Enron - Were they the Crookedest Guys in the Room?

The Rise of the Big "E"

In May 1985, InterNorth Incorporated and Houston Natural Gas announced that they would
merge. Their combined value was an estimated $2.3 billion. These firms were two of the
largest gas pipeline companies in the United States. As part of the negotiations, the chairman
and CEO of InterNorth, Sam Segnar, would be the head of the new entity until January 1,
1987, when the chairman and CEO of Houston Natural Gas, Kenneth Lay, would take over.
The new company was initially called HNG/lnterNorth and later was renamed Enron.' Lay's
first choice for the new name of the company was “Enteron,” but that was scrapped just days
before it was announced to the public when Lay learned that enteron was the name for the
digestive tract.

In 1990, Lay created a division of Enron called Enron Finance Corporation and hired Jeffrey
Skilling to run the company. Skilling had been an accounting consultant to Enron through the
firm of McKinsey & Company. Lay was so impressed with the accounting systems that
Skilling developed for Enron that he custom-tailored the lead position at Enron Finance
Corporation for him.

By 1995, Enron had become the largest independent natural gas company in the United
States. In 1996, Andrew Fastow, Enron's chief financial officer and one of the key players in
Enron's downfall, was almost fired from Enron when he did an unsatisfactory job of
managing a retail unit of Enron that competed against local utilities in different parts of the
United States. But Fastow used his connections within Enron to keep his job and return to the
finance department.

In 1997, Skilling became president and chief operating officer of Enron. Fastow was in charge
of the complex transfer of debt from Enron's balance sheet to two LJM partnerships, which
Skilling and Enron's board of directors encouraged Fastow to form in 1999 and operate under
his own name, so Enron could conduct transactions off its books and avoid reporting losses.4
Fastow appeared obsessed with the accumulation of wealth and considered it the only true
measure of success in the business world. His obsession was ironic because Fastow's wife,
Lea, was an heiress to a real estate fortune in Houston. However, that did not dampen his
desire to accumulate the $30 million he made related to the off-balance sheet partnerships and
the $23 million he received for selling Enron stock in 1999 and 2000. During a congressional
inquiry, Congressman James Greenwood of Pennsylvania called Fastow the "Betty Crocker of
cooked books."

Enron's strategic focus was to convince customers and the federal government that
deregulation of the energy industry would result in more choices by customers and a more
competitive marketplace, and to generate the same brand recognition as AT&T. The company
took a number of measures to ensure the success of this strategy, including purchasing
advertising time during the Super Bowl XXXI telecast in 1997, and reinforcing Enron's

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already strong personal relationship with the then governor of Texas and future president of
the United States George W. Bush, whose family was a big player in the oil business.

In July 2000, Enron released its code of ethics policies to its employees. The 63-page
document, with two additional blank pages for notes, highlighted Enron's ethical commitment
by top management. The foreword from this document written by Lay is shown in Table 1.

Table 1 Foreword From Enron's Code of Ethics Manual

As officers and employees of Enron Corp" its subsidiaries, and its affiliated
companies, we are responsible for conducting the business affairs of the companies in
accordance with all applicable laws and in a moral and honest manner.

To be sure that we understand what is expected of us, Enron has adopted certain
policies, with the approval of the Board of Directors, which are set forth in this
booklet, I ask that you read them carefully and completely and that, as you do, you
reflect on your past actions to make certain that you have complied with the policies, It
is absolutely essential that you fully comply with these policies in the future, If you
have any questions, talk them over with your supervisor, manager, or Enron legal
counsel.

We want to be proud of Enron and to know that it enjoys a reputation for fairness and
honesty and that it is respected, Gaining such respect is one aim of our advertising and
public relations activities, but no matter how effective they may be, Enron's reputation
finally depends on its people, on you and me. Let's keep that reputation high,

July 1, 2000

Kenneth l. Lay

SOURCE: www.smokinggun.com

In October 2000, Jordan Mintz, a lawyer, was transferred from his position as vice president
for tax at Enron North America to the position of vice president and general counsel for Enron
Global Finance, which was the division run by Fastow. As soon as he started reviewing the
documents pertaining to the agreements between Fastow's partnerships and Enron, Mintz was
immediately troubled. He discovered that Fastow was representing his own partnership as a
negotiator, and that his subordinates were representing Enron in the deals. He also noticed
that the approval sheets for deal transactions had not been signed by Skilling, even though
there was a space on the documents for Skilling's signature. When Mintz went to Richard
Causey, Enron's chief accounting officer, Causey's advice to Mintz was not to stick his neck
out to investigate the details of the transactions: Fastow did not sever the potential conflict-of-
interest ties with the partnerships until July 2001.

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From 1998 to 2000, the total compensation paid to the top 200 executives at Enron went from
$193 million to $1.4 billion. The top three Enron executives went from tens of millions in
1998 to

The Rank and Yank Culture at Enron

There was a simple understanding at Enron. The company believed it could get the best and
brightest employees and pay them the most in the industry, but if they did not perform they
would be fired. Skilling established a performance review committee to evaluate Enron's
employees. It quickly got a reputation for being the toughest employee ranking system of any
company in the United States. Although the official components of an employee's evaluation
were based on respect, integrity, communication, and excellence, the employees quickly
learned that the only performance measure that mattered in the evaluation was their
contribution to Enron's profitability. Each employee’s performance was compared with others
to generate an overall ranking. The top 5% were given a ranking as superior, the next 30%
were ranked as excellent, and the next 30% were ranked a strong. The bottom two categories
were satisfactory (20%) and needs improvement (15%), respectively. These evaluations
occurred every 6 months, and anyone who did not move from the need improvement category
to one of the higher categories was fired. As a result, the culture at Enro became fiercely
competitive and. secretive, with each employee looking out for his or her own performance
Without regard to helping colleagues improve their performance.

