What happened in the Enron scam
Enron scandal. Demonstrative Breakdown: How the History of the American Enron Reshaped the world's corporate legal framework. The essence of the Enron circuit
Writer, journalist, financial analyst, internet trading specialist, founder of the first Russian-language internet school of vCollege stock market trading and Insider.pro columnist Sergey Golubitsky on the biggest scandal in US corporate history.
On October 16, 2001, Enron, the world's largest energy trader (20% of the total US energy market), issued a press release following the results of another quarterly report, after which the company's capitalization decreased by $ 60 billion.
However, the company did not go down in history for its fabulous losses. She has been remembered as the creator of a massive financial fraud that forever undermined public confidence in public corporations. Ask someone what Enron is and they will answer you without hesitation:
"A company that ruined half of America's pension funds!" Andrew Fastov, Jeff Skilling and Kenneth Lay - the greatest scammers in history! Enron is a symbol of theft! "
After listening to the pathos tirade, ask another question: "And what exactly was Enron doing illegally?" I assure you that you will not hear anything other than emotional epithets. Because society was delighted to hide the essence of events and reduce the plot to its own name - Enron. Please note that it was not Lei, not Fastov, not Skilling, but the faceless name of the company that was made the scapegoat. This is despite the fact that Enron's “fraud” is a fiction and the schemes he used to “deceive investors” are now a universal tool to beautify the balance of public corporations.
I want to briefly convey to readers the true meaning of the events of 14 years ago and then build a bridge to the present that follows the fate of the heroes of the story.
So what happened on October 16, 2001? Enron released a press release comment on its quarterly report that the company's shares no longer participated in the "patriotic rally" (the unanimous rise of the US stock market that followed the 9/11 disaster) and that the trend towards annihilation became bearish.
I have to say that before the events described, Enron's papers had already depreciated for a whole year - from $ 90 (the historic high point of Fall 2000) to $ 25 apiece. After the press release, the shares plummeted to a few cents, the New York Stock Exchange delisted Enron, selected the three-digit ENE honor symbol and copied the papers in the infamous "pink leaflets" in which they quietly died.
The reason for the annihilation is the announcement of a loss of $ 1.2 billion that literally came out of nowhere as nothing in the statements of the previous quarter indicated any losses.
An investigation began and quickly escalated into a major scandal: Enron was not just any dotcom, but America's backbone energy business, whose stocks were part of the mandatory portfolio of all pension and largest mutual funds in the country. The poor people's losses ran into tens of billions of dollars, and the damage to Enron, even after the check, was no longer accountable: the entire business of the powerful company, whose energy companies were based on five continents, turned out to be entirely virtual Fictions was woven.
The idea from which all Enron's books and plans arose is very organic to the American mentality, which perceives reality in two parallel dimensions. I once described this phenomenon in the essay "America and America". To save time and simplify the concept, I conclude that "America" is the usual reality of tangible things including so-called real business (industrial production, services, municipal services, etc.), and "America" is one World of imaginary nonexistence Relationships, which in the United States are not only perceived as objectivity, but also dominate tangible reality.
The parallel world of "America and America" has many incarnations, of which we are now only interested in one thing: the total dominance of the virtual world of market capitalization over the real business of public companies themselves.
The management of Enron therefore decided that the benefits of doing business properly in America were incomparably more important than the benefits of doing real business in America.
As a result, the search began for such systems that would make it possible to create a flawless virtual image of the company in the financial markets. Simply put, you get high ratings from rating agencies.
- to carry out a classic hedge (using financial instruments), but this route is fixed;
- using traditional insurance is even more expensive.
- delegate risks to structures specially created for this task.
The last way is called sharing responsibility, and of course Enron didn't invent it. He didn't invent anything at all, just creatively developed and perfected other people's practices. Either way, the company has embarked on the third avenue of risk elimination, which has allowed it to completely divide its business into two realities - the reality of tangible things (dozens of power plants, thousands of miles of high voltage lines, water treatment plants around the world, etc.) . ) and the reality of a virtual storefront - flawless deals that achieved top ratings and ratings doubled market capitalization every three years.
The technical implementation of the described responsibility allocation concept was carried out by Andrew Fastov, Enron CFO, who was brought into the company by Jeff Skilling. Fastov didn't invent anything here either, just "creatively borrowed" on the side. The first scheme was implemented in 1991 and then perfected in a project called Cactus III.
Let's start with the problem.
Enron's plans resolved the contradiction between electricity suppliers and their consumers. Consumers are interested in long-term, fixed-price contracts. The suppliers only agree on short-term deliveries and demand a monthly change in electricity prices, taking market conditions into account. At the same time, there is a constant shortage of current cash at suppliers.
Enron decided to become an intermediary and, on the one hand, to supply consumers with electricity at fixed prices and, on the other hand, to finance energy suppliers who would subsequently pay for their products with Enron at competitive prices.
