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Enron 101 PDF
Enron 101 PDF
University Photography
How a group of cial statement analysis. At the time,
ENE was trading around $40/share
fund a holding of 720 shares (includ-
ing splits) at an average purchase price
business students and was widely touted by analysts as
being the company best placed to take
of $29.40.
The very next year the sell call was
sold Enron a year advantage of accelerating deregulation
in energy markets.
taken up again, this time in greater
urgency. A role in managing the Cayuga
before the collapse To their own surprise, the team Fund is part of the required curriculum
returned a “sell” recommendation based for second-year students. Two of them,
By Gregory DL Morris on the strict application of the funda- Feidhlim Boyle and Tyger Park, were
mental tools Professor Lee had taught assigned the energy, mining and manu-
Wall Street lore says that no one them. Although the team did note that facturing sectors, including Enron. As
saw the collapse of Enron coming. the eight-variable Beneish model indi- Boyle and Park settled back into the
Chairman Kenneth Lay, CFO Andrew cated possible earnings manipulation, class routine that summer of 2000,
Fastow, COO Jeffrey Skilling and their sell recommendation was based nothing was hotter than ENE, which
their band of brigands had done such primarily on an intrinsic value of about was trading higher than $90/share.
a good job of fooling accountants, $35/share versus the then-current price Boyle and Park were in Profes-
auditors, investors and regulators that of $48/share in a 52-week range of $35 sor Lee’s analysis course two years
the implosion was a shock to all. Like to $51.50/share. later, and were familiar with the 1998
much conventional wisdom on Wall Later that year JGSM started the evaluation. Again the recommenda-
Street, this is not entirely true. Cayuga Fund, a live-money invest- tion was sell on ENE, but this time it
In May 1998 a team of students at ment opened with $650,000. The sell involved real money. Boyle and Park
Cornell University’s Johnson Gradu- call on ENE had proved prescient, stood in front of their class and made
ate School of Management (JGSM) in and the fund took a modest position a case to sell one of the highest fliers
Ithaca, NY, selected Enron as the sub- in ENE in December 1998 at around on Wall Street.
ject of their term project for Professor $27/share. A separate purchase in The class accepted their argument,
Charles M. C. Lee’s course in finan- October 1999 at $40/share gave the as did the faculty and staff supervisors.
For the time being the only real donated, most comes at a discount, fund at a research university. “The Uni-
money at stake is in the Cayuga Fund. and in return we help the vendors with versity of Michigan is probably most
Thomas stresses that the Cayuga Fund their beta testing,” she adds. comparable to us, but that is because it
“is not just play money. We do seri- According to a recent survey by was modeled after us,” she says. “The
ously want to make money, and we Brian Bruce, director of the Alterna- University of Texas at Austin also has
are very proud of the return, especially tive Asset Management Center of the a trading room and a fund.”
as this is an educational fund and we Cox School of Business at Southern She further differentiates among
don’t use any leverage.” Methodist University in Dallas, there the educational funds. “I believe that
As of May 2009, the fund had assets are at least 275 schools that have many of the larger funds hold a lot
under management of $11.6 million, student-managed live-money invest- of Treasuries and are managed more
according to Lakshmi Bhojraj (BA ments. Total assets under management passively. We are among the largest
’95, MBA ’01), director of the Parker were about $340 million, but that was actively managed.” Bhojraj also notes
Center for Investment Research at pre-recession. “It may be as low as that many educational funds handle
JGSM. She is also a classmate of Boyle $250 million now,” says Bruce. “That mostly endowment money. “We have
and Park. The center was established is why we are renewing our survey and real investors. The endowment is one
in 1998 concurrently with the creation hope to have results later this year.” of them, but it is not a significant
of the Cayuga Fund and the school’s Most B-school funds are quite small, investor.”
move from a Modernist box on the with average assets under management The Cayuga Fund uses both a quan-
edge of campus to Sage College, a lov- of $1.4 million and the median hold- titative and a fundamental approach,
ingly restored Queen Anne complex in ing of just $400,000. Ohio State and and a proprietary model to screen
the very center of the university. the University of Minnesota had more stocks. Screened stocks are passed to
Bhojraj says that Parker Center is than $20 million in the last survey, the student sector managers for funda-
a state-of-the-art facility, comparable latter split evenly between a growth mental analysis. The faculty director
in capability, if not size to any trad- and an income fund. Cornell and the and Parker Center director supervise
ing floor on Wall Street. “We have University of Texas are the only other and manage the risk of the portfolio
cool data walls with live feeds. The schools with more than $10 million. all year. This includes taking positions
software and analytical tools alone Bhojraj notes that Cornell is one of as hedges and supplementing student
would cost $1.8 million just for fees the few institutions to combine a full- recommendations with quant picks.
at a commercial operation. Some is scale trading floor and a live-money They actively rebalance and manage