The Beginning of the End

In March 200 I, the first crack in Enron's armor occurred when Bethany McLean from Farron
Magazine wrote an article titled "Is Enron Overpriced?". In the article, McLean questioned
how it was possible for Enron's stock to trade at 55 times its earnings, two and a half times
greater than one a Enron’s chief competitors, Duke Power. She also questioned how Enron's
stock could have more than doubled to $126, as forecast by Enron's top management. The
core of her questions was a simple one: How does Enron make its money? She was unable to
develop a clear picture of the revenue and cash flow streams at work at Enron, and when she
asked Enron for more detailed information than was released to the public, Enron declined for
proprietary reasons. The confusion about revenue generation was based on Enron's shifting its
strategic focus over time. In the beginning of the 1990s, approximately 80% of Enron's
revenue came from the traditional gas pipeline business. During the 1990s, Enron sold its iron
and steel assets that were related to the gas pipeline business, and by 2000, 95% of Enron's
sales and 80% of its operating profits were generated from the business Enron labeled as
"wholesale energy operations and services." This business sector was described by Enron as
the "financialization of energy," which McLean restated as the trading through buying and
selling of energy. The lack of details on Enron 's operations frustrated Wall Street analyst,
who were evaluating Enron s bonds and stock, as well as Enron's competitors, who could not
understand how Enron always did better than the competitors when it came to financial
performance.
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A key component of the contracts between the off-balance sheet partnerships and Enron was
that the deals were financed by Enron stock. As a result, top management's only goal was to
keep the stock price at high levels. In addition, the contracts with the partnerships had
provisions called triggers. A trigger refers to the price of the Enron stock. If the Enron stock
fell below certain trigger points, the losses and debt from the partnerships would have to be
transferred to Enron's balance sheet. The contracts had trigger prices such as $57.78, $47.00,
and $28.00 per share, which were not a threat when Enron's stock was at a high of $90.00 a
share. However, as the stock price fell there was increased pressure on Enron management
and its accountants to do whatever they could to keep the stock price higher than the trigger
points. One set of deals, made with four Fastow partnerships called the Raptors, would result
in a loss of more than $500 million if the deals were transferred to the Enron books when the
trigger point was met. Enron was facing an end-of-March quarterly closing of its books,
which would have to absorb a $504 million loss from the Raptor dealings. It was resolved
when an Enron accountant used several complex transactions to be able to refinance the
Raptor transactions on March 26, 2001. Two weeks later, Enron reported its quarterly
financial results, which included $425 million in earnings. In an analyst's conference call on
April 17, 2001, Skilling was upbeat because of the announced level of quarterly profits. There
were no comments by Enron pertaining to the Raptors, which was considered the most
important transaction of the quarter. One of the analysts, Richard Grubman, from Highfields
Capital Management asked why Enron released only its profit figures and not its balance
sheet information. Skilling's response was that it was not Enron's policy to release that
information. Grubman responded that Enron was the only company that he monitored that did
not release its balance sheet or statement of cash flows. Skilling's response was to say thank
you very much and that Enron appreciated it. Grubman said thank you, and Skilling
responded under his breath, "Thank you, a··hole”

On June 12, 2001, Skilling was a featured speaker at the StrategiCc Directions technology
conference. There he claimed that the Internet allowed Enron to implement all its strategic
focuses. In addition, a question from the audience asked Skilling what his views were about
the California power crisis. He responded with a joke in which he said the only difference
between California and the Titanic was that the Titanic went down with its lights on. Less
than 2 weeks later, a protestor hit Skilling with a cream pie when he visited California.

On August 14, 2001, Skilling resigned as Enron's CEO and president. Skilling had taken over
from Lay as CEO in January 2001, and Lay regained his title of CEO, which he had held for
15 years in addition to being the chairman of the board. As CEO, Lay had increased Enron's
market capitalization from $2 billion to $70 billion with revenues of more than $100 billion in
2000.

Skilling stated personal reasons as the explanation for his quick departure, although Enron
stock had dropped by almost half in the 8 months during Skilling's reign as CEQ. In response
to Skilling's resignation, Lay stated that no accounting, trading, or reserve issues were related
to Skilling's decision and that Enron was in the strongest financial shape in its history.

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The Role of Mark-to-Market Accounting

During the mid-1990s, Enron had adopted another one of its many controversial strategies,
mark-to-market accounting. Mark-to-market accounting is based on the accounting procedure
of recognizing the fair market value of long-term, outstanding, energy-related contracts. The
challenge to recognizing the fair market value in the energy industry is that there are usually
no sources from which to obtain a quoted price so an accurate evaluation can be calculated.
As a result, energy companies such as Enron were allowed to determine their own valuation
method to be used to calculate the fair market price. 18 Enron booked the full amount of the
revenue from a 10-year contract immediately because there was no restriction on how to
calculate the fair market value. Therefore, Enron was able to "control" its income levels for
any given year through the manipulation of revenue recognition of its long-term energy
contracts. Enron did disclose in a footnote in its 2000 annual report that managerial judgment
is needed to estimate the fair market value of the long-term contracts. The aggressive use of
mark-to-market accounting was one of the concerns that Sherron Watkins raised in her
infamous letter to Lay.

The Letter

After Skilling resigned as CEO, Lay asked employees to write to him if they had any
concerns. He got more than he bargained for when a seven page anonymous letter started with
the simple question of whether Enron had become too risky to work for. The author of the
letter revealed herself to Lay later. Sherron Watkins was an accountant who had worked for
Enron for 8 years until she was laid off in 2000, only to be rehired in June 2001 to work for
Fastow. Watkins wrote that Skilling' quick departure as CEO would raise questions and
concerns about Enron's accounting practices. In addition, she went into great detail about her
concerns about the Fastow partnerships that were playing a significantly larger role in Enron's
operations. Watkins pointed out the transactions were based on a strong Enron stock price,
which increased the level of risk as the stock price started to decrease. She also stated that to
the layperson, it appears that the sole purpose of these partnerships was to hide losses for
Enron for which the partners would be rewarded with future Enron stock. She also revealed
her fear that Enron would implode via a series of accounting scandals and that Enron workers,
herself included, would have no credibility if they had to find jobs if Enron went bankrupt She
warned that the legacy of Enron would be nothing more than an elaborate accounting hoax if
corrections were not made. She said that the real reason Skilling resigned was that he saw that
these transactions would be unfixable in the future. She continued by asking Lay whether
there was a way "our accounting gurus” could reverse those deals and finished the letter
asking whether Lay and chief accounting officer Causey could review the partnerships for
2002 and 2003.

Lay showed the letter to Enron's general counsel, James Derrick. who recommended that the
concerns be investigated. After Watkins identified herself to Lay, the investigation of the
issues was done by the law firm of Vinson & Elkins. Lay met with Watkins on August 22,
2001, to discuss the issues raised in her letter. On September 21, 2001, Vinson &. Elkins
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reported its findings to Lay and Derrick. The law firm concluded that there was no reason to
be concerned about the transaction and that it would provide a written report in the following
weeks outlining its conclusions. On October 15, 2001, Vinson &. Elkins presented its written
report to Enron. The law firm's cursory investigation and findings "appear[ed] worthy of
Inspector Clouseau," according to Dan Ackman in his Forbes.com article "Enron's Lawyers:
Eyes Wide Shut?”. The following day, Enron announced that the partnerships with Fastow
had generated a $35 million loss for Enron, which needed to be recognized on Enron's books.
By October 22, 2001, the price of Enron stock had fallen to $20 per share, and the employees
were locked out of selling their stock because of a shift in the administration of Enron's
retirement plans. As a result, many employees lost all of their retirement savings.