The miracles of securitization
So here's the challenge Enron faces: Finding money to fund utilities!
Good decision: keep securitization. How is that done?
- A company that is planning to obtain securitization funding (called an originator) creates the assets that continue to provide cash in a large portfolio, and then sells that portfolio to a third party. Please Note: It is being sold but not being transferred for rental or temporary use. This is a very important condition called remote bankruptcy transmission - the neutralization of the bankruptcy factor. Indeed, after the sale of assets, the fate of your company no longer depends on the fate of the creator: even if it goes completely bankrupt, the withdrawn assets will remain intact.
- From that moment on, the protagonist, the owner of the asset portfolio, is already this third party, known as the Special Purpose Entity (SPE), the target company. The target company is created specifically for a specific project (this is what the goal is for). Since the target company's assets are not presented to the eye, they have to pay the creator. But SPE has no money, as you know. Hence, it prepares the topic itself before securities. These are usually different types of bonds. Bonds or bills secured - absolutely true! - pending cash receipts from assets purchased by the creator.
- The most important step in securitization is getting creditworthiness for new securities. Obviously, if a high rating is not guaranteed, no one will buy the target company's debt obligations, and the entire system will collapse before it reaches a victorious end.
- Once appropriately rated, the SPE Notes will go onto the securities market where they are normally bought by ordinary investors.
- Final chord: the target company transfers the proceeds from the sale of securities to the originator, thereby paying for the assets sold. I think it should be noted here that the Creator did not lose control of the assets from the start: even though he sold them to the front company (we'll call a spade a spade) of the target company, he immediately received a subcontract from that target company, asset management .
To clarify, I present the securitization in the form of a simple diagram.
Two unsolved problems remain. What is attractive about securitization from investors buying the target company's debt? And why did this Creator need all this mess?
Everything is simple with investors: first, they buy bonds with a pure heart because they know exactly what assets those securities are collateralized. After all, with all of his debts, problems, third party obligations, and other headaches, the Creator was torn out of the picture from the start when he sold the target company's assets! But at SPE itself everything is on the surface: no secondary business, left-sided - nothing but transparent assets.
The most important thing: the bonds of the target company have been given a good credit rating, so you can safely invest in such a transparent system.
Another important condition: the target companies' debt obligations are based on all the rules of fashionable structured finance. This means that securities are categorized according to the principle: "The higher the risk, the higher the return." Securitized certificates of the categories senior, middle and junior (senior, mezzanine, junior notes) as well as bonds with fixed and variable interest rates are issued. Thus, the investor can choose a security that suits him best in terms of temperament, risk tolerance, etc.
The securitization theory described above (in a simplified form, of course) is not yet directly related to the operation of Enron, as it does not take into account the main fact: a solution was needed that would be appropriate for a situation in which that of the creator of the original target company assets sold did not belong to him.
That was the case with electricity: the suppliers were willing to pass it on to Enron for resale to consumers at fixed prices after the company funded the suppliers. And in order to receive funding (via SPE), Enron must first have electricity. It turns out to be a vicious circle.
Andrew Fastov found a way out of this circle - with the help of the "Cactus III" program, in which two SPEs were ingeniously involved.
- The first target company, the same Cactus III, issued two types of debt: Class A with a fixed percentage and Class B with a variable percentage.
- The second target company received a loan from a syndicate of banks and used this money to redeem bonds from Cactus III.
- With the proceeds, Cactus III financed the gas producers and received gas from them.
- Enron bought gas from Cactus III and sold it to end users at fixed prices.
- Cactus III used the cash from the sale of gas to Enron to pay its obligations to the second target company (for Class A securities) and General Electric Credit (for Class B securities).
This whole arrangement allowed Enron to fully offset all of its debt obligations to fund the gas producers. The fact that the brilliant indicators only existed on paper, that is, at the level of the annual financial statements, did not bother anyone, since the rating agencies only looked at the statements made by Enron.
The rest is a technical matter: a high credit rating, complemented by an endless series of successful PR campaigns, constantly aroused public interest in the company's securities, whose capitalization skyrocketed.
In October 2001, the accumulated debt for various SPEs reached a critical point and Enron had to cover the losses on its own balance sheet. You know the rest.
And that's the main thing
What do I think is the main thing in everything that is said? The fact that Enron's de facto criminality of business activity was always only indirectly determined - by losses of investors in its own shares! This is an amazing moment that when they were covered up in 2001 they are still covering up today.
Why? Because the route with SPE is absolutely legal! And as I wrote earlier, it is widely used by public corporations as the most effective budget-clearing tool. What a calamity (for the judiciary).
In other words, Enron couldn't be judged for Cactus III and the like. Then what can you do? Indirectly - for the ruin of pension funds. But this is such hypocrisy as it goes against the very foundation on which the entire free financial market rests, which is scary to even think about.
