419 Enron: Questionable Accounting Leads to Collapse Once upon a time, there was a gleaming… 1 answer below »

419Enron: Questionable Accounting

Leads to Collapse

Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant

tilted “E” in front, slowly revolving in the Texas sun. Enron’s “E” suggested to Chinese

feng shuipractitioner Meihwa Lin a model of instability, which was perhaps an omen of

things to come. The Enron Corporation, which once ranked among the topFortune 500

companies, collapsed in 2001 under a mountain of debt that had been concealed through

a complex scheme of off-balance-sheet partnerships. Forced to declare bankruptcy, the

energy firm laid off four thousand employees; thousands more lost their retirement

savings, which had been invested in Enron stock. The company’s shareholders lost tens

of billions of dollars after the stock price plummeted. The scandal surrounding Enron’s

demise engendered a global loss of confidence in corporate integrity that continues to

plague markets, and eventually it triggered tough new scrutiny of financial reporting

practices. To understand what went wrong, we’ll examine the history, culture, and major

players in the Enron scandal.

ENRON’S HISTORY

The Enron Corporation was created out of the merger of two major gas pipeline

companies in 1985. Through its subsidiaries and numerous affiliates, the company

provided products and services related to natural gas, electricity, and communications

for its wholesale and retail customers. Enron transported natural gas through pipelines

to customers all over the United States. It generated, transmitted, and distributed

electricity to the northwestern United States, and marketed natural gas, electricity, and

CASE 1 2

Enron: Questionable Accounting

Leads to Collapse

This case was developed under the direction of O.C. Ferrell with the assistance of Jennifer Jackson and Jennifer

Sawayda, University of New Mexico. Neil Herndon, helped to draft the original version of this case. The author

conducted personal interviews with Ken Lay in 2006. This case is for classroom discussion, rather than to illustrate

either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources

used for this case were obtained through publicly available material.

Daryl Benson

420Part?: Cases

other commodities globally. It was also involved in the development, construction,

and operation of power plants, pipelines, and other energy-related projects all over the

world, including the delivery and management of energy to retail customers in both the

industrial and commercial business sectors.

Throughout the 1990s, Chair Ken Lay, chief executive officer (CEO) Jeffrey Skilling,

and Chief Financial Officer (CFO) Andrew Fastow transformed Enron from an old-style

electricity and gas company into a $150 billion energy company and Wall Street favorite that

traded power contracts in the investment markets. From 1998 to 2000 alone, Enron’s revenues

grew from about $31 billion to more than $100 billion, making it the seventh-largest company

of theFortune500. Enron’s wholesale energy income represented about 93 percent of 2000

revenues, with another 4 percent derived from natural gas and electricity. The remaining 3

percent came from broadband services and exploration. However, a bankruptcy examiner

later reported that although Enron claimed a net income of $979 million in that year, it really

earned just $42 million. Moreover, the examiner found that despite Enron’s claim of $3 billion

in cash flow in 2000, the company actually had a cash flow of negative $154 million.

ENRON’S CORPORATE CULTURE

When describing the corporate culture of Enron, people like to use the word

arrogant,perhaps justifiably. A large banner in the lobby at corporate headquarters

proclaimed Enron “The World’s Leading Company,” and Enron executives

blithely believed that competitors had no chance against it. Jeffrey Skilling even

went so far as to tell utility executives at a conference that he was going to “eat

their lunch.” There was an overwhelming aura of pride, carrying with it the deepseated

belief that Enron’s people could handle increasing risk without danger. The

culture also was about a focus on how much money could be made for executives.

For example, Enron’s compensation plans seemed less concerned with generating

profits for shareholders than with enriching officer wealth. Enron’s corporate

culture reportedly encouraged flouting, possibly even breaking, the rules.

Skilling appears to be the executive who created a system in which Enron’s

employees were rated every six months, with those ranked in the bottom

20 percent forced out. This “rank and yank” system helped create a fierce

environment in which employees competed against rivals not only outside the

company but also at the next desk. Delivering bad news could result in the “death” of the

messenger, so problems in the trading operation, for example, were covered up rather than

being communicated to management.

Enron Chair Ken Lay once said that he felt that one of the great successes at Enron was

the creation of a corporate culture in which people could reach their full potential. He said

that he wanted it to be a highly moral and ethical culture and that he tried to ensure that

people did in fact honor the values of respect, integrity, and excellence. On his desk was an

Enron paperweight with the slogan “Vision and Values.” Despite these intentions, however,

ethical behavior was not put into practice. Instead, integrity was pushed to the side at Enron,

particularly by top managers. Some employees at the company believed that nearly anything

could be turned into a financial product and, with the aid of complex statistical modeling,

traded for profit. Short on assets and heavily reliant on intellectual capital, Enron’s corporate

culture rewarded innovation and punished employees deemed weak.

Enron’s

corporate culture

reportedly

encouraged

fl outing, possibly

even breaking,

the rules.