On October 16, 2001, Enron announced a third-quarter loss of $618 million based, in part, on
the write-down of different investments, which included the limited partnerships between
Enron and Enron's CFO, Fastow. A charge of $35 million was applied against the third-
quarter results based on the early termination of some specific finance arrangements between
Enron and Fastow's partnerships, LJM, Cayman L.P. and LJM2 Co-Investment L.P. Other
write-downs included the retail power business, broad band telecommunications and other
technology investments. On October 24, 2001, Fastow was forced to resign as CFO of Enron
after the Securities and Exchange Commission (SEC) stated that it was going to investigate
the financial reporting at Enron, including a $ 1.2 billion write-down on shareholders' equity,
based on the partnership deals between Fastow and Enron. The write-down occurred when
Enron wrote off a promissory note that had been on the books, but the transaction related to
the note was not visible in Enron's quarterly financial results. Investors raised concerns about
the write-off because of the transaction's lack of visibility in the financial statements and
raised questions about whether Enron was hiding other off-balance sheet transactions that
could negatively affect Enron's financial performance.

Fastow was replaced by Jeffrey McMahon in October 2001. He had been Enron's treasurer
but stepped down from that position in 2000 when he raised concerns about Fastow's
partnerships as they related to Enron's financial operations. After leaving the treasurer
position, McMahon became the head of Enron's industrial-markets division. After Enron's
fall, McMahon was not charged with any crimes but was ordered to pay $300,000 to settle
civil allegations.

By the end of October 2001, the questions continued to mount about Enron's operations.
Some critics asked how the deregulation that Enron had touted as the American way could
result in the state of California having to deal with soaring energy costs and frequent
blackouts during 2001. Additional questions were raised about Enron's broadband operations
and how Enron would be able to make a profit on the venture. Furthermore, investors were
asking why Enron was releasing public statements that it did not have enough cash to survive
when it had reported such high levels of profitability. The stock price had fallen 80% from
January to October 2001, which resulted in a decrease of $50 million in market capitalization.
Enron's stock price closed at $ 15.40 on October 26, 2001.

By November 2001, Enron's off-balance sheet transactions may have hidden billions of
dollars in debt and Enron's profit may have been misstated for many years. When Lay was
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asked about the details pertaining to the off- balance sheet transactions involving Fastow, his
response was that he could not give the details and that the transactions were way over his
head. In trying to salvage some value for the company, Lay tried to negotiate selling Enron to
one of its competitors, Dynegy. Dynegy initially agreed to buy Enron on November 9, 2001,
but less than 3 weeks later on November 28, 2001, Dynegy had enough concerns about
Enron's operations and financial stability to stop all negotiations. Dynegy had initially agreed
to pay Enron $9 billion and assume $13 billion in debt to take over the company but walked
away from the deal when Enron released more information that raised concerns about the
long-term financial viability of the company. From a high of $90 per share in August 2000,
Enron stock closed at 61 C on November 28, 2001.

To Chapter 11 and Beyond

On December 2, 2001, the seventh largest company in the United States, Enron, filed for
Chapter 11 bankruptcy. With assets of just less than $50 billion, it was the largest bankruptcy
filing in U.S. history. The previous largest bankruptcy filing was Texaco in 1987 when the oil
company had $36 billion in assets. The complexity of the filing was shown when Enron
provided a combined list of creditors that was 54 pages long. At the time of the filing, Enron
had $ 13.15 billion in debt on its balance sheets, but also had an additional $27 billion in debt
based on off-balance sheet transactions. On the same day, Enron filed a $ 10 billion lawsuit
against Dynegy for breach of contract for not fulfilling the purchase of Enron. More than
6.000 employees lost their jobs when Enron filed for bankruptcy. On December 12, Congress
began its investigation into the reasons Enron collapsed. On January 10, 2002, the Department
of Justice (DOJ) announced that it would start a criminal probe of Enron, and on January 22,
2002, the Federal Bureau of Investigation (FBI) searched Enron's headquarters in Houston for
evidence. On January 23, 2002, Lay resigned as CEO of Enron but kept his position on
Enron's board of directors.

On January 25, 2002, the first fatal tragedy occurred when former Enron vice chairman
Clifford Baxter committed suicide in his car in a suburb of Houston. Baxter was found dead in
his 2002 Mercedes-Benz with a gunshot wound to his head. Baxter had made an estimated
$22 million from 1998 to 2001 when he was with Enron but became unhappy with the
direction of the company's business dealings and resigned his position in May 2001. He
stayed on as a consultant for Enron. Baxter had been informed that criminal investigators
wanted to interview him about his knowledge pertaining to Enron's operations. Before he
became vice chairman, Baxter was the CEO of Enron's North American division and later the
chief strategy officer for Enron. In her infamous letter to Lay. Watkins stated that Baxter had
complained to Skilling about how the limited partnerships were inappropriate.

Lay resigned from his board position on February 4. 2002, one day before the U.S. Senate
panel subpoenaed Lay to testify in the congressional investigation of Enron. On February 7,
2002, Fastow and Skilling both refused to answer questions related to Enron during
congressional hearings. On February 12, 2002, Lay followed suit by citing his protection
under the Fifth Amendment and refused to testify before Congress.
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As a direct result of the accounting scandals that occurred at WorldCom, a global
telecommunications company that declared bankruptcy in 2002, and Enron. President Bush
signed into law the Sarbanes-Oxley Act on July 30, 2002. The act required publicly traded
firms to abide by a number of new corporate governance requirements or face severe penalties
and potential prison time for the executives involved in the firm's decisions.

The Role of the Board of Directors

In the October 2000 issue of Chief Executive Magazine, Enron was ranked as having one of
the top five boards of directors in the United States. The criteria that the magazine used to
determine the best board of directors were those boards that work in harmony with the CEO
and that are respected in the community and industry for their activities. In addition, each of
the five best boards make an "extra effort" to accomplish good corporate governance, which
allows them to be good role models for other companies." But by November 2001, the luster
was definitively off the best board reputation at Enron, because it was now known that the
board members had consulting and other financial agreements with Enron.

The board of directors played an active role in the decisions that eventually led to the spiral
decline of Enron. They suspended Enron's code of ethics to allow the creation of the
partnership between Fastow and Enron in June and October 1999. The waiver was needed to
allow the Enron CFO to also serve as a general partner in the other entities. At a February 12,
2001, meeting of the audit committee, none of the members of the committee, all outside
directors, challenged a single transaction that was presented related to the dealings in 2000
between Fastow's partnerships and Enron. The result was that a large amount of debt was
taken away from Enron's balance sheet, and Fastow pocketed more than $30 million. One of
the potential criticisms of the audit committee was that half of its members did not live in the
United States, which made 100% attendance of the committee difficult to achieve. For
example, one audit member, Ronnie Chan, missed more than one quarter of the audit
meetings in 1996, 1997, and 2000.