And so it happened: Enron is the worst enemy of mankind in the history of the global economy. Please note that Enron is a company, not the people who implemented all of these programs.
In this regard, it is interesting to see how the further fate of the same people developed.
- For the captain in Enron - Kenneth Leah - fate didn't work out: he died of a heart attack on his ranch in Colorado in the summer of 2006 without spending a single year behind bars.
- Jeff Skilling sued the state ad infinitum for every charge and still got the answer: Instead of the 24 years imprisonment appointed by the first judge, they ended up negotiating for 10 years, so that Skilling was released as early as 2017. It's humble for the person who organized "the greatest investor heist in human history," isn't it?
- Lead "circuit maker" Andrew Fastov gave up on everyone he could, investigators fell passionately in love with him and punished him with a puppet: six years in a low-security prison (they also confiscated $ 24 million worth of property) .
- Fastov has long "sat back" and lectured at many American universities in recent years to hold onto the chair, readers! - "Business Ethics".
Well, the one who was guilty of civilization in the mythological tablets stepped into a "face" - the Enron company.
America was shocked by the sudden bankruptcy of Enron, the seventh largest US company and largest electricity trader in the world. Bankruptcy reports, even large ones, rarely appear on the front pages of newspapers. But Enron is a special case. His collapse was a life and death catastrophe for many American families. And not just Americans. The company operated in two dozen countries on four continents.
Enron announced its financial bankruptcy on December 2, 2001 and went to a New York court to declare the company bankrupt under Article 11 of the law. The company is believed to continue to operate while its creditors reorganize the company's finances.
Why did concern suddenly collapse, which yesterday was considered a symbol of reliability? It all started with the fact that Enron went through a hugely unsuccessful transaction and bought a company that was only making losses. Dealing with difficulties like this is a matter of honor and professionalism for a strong company. However, if you do report losses it could damage the company's creditworthiness and investors will turn away from it. Shareholders will begin to get rid of their packages. As a result, the company loses the required working capital.
In 1998, Andrew Fastow, 36, who had worked for the company for eight years and was known as a financial genius, was named Enron's chief financial officer. It was he who invented the ingenious system that enabled the company not only to exclude losses from its accounting records, not to pay taxes, but also to attract new investments.
Fastow has worked with numerous globally registered companies, usually in offshore areas. On closer inspection, it turned out that the companies were a sham - they were run by the managers at Enron themselves. There were more than three thousand such "branches" in the energy giant. Only at one legal address (Georgetown, PO Box 1350) on the Cayman Islands were 692 (!) Subsidiaries of the energy giant registered! The partner company bought illiquid real estate from Enron along with debt and paid out Enron's own shares, which were received as a portion of the authorized capital. In this way, the energy company not only eliminated debts from its balance sheet, but also indicated in the documents blocks of shares that were invested in partnerships as assets, when in reality it was only transferring shares from one pocket to another and vice versa.
Despite the complexity of the Fastow system, its principle is quite simple: on the one hand, electricity transactions via subsidiaries made it possible to overestimate the costs and thus the sales price of electricity; on the other hand, these corporate debts were created for offshore companies. what she didn't want to advertise.
By posting false statements, Enron executives have artificially and many times overvalued the market value of stocks, attracting new investments and routing them to the same offshore network. What was initially a temporary, extreme and enforced measure gradually became the main content of the activities of its top managers.
Most surprisingly, all offshore companies were formed for absolute legal reasons and reported to US tax authorities. In addition, their activities have been approved by Enron's board of directors, lawyers and external auditors, the famous Arthur Andersen law firm. There is no doubt that the auditors actively participated in the development of the fraudulent system.
Because Fastow and his colleagues ran offshore partner firms, they received substantial rewards there. In particular, from the activities of only one of the offshore companies, Fastow received more than $ 30 million and his assistant Michael Copper received $ 10 million.
All debts and expenses were made available to the tax service in full, so that the company was classified there as unprofitable. Enron hasn't paid any income tax in years! Instead, he even received substantial tax refunds from the treasury: between 1996 and 2000, a total of $ 380 million was transferred to the company's accounts.
Enron, a national company, had broad links in political circles, particularly with the Republican Party. Company President Kenneth Leigh was considered a close friend of George W. Bush and his largest private sponsor. In 2000 alone, Enron spent $ 2.4 million lobbying the White House and Congress. 71 senators and 188 congressmen are known to have received support from the energy company.
The Enron leadership funded not only Republicans, but Democrats as well. There was a reason for that. If you give enough money to both parties, regardless of which party is in power, you can maintain influence.
In early 2001, Enron had a new president - Jeffrey Skilling. Kenneth Lay, who led the company for fifteen years, remained Chairman of the Board of Directors. However, a few months later, Skilling unexpectedly resigned.
