Business Law
When most people think of securities fraud and corporate misconduct, they will often associate Enron to these ideas. This is because it went from being the tenth largest company in America to one the biggest bankruptcies in U.S. history. On surface, everything appeared to be fine. Until it was disclosed, that the firm was running out of cash and the executive officers were unloading their stock. (Eichenwald, 2005)
This raised concerns that something more was happening behind the scenes. To fully understand what occurred requires carefully examining the firm itself, the effects it had on the legal system, the lasting impact on stakeholders and conducting an analysis of the situation. Together, these elements will highlight the various securities laws that were violated and the way case changed corporate governance going forward. (Fox, 2004)
The Circumstances at Enron
Enron was founded in 1985. This occurred after Houston Natural Gas merged with Northern Natural Gas. The combined companies were taking advantage of deregulation inside the natural gas industry and electricity markets. At the heart of their strategy, was to create a business model to purchase these assets and then sell them to customers for a sizable profit margin. This became a concept known as energy trading. (Eichenwald, 2005) (Fox, 2004) (Fusaro, 2002)
However, major problems began to develop when they would speculate that prices were moving higher and went in the opposite direction. This caused the company to experience tremendous losses and it created uncertainty in their business model. Moreover, the firm was aggressively purchasing new businesses that were deregulating in various parts of the world. They also began to construct facilities in order to meet the growing demand in countries (such as: India) for electricity and natural gas. (Eichenwald, 2005) (Fox, 2004) (Fusaro,...
This is when the firm would go into the marketplace and show that a particular asset was worth less than it actually was. The way that this was accomplished is they would make it appear as if they were taking the loss. (Eichenwald, 2005) (Fox, 2004) (Fusaro, 2002)
Instead of reporting this to their shareholders, they would hide them in off the books investment vehicles known as special purpose entities. This is where they would send assets that were unprofitable and offer anyone who invested in them with Enron's common stock as a form of compensation. In the 1990s, this helped them to increase the price of the stock and make the firm appear to be financially solvent. (Eichenwald, 2005) (Fox, 2004) (Fusaro, 2002)
After, the economy began to slow in early 2000, is the point that this strategy backfired. This is because the stock was declining and they were passing on more of their losses to these special purpose entities. To compensate investors, Lay and Skilling offered them with greater numbers of shares. At the same time, they continued to claim how the company was fiscally strong. Yet, the upper management knew what was happening and began selling their stock. (Eichenwald, 2005) (Fox, 2004) (Fusaro, 2002)
In August 2001, Sharon Watkins (an employee at the firm) questioned these practices and reported to regulators that the company was on the verge of financial ruin. This resulted in an investigation by the Securities and Exchange Commission (SEC). When this happened, it was only a matter of time until these losses were reported to Wall Street and the price of the stock imploded. Unable to find a buyer or receive any kind of additional financing, the company was forced to file for bankruptcy in late 2001. (Eichenwald, 2005)…
