ENRON’S FRAUD & SCANDAL A CASE STUDYPRESENTED BY: JILL CHARPIACOURSE MGT7019-8-8

Enron Logo, (2006)

OVERVIEW Overview Enron’s Brief Historical Study Unethical Behavior Determination Reflection on Ethical Standards and Social Responsibility Response Influence of Leadership, Related Cultural, Environmental, and Legal

Implications Impact on stakeholders and Outcome of Event Comparison of Consequences Fairness of Punishment Recommendations for Action Recommendations for Students Conclusion

ENRON’S BRIEF HISTORICAL SUMMARY

Background $138 Billion Dollar Energy Corporation in (as reported in 2001) Formed by Kenneth lay by merging Houston Natural Gas and InterNorth Operated from 1985 until 2001 Sherron Watkin’s, VP for Corporate Development and her involvement Scandal was brought to light in 2001 (Wikipedia, 2015) Enron’s Top Executives sold their shares prior to report of scandal Stock price dropped from $90.75 to less than $1.00 a share (Schupp, 2014) 5 year investigation, 1,800+ interviews 16 Enron employees and 4 Merrill Lynch employees were indicted and charged

(Federal Bureau of Investigation, 2006) Shareholders and Employees sued to recoup funds, recouped only a fraction

(CNN, 2015)(Kenneth Lay, Enron CEO 2014)

UNETHICAL BEHAVIOR EXAMINATION

Removing Debts from Balance Sheet Showing Increased Profits Covering up of financial issues Acquiring funding (Enron & Investment Banks) Lack of Whistle Blowing (Ms. Watkins) Executive and Spouses selling stock prior to downfall Shareholders and Employees receiving small settlement Judge giving less than appropriate sentences Who else was involved?

(Sherron Watkins, 2012)

(Judge Simeon Lake, 2007)

REFLECTION ON ETHICAL STANDARDS & SOCIAL RESPONSIBILITY RESPONSE

Reflection on Ethical Standards and Laws Some requirements approved prior to Enron and the remainder approved after

1) Prevent death or substantial bodily harm2) Preventing a crime or fraud3) To prevent, mitigate or rectify a situation where financial injury, where lawyer’s services were used4) To obtain legal advice in regards to rule compliance5) To establish a claim or defense of the lawyer

(Lawry 2015)

INFLUENCE OF LEADERSHIP & RELATED CULTURAL, ENVIRONMENTAL & LEGAL IMPLICATIONS

How Far Did the Leadership of Enron Extend into it’s Internal Culture Levels of Corruption Merrill Lynch, Investment Bankers Loss of Control

Environmental Implication Community Effects

Legal Implication Development of Sarbanes-Oxley Act (SOX) Used to instill trust in public organizations once again They added a Public Company Accounting Oversight Board (PCAOB)

(Aßlander, 2005)

(Laboc, 2010)

(Cernusca, 2011)

IMPACT ON STAKEHOLDERSM & OUTCOME OF EVENTS

 

(Nehrams2020, 2015)

COMPARISON OF CONSEQUENCES Indicted

Total of 32 People Charged

Total 16 Enron employees 4 Merrill Lynch employees 12 Acquitted

 Company Loss: Total loss: $74 Billion Loss due to Fraud: $45 Billion Recovered: Approximately $2.85 Billion

(Jeffrey Skilling, 2011)

(CNN, 2015)

FAIRNESS OF PUNISHMENT

Kenneth Lay (CEO) Earnings: $217 Million (4 years + stock options) + $19 Million Bonus Salary Indictment: 11 counts, one count of conspiracy to commit security and wire

fraud, 2 counts wire fraud, 4 counts securities fraud, 1 count of bank fraud and 3 counts false statements

Sentence: Was to be scheduled for a total max of 45 years in prison and an possible fine of $90 million. Prior to sentencing he died from a heart attack. The case was dropped.

Mrs. Linda Lay (Kenneth Lay’s Wife) Case: She sold approximately 500,000 shares at a value of $1.2 Million of Enron

stock approximately 30 minutes prior to the announcement of Enron’s collapse. Funds donated to charity Charge: Never charged

(High Security Restraints, n.d.)