One board member on the audit committee, Lord John Wakeham, was paid a consulting fee of
$72,000 in 2000 for his advice on Enron's European operations. Another audit member,
Wendy Gramm, who is the wife of Senator Phil Gramm, worked at the Mercatus Center at
George Mason University, which received $50,000 in donations from Enron from 1996 to
2001. Another audit member, Dr. John Mendelsohn, worked at the University of Texas M. D.
Anderson Cancer Center which received more than $2 million from 1993 to 2001 from Enron.
ln 2001, Enron's board members were considered some of the highest paid in the United
States with an annual compensation of cash and stock of $400,000 based on the price of the
stock when the annual meeting was held. ~

Although Congress admonished Enron's board members for their lack of oversight, they were
never indicted as parties to the Enron scandal.

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Arthur Andersen

On February 5, 2001, accountants at Arthur Andersen's Houston office met to discuss the off-
balance sheet partnerships that Enron had started in 1999. They were uncertain how to address
the issue until they decided to recommend that a special board committee be formed to review
the transactions. One week later, on February 12, 2001, the audit and compliance board met to
review the transactions and did not raise any concerns."

On January 3, 2002, Arthur Andersen's lawyers went to Houston to review and retrieve all the
related documents for the Enron audit for the government investigation. They found that the
electronic files had been deleted from all the computers in Andersen's Houston office. In a
panic, the lawyers called Andersen's general counsel. Andrew Pincus, and Andersen's CEO,
Joseph Berardino, to notify them that the documents were not available to retrieve. In a
conference call the following morning, the lawyers told Andersen that the deletion of the e-
mails was both abnormal and suspicious, and there appeared to be significant shredding of
documents. On January 10, 2002, Andersen announced in a press release that the Houston
office had destroyed an undetermined but significant number of documents that were related
to the Enron audit.

On January I5, 2002, the lead partner for the Enron audit, David Duncan, was fired by Arthur
Andersen. Arthur Andersen released information that stated that Duncan was the person
primarily responsible for the order to destroy thousands of emails and other documents that
were related to the Enron audit. The destruction of the documents occurred as the SEC was
ready to request the documents at the start of its investigations of Enron's financial reporting.
The destruction of the documents was an attempt by Duncan and other members of
Andersen's Houston office to try to control the Enron investigation at the local office and not
have the investigation affect the firm at a national level. Duncan's response to the charges was
that he was just following the instructions that were sent to him by an Andersen lawyer,
Nancy Temple on October 12, 2001, stating that Andersen's corporate policy allows the
disposal of many documents as a common course of action. Duncan called a meeting on
October 23. 2001. to discuss how to dispose of the documents related to Enron in a quicker
manner. The destruction of the documents occurred until November 9, 2001, when Duncan's
assistant sent out an e-mail to "stop the shredding”. That was the day after Andersen received
a subpoena from the SEC. Berardino stated that he first learned of the destruction of
documents on January 3, 2002, and notified the DOJ and the SEC the following day.

It was also revealed by an unnamed person who was close to David Duncan that Andersen's
corporate office in Chicago appeared to be aware ofthe off- balance sheet transactions that
occurred between Fastow's partnerships and Enron. The conclusion of the corporate office
being aware of the transactions was based on a report from Enron's law firm, Vinson &.
Elkins, dated October IS, 2001, which reported that all the material facts related to the
partnerships were disclosed and reviewed by Arthur Andersen.'"

On March 2, 2002, Andersen was informed that the OOJ was ready to ask that Andersen be
indicted for obstruction of justice. On March 3, 2002, Andersen executives accompanied by
the firm's legal team met with DOJ officials in Washington. The lawyers argued that there
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was "inappropriate behavior" made by some Andersen employees, but the firm as a whole
should not be charged. If charges were made against Andersen, it would be a deathblow to the
firm because clients would leave and foreign offices would split from the parent firm. The
DOJ was not convinced and stated that this was not the first occurrence of this behavior by
Andersen. DOJ officials cited Andersen's involvement in the fraud cases of Sunbeam, Waste
Management, and Baptist Foundation of Arizona as examples of a pattern of inappropriate
behavior by Andersen. The government also raised concerns about whether Andersen officers
realized the severity of their actions. The next morning, the message was conveyed to
Andersen that if it did not plead guilty, it would be charged with obstruction of justice. After
Andersen's lawyers recommended that Andersen enter a guilty plea, Andersen fired their law
firm and told the new law firm to fight the indictment.

In a last attempt to salvage the firm, Arthur Andersen executives started negotiations with
Deloitte Touche Tohmatsu on March 7, 2002. By March 9, 2002, the negotiations had turned
for the worse for Andersen when the lawyers for Deloitte advised against acquiring all of
Andersen because of the legal liability. Deloitte wanted to pick which offices it wanted to
acquire but not take over responsibility of the U.S. office. The proposal was submitted to the
Andersen board, which was split on the recommendation. Some board members believed that
the issue was solely isolated to the U.S. operations and would not affect the foreign offices.
As the negotiations were taking place, Andersen continued to lose more clients, which
increased the threat of additional legal liability and reduced the firm's level of cash flow. On
March 12, 2002, Andersen was informed by a class-action lawyer that any merger would have
to include the agreement that the acquiring firm would have to set aside $1 billion to resolve
all class action lawsuits. On that same day, Andersen's Spanish office announced that it was
moving its operations to Deloitte. Even with the writing on the wall, Andersen executives
continued to fight what was in hindsight a lost cause. The DOJ filed an indictment against
Andersen on March 14, 2002. Berardino stepped down as CEO, and on April 5, 2002,
Andersen officials were drawing up a negotiated deal with the government to resolve the
indictment in return for admitting wrongdoing. That deal fell apart the following day when
Duncan pleaded guilty to document destruction in return for cooperating with the DOJ. On
April 17, 2002, the government presented Andersen with its final offer, which included the
cooperation of Andersen partners even after they had left the firm, to Andersen lawyers.
Andersen executives needed to agree to this offer by 5 o'clock Pacific time that evening.
Andersen lawyers argued that no one accounting firm would hire the employees under those
conditions. The government withdrew that requirement but stated that Andersen had to agree
to all the other terms in the proposal by 8:30 a.m. pacific time the next day. Andersen's
lawyers tried in vain to contact all the members of Andersen's management team that evening
to discuss the offer. The lawyers could not contact all of the executives, and the government
withdrew the offer the next morning at 8:30 a.m. pacific time.