In August 2001, Kenneth Leigh took over the management of the company again. He soon received an alarming letter from an informed company employee, Sharron Watkins. She reported that Enron had been doing "unacceptable bookkeeping" for years and was now on the verge of collapse: "I fear we will soon explode with scandals." Kenneth Ley instructed the attorneys to do a "limited" investigation of the letter to carry out allegations contained.
Knowing that Enron's shares were about to devalue, top executives began to sell their shares. Kenneth Leigh sold 1.8 million shares for $ 101 million. Enron's 29 board members did the same, cashing out $ 1.1 billion worth of shares. At the same time, Ley reassured Enron's regular employees that the company's business is doing well and that the price of its shares will rise 800 percent over the next decade.
On October 15, 2001, the law firm Vincen & Elkins warned Enron executives in its report that the company could soon be the subject of public scandals and defendants in legal proceedings. Three days earlier, Enron's accountants had ordered the destruction of documents related to the audit.
No further obfuscation was possible. Enron announced a loss of $ 638 million and a decrease in corporate capital of $ 1.2 billion. The losses were attributed to Andrew Fastow's offshore fraud being fired from the company.
Enron's shares fell in price. Kenneth Ley tried unsuccessfully to tap into the Bush administration. He called Trade Secretary Don Evans and Treasury Secretary Paul O'Neill asking him to influence the rating agencies. But the scandal went too far. The Securities Commission has opened an investigation into a potential conflict of interest in offshore operations.
In November 2001, Enron revised its financial statements for the past five years. Profits for that period were reduced by $ 586 million and debt increased by an additional $ 2.5 billion.
Leading agencies that evaluate the creditworthiness of companies have assigned Enron a so-called junk rating. In August 2001, when a share in the company was $ 90, it fell to 42 cents after the bankruptcy filing. Many shareholders who willingly bought Enron's papers and focused on rainbow coverage went bankrupt. Robert Belfer, a director at Enron and the largest private equity owner in an electricity company, lost $ 2 billion! There were large pension funds among the investors, so that tens of thousands of teachers, police officers and firefighters lost part of their pensions.
Enron's bankruptcy has been recognized as the largest in American history. The market price for Enron's losses was $ 75 billion. More than four thousand of his employees in the US and over a thousand in Europe have lost their jobs. The so-called "401 pension plan" was popular with the company's employees, according to which all employee savings were invested in Enron shares. As a result of the catastrophic decline in share prices, pension assets have almost completely devalued.
Accounting firm Arthur Andersen purposely covered up Enron's financial shortcomings in order to keep a profitable client. In fact, it wasn't until 2000 that Andersen received more than $ 50 million from the energy giant for his services. Not only were the company's employees involved in developing the company's plans, but on the verge of collapse, they also destroyed a host of documents related to Enron.
The management of accounting firm Arthur Andersen was forced to admit the "mistakes" made in examining the energy company's financial transactions and statements, but tried to scapegoat department head David Duncan, who oversaw document destruction. He was immediately fired from the company. However, Duncan's attorneys have proven that their client worked directly from the company's headquarters.
The grand jury found Arthur Andersen guilty of obstructing the judiciary, after which it practically no longer existed. The number of employees fell from 28,000 to 250 people.
On January 25, 2002, the first body appeared in the case: Former Enron Vice President Baxter shot himself in his Mercedes parked two miles from the house. According to the police, he left a suicide note. Baxter was one of those summoned to Congress to testify. As Vice President of Strategy, he was directly involved in Enron's financial pyramids and earned $ 35 million from the fraud.
The main actors refused to testify to the congressional commission and referred to the relevant article of the law. And only the former head of Enron, Jeffrey Skilling, decided to answer questions from Congressmen. However, he showed astonishing forgetfulness and ignorance: Skilling answered almost all questions of the legislature that he did not remember or that he knew nothing bad about.
Congressmen and the press waited with particular impatience for Vice President Sharron Watkins' speech. She called Fastow and Skilling the main machinists, these two keeping Leia in ignorance. Sharron said that Fastow was just furious when he found out about her meeting with the company's executive Leah. "He demanded that I be fired immediately and that the computer be taken away," Sharron said. "I actually had to return the computer, but I managed to download all of the valuable files to my laptop."
The US Congress passed a law against corporate fraud. The new legislation provided tighter control by the state and shareholders over companies, their officers and auditors. The sentences for fraud managers have quadrupled - to 20 years and in special cases to 25 years.
In 2004, Andrew Fastow was sentenced to ten years in prison. The financier claimed he had never broken the law. He later admitted his guilt in full, as was testified in the case of the two former leaders, Lei and Skilling. As a result, the court reduced Fastow's sentence to six years.
