The process of globalization has led to the opening of many borders between the countries, including political, cultural and, of course, economical borders. Nowadays, the most powerful and profitable companies are the ones that work not at the national level, but at the international one. Globalization caused the formation of multiple corporations, which operate worldwide, thus have influence not only on one particular nation, but on the world as a whole. Indeed, the influence and importance of large corporations cannot be underestimated. Such commercial enterprises influence lives of thousands of people, which they employ; they influence the development of national economy, being one of the largest tax-payers, and have a significant impact on so-called global economy created by globalization. However, such influence cannot be always positive, and it is not positive especially in a situation when a large corporation is involved in any sort of economic fraud. This is how it happened with Enron Corporation, whose infamous reputation has become the common property of the people due to its bankruptcy in 2001. The company was involved in various bubble schemes in order to conceal its enormous in size debt from shareholders and avoid legal prosecution. As the time went by the debt was growing larger, so the top managers of Enron decided to announce the real worth of the company, which appeared to be more about one billion dollars less than it had been reported before. After such an announcement a lot of investigations were conducted to find out the reason of such a huge collapse, so the fraud was revealed and company’s executives were accused of violation of laws. Some of the former Enron executives have been already convicted of committed crimes, others will be in future. Scandal, which occurred after Enron reported bankruptcy, led to the monitoring of existing companies in order to avoid similar situations in future.
The main purpose of the current study is to speak about Enron Corporation, its illegal deals and partnerships, and legal and ethical issues that occurred while the company was manipulating its profits, costs and stock value. The paper will also explore the corporate and partnership structures created by Enron and its related entities in order to conceal its dept from shareholders.
Enron: A Company of Fraudulent Deals and Partnerships
In order to analyze how Enron operated and what schemes it used while manipulating its profits, costs and stock value, it is necessary to explore how it started to operate. The birth of Enron dates back to 1985, when two companies Houston Natural Gas and InterNorth merged, and Kenneth L. Lay became the chairman and chief executive of the new company called “Enron”. In 1989 “Enron launches Gas Bank, which allows gas producers and wholesale buyers to purchase firm gas supplies and hedge the price risk at the same time” . So, the company started its business by shipping natural gas through pipeline, and during the next 16 years the role of Enron grew so rapidly that it became one the most important energy traders in the United States. While operating on the market it traded electricity and other products, including paper, coal, pulp, plastics and metals. International affairs of Enron include purchase of British company Wessex Water, opening a plant in India and others. While the company was growing in size and power, it started to be involved in many partnerships and deals, which were off-the-balance-sheet and were recognized illegal by the court. Such transactions were concluded in order to hide the debt of Enron from its shareholders and employees. However, the conspiracy was foiled and the public learned the real situation of the company. Unfortunately it was too late and the process of company’s collapse was unstoppable. In 2001 Enron’s officials announced that “shareholder equity shrank by $1.2 billion” , which was the result of not only inflated estimates, but also failure to report the company’s debts to the investors. Employees of Enron were one of the first ones to feel the consequences of such a huge economic fraud, because in December 2001 the company laid off nearly 4,000 of its workers in the United States. The crime committed by Enron’s top managers also had its accessories, including Enron’s accounting firm called Arthur Anderson, which was found guilty by the jury for “obstruction of justice in the investigation of Enron, probably dooming the firm” . Indeed, the members of Arthur Anderson firm were accused of shredding of Enron-related documents after revealing that the company is being probed. So, the first Enron’s former executive to be convicted was Michael Kopper, who pleaded “guilty to two felonies arising from his dealings with Enron partnerships, marking the first criminal charges against an Enron insider” . Most of the Enron’s executives were accused of securities fraud, mail fraud, money laundering and conspiracy, including Enron’s accounting firm, which was accused of obstruction of justice. As it has been mentioned above, Michael Kopper was the first one to be convicted, so later he helped the investigators to uncover other executives involved in Enron fraud. Thus, the whole system, including thousands of insiders, that was used to conceal the debt of Enron was revealed.
The main illegal schemes were found while exploring the relationship between Enron, LJM and Chewco. Such partnerships gave ability to Enron’s executives to hide the debts and avoid liability. This is how it worked with Chewco, which was created by Enron’s executives in 1997. Chewco Investments was created in order to “buy out the shares of California Public Employees’ Retirement System (CalPERS) in a joint venture investment partnership known as JEDI” . The company was working illegally as it claimed the profits that it didn’t own. At that time Andrew Fastow, who was Enron’s Chief Financial Officer, wanted to run Chewco, but he was refused, because other officials thought that Fastow’s conflict of interest would be known by the public. So, Fastow appointed one of his employees named Michael Kopper to run the company. From this deal Fastow gained much profit, because when Enron wanted to acquire Chewco, he increased the price for it. Fastow also received a large amount of money from Kopper, who was given “$1.5 million in management fees and other payments, which reports claim were of dubious legality” . As the author of the book “Enron: the Rise and Fall” Loren Fox says that this partnership was “the first “independent” partnership run by an Enron employee” , meaning that this is how it all started. Another scheme is associated with Southampton. It is known that “Enron bought the shares of National Westminster Bank (NatWest) in a limited partnership with Credit Suisse First Boston” . Indeed, the company paid $20 million for the acquisition, however, only $1 million was transferred to NatWest, the rest of the money was divided between some of Enron’s executives and three employees from NatWest, who were aware of the deal. However, the biggest fraudulent partnership of Enron was LJM partnership, which is really a whole group of partnerships. LJM partnership was created by Enron’s executives in 1999 for the purpose of hedging its investments into a new Internet company called Rhythm NetConnections. CEO of Enron at that period of time was Jeffrey Skilling, who wanted to announce the profits on the paper. For this reason they created a partnership with the company, which was situated in the Cayman Islands, and funded it. LJM, this is how the company was called, took part in various rather risky deals, for example, it created a subsidiary for Rhythm NetConnections, which was called Swap Sub. The latter agreed to purchase Rhythm NetConnections at a price, which was higher than it should be at the time of sale. “The partnership was especially risky because of the possibility that both Rhythm and Enron’s stock could fall simultaneously” , however, Enron was ready to take any possible measures to keep its debts in secret. In 2001, “The Wall Street Journal” reported that “Fastow made at least $7 million from running the LJM partnerships” . Another secret partnership of Enron was RADR, which was created in 1997 in order to make some gerrymanders with windmills owned by Enron. RADR was supposed to purchase electricity-generating windmills from Enron, and then sell them back to Enron. Money from these deals went to some of the top officials of Enron and their families. It has been reported that RADR generated nearly $4.5 million operating from 1997 till 2000.