On May 6, 2002, Andersen's trial for obstruction of justice began in federal court in Houston.
After 6 weeks of trial and 10 days of jury deliberations, on June IS, 2002, Arthur Andersen
was convicted of obstruction of justice for destroying Enron documents while the firm was
under notice of a federal government investigation. The jurors commented that Andersen
lawyer, Temple, was a "corrupt persuader" by sending the e-mail to remind Andersen
10 
 
employees that it was firm policy to destroy some documents. By the end of the trial,
Andersen had laid off 7,000 employees and had lost 650 of its 2,300 clients:2 In September
2002, Arthur Andersen closed down as a firm when all of its state licenses were suspended.
On May 31, 2005, the Supreme Court overturned the conviction against Arthur Andersen on
the grounds that the judge at the trial went beyond the court's legal guidelines by not having
the jury be required to find Andersen guilty of acting "dishonestly" when it destroyed the
documents. The prosecutors argued that Andersen could be found guilty of obstruction of
justice by destroying documents that would interfere with a government investigation
regardless of Andersen's intent. By the time the conviction had been overturned, Andersen
had fallen from employing 28,000 employees at its peak to 200 employees who were
primarily responsible for resolving the outstanding lawsuits against the firm."

The Fall of Enron's Smartest Guys in the Room

Andrew and Lea Fastow

On October 2, 2002, Andrew Fastow was formally charged with committing fraud. money
laundering, and conspiracy in his role in the Enron scandal. On May 1. 2003, Fastow's wife.
Lea, who was a former assistant treasurer at Enron, was charged with conspiracy to commit
wire fraud and money laundering. On January 14, 2004, Fastow pleaded guilty to two counts
of conspiracy to commit securities fraud and wire fraud, and agreed to cooperate with the
DO]. Under the terms of the agreement, Fastow agreed to serve 10 years in prison and give
the government more than $29 million. The 96 other charges against Fastow were to be
dropped if the government determined Fastow acted in good faith when cooperating with DOJ
officials. A summary of some of the reasons for Enron's fall were:

1. The failure to have effective internal controls to monitor actions

2. Board of directors that did not know or refused to find out what its role should be in
the company

3. Multiple areas of actual and potential conflict of interest between Enron executives
and Enron stockholders

4. The use of off- balance sheet transactions to drastically reduce the level of liabilities
of the company

5. Illegal and unethical fraudulent activities that were difficult to identify that related
to the accounting methods used by Enron

6. A corporate culture that condones illegal and unethical behavior by its employees
without the employees taking any responsibility

Lea Fastow negotiated to plead guilty to filing false tax forms for not declaring more than
$200.000 in income from one of Fastow's special purpose entities. Her lawyers and the
11 
 
prosecutors had originally agreed for her to serve 5 months in prison to ensure that one parent
would be with their two sons as the Fastows served their time in prison. The presiding judge
rejected the plea bargain based on the 5 months, and on May 6, 2004, Lea Fastow was
sentenced to 1 year in prison and was ineligible to receive any time off for good behavior.

Jeffrey Skilling

On February 19, 2004, Jeffrey Skilling was charged with fraud, lying to auditors, and
providing false financial records to the SEC. The SEC claimed that Skilling was responsible
for defrauding investors by manipulating Enron's publicly reported financial results. The
specific complaints included the manufacture and manipulation of reported earnings through
the improper use of reserves, deliberately concealing the massive losses of Enron's retail
energy business, Enron Energy Services; fraudulently promoting false information pertaining
to the performance of Enron's broadband unit, Enron Broadband Services, to investors; and
using special purpose entities and limited partnerships to manipulate Enron's financial results'.
The low point for Skilling came 2 months later when, on April 8, 2004, Skilling, who had had
too much to drink, started a fight with two men outside of a New York bar on Manhattan's
Upper East Side, where he and his wife were having drinks with friends. Skilling had accused
the men of being undercover FBI agents, which they were not. In addition, he was alleged to
have attempted to lift the blouse of a woman who was with the men to look for wires to record
his conversations. The New York police had Skilling sent to a New York hospital in an
ambulance, reporting that he was emotionally disturbed. His blood alcohol content was
equivalent to that of a 200-pound man who had had nine drinks within an hour.

Kenneth Lay

On July 8, 2004, the SEC charged Kenneth Lay with 11 counts of fraud and insider trading.
The specific complaints included Lay's early participation in the continuous activities that
supported the defrauding of investors by constantly providing false or misleading statements
to the public about Enron's financial condition. In addition, he was charged with failing to tell
the public about the huge losses occurring in the Enron Broadband Services and Enron
Energy Services divisions. Lay also had more knowledge about the limited partnerships,
which resulted in the releasing of inaccurate financial statements to investors.

Another charge was that Lay knew about additional problems that occurred at Enron after
Skilling had resigned as CEO, including stating publicly that there were no financial or
accounting problems. Yet, he informed his managers about the deteriorating financial position
at Enron. Lay was also accused of continuing to mislead the public in August and September
2001 when he talked in public about the robust financial perfonnance and future growth of
Enron although he had intimate knowledge about the true failing financial nature of the
company. He sold more than $20 million in stock during this period. In addition, Lay was
charged with insider trading for selling Enron stock from January 25, 2001, to November 27,
2001, in the amount of more than $ 135 million. During that time he stated the financial
12 
 
growth of Enron was positive for the future although he had information that reflected the
failing financial performance of the company. Lay's response was that Fastow was fault for
the collapse of Enron and that Lay was not to be blamed. This response came 2 hours after he
had been handcuffed and taken to a Houston courthouse. Lay acknowledged that wrongdoing
was committed at Enron but claimed he was not aware of it during his time as CEO and
chairman.

Richard Causey

On December 28, 2005, Enron's former chief accounting officer, Richard Causey, pleaded
guilty to one count of securities fraud for his role in Enron's accounting fraud. The
government agreed to ask for 5 years of prison for Causey if he cooperated fully with the
government. If the govern me had determined that Causey did not provide full cooperation, it
would recommend prison for 7 years. Causey, known at Enron as the "Pillsbury Doughboy,"
admitted that he was involved in a conspiracy along with other members of Enron's top
management to generate false and misleading financial statements. The decision to plead
guilty caught Lay and Skilling off guard because they had been presenting a unified defense
until 1 week before the announcement of the plea bargain. On November 15, 2006, former
Enron chief accounting officer Richard Causey was sentenced to 5 years in prison. Causey
was also ordered to pay $ 1.25 million to the government.

Lay and Skilling's Unified Defense Falls Apart

Less than 2 weeks before their trial was scheduled to start, Lay and Skilling presented their
unified defense to the public. Both top Enron executives stated that not only did they do
nothing wrong, but all the company moves during their tenure were legal. In legal circles, the
"idiot" or "ostrich" defense created additional challenges to the defense team because if there
were no illegal activities at Enron, why did the 30 lower-level Enron employees plead guilty
to crimes they did not commit?

