Research Of The Case Of Enron Corporation Bankrupsy

Kenneth Lay was one of the many individuals involved in America’s biggest ever corporate fraud scheme, the 2001 Enron Scandal. Lay came from a family who owned a farm in Missouri, and had very little money. He earned a P. H. D in Economics, and turned to the energy business in 1985 when he merged two companies to create Enron. Kenneth Lay was CEO, for more than fifteen years and Chairman of the Board of Directors of Enron since 1986.

Enron was an American energy company based in Houston, Texas. Before its fall in December 2001, Enron had grown into a major energy trading company, which was once the seventh-largest company in America. Enron's assets had been estimated at $100 billion at one point and then more than doubled its revenue of $40 billion in 1999. Enron earned such revenues by exploiting the California market.

“Due to the efforts of Lay, Skilling, Causey and their conspirators, the financial appearance of Enron presented to the investing public concealed the true state of Enron. The Conspiracy objectives included: reporting recurring earnings that falsely appeared to grow smoothly by 15 to 20 percent annually, creating the illusion Enron met or exceeded expectations of securities analysts, touting falsely the success of Enron's business units, concealing large losses, masking the true magnitude of debt, deceiving credit rating agencies in order to maintain an investment grade credit rating, and artificially inflating the share price of Enron’s stock, including attempting to stem the decline of Enron’s share price in 2001.

As a result of the scandal, Lay and the others were able to enrich themselves through salary, grants of stocks, bonuses, and other profits.

Case and Background Information

Sherron Watkins, one of the worlds best known Whistleblowers, brought such corruption to the agency’s attention in the summer of 2001. She was working under the Chief Financial Officer, Andrew Fastow. While observing his accounting sheets, she noticed a list of weak assets Enron wanted to sell that had been tucked into off-balance-sheet financial structures that was intended to lock in their value against underperforming assets. She noticed the structures, known as Raptors, were “under water” because they owed Enron hundreds of millions of dollars and contained only falling Enron stock to repay the debt. The Raptors had been capitalized with funds from Fastow-run LJM partnerships, which had already recouped their investment plus profits. After observing the accounting sheet, Watking knew Enron engaged in illegal activity, and would soon be caught. In her testimony she stated, “my understanding as an accountant is that a company can never use its own stock to generate a gain or avoid a loss on its income statement”. In August 2001 Sherron Watkings took a reactive strategy and conducted an internal report. Watkins wrote Lay a memo that read:

“Dear Mr. Lay, has Enron become a risky place to work over for those of us who haven't got rich over the last couple of years, can we afford to stay? Skillings abrupt apparcher will raise suspicion of accounting improprieties. Skilling is resigning for “personal” reasons, but I think he wasn’t having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now then resign in shame in two years. I am incredibly nervous we will implode in a wave of accounting scandals. ”

As the company continued to fall in prices due to bad publicity, Kenneth Lay told employees, “just like America is under attack of terrorism, I think we are under attack. Enron has been through some tough times before. That is right, they tried to take us down in the eighties with that fony oil trading scandal. They have tried to take us down many times, but in each and every case the company has came back and has come back stronger than it has before. All of us in this room today are being tested, will we measure up to the character? We need to show our character as an organization. ” After the meeting, Lay became aware that the Securities and Exchange Commission launched a formal investigation of Enron Corporation. December 2, 2001 Enron filed for bankruptcy.

United States of America v. Kenneth L. Lay was charged in Federal Court by The United States District Court, Southern District of Texas, Houston Division. It was presided by Federal District Court Judge Sim Lake. Kenneth Lay plead not guilty to all charges and was released on a $500,000 bail. On May 25, 2006, Lay was found guilty on six counts of conspiracy and fraud after jurors spent six days deliberating for over three months of testimony that came from 54 witnesses in the fraud and conspiracy trial. In a separate bench trial, Judge Lake ruled that Lay was guilty of four additional counts of fraud and making false statements. Kenneth Lay’s charges included:

• Count 1: Conspiracy to commit Securities and Wire Fraud
• Count 12 & 13: Wire Fraud- False and Misleading statements in employee meetings
• Count 27, 28, & 29: Securities Fraud- Presentations to Securities Analysts & Rating Agency Representative
• Count 38: Bank Fraud
• Count 39, 40 & 41:Making false statements to banks

The Statutes include:

• § 240. 14c-6 False or misleading statements: “No information statement shall contain any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the same meeting or subject matter which has become false or misleading. ” (Legal Information Institute)
• 18 U. S. Code § 1344 - Bank fraud: “ (1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises. ”
• 18 U. S. Code § 1348- Securities and commodities fraud: “Whoever knowingly executes, or attempts to execute, a scheme or artifice (1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934. Or (2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934. ”