Despite of the fact that Enron’s officials were able to keep in secret their illegal deals for a rather long time, Enron scandal was made public. So, nowadays everyone can get to know about Enron’s failure as the example of failure of corporate governance in a company, where all of the control mechanisms were confined by executives’ conflicts of interest, which led to the enrichment of some of the top managers at the expense of company’s shareholders. Described above actions of Enron Corporation were taken for the purpose of misleading the market. Enron’s officials created “the appearance of greater creditworthiness and financial stability than was in fact the case” . The outcome was rather obvious; company was sentenced to liquidation due to its bankruptcy. Nobody could at first believe that the company was involved in such a huge economic fraud, because Enron used to have a rather prestigious reputation.
It may seem inappropriate to speak about ethics peculiar to the company that was involved in so many fraudulent schemes, deals and partnerships, however every company possesses certain ethical norms, and Enron is not an exception. Though, it is an exception in terms of the quality of those ethical norms. Generally speaking, if the company wants to take an ethical course of actions, it should constantly report its stakeholders about the current situation, because all of them have the right to know it. In Enron’s situation, the company made certain reports; however, those reports were too far from the truth. The company was afraid to loose its investors, who could have sold their stock, if they got to know about the debt. The company could have lost its customers, who could switch to the competitors, or employees, who could have found other jobs with better conditions. The author of the book “Ethics and Corporate Social Responsibility: Why Giants Fall” Ronald R. Sims states that Enron’s collapse makes a good example to understand why “ethical organizational demises occur” .
Speaking about ethical issues existing inside of the company, it is necessary to mention that Enron had a special hiring policy for the new employees. The company used to have more than 20,000 employees working in nearly 40 countries worldwide. It is responsible for the implementation of various innovations, which are still being used. However, the company did not care much for its workers. Enron’s executives used to hire graduates only from the best business schools, promising them a lot of alluring prospects, such as bonuses and promotion in future. Such promises made young workers enthusiastic about their work, however, everything changed once they were hired. New employees then found themselves in a culture, where they should struggle to survive. Top executives organized tough competition between the employees in order to have a full control of their work. Of course new employees wanted to excel their colleagues, so they did whatever the boss told them to. It is obvious that almost none of them got anything they were promised to. They worked in an atmosphere of constant anxiety, knowing that they would be either promoted or laid off. In reality, while Enron’s executives were making profits from their fraudulent actions, such as cashing in stocks of the company, being aware that the company would collapse soon, shareholders and employees were losing their money, as the latter had everything in the stocks of the company. After the company was recognized a bankrupt, thousands of Enron’s employees lost their jobs and retirement funds. Enron’s executives promised to pay out certain compensations to the workers; however, it did not do much help. Enron’s bankruptcy was a result of numerous unethical decisions, which have caused unemployment of thousands of people, loss of money and even health problems, which were a result of stress. Enron’s executives prevented their employees from selling stock shares, when the price per share was about $80, however, a month later one share cost less than one dollar, so employees and people, who had already retired, lost all of the money they have been saving for the whole life.
Having spoken about Enron and the problems, which appeared after its collapse, it is necessary to make a conclusion. Enron’s executives, such Michael Kopper and Andrew Fastow did their best to prevent shareholders and employees from getting to know about company’s huge debt. For this reason, they and their colleagues concluded multiple partnerships, made spurious reports for shareholders and misled the employees. All of these actions were done in order to foul the trail. At the beginning they succeeded. Enron’s reputation was close to be perfect, so nobody could suspect anything. However, things changed, and the company had to announce its bankruptcy, which is considered to be the biggest bankruptcy case in the USA. Enron was operating in many countries and was the employer of about 20,000 people, the majority of whom lost their jobs after Enron’s collapse. Some of the top managers of Enron have been already convicted; others are waiting for their hearings. So, it seems like the story has already come to its logic end. However, thousands of employees and retirees, who have been saving money for years, do not think so, because they will never get their money back, and the compensations they received are not enough to make up for the stress they experienced.
Fox, Loren. “Enron: The Rise and Fall”. Wiley, 2003
Sims, Ronald R. “Ethics and Corporate Social Responsibility: Why Giants Fall”. Praeger, 2003
“Enron: Corporate Failure, Market Success”. June/July 2002 http://www.fenews.com/fen26/enron1.html
“Enron Fraud Information” http://www.enronfraudinfocenter.com/information.php
“How Did Enron Defraud Shareholders?” http://www.securitiesfraudfyi.com/enron_fraud.html
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