Prepared and presented by Phoenix

The company’s success was based on artificially inflated profits,

dubious accounting practices, and – some say – fraud.

Phoenix
•In 1985 Enron was born
from the merger of
Houston Natural Gas and
InterNorth.

•Started trading futures in

Gas Contracts. “Mid 1980s: Enron business entirely in
the USA, focused on gas pipelines and
power”
•Soon got the control of
over 25% of the all Gas
business.
Phoenix
•Entered into the
derivatives business.

•Began trading in
commodities like
steel, coal, weather
risk etc.
“2001: Enron trading in hundreds of commodities
Interests in: USA, South America, Europe, Asia and
Australia”
•By 2000, even
stepped into the
dot.com business.
Phoenix
•Entered into the
derivatives business.

•Began trading in
commodities like
steel, coal, weather
risk etc.
“2001: Enron trading in hundreds of commodities
Interests in: USA, South America, Europe, Asia and
Australia”
•By 2000, even
stepped into the
dot.com business.
Phoenix
•Global energy crises by late 90s.

•In India, lost the Dabhol Power project, in

which Enron had committed $2.9bn.

•Beginning of Dot.Com bubble crises and

fallout of blockbuster internet deal.

•Enron delivered smoothly growing

earnings (but not cash flows).

Phoenix
•Enron was a trading company, yet was given very high PE of 70 as
compared to PE of 20, given to other trading companies

•During 2000, Enron’s derivatives-related assets

increased from $2.2bln to $12bln and derivates-
related liabilities increased from $1.8bln to $10.5bln

•Enron’s top management gave it’s managers a blank order to “just

do it”

Phoenix
•May, 2001 – Mr. Baxter, the
Vice Chairman resigns.

•14th Aug, 2001 – Jeff

Masterminds: (lef
Skilling resigned as CEO. Ken Lay; Jeff Skill
t to right): founder
ing; Andy Fastow
;
and Lou Pai
•Stock had already fallen to $30 from $90 in Feb,
2001.

•Oct, 2001 – Moody’s downgraded Enron’s debt.

Phoenix
•8th Nov, 2001 – Told investors that they were
restating earnings for past 4 and ¾ years.

•By end of Nov, 2001 stock reached $0.3 falling

from its peak price $90 in just 8 months.

•2nd Dec, 2001 – Filed Bankruptcy. Phoenix

 Energy producer fears Electricity company
warm weather. Pays fears cold weather. Pays
Enron to hedge against Enron to hedge against
the collapse of demand rise in price and demand
and prices due to warm due to cold weather.
weather.
Enron, as market maker, profits by taking commission on hedge in
both eventualities. Phoenix
 “Kenneth Lay himself had strong
personal ties to two Republican
Presidents”

Total donations during 1989-2001

SENATE amounted
$1,133,981 ($1.1mn)

HOUSE OF REPS

Phoenix
 “”
Special
4
Purpose
ENRON 3 Entity
A huge hole had
5 (SPE)
opened in the
accounts.
-BBC
2
Account
In 1 Partnership
Profit 1. Enron sets up partnership using stock as funding
2. Partnership sets up SPE
3. SPE agrees contract to pay Enron if its
investment declines in value
4. Payment made as investment declines
5. Payment posted as profit, even though it is
Enron’s own money
Phoenix
Phoenix
 4

2
1998
1
1999
0 2000
2001
-1

-2
3 6 9 Year
months months months

Negative Cash Flows: 1st three quarters in 1999, 2000 & 2001

Phoenix
 •Sherron Watkins, an Enron vice-president, wrote
an anonymous letter to Kenneth Lay setting out
her fears of an impending scandal.

•Fearing the predictable collapse she ordered

Enron's lawyers to conduct an investigation into
Wat k in s
Sh err on the partnerships.

•Mr. Lay was also moving to reassure the markets.

He was doing all he could to "restore investor
confidence" he told staff and shareholders.

•But amid the selling, Mr. Lay himself joined the

crowd as he exercised options on 83,000 shares Kenn
eth L
a y
worth almost $2m.

Phoenix
 •Andersen executives including chief
Enron auditor David Duncan, decided to
consult lawyers over whether or not the
partnerships were legal.

•Andersen told Enron that it had no

other choice but to change the way it was accounting
for its special partnerships.
•At some point after this, staff in Andersen’s Houston
office began shredding documents relating to Enron.

Phoenix
•Arthur Andersen was one of the
world’s five leading accounting firms.

•Legal examination of Sherron Arthur An

dersen’s H
Watkins's concerns concluded that the branch ouston
partnerships in question, Raptor and
Condor, had been approved by
Andersen.

•Was paid $52mn in 2000, the majority

for non-audit related consulting e
ing
stroy e
services. e fi
aid d
rm s was rou
T h men t s
tin

docu
Phoenix
Enron’s Accounts: The Company announced the restated figures

Year Reported Revised True debt True equity

Income Income restated by restated by
1997 $105m $77m Up $771m Down $258m

1998 $733m $600m Up $561m Down $391m

1999 $893m $645m Up $685m Down $710m

2000 $979m $880m Up $628m Down $754m

Reported and revised income, debt and shareholder equity 1997-2000

following special partnership revelations.
Phoenix
 In spite of
all help,
failed to
save
Enron

“
I take responsibility for what happened at Enron, both good and
bad. But I cannot take responsibility for criminal conduct that I was
unaware of. -Kenneth Lay

Phoenix
Phoenix
Phoenix
J P Morgan: Sumitomo Mitsui Corp:
$900m $210m
Citigroup: Nikko Cordial:
$800m $207m
Credit Lyonnais: Principal Financial Group:
$250m $171m
Bank of Tokyo Mitsubishi: Abbey National:
$248m $164m
Chubb Corp: National Australia Bank:
$220m $104m
Canadian Imperial Bank: Duke Energy Corp:
$215m $100m
Some 25 further companies have declared Enron exposure
totaling an estimated $1bn.
Total global investment exposure of at least $4bn Phoenix
“
Laid-off and
retired 4000
employees from
the company
lost most of
their life
savings, which
was in company
stock.
Phoenix
Phoenix