An Enron scandal summary would sound much like the descriptions of other high-profile business scandals, except that the Enron executives were actually punished for their misdeeds. Enron was a business conglomerate and Wall Street darling during the 1990s, created by the merger of smaller oil and energy companies. Houston executives Kenneth Lay, Andrew Fastow and Jeffrey Skilling parlayed their new mega-company into a poster child for American business, boasting of record profits with minimal losses. Unknown to almost everybody, this image was the result of one of the greatest swindles in financial history.
The shell game. Not everyone knows this, but stock prices are based on how successful a company appears, not how much money it has in the bank. Enron’s executives, aided by timely deregulation of the power-utility industry, turned this loophole into a gold mine. They posted profits based on how much a given business venture could make, not how much it was actually worth, and concealed losses with offshore “shell” companies. Their accountancy firm, Arthur Andersen LLP, was old and well-respected; no one believed it would be party to corporate fraud, making Enron seem squeaky-clean.
The last scam. To be sure, when Lay and company founded Enron in 1985, it had real financial assets, but by the late ‘90s, these assets mostly existed as numbers in books. Then, in 2000, one of Enron’s subsidiaries did something that was both stupid and criminal: it created an artificial energy crisis in California. Increasing demand through phony power-plant shutdowns and rolling blackouts, Enron drove up the price of electricity and its own profits. But this also focused the attention of journalists and federal investigators on the parent company, whose stock prices had never been higher.
The collapse. Initially, Skilling and other executives responded to questions by insulting reporters and lying to employees. When pressure mounted, Skilling sold his Enron shares at a massive profit and resigned; Lay stayed on. In 2001, the Enron scandal came to light, resulting in massive stockholder defections. In December of that year, the company declared bankruptcy, its formerly golden stock now worthless. Because of its silent complicity in the Enron scandal, the Arthur Andersen company was also forced to close its doors.
The fallout. In the end, 90,000 people lost their jobs; Enron employees, who had been encouraged to invest their retirement plans in company stock, lost $2 billion into the bargain. Stockholders lost another $70 billion in the Enron scandal, and the state of California sued for $6 billion in energy losses. Chief executive Ken Lay escaped justice, dying of a heart attack before he could be sentenced. Skilling, Fastow and another dozen executives went to prison. Skilling appealed his 24-year sentence to the U.S. Supreme Court; Fastow’s release was scheduled for December 2011.