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The Rise and Fall of Enron - The Biggest Scandal in the History of American Finance - YouTube
Channel: How It Happened
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At the start of 2001, Enron was the
blueprint for large corporations,
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boasting 30,000 employees and an
annual revenue of $100 billion,
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But by the end of the year,
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the company had garnered the title
of biggest bankruptcy of all time
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While Arthur Andersen, one of the big 5, suffered
a similar fate for their part in the scandal
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So how did the energy giant once valued at 70
billion dollars go from winning Fortune’s most
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innovative company for 6 years in a row to
bankrupt in the space of just a few months.
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Here’s a story of fraud, corruption
and serious mismanagement.
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Here’s How It Happened.
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For some background, Enron was founded
as a result of a merger between energy
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firm InterNorth and utility company
Houston Natural Gas back in 1985.
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American Ken Lay was appointed CEO and legendary
artist Paul Rand, who also made the logos for IBM,
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UPS and ABC, designed the now infamous Enron E
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The energy market underwent significant
deregulation throughout the 80s and 90s,
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leading to extremely volatile prices
and a belief that anything was possible
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as companies rode the bull market
that followed 1987’s Black Monday.
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Enron opened its own trading
subsidiary to maximise profitability,
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and Jeffrey Skilling was appointed
CEO of Enron Capital & Trade in 1991
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Skilling oversaw the introduction of
mark-to-market accounting within the corporation,
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that is the practice of valuing your assets
based on predictions of their future prices,
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rather than on historical prices
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And in short, it basically gave Enron
the right to decide their own profits,
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without being held accountable for
the accuracy of the valuations.
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Based on these optimistic calculations,
Enron’s revenue figures began to skyrocket
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as the 90s wore on. The firm was named
as Fortune’s best company to work for
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in 2000, as its stock price peaked
at $90 a share and its directors
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outlined their expectations of even
further profits in the near future.
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As Enron invested hundreds of millions more
into projects both in the US and overseas,
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the company was able to hide these losses behind
false estimations of the new asset’s value,
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like a power plant in the north east of England.
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To cover any reported losses or cashflow
issues, Enron would borrow money from its SPV’s,
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special purpose vehicles, which were subsidiaries
of the corporation capitalised with Enron stock,
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making it impossible for the lenders to retrieve
their money if the energy company was struggling.
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The crashing of the dot com bubble
in 2000 hit Enron’s assets hard,
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as they had now diversified into industries like
video on demand and high speed broadband networks.
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Investors were becoming more cautious
and increasingly skeptical of the
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firm’s complex business model, and by early 2001,
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serious questions were being asked
of Enron’s financial statements.
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Lay stepped down as CEO in February
to be replaced by Skilling, with
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Enron’s stock price halving to $40
in the six months that followed
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Amid widespread speculation about
the company’s accounting methods,
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Skilling stepped down from his new role in August
2001, as Lay returned to his former position.
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Analysts were downgrading Enron’s stock rating
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and Lay began selling millions of
dollars worth of his shares in the firm
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In October, Enron announced its
first quarterly loss in 4 years
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thanks to taking charges of a billion
dollars from its underperforming assets
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and the SEC began a formal investigation
into its financial statements.
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During November, the company revealed
it had overstated its profits by
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$591 million between 1997 and 2000,
meanwhile over 20,000 of its employees’
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401k pension plans were locked for 30
days due to a change in administrator.
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A merger was agreed with close
competitor Dynegy, but was called off
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due to concerns that Enron was still lacking
transparency in its off-balance-sheet debt,
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And on 30th of November, the
company’s stock price hit rock bottom,
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at just 26 cents a share, down
from 80 dollars back in February.
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And Enron filed for bankruptcy protection
two days later on 2nd of December,
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marking less than a year since it became the
seventh biggest corporation in the United States.
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Thousands of employees lost their
jobs and their life savings,
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and shareholders eventually sued banks like JP
Morgan Chase and Citigroup for conducting deals
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with Enron, later winning $7.2 billion that
was shared amongst the 1.5 million victims.
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Several executives went on trial for a range
of charges related to the company’s nefarious
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activity, including Lay and Skilling, who
were charged with a total of 39 counts of
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fraud and conspiracy between them in January
2006, to all of which they pleaded not guilty.
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Lay died from a heart attack before the
sentencing, but Skilling was sentenced
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to 24 years, of which he served
12 before being released in 2019.
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Not exempt from punishment were Enron’s auditors,
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Arthur Andersen, who were one of
the big 5 accounting firms, and
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also had their reputation dragged through
the mud for their compliance in the fraud.
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They were found guilty of destroying
documents that were of relevance to the SEC,
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which was cause to void their auditing licence
and leave the firm with no choice but to close.
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Hence their absence from the
big 4 that we know today,
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although their consultancy branch does
still remain in operation as Accenture.
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The fiasco saw the United States Senate impose
much tighter regulations to prevent a repeat in
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future, namely the Sarbanes-Oxley Act which
created a board to oversee audit reports
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for public companies and strict controls on
what services these auditors could provide,
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Not to mention the requirement for executives
to sign off on all financial reports,
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meaning they could no longer plead
ignorance of their firm’s wrongdoings.
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Undoubtedly the effects of the Enron Scandal are
still felt in the finance industry today, even
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twenty years later, so let us know your thoughts
and what you think the next Enron might be.
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And that’s how it happened.
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Thanks for watching.
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