no one pointed fingers at Enron. For 2000, the corporation reported $101 billion revenue and the auditors gave a clean report. But, at this stage, Enron announced its intention that during the third quarter of 2001, it would book a loss of $1.01 billion and, at the same time, reducing shareholders’ funds by $1.2 billion as a result of correcting accounting errors in the past. After a long trial, Andrew Fastow, the former Enron finance executive has been sentenced to six years in prison. Fastow pleaded guilty for fraud and money laundering in 2004 and also became the chief whiteness in the trial against Jeffrey Skilling and Ken Lay. His testimony helped convict Lay (who died in July 2006 after a heart-attack) and Skilling,

The Smartest Guys in The Room

Skilling was born in Pittsburgh, Pennsylvania, and was the second of four children of Betty (Clarke) and Thomas Ethelbert Skilling, Jr. His father was a sales manager for an Illinois valve company. He grew up in New Jersey and Aurora, Illinois. When he was 16 years old, he worked at WLXT (channel 60), a UHF television station in Aurora.

Skilling graduated from West Aurora High School. He received a full scholarship to Southern Methodist University in Dallas where he was a member of the fraternity Beta Theta Pi. He initially studied engineering before changing to business. After graduation, he went to work for a Houston bank, which sent him to Harvard Business School. During his admissions interview for Harvard Business School, he stated that he was asked if he was smart, to which he supposedly replied, "I'm fucking smart". Skilling earned his M.B.A. from Harvard Business School during 1979, graduating in the top 5% of his class as a Baker Scholar. He became a consultant at McKinsey & Company in the energy and chemical consulting practices. Skilling became one of the youngest partners in the history of McKinsey. Skilling started his career in Houston as an analyst for First City Bancorporation of Texas in Houston. First City was one of Enron's banks and just before it failed the first time, Skilling quit.[citation needed] The CEO of Collecting Bank, the FDIC's facility for managing the bad assets of First City, was Sam Segnar, the first CEO and chairman of Enron. The new First City Bank, headed by A. Robert Abboud, was also an Enron bank. Abboud was the former president of First Chicago Bank and Occidental Petroleum under Armand Hammer.[citation needed] First City was initiated by Judge James Andersen Elkins and his law partnership, Vinson & Elkins, one of Enron's main law companies. As a consultant for McKinsey & Company, Skilling worked with Enron during 1987, helping the company create a forward market in natural gas. Skilling impressed Kenneth Lay in his capacity as a consultant, and was hired by Lay during 1990 as chairman and chief executive officer of Enron Finance Corp.

Fastow was born in Washington, D.C. He grew up in New Providence, New Jersey, the middle of three sons in a middle class Jewish family.[1] His parents, Carl and Joan Fastow, worked in merchandising. Fastow graduated from New Providence High School, where he took part in student government, played on the tennis team, and played in the school band.[2] He was the sole student representative on the New Jersey State Board of Education.[3]

Fastow graduated from Tufts University in 1983 with B.A.s in economics and Chinese. While there, he met his future wife, Lea Weingarten, whom he married in 1984. Fastow and Weingarten both earned MBAs at Northwestern University and worked for Continental Illinois National Bank and Trust Company in Chicago

What did Enron do wrong ?

Enron used special purpose entities—limited partnerships or companies created to fulfill a temporary or specific purpose to fund or manage risks associated with specific assets. The company elected to disclose minimal details on its use of "special purpose entities".[26] These shell companies were created by a sponsor, but funded by independent equity investors and debt financing. For financial reporting purposes, a series of rules dictate whether a special purpose entity is a separate entity from the sponsor. In total, by 2001, Enron had used hundreds of special purpose entities to hide its debt.[23] Enron used a number of special purpose entities, such as partnerships in its Thomas and Condor tax shelters, financial asset securitization investment trusts (FASITs) in the Apache deal, real estate mortgage investment conduits (REMICs) in the Steele deal, and REMICs and real estate investment trusts (REITs) in the Cochise deal.[27]

The special purpose entities were used for more than just circumventing accounting conventions. As a result of one violation, Enron's balance sheet understated its liabilities and overstated its equity, and its earnings were overstated.[26] Enron disclosed to its shareholders that it had hedged downside risk in its own illiquid investments using special purpose entities. However, investors were oblivious to the fact that the special purpose entities were actually using the company's own stock and financial guarantees to finance these hedges. This prevented Enron from being protected from the downside risk.[26] Notable examples of special purpose entities that Enron employed were JEDI, Chewco, Whitewing, and LJM.

