American corporate fraud cases and patterns

American Corporate Fraud

This new century began with great expectations. However, just as the door of the 21st century opened, September 11th shocked the world and bruised the economy. Then, followed the bankruptcy and corporate scandals of some of America's major corporations. One such Fortune 500 company that fell at the new century's threshold was Enron, one of the world's leading energy companies. Once hailed as the most promising corporation in the United States, Enron is now in bankruptcy and under federal investigation for fraudulent accounting practices. The depths of its unethical practices and the aftermath of its collapse are still unfolding day by day.

Founded in 1985, Enron began as an energy company, shipping natural gas through pipelines. In 1989, Enron expanded into the natural gas commodities market, basically betting on future gas prices. By 1994, Enron was trading electricity contracts, eventually becoming the largest electricity trader in the United States and by the late 1990's it was trading coal, paper, and even telecom bandwidths. Most of Enron's revenue was coming from trading by the close of the century. Then, in October 2001, Enron made an announcement that it was actually worth $1.2 billion less than it had claimed. This was due largely to "debts and losses the company had attributed to separate investment partnerships it had created in the late 1990's and kept off the company's books."

On December 2, Enron declared bankruptcy, the largest bankruptcy in U.S. history. By December 3, thousands of Enron employees in Houston were emptying their desk drawers into boxes, packing up pictures and other personal items from their offices and heading home. Telecommuters across the country sat at computers in their basements, dens and spare rooms converted into offices trying to log into their Enron email accounts. None received access. Jim Olcott, who worked for over two years from his home in Syracuse, New York, for Enron Energy Services said he had been given a list of phone numbers from corporate for officials handling the layoffs. Olcott said, "I dialed it and got answering machines. It was useless." Not only had jobs been lost, leaving thousands unemployed, many had lost their retirement accounts. Now, not only were they unemployed, their life savings had literally vanished, nest eggs empty. Roger Boyce, who had worked for Enron for almost 30 years, had put all of his 401(k) funds into company stock. As part of a stock option plan, Boyce had purchased shares in Enron stock over the years. He had also received as an outright gift from the company about 15,000 shares in Enron stock, plus matched company contributions to his 401(k) plan. The 67-year-old retired Enron employee owned 26,000 shares of Enron stock that at the end of 2000 was worth roughly $2 million. By early December 2001, Boyce's entire stock was valued under $10,000. Like Boyce, many Enron employees had over sixty percent of their retirement savings invested in company stock.

What happened? How could the darling of Wall Street, the seventh largest company in the U.S., a shining diamond in the world of finance, become just a lump of coal? It is a story that is still unraveling the details. However, there are a few key points that have revealed. Enron's greatest strength was its stock, which appeared to be such a great investment due to overstated financial statements. Moreover, Enron executives touted its successes with such flare that few doubted or even questioned the reality of the company's holdings. Furthermore, Wall Street analysts and accountants helped enable the company to create and finance more than 3,000 outside partnerships. Only when Enron's stock dropped 99% from its all-time high was the truth revealed. Enron was essentially a "financial house of cards." Partnerships, with names like Yellowknife, Whitewing, and Miss Kitty, "allowed Enron to move its debts off its financial statements and out of public scrutiny, effectively creating the mirage that Enron was a financially vibrant company." Although, some of the partnerships may have had legitimate purposes, many were simply used to hide the billions of dollars of debt created from failed ventures to expand outside the core energy businesses. Not only had it made markets and traded in oil and gas, but also things like water, Internet traffic, and even weather. All of this made Enron look more profitable to investors and low risk to lenders.

Enron employees felt they had landed over the rainbow and found the pot of gold. The company had recruited the best from the financial world, academia, and government. Working at Enron was the top of the world. With the best and brightest employees, how then, did no one catch on that things were not quite as they seemed? The majority of Enron's employees had no clue regarding the details of partnerships such as Chewbacca, or Chewco, named after the Star Wars character. One reason Enron was able to keep its employees in the dark, was its practice of constantly moving workers between departments and divisions as its use of partnerships grew. Most employees were moved at least twice a year. Changes were so frequent that workers had their own 'Top 10' list. Number 7 on the list was "Because the basic business model is to keep the outside investment analysts so confused that they will not be able to figure out that we do not know what we are doing." And the Number 1 reason for the constant shuffling, "Forget all the hype about being Fortune's #1 - congratulations to Enron for having broken a Guinness book of world record with 942 reorganizations in one year!"

One senior administrative assistant explained, "There were no reins. You didn't have to justify why you needed $50 million to start a new company. And if it failed, there was no accountability." Enron's collapse not only destroyed the lives of thousands of its employees, it brought down one of the world's top accounting firms, Arthur Andersen. Andersen's attempt to cover-up Enron's financial accounting by shredding documents has made its name forever synonymous with 'shredder.'