Skilling commented that his trial would be a business case, not a criminal case. On January
30, 2006, the trial of Lay and Skilling started in Houston with the first surprise - the jury was
selected in one day. It was extremely rare for a trial of this magnitude to have the full jury in
place after on one day in the selection process.

On February 9, 2006, Lay's lead lawyer argued in court that Enron collapsed not because of
accounting fraud, but because of a market run on Enron stock. The lawyer pointed to a 2001
Wall Street Journal article that raised questions about one of Fastow's limited partnerships as
the starting point of the rapid decline of Enron.

During the trial, the prosecution accused Enron of manipulating the financial statements even
if it meant one penny difference in the results. The "tweaking" of profits, the defense argued,
is a standard practice of companies, and those adjustments were just routine refinements in
their initial estimates. The defense claimed that accountants often would "sharpen" their
13 
 
pencils and "scrub” their books to look for any calculation to slightly adjust the final financial
results.

During the testimony of Kenneth Rice, former head of Enron Broadband Services, the jury
heard Rice state that Skilling knew of the heavy losses that were occurring at the unit but told
the public of strong financial performance of the division. In addition, former Enron
accountant Terry West testified that she was told that Enron needed to have a quarterly profit
of 35C per share and it was her responsibility to work backward through the financial
statements to provide the income figure needed to reach those earnings per share objectives.

Paula Rieker, former corporate secretary and deputy investor-relations chief at Enron, testified
in court that Lay presented misleadingly optimistic statements about Enron's financial
performance hile knowing the true financial picture. Rieker recorded all the minutes of the
board meetings as corporate secretary. In addition, Lay continued to sell Enron stock while
misleading the investing public. Rieker presented documentation that showed the belt
tightening occurring at Enron toward the end, which included canceling a Christmas party,
laying off employees, and other efforts to raise money for the company all occurring as Lay
was trading more of his Enron stock for cash. Rieker also testified that Enron's outside board
members were outraged by Lay's dumping of stock while he was presenting false information
and quoted Enron director John Duncan as stating that Lay was using Enron like an ATM
machine to withdraw money from the company.

Wesley Colwell, formerly of Enron's wholesale energy unit, testified in court that Skilling
was looking to beat the street estimate for the second quarter results for 2000. As a result,
Colwell was ordered to transfer $14 million from a reserves account to create a 2¢ per share
increase in Enron's quarterly results.

The next day of the trial. February 28, 2006, David Delainey, the former head of Enron's
Energy Services unit, testified that he was told by Skilling to transfer losses that occurred in
his unit's trading contracts to the wholesale division to try to hide the losses. Delainey told the
court that the transfer had no business purpose other than to hide the loss, and he knew that it
was not proper accounting. The transfer resulted in the announced result for the Energy
Services unit of $40 million when the retail unit actually had a loss of approximately $260
million." The credit reserve was used as a "cookie jar" to allow Enron to manipulate its
earnings when its actual operations would not make the forecasted earnings per share. The
cookie jar fund was established by transferring part of the huge profits that Enron was able to
acquire via the California energy crisis.

On March 7, 2006, former CFO Fastow took the stand to testify against his two former
bosses. Fastow told the jury that Skilling was fully aware of the purpose of the limited
partnerships and knew they were being used to hide debt. When a second limited partnership
(LJM2) was proposed by Fastow, Skilling's response was to try to get as much "juice" out of
the partnership as possible. LJM2 was used to "warehouse" Enron assets. which meant that
Enron would submit transactions as if to buy assets but it was only to pretend to make the
acquisitions. Enron would promise to buy them back for a premium to its trading partner.

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The original partnership, LJM I, was formed so Enron could "solve a problem" of trying to
cover up investment losses from its operations.60 An example of a deal with LJM 1 was when
the partnership bought an interest in a power plant in Brazil in 1999. Based on the investment
by LJM I. Enron recorded income from the transaction and was able to achieve its earnings
per share target. Fastow did not want his partnership to buy it because he thought the power
plant was a “piece of sh..”, but LJM 1 did buy an interest when Skilling guaranteed Fastow
that LJM 1 would not lose any money on the deal. It was a win-win situation for Fastow
because he had no risk for his partnerships and he would be considered a hero at Enron for
helping the company reach its financial goals. In 2001, Enron bought back the interest in the
power plant from LJM 1 for a premium after Fastow had sold his shares in the LJM 1
partnership to ensure that Enron did not have to report the repurchase as a "related party
transaction" under SEC requirements. That was the first of many agreements between Enron
and Fastow's partnerships. For each transaction, Fastow was guaranteed not to lose any
money, which Skilling called a "bear hug" guarantee. The number of guaranteed transactions
continued to build at such a pace that Fastow listed them and called it the Global Galactic
agreement, which was the responsibility of former chief accounting officer Causey.

Fastow also testified that Lay was informed in a meeting on August 15, 2001, that there was a
"hole in the earnings" and that Enron would not make Wall Street forecasts by a significant
amount. Fastow had estimated that Enron had between $5 billion and $7 billion of problems
in its financial statements. Within a few days of that meeting on August 20, 2001, Lay told
Businessweek that Enron was in the strongest shape in its history and that it did not have any
accounting problems.

In a highly risky decision, both Lay and Skilling testified in court to defend their actions.
Some experts stated that this was a dicey strategy because instead of objectively explaining
their actions, former CEOs could become evasive and arrogant when challenged by the
prosecution. One former federal prosecutor, Stephen Meagher, warned that in many cases the
testimonies at trial of top executives blow up in their faces based on the executives' responses
to questions. In addition, experts warned that a jury could disregard all the previous evidence
that was presented in a trial after they heard the testimony of the top decision makers of a
firm. Furthermore, top executives must ensure that their testimonies are presented in such a
way that they appear very knowledgeable about all parts of the operation because this would
void the "I didn't see anything wrong" defense.

In addition, top executives also run the risk of increased sentences for perjury if their
testimonies are not consistent with past statements. Lay did not give any sworn testimony
before the trial, but Skilling gave prosecutors approximately two thousand pages of testimony
to review. Skilling gave testimony before Congress, whereas Lay used his Fifth Amendment
rights. Skilling also testified before the SEC and gave television interviews, which were used
to explain his actions.