Kenneth Leigh died of a heart attack on July 5, 2006. A Houston federal court acquitted him posthumously. Jeffrey Skilling received 24 years and 4 months in prison. For the first time in recent US history such a severe sentence has been placed on a senior leader. The collapse of the Enron company triggered a chain reaction in the American economy. Hundreds of companies have been forced to revise their reporting. This led to many fatal consequences.
USA: Houston, Texas
Headquarters of the Enron Corporation
Enron Corporation (pronounced Enron Corporation) is the now-defunct American energy company, which closed its operations as a result of bankruptcy in 2001. The company's headquarters were in Houston, Texas. Prior to bankruptcy, Enron had around 22,000 employees in 40 countries and was one of the world's leading companies in areas such as power generation, gas transportation, gas distribution, communications, and pulp and paper manufacture. In the non-manufacturing sector, the company traded in futures and derivative securities. Reported revenues for 2000 were approximately $ 101 billion. Fortune magazine named Enron America the Most Innovative Company for six years in a row. In late 2001, it became known that information about the company's financial condition had been largely forged by the accounting fraud known as the Enron case. Since then, Enron has been a popular symbol of willful corporate fraud and corruption.
The company emerged from bankruptcy in November 2004. According to a court-approved restructuring plan, it was one of the largest and most complex bankruptcy cases in US history. The new board of directors changes Enron's name to Enron Creditors Recovery Corp.and focused on the reorganization and liquidation of individual Enron assets. On September 7, 2006, Enron Prisma Energy International sold its last remaining business to Ashmore Energy International Ltd (currently AEI).
Enron was founded in 1985 through the merger of InterNorth and Houston Natural Gas.
The company's bankruptcy, which occurred as a result of a major scandal called Enron Cases, has become one of the largest in world history. The main allegation against Enron was the falsification of reporting, which misled investors. During the scandal, company vice president Clifford Baxter committed suicide.
The use of various financial and offshore systems has been exposed. In order to carry out a scam, many legal entities were formed, mainly located in offshore zones. 692 subsidiaries were registered at a legal address (Georgetown, PO Box 1350) in the Cayman Islands. Despite the complexity of the systems, the principle behind their operation was simple: on the one hand, electricity transactions through subsidiaries increased the costs and sales price of electricity, on the other hand, offshore loans were granted to the company for which management did not want to advertise. So Enron's fraud was not to hide income, but to hide losses.
One of the outcomes of the Enron affair was the passage of the Sarbanes-Oxley Act by US lawmakers, which tightened financial reporting requirements, and the collapse of Arthur Andersen accounting firm, which was previously one of the top five accounting firms in the world.
- Kenneth Leigh - company director and president since 1986.
- Andrew Fastow - Head of Financial Services.
- David Duncan is Enron's principal auditor at Arthur Andersen. His duties included reviewing Enron's reporting.
Enron in literature and cinema
- Pipe Dreams: Greed, Ego and the Death of Enron - a book about Enron
- "Enron. The Smartest In This Room ”- 2005 documentary about the company's collapse
- “The triumph of the dead Leviathan. Financial and business novel about the Enron company “- Sergey Golubitsky
- "The Crooked E: The Un-Shredded Truth About Enron" ("Scam of the Century", 2003) - a television movie about the company's final days, later released on DVD.
- Former company's official website (now the website of Enron Creditors Recovery Corp., the organization that does Enron's business)
- Alphabetical company
- Company founded in 1985
- Company abolished in 2001
- US companies that do not exist
- US energy company
- Listed companies on the London Stock Exchange
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See what "Enron" is in other dictionaries:
Enron - Logo The energy company Enron calls for the affected corporations of the USA and had its headquarters in Houston, Texas. Enron happily calls itself "The largest company in the world" and became ... ... German Wikipedia
Enron - Saltar a navegación, búsqueda Enron Creditor Recovery Corporation Fundación Omaha, Nebraska, 1985 Sede Houston, Texas, EE. UU. Industria Energia ... Wikipedia Español
Enron - (wholly Enron Corporation) a US energy trading company founded in 1985 as a gas pipeline company based in Houston. Under the leadership of Kenneth Lay, it grew into one of the largest corporations in the United States and the largest ... ... useful English dictionary
Enron - Corporation fue una empresa de energia con sede en Houston, Texas que empleaba cerca de 21,000 personas hacia mediados de 2001 (antes de su quiebra). Una serie de técnicas contables fraudulent, apoyados por su empresa contable, la entonces ... ... Enciclopedia Universal
Enron - For the game, see ENRON (playback). Enron Corporation Enron logo designed by Paul Rand Former type public company Industry Energy Fate ... Wikipedia
Enron - Logo de Enron Création Omaha, Nebraska, 1931 Date 1985, prend le nom d Enron ... Wikipédia en Français
Enron - A US * multinational that filed for Chapter 11 bankruptcy reorganization in December 2001. At the time, it was the largest bankruptcy in the United States. Company history. The discovery of false bookkeeping and fraud forced Enron to create ... ... an auditor dictionary
enron - v. When business leaders poorly manage a company for personal gain. It was painful for Bill in tech to sit back and watch the CEO and his biker chick wife circled the company. n 1) Large corporations' beliefs that they are above the law; also ... ... dictionary of American slang
Who would have thought the largest American energy company Enron end its existence in such a shameful way. Enron's bankruptcy came as a surprise. After the organization began operating in steady and self-confident positions of authority in the global energy industry, it was known for its transparent reputation. Everyone was sure that what they did was a guarantee of real business, a role model.The company was a full-fledged trading market for the sale of natural gas and electricity, and Internet trading was also quite developed. Enron was so important and respected that it even introduced the Distinguished Public Service Award. Mikhail Gorbachev, Eduard Shevardnadze and other personalities of the international level were once their happy owners.