CALIFORNIA mid 1990 s to Early 2000’s Entire families trapped in elevatorsLights at intersections went out unexpectedly , causing accidents even deathsRestaurants went out of business because of the electricity were so jacked up that the bills couldn’t be paid.

Whole neighborhoods without lights Elderly and Low Income people were the most vulnerable . They couldn’t afford their electricity which meant their health was at risk if using medical equipment.

But WHY … Who is it to blame?

Was Enron run by Crooks ? Kenneth Lay was Enron s CEO .Lay worked in the early 1970s as a federal energy regulator. He

then became undersecretary for the Department of the Interior before he returned to the business world as an executive at Florida Gas Transmission. By the time energy was deregulated in the 1980s, Lay was already an energy company executive and he took advantage of the new climate when Omaha-based Internorth bought his company Houston Natural Gas and changed the name to Enron in 1985. The much larger, better capitalized and more diversified Internorth was then used as an asset to propel his efforts at Enron. He also was a member of the board of directors of Eli Lilly and Company and was also a director of Texas Commerce Bank which later was taken over by JPMorgan Chase.

Lay was one of America's highest-paid CEOs, earning a $42.4 million compensation package in 1999.[8] Lay dumped large amounts of his Enron stock in September and October 2001 as its price fell, while encouraging employees to buy more stock, telling them the company would rebound. Lay liquidated more than $300 million in Enron stock from 1998 to 2001, mostly in stock options. As the scandal unfolded, Lay insisted he wanted to "tell his story," but later reneged on a promise to testify to Congress, taking the Fifth instead.[9] Condé Nast Portfolio ranked Lay as the 3rd worst American CEO of all time.[10]

Lay had been married to his second wife and former secretary, Linda, for 22 years and had two children, three stepchildren, and twelve grandchildren

What were the consequences of the Enron Scandal ?

The House passed Rep. Oxley's bill (H.R. 3763) on April 24, 2002, by a vote of 334 to 90. The House then referred the "Corporate and Auditing Accountability, Responsibility, and Transparency Act" or "CAARTA" to the Senate Banking Committee with the support of President George W. Bush and the SEC. At the time, however, the Chairman of that Committee, Senator Paul Sarbanes (D-MD), was preparing his own proposal, Senate Bill 2673.Senator Sarbanes's bill passed the Senate Banking Committee on June 18, 2002, by a vote of 17 to 4. On June 25, 2002, WorldCom revealed it had overstated its earnings by more than $3.8 billion during the past five quarters (15 months), primarily by improperly accounting for its operating costs. Senator Sarbanes introduced Senate Bill 2673 to the full Senate that same day, and it passed 97–0 less than three weeks later on July 15, 2002.

The House and the Senate formed a Conference Committee to reconcile the differences between Sen. Sarbanes's bill (S. 2673) and Rep. Oxley's bill (H.R. 3763). The conference committee relied heavily on S. 2673 and "most changes made by the conference committee strengthened the prescriptions of S. 2673 or added new prescriptions." (John T. Bostelman, The Sarbanes–Oxley Deskbook § 2–31.)

The Committee approved the final conference bill on July 24, 2002, and gave it the name "the Sarbanes–Oxley Act of 2002." The next day, both houses of Congress voted on it without change, producing an overwhelming margin of victory: 423 to 3 in the House and 99 to 0 in the Senate. On July 30, 2002, President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt.

The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002), also known as the "Public Company Accounting Reform and Investor Protection Act" (in the Senate) and "Corporate and Auditing Accountability and Responsibility Act" (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. There are also a number of provisions of the Act that also apply to privately held companies, for example the willful destruction of evidence to impede a Federal investigation.

The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals, including Enron, and WorldCom . The section of the bill cover responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and required the Securities and Exchange Commission to create regulations to define how public corporations are to comply with the law.

Enron s Stakeholders

Since 1998 to early 2000 Kenneth Lay quickly dumped about 300 million dollars of company stock while preaching it s employees to keep buying stock since it would eventually pick up in the 1990 s Enron s stock was valued at 90$ a share where in early 2000 s it was valued 1 $ .