(New York Times, 2006)

FAIRNESS OF PUNISHMENT, CONTINUED

Sherron Watkins, (Former Vice President) No indictment or charges brought even with her knowledge and lack of

whistle blowing. Submitted written letters and testified in House of Representatives Now has lucrative book deal and speaking career

Jeffrey Skilling (Former CEO) Annual Salary: $132 Million Indictment: 28 Counts of securities and wire fraud. Charge Found guilty on 19 counts of conspiracy, fraud, false statements and

insider trading. Sentenced: 24 Years and 4 months in prison later reduced by 10 years to

agree to stop challenging his conviction and forfeit roughly $42 million. Houston Chronicle, 2011

FAIRNESS OF PUNISHMENT, CONTINUED

Andrew Fastow (CFO of Enron that began a company called Swap Sub)Charge: 98 counts of fraud, money laundering, insider trading, and conspiracy. Pled to: 2 charges of conspiracy Actual Sentence: 6 years in prison, 4 less than his plea agreement Lea Fastow (Assistant Treasurer)Indictment: 6 felony countsActual Charge: 1misdemeanor for filing a false tax return Actual Sentence: 1 year in prisonRichard Causey (Former Chief Accounting Officer)Indicted: 5 felony county of securities fraud and 1 count conspiracy to commit securities fraud Possible Sentence: 55 years in prison and $5,250,000 fineActual Sentence: 5 years & 6 months in prison for 1 count securities fraud, $1.25 Million restitution (Houston Chronicle, 2007)  Michael Kopper (Finance Managing Director)Indictment: 1 count money laundering, 1 count conspiracyPossible Sentence: Up to 15 years in prisonActual Sentence: 3 years and 1 month, served less that 2/3 of the sentence, $12 Million forfeiture in illegal gains, and a fine of $50,000Kenneth Rice (Chief of High Speed Internet Unit) Indictment: 40 charges, including fraud and conspiracy Pled 1 count of securities fraud and agreed to cooperate with federal prosecutors. The other charges were dropped. Actual Sentence: 27 months (Hays, 2007)  

(Houston Chronicle, 2011)(New York Times, 2006)

FAIRNESS OF PUNISHMENT, CONTINUED

Kevin Howard (Chief Financial Officer), 5 counts fraud, conspiracy/falsifying records, Potential Sentence: Up to 30 years in prison, Actual: 1 year probation Ben Gibson (Treasurer), Pled to 1 count conspiracy, Sentenced 5 years, only served 2/3 in prison Mark Koenig (Head of Investor Relation, 1 Count Conspiracy, Sentenced 18 months Paula Rieker (Former Enron Vice President), Pled: Insider Trading, 6 Counts Conspiracy and Fraud, 2 years probation Lawrence Lawyer (Vice President, Global Markets), Pled to failing to report income, Served 18 months in prison David Delaney, (Former CEO of Retail Energy), Pled to insider trading, served 9 months in prison Arthur Andersen, (Owner of Audit Firm), Charged with obstruction of justice, Charge was overturned, CPA license surrendered and business was closed David Duncan, (Auditor) Charged with securities violations but was not convicted. Plea withdrawn Timothy Balden (Head of Trading, Enron Energy), Pled to manipulating power markets, served 2 years’ probation Jeffrey Richter (Trader, Enron Energy), Pled guilty to manipulating power markets, served 2 years probation John Forney (Energy Trader), Pled guilty to manipulating power markets, served 2 years probation Joe Hirko (Co-CEO, Enron Broadband Services), Pled guilty to charge arising from overstating performance of broadband division, served 16 months in prison Rex Shelby (Vice President of Engineering Operations), Pled guilty to 2 years probation Scott Yeager (Strategic Business Executive) Acquitted on all charges Kevin Hannon (Chief Operating Officer), Pled guilty to Conspiracy, served 2 years in prison Michael Krautz (Accountant), 5 counts fraud, conspiracy and falsifying records, Acquitted William Fuhs (Merrill Lynch Banker), 47 months in prison Robert Furst (Merrill Lynch Banker), Convicted but appealed and won Daniel Bayly (Former Head of Investment Banking), Convicted but appealed and won Sheila Kahanek (Accountant), Acquitted Giles Darby, David Bermingham, and Gary Mulgrew, 7 Counts of Wire Fraud, Pled to 1 count of Wire Fraud, Each Sentenced: Each sentenced 37 months Dan Boyle, (Vice President Global Finance Group), Sentence 3 years 10 months

(Houston Chronicle, 2011)

RECOMMENDATIONS FOR ACTION

Proper Ethics Training Program Create an environment that is safe for whistleblowing Implement laws and punishments in an appropriate manner

(Hays & Ariail 2013)