Bankruptcy Enron. Reasons for the collapse of the company
Enron went bankrupt in 2001. Up until then, the company, which was founded in 1985, had more than twenty thousand employees in forty countries. She rightly held a leading position in both manufacturing and the financial industry (futures, securities). As they say, nothing was bad, trust in the company was very high, it was second to none. In December 2001, the fact of accounting fraud, which consisted of falsifying information about data relating to the company's financial situation, was discovered. 16 years of successful and unmatched work turned to dust from which a well-coordinated corruption program emerges.
The Enron scandal (Enron case) with the forgery of documents led to the complete bankruptcy of the organization, which is considered to be the most famous in the world economic scene. The essence of the allegation against key company officials lies precisely in the falsification of reporting information, which resulted in significant financial losses for investors and threw thousands of workers into the streets with no money. In fact, almost all of them were investors in the company's pension fund. The savings totaled more than $ 2 billion. In a major scandal, Clifford Baxter, the company's vice president, committed suicide.
So the scam of the century is Enron's bankruptcy caused by the active use of all kinds of commercial and offshore methods to hide losses, not capital. In order to carry out the fraud process, fake legal persons were specifically registered in the area of the offshore zones. For example, one legal address in the Cayman Islands contained nearly seven hundred created organizations. The auditing firm Arthur Andersen was also affected, an accomplice in the Enron fraud and providing positive information about the status of the company's documentation.
Specialists identify two main reasons for the downfall of the company:
- The total lack of a clearly established system of regulation (control) both inside and outside.
- Conflict of financial interests between senior officials and the company as a whole.
These reasons have become the motivation for corporate administrators to hide financial losses and overestimate profitability.
Consequences of the crisis
Enron's operations and the nefarious bankruptcy that followed had a significant impact on almost every sector of the global economy. The corporate side was particularly affected. The process of systematically disguising losses through changes in the report documentation has entered economic theory as "enroning". In order to prevent similar incidents in the future, many countries have supplemented their legal basis with specific orders and orders with a controlling character. Most of the world's leading companies with relatively stable and successful reputations have changed their corporate documents and internal rules for regulating administrative accounting and auditing.
US President George W. Bush solemnly signed the anti-fraud legislation of Congress in July 2002. In his speech, he compared such fraud to the terrorist attack of September 11, 2001, and promised that neither would undermine the American economy.
What is the essence of the new legislation? It provides for stricter control by the state and company shareholders over the companies themselves, their officers and accountants. In particular, the law prescribes the creation of a new supervisory body for the examination of the securities commission. In the past, accounting firms in the United States were largely self-regulatory.
The law also requires companies to set up independent audit committees that should hire accountants to review the company's accounts (previously this was done by management). The law stipulates that management must personally certify statements.
Interestingly, the law makes it easier for shareholders to prosecute their company's executives and their auditors. And the sentences for fraud managers have quadrupled - to 20 to 25 years.
What made the top political leadership of the superpower take such serious action? Most likely a major scandal with the Enron company.
We wrote about the biggest fraud of the 20th century - the collapse of the BBC Bank (BCCI) - in issue 16 (41) of our newspaper in the article “A 30 year old fraud”. The 21st century did not take long. It was marked by a no less well-known scandal - the collapse of the American energy giant Enron.
Enron Corporation was founded in 1985 as a result of the merger of two Texas and Nebraska gas companies. It was the first company to have an all-American network of gas pipelines. The company initially only specialized in gas, but eventually turned to electricity. Gradually, it shifted its activities to the retail sector.
The company has successfully mastered the energy futures and derivative securities market. This later gave her considerable financial flexibility. She soon became the largest trader in the electricity market and even finished seventh in the prestigious Fortune 500 rankings in 2001. At that time, the company already had 22,000 employees in 40 countries!
It should be noted that the US energy industry was freed from excessive state control in the 1990s. While Enron held a dominant position, it was able to manipulate electricity prices across the country.