This is one of the reason s why Stakeholders sued Enron for about 400 billion dollars.

Was the Punishment Fair ? Was everyone responsible prosecuted ?

Lou Lung Pai (Chinese: 白露龙 ; pinyin: Bái Lòulóng) born in Nanjing, China in 1946, is a Chinese-American businessman and former Enron executive. He was CEO of Enron Energy Services[3] from March 1997 until January 2001 and CEO of Enron Xcelerator, a venture capital division of Enron, from February 2001 until June 2001.[1] He left Enron with over $280 million. Pai was the second largest land owner in Colorado after he purchased the 77,500-acre (314 km2) Taylor Ranch[4] for US$12 million in 1999,though he sold the property in June 2004 for US$60 million.

Lou Pai has not been charged with any criminal wrongdoing in the Enron scandal and has exercised his 5th Amendment right in regard to the subsequent Enron class action lawsuit. However, as a result of the lawsuit, Pai forfeited $6 million due to him from Enron's insurance policy for company officers to a fund for Enron shareholders.

Accounts of the Enron scandal have frequently portrayed him as a mysterious figure; a former Enron employee, interviewed in the documentary film Enron: The Smartest Guys in the Room, referred to Pai as "the invisible CEO

MY RECOMMENDATIONS

Incentives must be paid after a project is done or at least when the company is really

profiting from that certain project. • Operational risk should be minimized andthere

should be some sort of check up. • Careful selection of accountingapproach and

financial structures to use. • Minimized payment in stocks.

Mark-to-market accounting mixed with the use of SPEs made Enron look financially healthy

when it actually was bleeding, bleeding severely. Misleading information was given to the

investors due to the accounting system, which eventually lead to decreasing stock price when

the information about this started to surface. We think this was just a matter of time rather

than a question about if they would get away with it. Sooner or later more and more of the bad

investments had to be questioned because of its great sizes and also because at some time it

hade to show that there were short of real cash in the company.

We think the downfall of Enron was caused by several factors. Among many are the topics

we have chosen to present in this paper, the mark-to-market method, the competitive working

environment and the use of special purpose entities. Not to forget is the importance of the

people behind this, Lay, Skilling, Fastow and Mark. The Enron scandal is not only a story

about complex accounting it is also a story about the people who made it possible. People that

made decisions affecting not only themselves or the 21.000 employees at Enron but also

America as a whole.

Conclusion : Arthur Andersen, a venerated accounting firm, was put to sleep by government

officials amid charges it turned to crime to keep a crooked client happy. Powerful regulators, like Harvey Pitt, the chairman of the Securities and Exchange

Commission, were out the door. A new breed of state enforcers, epitomized by New York Attorney General Eliot

Spitzer, took their place and muscled in on the traditional turf of the feds. "Enron signaled a realization that there was no checks-and-balances system in

corporate America," said Laurence Stybel, a principal at Board Options, a Boston consulting firm.

If it weren't for Enron, some analysts say, Spitzer wouldn't have taken on mutual funds for questionable trading – and won.

Martha Stewart might not have faced prosecution – or have lost. More broadly, Enron's demise debunked many myths of the market-driven New

Economy that rose in the 1990s, says Charlie Cray, director of the Center for Corporate Policy. That economy was slavishly devoted to principles like deregulation, privatization and globalization – all of which helped Enron construct a house of cards.

"Generally, Enron revealed the failures of the self-regulated model of business," Cray said. "It was sort of a perfect storm."

REFERENCES

Mclean, B & Elkin, P. (2004) The smartest guys in the room. New York. Fortune.

Bryce, R. (2002) Pipe Dreams: Greed, Ego, and the death of Enron. Oxford: PublicAffairs.

Healy, Paul M. Krishna G. Palepu. (2003), The Fall of Enron. Journal of Economic Perspectives

GIFFORD, R.H. (2004). Regulation and unintended consequences: Thoughts on Sarbanes-Oxley.

GOMPERS ,PAUL A., ISHII, JOY L., and ANDREW METRICK.(2003). Corporate governance and equity prices, Quarterly Journal of Economics 118, 107-155.

JOHN, KOSE, LUBOMIR LITOV, and BERNARD YEUNG.(2004). Corporate governance and managerial risk taking: Theory and evidence. Working Paper. New York University

McKINSEY & Comp.(2002).Global Investor Opinion Survey: Key Findings.