RECOMMENDATIONS FOR STUDENTS

Learning from Enron’s Case Study Shows Us What Not To Do As Students You will be faced with challenges in your studies

Challenges of Time or the lack thereof High Levels of Course Difficulty

Recommendations Push Forward Don’t Give Up Believe in Your Work Don’t Take Shortcuts Spend the Time Needed to Learn Remember why you started your degree

Untitled Illustration of Graduation Cap and Diploma [Online image]. (n.d)

CONCLUSION Overview Enron’s Brief Historical Study Unethical Behavior Determination Reflection on Ethical Standards and Social Responsibility Response Influence of Leadership, Related Cultural, Environmental, and Legal

Implications Impact on stakeholders and Outcome of Event Comparison of Consequences Fairness of Punishment Recommendations for Action Recommendations for Students Conclusion

REFERENCES

Aßlünder, M. S. (2005). How could it happen? Enron and the architecture of wrongdoing. EBS Review, (20), 63-73

Cernusca, L. (2011). Ethics in accounting the consequences of the Enron scandal. Agricultural Management /Lucrari Stiintifice Seria I, Management Agricol, 13(3), 35-42

CNN, (2015). Enron Fast Facts. Retrieved from http://www.cnn.com/2013/07/02/us/enron-fast-facts/Federal Buearu of Investigation. (2006). Crime in the Suites, A Look Back at the Enron Case. Retrieved October 5, 2015 from https://www.fbi.gov/news/stories/2006/decemberFrayter, K. (2008). Enron investors to split billions from lawsuit. Retrieved from http://www.cnn.com/2008/US/09/09/enron.settlement/

Gordon, M. (2004). Ex-Enron Workers To Get $85 Million In Suit Settlement. Retrieved from http://www.washingtonpost.com/wp-dyn/articles/A22684-2004May12.html

Hays, J. B., & Ariail, D. L. (2013). Enron should not have been a surprise and the next major fraud should not be either. Journal of Accounting & Finance (2158-3625), 13(3), 134-145

Hays, K., (2007). Rice gets 27-month sentence. Retrieved from http://www.chron.com/business/enron/article/Ex-Enron-insider-Rice-gets-27-month-sentence-1841354.php

High Security Restraints, (n.d.) Retrieved October 7, 2015 from http://www.peerless.net/tl_files/content/handcuffs/B%20Series/B%20Series%20-%20High%20Security/M703BHS%20Metal.jpgHouston Chronicle, (2011). Where are the faces of the Enron trial? Retrieved from http://fuelfix.com/blog/2011/11/28/the-defendants-of-the-enron-era-and-their- cases/#1875101=0

REFERENCES, CONTINUED

Jeffrey Skilling [Online Image]. (2011). Retrieved October 9, 2015 from http://dailybail.com/home/enrons-jeff-skilling-may-get-decade-knocked-off-sentence.html Judge Simeon Lake III [Online Image.] (2007). Retrieved from http://johnfenzel.typepad.com/john_fenzels_blog/2007/01/page/10/Kenneth Lay, Enron CEO [Online image]. (2006). Retrieved from http://www.eoearth.org/view/article/152569/Lawry, R. P. (2015). Lawyers' ethics in a post-Enron world. Phi Kappa Phi Forum, 95(1), 27-30 Laobc (2010). Scales of Justice [Online image]. Retrieved October 7, 2015 from https://openclipart.org/detail/62989/scales-of-justiceNehrams2020, (2015). Enron Stock Price. Retrieved October 7, 2015 from https://commons.wikimedia.org/wiki/File:EnronStockPrice Schupp, R. W. (2014). Enron, Sarbanes-Oxley, and the supreme Court, a discussion of the Lawson v. FMR, 134 S. Ct. 1158, (2014). Franklin Business & Law Journal, 2014(2), 2-20Sherron Watkins. [Online image]. (2012). Retrieved October 7, 2015 from http://www.abc.net.au/news/2012-02-23/sherron- watkins/3844796New York Times, 2006. 10 Enron Players: Where They Landed After the Fall. Retrieved from http://www.nytimes.com/2006/01/29/business/ businessspecial3/29profiles.html?pagewanted=allUntitled Illustration of Graduation Cap and Diploma [Online image]. Retrieved October 7, 2015 from http://ibi.edu.mk/?page_id=186 Wikipedia, (2015). Enron scandal Retrieved October 6, 2015 from https://en.wikipedia.org/wiki/Enron_scandal