As a national company, it couldn't stay away from politics. She had broad connections in political circles, particularly in the Republican Party. Suffice it to say that Enron President Kenneth Leigh was seen as a personal friend of George W. Bush. In fact, throughout its political career in general, and in the campaign in particular, the company has been the main sponsor of the current US President.
Monetary donations were generously distributed to meet the electoral needs of a variety of political figures: both Republicans and Democrats. For this purpose, according to experts, only in the period from 1989 to 2001. About 6 million dollars were allocated. Just for the needs of George W. Bush, the company donated more than $ 600,000 during his tenure and another $ 300,000 - for the inauguration. Enron's leadership in the past has included many high-ranking US presidents.
It is therefore not surprising that the company has received an unprecedented share of the state's electricity supply and huge tax breaks. In addition, she had a decisive say in the selection of the people responsible for regulating the energy market (those who have to oversee the company itself).
So far, however, there is no particular reason to be outraged by smart business people. All of this is generally consistent with US law. The election contributions were not made “blindly” (as is common in some other countries), but by bank transfer. All of this was reflected in the coverage: both the payers and the campaign headquarters.
The company's fraud was different: in its accounting. The company's management has developed and implemented a complex scheme to hide certain data not only from the public, but also from shareholders and investors. This was done in order to distort the real financial condition of the company.
No entities were created, but thousands of legal entities, mostly offshore companies and partnerships. For example, 692 subsidiaries of the energy giant were registered on the Cayman Islands at the legal address (Georgetown, PO Box 1350) alone. Do you think of fake companies? Not so easy.
All of these offshore companies have been fully legally incorporated with reports submitted to US tax authorities. In addition, Enron's offshore activities have been approved by its board of directors, attorneys and outside auditors - Arthur Andersen.
Although the invented scheme seems unusually complex, it is actually quite simple. On the one hand, electricity transactions through subsidiaries made it possible to “increase” the cost price and, accordingly, the sales price of electricity. On the other hand, offshore firms took on debts the company refused to advertise.
I have to say that American law is pretty strict about offshore operations. The current legislation on so-called controlled foreign companies provides for the compulsory inclusion of the income of offshore companies in the taxable income of their American owners. Hence, it is impossible in the United States to simply put profits offshore for the purpose of tax evasion while staying (at least formally) in law.
But Enron scammers didn't need that. Offshore was not a dumped profit, it was a loss. The question arises - why? This made it possible to significantly improve the company's financial performance, which means the price of its shares rose. The company captured an increasing market share. This enabled her management and employees to earn millions of dollars in rewards. Of course, the value of her stakes in her own company also grew.
In parallel, some workers managed to make a profit from the trading activities of the offshore companies through which the financial flows went. Enron's CFO Andrew Fastow who developed this ambitious program received more than $ 30 million from the activities of one of the offshore companies, and his assistant Michael Copper received $ 10 million. This created a conflict of interest between the company and its employees.
Do you think such a powerful and balanced company has paid a lot of taxes? Not at all. After all, book profit and profit for tax purposes are two different things. And at Enron, they were fantastically different. The data presented to shareholders and tax authorities varied widely.
All debts and expenses to the tax authorities have been made available in full. As a result, the company was completely unprofitable for the tax authorities. Hence, Enron did not pay any income tax at all. In addition, he received large tax refunds from the treasury. For the period 1996-2000 a total of $ 380 million was received.
"How many ropes don't pucker ..."
It was extremely difficult to catch cheaters hot. After all, the most experienced and highest paid lawyers and accountants in the world worked for them. Interestingly, every single Enron transaction, contract, or tax calculation was legal or nearly legal. And even during the process, there was a high probability of being recognized as such. But it couldn't go on forever. Hidden debts accumulated and grew. Sooner or later they had to come.
And this happened in 2001 - the first year of our century. Enron started the new year with a new president. It was run by Jeffrey Skilling. But Kenneth Leigh didn’t go, and instead became Chairman of the Board of Directors. Six months passed while the new leader was dealing with the matter. And "see", he was frightened and resigned. However, he later testified, arguing that he was not guilty.
In August Enron was again led by Kenneth Leigh. Seeing disaster imminent, he first ditched his Enron stock (valued at more than $ 20 million) and continued to convince shareholders that things were going well. Many other business leaders have done the same. Therefore, they are accused of misusing inside information.
In October 2001, as the quarterly filing deadline approached, further debt concealment was no longer possible. And Enron announced a loss of $ 638 million and a $ 1.2 billion decline in corporate capital. The losses were attributed to chief accountant Andrew Fastow's offshore fraud, who was immediately fired.
A sharp decline in stocks followed. It smelled like disaster. Lei turned to the government and hoped for a "special friendship". But a blow awaited him. The Cabinet of Ministers had their own deliberations and the Securities Commission opened an investigation into a possible conflict of interest in operations with offshore companies.
