THE CON: Though the energy giant Enron was $30 billion in the hole, its stock price grew by 90 percent in 2000. Execs hid the company’s massive debt inside so-called special purpose entities and, with the help of the nation’s biggest banks, made loans look like the sales of major assets.
THE DAMAGE: $30 billion
THE OUTCOME: 20,000 Enron employees lost their jobs, as well as billions of dollars in stock and retirement savings. The Enron settlement package is the largest in history: $7.2 billion distributed to 1.5 million individuals and entities.
In 2000, the Enron Corporation was named the “most innovative company in America” by Forbes magazine for the fifth year running. With revenues of $60 billion at its peak, the Texas energy giant seemed unstoppable – reporting growth even when the market faltered in the spring of 2001. But once the first thread was pulled, it didn't take long for company's lies to unravel. In short order, CEO Jeffrey Skilling resigned and Enron declared bankruptcy. Then, with a hard look at Enron’s accounting, the truth was revealed. Outraged Americans learned about the off-the-books schemes by which the company hid its huge debt, disguised losses and created false profits.
When Enron crashed, 20,000 people lost not only their jobs but also billions of dollars in stock and retirement savings. The financial sting of the company's fall was designed to land far from those who were responsible: top Enron executives – sensing the end was near – converted $66 billion worth of stock into cash while the company's auditors worked overtime to shred tons of documents. The nation was shocked at the greed and hubris that came out during the trials of Enron's top executives – especially that of Jeffrey Skilling, the CEO who tried to slip out the back door but was convicted of fraud, conspiracy and insider trading.
Skilling sought to transform Enron when he became CEO in 1995. His plan: push the energy industry beyond the limitations of the pipeline. In his vision, the stuff of Enron – natural gas and electricity – were financial tools that could be bought and sold for profit. Under Skilling, Enron grew steadily to become the 7th largest corporation in the country; this growth was due in part to an advantageous accounting structure. With “mark to market” structuring, a company books future profits before the ink is even dry from the signing of the deal. As an example: in 1999, Enron bought naming rights for a new ballpark for the Houston Astros. Under the deal struck, payment for Enron Field was to be spread over 30 years; once the field opened, Enron had an exclusive contract to provide power to the Astros. In the first year, the total worth of that contract – $100 million – was booked as revenue.
The direction of everything was up for Enron; in 2000, its stock worth climbed 90 percent. Enron employees carefully noted the ups and downs of the stock; after all, they were paid primarily in stock and urged to invest their retirement plans in the company. To keep those numbers at the forefront of employees’ minds, the stock prices were posted every morning in the elevator.
If it looked as if profits were forever rising, Enron was actually losing money every year. Under Skilling's watch, a system was created to hide $30 billion worth of debt. So-called “special purpose entities” were created where Enron would appear to make a sale but would buy an asset back at a profit to the lender. Several of the nation's biggest banks were in this game with Enron, putting up as much as $25 million apiece for what looked like the purchase of an asset but was actually an enormous loan.
After the Internet bubble burst, Enron stock finally dropped; nerves ran high and the secrecy with which Enron shrouded its books started to raise eyebrows. In an infamous incident in 2001, Skilling lost his temper in a conference call and insulted an analyst who dared ask why Enron couldn't produce a balance sheet with its earnings.
Skilling, who for the last few years had sold more than $190 million of his stock, had plenty of reason to worry. An article appeared in Fortune magazine in 1996 that asked a simple, but not yet fully examined, question: How does Enron make its money? Citing personal reasons, Skilling resigned as CEO. At that point, the Securities and Exchange Commission launched an investigation and, just four months after Skilling stepped down, Enron declared bankruptcy.
The toll of Enron's collapse was enormous. Many thousands of people became suddenly unemployed and, with retirement and pension funds filled with Enron stock, virtually penniless. Nearly 20 former Enron employees entered guilty pleas, including CFO Andrew Fastow, who received 10 years in exchange for his testimony. Enron founder and president Kenneth Lay died before sentencing, while Skilling was sentenced to 24 years and ordered to provide $45 million in restitution to the victims of the Enron fraud.
Enron – a company never known to do anything small – had the largest settlement package in U.S. securities litigation: $7.2 billion to be distributed amongst 1.5 million individuals and entities.