When Skilling took the stand in his defense on April 10, 2006, he immediately stated that he
was innocent of all charges and that a vast majority of Enron employees who had testified at
the trial were also not guilty of any crimes. He told Lay that he wanted to resign from Enron
because he was bothered by Enron's falling stock price. Skilling defended his actions at
15 
 
Enron, claiming his work at Enron helped the world become a better place. He also gave as an
example of his commitment to Enron that he accepted only $21.5 million in stock in 1997
when he became Enron president instead of the $70 million that was due him. He explained
that he gave up almost $50 million that year to set an example for the other employees and to
make a statement to the board of directors about his commitment to Enron.

At the trial, Skilling claimed that he sold 500.000 shares of Enron stock on September 17.
2001, as a direct result of the September 11 attacks. September 17 was the first day after the
attacks that the stock market was opened. Skilling, however, could not explain why he wanted
to sell 200.000 shares on September 6, 2001, because he testified that he thought Enron's
financial condition was still very strong and less than 3 weeks earlier told his broker that
Enron stock was a good buy at $37.18. The September 6, 2001, trade was not executed
because the broker needed a letter from Enron that stated that Skilling was no longer an
officer of the company and. therefore, the restrictions to sell his stock would be removed.

On April 24, 2006, Lay took the stand in his own defense for his role in the Enron collapse
and repeated the constant theme throughout his defense that Fastow was the mastermind of
the financial operations at Enron. Lay testified in court that the deceit of Fastow and at most
two other people were responsible for all the financial problems that plagued Enron. In
addition, he claimed that he would not have taken over as CEO if he thought that there were
fraudulent activities occurring at Enron. He concluded that the collapse of Enron was a classic
run on the bank that was started when Fastow's partnerships were made public to investors.

During his testimony, Lay admitted that he probably violated Enron's code of ethics by
making a $120.000 investment along with a $160,000 investment from Skilling into an
Internet company, PhotoFete, which did business with Enron. Neither Lay nor Skilling
notified the board of directors of their investments in the company, which was started by
Skilling's ex-girlfriend, Jennifer Binder.

Lay became flustered on the stand when the prosecution informed him that his son, Mark Lay,
had executed four short sales orders for Enron stock in March 2001. A short sales order is
bought when an investor believes that the stock price will go down in the future. Kenneth
Lay's lawyer had stated that short-sellers of Enron stock were considered vultures. The
prosecution asked Lay whether he would consider his son to be a vulture. In addition, the
prosecution pointed out that as late as September 2001. Lay was telling his employees to buy
stock and that he also was buying Enron stock. The prosecution also showed that as Lay was
saying that he was selling millions of shares of Enron stock back to the company, not on the
open market. As a result, those millions of transactions that totaled $70 million were not
released to the investors. Lay's response was that he tried to hold as many shares of Enron as
he could, but he had to sell some stock to cover margin calls on his personal loans. The
prosecution pointed out that Lay had millions of dollars in assets at his disposal, which he
could have sold to pay for the margin call, including $14 million in non-Enron securities and
$ 11 million in an unused line of credit that was available to cover the relatively small margin
call. For example, in July 2001, Lay sold Enron stock back to Enron after receiving a margin
call of $483.000.

16 
 
After his 6 days of testimony, experts thought that Lay hurt his case more than helped it. It
appeared that Lay was not able to shift from being in charge of a boardroom to being under
examination by others. As stated previously, Lay appeared to fall into the trap of using his
self-confidence, which was necessary as CEO and chairman to alienate the members of the
jury. Lay seemed unprepared for some of the questioning and was testy and hostile during
certain exchanges with the prosecution at the testimony.

The prosecution gave Lay many opportunities to admit that he was as least partially
responsible for the downward spiral at Enron. Lay continued to blame the media and vulture
short-sellers (but not his son) for Enron's demise. When the prosecution commented that Lay
was developing a longer list of people to blame without including himself. Lay did not admit
to any blame but said that he did all the things that were humanly possible to do at the time
and that his decisions were based on real-time speed with a limited amount of information.
Lay, from the beginning, made it clear to his lawyers that he wanted to control his testimony.
After a series of questions from his lawyer, he asked his lawyer where he was going with that
line of questioning.

In his instructions to the jury, Judge Simeon Lake, dealt a blow to the defense by stating that
the jury could find the two former CEOs guilty if they consciously avoided finding out about
the fraud at Enron. This defense - which is commonly referred to in legal matters as “Willful
blindness”, “deliberate ignorance” or the "ostrich defense" - would have given a legal reason
for Lay and Skilling to be found not guilty. This defense was unsuccessfully used by Bernard
Ebbers in his trial for the WorldCom fraud. By allowing the jury to find Lay and Skilling
guilty by not asking what was going on, the prosecution would have to prove only that these
illegal activities were going on at Enron and the CEO was responsible for discovering them.

Lay's and Skilling's Verdicts

On May 25, 2006, the federal jury found Lay and Skilling guilty of conspiracy and fraud. Lay
was found guilty of all 6 charges against him, and Skilling was found guilty on 18 counts of
conspiracy and fraud and 1 count of insider trading. Skilling was acquitted on another 9
counts of insider trading. Lay was convicted of 1 count of conspiracy, 2 counts of wire fraud,
and 3 counts of securities fraud. Skilling was convicted of 1 count of conspiracy, 12 counts of
securities fraud, 5 counts of falsifying business records, and 1 count of insider trading. On the
9 charges that Skilling was acquitted of, the jury foreman stated that not guilty meant only not
proven; it did not mean he was innocent. Lay faced as many as 45 years in prison, and
Skilling faced as many as 185 years. One of the jurors, Kathy Harrison, stated that the verdict
demonstrated that executives in charge need to be responsible for the operations of their
companies. The jury also stated that the creditability of Lay and Skilling was hindered based
on their testimonies because they argued that no crimes were committed at Enron. After the
verdicts were read, Lay and his family and friends moved to one corner of the courtroom and
prayed in a circle. On June 30, 2006 federal prosecutors requested that Lay and Skilling pay
almost $ 183 million in fines and penalties. The government was seeking relief in the amount
of $ 139.3 million from Skilling and $43.5 million from Lay.
17 
 
A month after the verdicts had been read, Skilling reflected on his performance at the trial. He
admitted that he was the best source of information for the prosecution and that the testimony
he had given to the SEC came back to hurt him. He told the Wall Street Joumal, the same
publication Lay blamed for the downward spiral of Enron, that he was stupid to provide the
information but it was the "ethical" thing to do. After the conviction on the 19 charges, the
government was able to put a lien on all of Skilling's assets including his 9.000-square-foot
Florida home, his multimillion-dollar mansion in Houston, and $50 million in a brokerage
account. Having battled depression and after considering suicide, Skilling concluded that life
was better than the alternative.