And the situation got worse. In November, Enron was forced to revise its reporting again. In the past five years, profits have been reduced by $ 586 million and debt has increased by an additional $ 2.5 billion. The company's stock held around $ 80 at the beginning of the year. per piece, collapsed to a level below 1 dol.! It was a disaster ...
As expected, everyone quickly parted with the former wealthy giant. In December 2001, the company declared bankruptcy, which became the largest bankruptcy in American history. More than four thousand employees in the United States and over a thousand in Europe have been laid off.
Current American President Jenna Welch's mother-in-law has suffered. She lost up to $ 8,180 on Enron's stock. That number looks particularly good given the hundreds of thousands of dollars in retirement assets that ordinary Enron employees have lost as a result of bankruptcy. It found that approximately $ 1 billion worth of pension savings that the company-controlled pension fund had invested in the company's stock were burned. Now they have not cost anything.
A criminal investigation followed. Of course, the auditors were initially interested in this. And it turned out that the employees of the accounting firm Arthur Andersen, as participants in the fraud, themselves developed plans for fraudulent operations. On the eve of the disaster, they destroyed a large amount of documents. Arthur Andersen was found guilty of obstructing justice. After that, there were practically none of the leading accounting firms in the world.
In January 2002, former company vice president Cliff Baxter committed suicide. And in August Allan Myerson, editor of the New York Times' economics division, jumped out the window of his 11th-floor office. It was Myerson who authored insightful material on the financial scams of the energy company Enron.
The investigation into the events leading up to Enron's bankruptcy is being carried out by several departments simultaneously - the FBI, the Department of Justice and the Department of Labor. Of course, Congress, almost the quickest to join the investigation, did not step aside: the interests of so many voters were affected!
One of the main defendants in the case is Andrew Fastow, the company's chief accountant and the suspected originator of the criminal system. In October 2002, he was charged with fraud and, at the same time, with money laundering, criminal conspiracy, and so on. He faces forty years in prison for fraud.
Enron's boss, Kenneth Lay, has dismissed all charges against him. He has surrendered himself to the authorities and is therefore lenient. He is imprisoned for "only" 175 years.
Who's to blame?
Some members of the presidential administration were embarrassed. It was found that Vice President R. Cheney and his advisors met with Enron leadership six times in 2001. The last such meeting took place less than a month before the bankruptcy declaration. US Attorney General J. Ashcroft declined to investigate Enron. According to information released in the media, he received $ 60,000 from Enron during the Senate election.
And George W. Bush himself was forced to make an official statement denying that the government knew of Enron's financial troubles and impending bankruptcy and promising to conduct a thorough investigation.
The scandal breaks out and the process will obviously be long. A number of leading American and foreign banks (including Citigroup and J. P. Morgan Chase) are sued.However, experts believe that it will not be easy for duped investors to prove their charges against bankers in court.
The scandal spread across the ocean. In the UK, Enron sponsored the Labor Party, which won the election. Now Conservatives are accusing the Labor Party of implementing the country's energy policy as a thank you in favor of Enron.
The collapse of the Enron company triggered a chain reaction in the American economy. Hundreds of companies using similar "creative accounting" practices have been attacked and have had to rewrite their accounts. Of the companies listed on US stock exchanges, 10% have reviewed their financial results over the past five years. This led to many fatal consequences.
American society, and especially the business elite and politicians, have given serious thought to the relationship between business and government, the role of trade structures in funding election campaigns, the influence of energy companies on the politics of the country, the conflict of interest in provision of advisory and auditing services.
American law has now tightened the requirements for foreign companies as well. For those whose shares are listed on US stock exchanges (after all, 1,300 foreign issuers are represented on the New York Stock Exchange alone). The same requirements apply to them as to American companies, including the rules for reporting and certification.
Therefore, management should only sign the balance sheet under oath, which automatically translates the provision of false data into the category of a criminal offense (perjury). For example, a director of a US-listed Russian company (and there are currently five of them) can spend a significant amount of time in an American prison if the US decides that their financial statements do not meet American standards.
All of this irritates even the USA's closest allies, for example Germany, which has its own legislation against fraudsters. Foreign businessmen are unhappy with US interference in their business affairs. These unilateral actions by American Themis are what they call "economic imperialism".
Most importantly, the Enron bankruptcy exposed serious problems related to the generally accepted accounting principles (GAAP) of the American financial reporting system.
All public companies in the world build their reporting on the basis of this system and its European counterpart IAS (International Accounting Standards). Today the effectiveness of a system to provide investors, lenders and business partners with reliable information has been questioned. It can be assumed that the standards for the disclosure of information, in particular with regard to off-balance sheet and management transactions, will be tightened in other countries.
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