After the trial Lay told the media,'I firmly believe I'm innocent of the charges against me,' Lay said following the hearing. 'We believe that God in fact is in control and indeed he does work all things for good for those who love the lord. ' In an interview with Scott Pelley from 60 minutes, Lay was asked how he felt about having his name associated with the scandal. Lay replied with, 'I don't like it at all as you'd expect. The last thing I would have ever expected to happen to me in my life would be that, in fact, I would be accused of doing something wrong and maybe even something criminal. '

The 2001 Enron scandal led to the bankruptcy of the Enron Corporation. Victims included 4,000 Enron employees left without jobs and wiped out savings and pensions and owing creditors $65 billion dollars. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. A partnering company known as Arthur Anderson, an accounting firm, closed in light of the scandal. However, Enron as an entire company was not criminally charged, just the individuals who played roles in the scandal. Enron sold its last business, Prisma Energy, during 2006, leaving Enron asset-less. During early 2007, the company name was changed to Enron Creditors Recovery Corporation. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies.

Context

An article titled, “Is “Willful Blindness” The New “Recklessness” After Global-Tech” describes the Willful Blindness doctrine. The article relates to the case of Kenneth Lay since he was wilfully blind during the whole scandal. For example he stated to news outlets that, “I firmly believe I am innocent of the charges against me as I have said from day one. ” (ABC News) In the American Scandal Podcast, Episode 3 Lay also stated, “there is nothing wrong with how Enron does business, it is a public relations problem. ”

The article states, “The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances. The traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge. ”

Lay also admitted to Pelley in an interview that there were criminals at Enron, however he insisted he was a victim, not a villain. When Pelley asked Lay what responsibility does he take, as chief executive officer, for the failure of Enron? Lay responded with,'I have to take responsibility for anything that happened within its businesses, but I can't take responsibility for criminal conduct of somebody inside the company. I think the primary reason for Enron's collapse was Andy Fastow and his little group of people and what they did. ”

Another article titled, “Control Fraud and Economic Criminology,” describes control fraud and raises issues on the fact that the doctrines of the law-and-economics school discount the role and significance of fraud. The authors believe they do so substantially on the ground that “market discipline” works to expose the inner workings of companies and to dissuade investors from risking money with those that are not clear and reputable. The article describes how control fraud emerged from a corporate criminal class, and leaders, with roots in American business and politics.

“Black points out that losses associated with control fraud are by far the largest source of financial losses associated with crime. Of this the savings and loan crisis was emblematic and precautionary, but it was not the only instance. The S&L crooks emerged from a corporate criminal class, with deep roots in American business and politics. The leaders of Enron, Tyco, Worldcom and other recent control frauds emerged from the same environment. And so too did the political leadership that was so closely allied with Enron. That leadership has given us the evisceration of the Federal Trade Commission, the Federal Energy Regulatory Commission, the Federal Communications Commission, and the Securities and Exchange Commission. Control fraud is not just the practice of an isolated few. For a politically significant part of the national business class, it is a way of life, aided and abetted by the government itself. ”

This case was not similar to the average corporate fraud case since the defendant, Kenneth Lay died between the period of the verdict and sentencing. His death led to his conviction being vacated. The fifth circuit explained the reasoning behind vacating his conviction as, “the criminal justice system exists primarily to punish and cannot effectively punish one who has died. The purposes of criminal proceedings are primarily penal-the indictment, conviction and sentence are charges against and punishment of the defendant such that the death of the defendant eliminates that purpose”. The indictment was also dismissed due to the fact that Lay’s death deprived him of his right to pursue a planned appeal.

Some challenges in detecting corporate corruption cases is the ability to have whistleblowers come forward, and have anyone believe them. For example Enron's Attorney, Rodgers, told Watkins, “Why would Fastow, our accountants and our law firm risk everything they have for something only you say is illegal. ” This proves Enron’s Attorney, would not take Watkins memo seriously and claimed she was blowing things out of proportion.

Another limitation illustrated in my case was creating a corrupt environment in which their type of criminal behavior seemed acceptable. They were all able to put their morals aside as leaders of the company and commit fraud. They all believed nothing was wrong with the criminal acts they were committing, by betraying investors, and employees within the company, and neither of them realized the danger it would put the company in. This was present in my case when Sherron Watkins meet with V&E to conduct an internal investigation, this was not the right way to do it though because it was a conflict of interest since Enron partners with them. For example they stated to Watkins, “this is not an investigation, it is a review, the distinction is important. ”

Conclusion

In light of this scandal, there are now new accounting rules in place. The Sarbanes-Oxley Act was a federal law enacted in 2002 that aimed at publicly held corporations, their internal financial controls, and their financial reporting audit procedures as performed by external auditing firms. The intent behind this act was to protect investors by improving the accuracy and reliability of corporate disclosures in the financial statements.

In order to prevent future corporate crimes there could be frequent auditing. This would help detect the crime early on. Another resolution could be setting up a whistleblower hotline, so that instances such as Watkins reporting to Lay, who was a part of the corruption, could be avoided. This would leave room for proper investigations to take place.