Enron Collapse: Overview

Modified on 2009/10/14 21:32 by admin
On January 23, 2002, Kenneth L. Lay resigned as chairman and chief executive officer of Enron Corporation. It just may have been the final nail in the one-time oil and gas giant's coffin.

The story of the rise and fall of Enron is fascinating and will be studied for years at business schools around the globe. How does the Nation's seventh largest company crumble into bankruptcy almost overnight? The answer may lie somewhere in the fog of corruption that currently lingers over the Houston skyline or, more likely, in the pounds of shredded paper the FBI and Justice Department are currently scavenging through. Why did Enron fail? Well, there is no real single answer, but reviewing the company's history may help us understand what happened to the former Fortune 500 giant.

Enron's road to failure was yellow-bricked for nearly its entire existence. The company was formed in 1986 through the merger of two natural gas pipeline firms, Houston Natural Gas and Internorth. Over the next several years, Enron's natural gas pipeline brought the company much success. Supplying natural gas was a lucrative business, but Enron wanted more. Enron wanted growth. How the company accomplished that growth eventually led to its demise. The man behind the plan was Jeff Skilling, an advisor from one of the Nation's leading management consulting firms, Mackenzie and Company. Skilling was an egotistical yet passionate entrepreneur who had been partly responsible for Enron's success during the early 1990s. His innovative policies were welcomed by CEO Ken Lay, who appointed Skilling president and chief operating officer in late 1996. For years, Enron had toyed with the concept of transforming itself from a gas utility into an energy trading firm. Trading was more lucrative yet also more risky. Skilling brought the company's trading dreams to fruition and soon Enron was making millions in gas futures. But still, it wasn't enough. Enron executives realized that the company could make even more selling other commodities such as steel, lumber, water, and electricity. At one point, Skilling decided to use Enron's immense pipeline to construct an Internet broadband service.

The company continued to expand, opening facilities in India and Brazil, and constructing pipelines in Europe and South America. Enron shares became the darling of Wall Street. Skilling was considered a visionary, a financial seer. Market analysts hung on his every word and Enron shares skyrocketed. In August 2000, the stock hit an all-time high, $90.56. Everything was grand and glorious at Enron's Houston headquarters. Or, so it seemed.

In reality, everything was not as it seemed. Energy prices plummeted. Profits from the company's trading operations suddenly became huge losses. New ventures never materialized. Enron's India plant failed. The broadband industry became saturated. A twenty-year video-on-demand deal with Blockbuster Video was canceled. In no time at all, Enron was losing billions. But company executives kept the losses hidden. Liabilities were removed from Enron's financial statements and placed into private partnerships set up by the company's Chief Financial Officer, Andrew Fastow. As a result, Enron's financial reports became suspect. Investors and analysts started asking questions that no one wanted to answer, least of all Skilling, who by February 2001 had become president and chief executive officer. Wall Street became edgy and the stock began to fall.

In August 2001, Skilling resigned from Enron citing personal reasons. Ken Lay reclaimed the position of CEO. Analysts and investors pressured Lay for answers, but he had been little more than a figurehead during Skilling's tenure, and was not familiar with all of Enron's prior maneuvering. Lay could not answer the questions shareholders and analysts desperately wanted. In October 2001, Enron reported a third quarter loss of $618 million. The end was near. Days later, the Securities and Exchange Commission (SEC) launched an investigation into the partnerships established by Fastow. In early November, Enron revealed it had overstated earnings by nearly $600 million during the past five years. Credit agencies soon downgraded Enron's bonds to "junk" status. Less than a week later, Enron declared bankruptcy and laid off 4,000 employees. When the smoke cleared, shareholders had lost millions, employee retirement plans had been wiped out and still the company had no answers.

Enron currently faces investigations by the SEC, the Justice Department, the Labor Department and the FBI. Congressional hearings have been held. Class-action lawsuits have been filed by thousands of shareholders who lost millions during the Enron implosion. Enron's auditor, Arthur Anderson, faces allegations that the accounting firm covered up corruption at Enron. On January 15, 2002, Arthur Anderson's lead partner on the Enron account was fired. Both companies have recently been accused of shredding incriminating documents.

History tells us to stay within our limits. No matter how great a society, or in this case, a corporation, there are limits to growth and expansion. The Roman Empire discovered this thousands of years ago. And, no matter what Hollywood tells us, greed is not good. In this case, greed destroyed the lives of hundreds of innocent employees and investors who trusted the leadership of Enron. The revamping of accounting principles and retirement plan regulations may be the only bright spots to emerge from the Enron scandal. Henry Ford once wrote, "Money doesn't change men, it merely unmasks them. If a man is naturally selfish or arrogant or greedy, the money brings that out, that's all." Well, Mr. Ford, you're absolutely right.

If you are an employee or shareholder of Enron, it may be important to contact an attorney who can help you protect your legal rights. Please keep in mind that there may be time limits within which you must commence suit.

See Also

  1. Securities & Investment Fraud
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