It was one of the largest securities fraud scandals in history, and the investigation into the extent of the fraud committed by Enron is still ongoing. As a result, Enron was forced to file for bankruptcy in December 2001.
History of Enron
Enron is an energy company based in Houston, Texas that deals with the energy trade on an international and domestic basis. It was formed in 1985 when Houston Natural Gas merged with InterNorth. After several years of international and domestic expansion involving complicated deals and contracts, Enron was billions of dollars into debt. All of this debt was concealed from shareholders through partnerships with other companies, fraudulent accounting, and illegal loans. Listed below are a few of the partnerships that allowed Enron to hide debt:
A group of entities secretly funded by Enron that purchased electricity-generating windmills from Enron, then later sold them back with some of the profits going to key Enron officials and their families.
A company formed by executives of Enron in order to buy out the shares of California Public Employees' Retirement System (CalPERS) in a joint venture investment partnership known as JEDI. Chewco bought out CalPERS interest in order to retain JEDI's off-balance-sheet status. However, Chewco did not meet the requirements for accounting rules and claimed profits that it was not entitled to. In addition, when Enron bought out Chewco's interest, Chewco's price was driven up, reaping huge benefits for the original investors (Enron execs).
Enron bought the shares of National Westminster Bank (NatWest) in a limited partnership with Credit Suisse First Boston. Enron paid $20 million, but only $1 million went to NatWest. The remainder of the money went to several executives and their families, as well as to three NatWest employees who were in on the deal.
Although top level executives at Enron were likely aware of the debt and the illegal practices, the fraud was not revealed to the public until October 2001 when Enron announced that the company was actually worth $1.2 billion less than previously reported. This prompted an investigation by the Securities and Exchange Commission, which has revealed many levels of deception and illegal practices committed by high-ranking Enron executives, investment banking partners, and the company's accounting firm, Arthur Anderson.
Investigation of Enron
To date, the SEC has uncovered several instances of financial fraud committed by high-ranking executives at Enron. Many of the executives have been charged with wire fraud, money laundering, securities fraud, mail fraud, and conspiracy. The following is a list of key players who are suspected of fraud related to the Enron scandal:
- Kenneth Lay - former CEO and Chairman of Enron.
- Andrew Fastow - former CFO of Enron. Fastow was indicted on 78 counts of securities fraud, money laundering, wire and mail fraud, as well as conspiracy to inflate Enron's profit.
- Michael Kopper - former director in the global finance unit. Kopper pleaded guilty to financial wrongdoing in August 2002.
- Jeffrey Skilling - former CEO of Enron.
- J. Clifford Baxter - former Vice Chairman of Enron. Accused of securities fraud, Baxter died in an apparent suicide in January 2002.
- Arthur Anderson - the accounting firm that was responsible for auditing Enron. Arthur Anderson was found guilty of obstruction of justice for shredding documents related to the Enron scandal.
- Timothy Belden - former head of trading at Enron's Portland, OR office. Belden pleaded guilty to one count of conspiracy to commit wire fraud related to Enron's activities during the California power crisis.
- Gary Steven Emigre, Gilles Robert Hugh Darby, David John Birmingham - three former employees of NatWest (National Westminster Bank). These men have been charged with wire fraud that defrauded their employer but benefited themselves and executives at Enron.