His partner did not have the same option. Lay died of a heart attack in Aspen, Colorado, on
July 5, 2006. He was 64. The cause of the attack was coronary artery disease. Lay had
previously had two heart attacks, and his autopsy showed that three of his arteries were 90%
blocked, so Lay was finally able to do in death what he was not able to do while he was living
- clear all criminal charges against him. A rule of U.S. law commonly called abatement ab
initio states that a defendant's conviction is wiped clean if the defendant dies before he or she
is able to appeal the conviction. As a result, Lay's conspiracy and fraud convictions no longer
exist in the legal system. From a prosecution perspective, the elimination of Lay's charges
made the job more difficult but not impossible for the U.S. government to seize ill-gotten
proceeds from Lay's estate. Although the seizure of assets from criminal charges is not
considered viable, civil charges against Lay can continue after his death. However, the
government has to again prove any facts from the criminal trial before they are admissible in
any civil proceedings.

In September 2006, Lay's estate agreed to pay $12 million to settle a lawsuit by employees of
Enron's pension plan. On September 18, 2006, Delainey, the former head of Enron's Energy
Services unit who had pleaded guilty in October 2003 to manipulating earnings, was
sentenced to 2 ½ years in prison for insider trading. Delainey could have faced as many as 10
years in prison. On September 26, 2006, former Enron CFO Fastow was sentenced to 6 years
for his role in the Enron fraud. After his prison sentence has been served, Fastow will be
sentenced to an additional 2 years of house arrest. To add to the many quirks of the Enron
case, Fastow received 4 years fewer than the 10 years he agreed to with the U.S. government
in 2004. The judge determined that Fastow needed to have a sentence that was both just and
merciful because Fastow had been subject to anti-Semitic remarks and personal threats.
Furthermore, the judge reviewed the high level of cooperation Fastow displayed in aiding the
government's case against Lay and Skilling. Fastow reported to the minimum security federal
detention center in Oakdale, Louisiana, to serve his 6 years. He was released on December 16,
2011.

On October 6, 2006, Paula Rieker, former corporate secretary and deputy investor-relations
chief at Enron, was sentenced to 2 years probation for insider trading. Rieker recorded all the
minutes of the board meetings and was found guilty of selling Enron stock after hearing that
Enron's broadband unit had lost millions of dollars, but that information was not released to
the public. Rieker could have served as many as 10 years in prison for her crimes.

18 
 
On October 23, 2006, Skilling was sentenced to 24 years and 4 months in prison for his role
in the Enron fraud. The judge noted that Skilling had repeatedly lied to Enron employees and
investors and had sentenced many people Lo a life of poverty based on his actions. In his
response, Skilling stated that he was remorseful for the toll that Enron had on people and
commented that he had friends at Enron who had died, but he did not admit that he had done
anything illegal. Skilling also continued to plead his innocence and vowed to continue to
pursue his rights to have himself acquitted of all charges. Under U.S. federal law, Skilling
must serve at least 85% of his sentence if it is not adjusted under appeal. As a result, the 52-
year-old Skilling will be older than 70 before he can be released from prison. The judge had
stated that Skilling's sentencing guideline calculation yielded a range of between 292 months
and 365 months in prison and he was sentenced to 292 months. Based on the length of his
sentence, Skilling would be initially assigned to a medium security prison.

On December 13, 2006, Skilling reported to a low security federal prison in Waseca,
Minnesota. He is now known as federal inmate 29296-179.87

In addition, based on a settlement reached between the prosecutors and the defense, Skilling
agreed to forfeit his remaining $60 million, of which $45 million will be used to establish a
fund for Enron victims and $15 million will help pay his legal bills. His legal fees are
estimated as greater than $50 million, of which $20 million still had not been paid as of this
writings.

In an interview that was released in June 2010, Skilling reflected on his legal strategy leading
up to his convictions. He would have done three things differently based on hindsight. The
first was to exercise his Fifth Amendment Rights. Skilling wanted to explain Enron's business
decisions but realized that he talked too much and gave the prosecution information that they
did not have to discover on their own. The second lesson is to go on a public relations
offensive. By remaining silent in the media, he was not able to challenge what was being said
about him and Enron in the public. The third lesson was to avoid sarcasm. In May 2001,
Skilling said "They're onto us” to a series of Enron executives, which was perceived at trial as
an admission of guilt instead of being humorous and sarcastic. In June 2011, the U.S.
Supreme Court reviewed the appeal of Skilling who claimed that he was unfairly convicted
because of the technical legal interpretation of the benefits received by committing fraud. In
2010, the Supreme Court ruled that the jury in the Skilling case was not given specific enough
direction pertaining to the legal terms and ruled that the Skilling case should be reviewed. In
2011, the Supreme Court did agree that the jury did not have the correct specific instructions,
but the Supreme Court determined that it could be considered a "harmless error." As a result,
Skilling's case went back to a lower court, which determined that it was a harmless error. So
Skilling's conviction was not overturned.

The Domino Effect

On June 12, 2005, Citigroup settled a class-action lawsuit brought by Enron investors for $2
billion for the bank's role in the energy company's collapse. This settlement followed the
settlement by Lehman Brothers and Bank of America for a combined payment of $491.5
19 
 
million. Two days later, JPMorgan Chase agreed to pay $2.2 billion for its role in the Enron
scandal. On July 16, 2005, Enron agreed to pay the state of California $ 1.52 billion for its
role in facilitating rolling blackouts and escalating energy prices in the Golden State. Because
Enron was under bankruptcy protection when the settlement was reached, Enron was
responsible for only 20% of the total settlement amount because California was an unsecured
claimant. On August 1, 2005, the Canadian Imperial Bank of Commerce (CIBC) paid $2.4
billion to settle its class-action lawsuit for its role in financially supporting Enron's operations

In 2007, Credit Suisse paid $61.5 million, UBS agreed to pay $ 115 million, and Deutsche
Bank agreed to pay $25 million to settle litigation pertaining to their role in the Enron fraud."
In January 2008, former lead auditor at Arthur Andersen, David Duncan, agreed to settle
allegations filed by the SEC that he had violated securities law by signing audit reports that
were false and misleading. No fine was issued, but Duncan was barred from appearing before
the SEC as an accountant. In March 2008, Citigroup settled litigation claims for $ 1.66 billion
against it for its actions during the Enron scandal

In April 2010, Enron the play opened on Broadway. Written by British playwright Lucy
Pebbles, Enron has played to two sold out runs in Britain before moving on to Broadway. In
an irony even too much for Enron, the play closed less than 2 weeks after the theater critic of
the New York Times called it flashy but also a labored economic lesson for the audience. This
cemented the author’s belief that Enron has become one of truly cursed words in the English
language.

Questions

1. Explain how Enron managed to betray analysts and investors.

(derived from Stanwick, P. and Stanwick, S. 2013. Understanding Business Ethics. Sage)

20