Case 12: Enron: Questionable Accounting Leads to Collapse421

ENRON’S ACCOUNTING PROBLEMS

Enron’s bankruptcy in 2001 was the largest in U.S. corporate history at the time. The

bankruptcy filing came after a series of revelations that the giant energy trader had been

using partnerships, calledspecial-purpose entities (SPEs),to conceal losses. In a meeting

with Enron’s lawyers in August 2001, the company’s then chief financial officer Andrew

Fastow stated that Enron had established the SPEs to move assets and debt off its balance

sheet and to increase cash flow by showing that funds were flowing through its books when

it sold assets. Although these practices produced a very favorable financial picture, outside

observers believed they constitutes fraudulent financial reporting because they did not

accurately represent the company’s true financial condition. Most of the SPEs were entities

in name only, and Enron funded them with its own stock and maintained control over

them. When one of these partnerships was unable to meet its obligations, Enron covered

the debt with its own stock. This arrangement worked as long as Enron’s stock price was

high, but when the stock price fell, cash was needed to meet the shortfall.

After Enron restated its financial statements for fiscal year 2000 and the first nine

months of 2001, its cash flow from operations was changed from a positive $127 million

in 2000 to a negative $753 million in 2001. In 2001, with its stock price falling, Enron

faced a critical cash shortage. In October 2001, after it was forced to cover some large

shortfalls for its partnerships, Enron’s stockholder equity fell by $1.2 billion. Already

shaken by questions about lack of disclosure in Enron’s financial statements and by reports

that executives had profited personally from the partnership deals, investor confidence

collapsed, taking Enron’s stock price with it.

For a time, it appeared that Dynegy might save the day by providing $1.5 billion in

cash, secured by Enron’s premier pipeline Northern Natural Gas, and then purchasing

Enron for about $10 billion. However, when Standard & Poor’s downgraded Enron’s debt

below investment grade on November 28, 2001, some $4 billion in off-balance-sheet debt

came due, and Enron didn’t have the resources to pay. Dynegy terminated the deal. On

December 2, 2001, Enron filed for bankruptcy. Enron now faces 22,000 claims totaling

about $400 billion.

The Whistle-Blower

Assigned to work directly with Andrew Fastow in June 2001, Enron vice president Sherron

Watkins, an eight-year Enron veteran, was given the task of finding some assets to sell off.

With the high-tech bubble bursting and Enron’s stock price slipping, Watkins was troubled

to find unclear, off-the-books arrangements backed only by Enron’s deflating stock. No

one seemed to be able to explain to her what was going on. Knowing she faced difficult

consequences if she confronted then CEO Jeffrey Skilling, she began looking for another

job, planning to confront Skilling just as she left for a new position. Skilling, however,

suddenly quit on August 14, saying he wanted to spend more time with his family. Chair

Ken Lay stepped back in as CEO and began inviting employees to express their concerns

and put them into a box for later collection. Watkins prepared an anonymous memo and

placed it into the box. When CEO Lay held a companywide meeting shortly thereafter and

did not mention her memo, however, she arranged a personal meeting with him.

On August 22, Watkins handed Lay a seven-page letter she had prepared outlining her

concerns. She told him that Enron would “implode in a wave of accounting scandals” if

422Part?: Cases

nothing was done. Lay arranged to have Enron’s law firm, Vinson & Elkins, look into the

questionable deals, although Watkins advised against having a party investigate that might

be compromised by its own involvement in Enron’s scam. Near the end of September,

Lay sold some $1.5 million of personal stock options, while telling Enron employees that

the company had never been stronger. By the middle of October, Enron was reporting a

third-quarter loss of $618 million and a $1.2 billion write-off tied to the partnerships about

which Watkins had warned Lay.

For her trouble, Watkins had her computer hard drive confiscated and was moved

from her plush executive office suite on the top floor of the Houston headquarters tower

to a sparse office on a lower level. Her new metal desk was no longer filled with the highlevel

projects that had once taken her all over the world on Enron business. Instead, now

a vice president in name only, she faced meaningless “make work” projects. In February

2002, she testified before Congress about Enron’s partnerships and resigned from Enron

in November of that year.

The Chief Financial Officer

Chief Financial Officer Andrew Fastow was indicted in 2002 by the U.S. Justice Department

on ninety-eight federal counts for his alleged efforts to inflate Enron’s profits. These charges

included fraud, money laundering, conspiracy, and one count of obstruction of

justice. Fastow originally faced up to 140 years in jail and millions of dollars in

fines if convicted on all counts. Federal officials attempted to recover all of the

money Fastow earned illegally, and seized some $37 million.

Federal prosecutors argue that Enron’s case is not about exotic accounting

practices but fraud and theft. They contend that Fastow was the brain behind

the partnerships used to conceal some $1 billion in Enron debt and that this

led directly to Enron’s bankruptcy. The federal complaints allege that Fastow

defrauded Enron and its shareholders through the off-balance-sheet partnerships

that made Enron appear to be more profitable than it actually was. They also

allege that Fastow made about $30 million both by using these partnerships to

get kickbacks that were disguised as gifts from family members who invested in

them and by taking income himself that should have gone to other entities.

Fastow denied any wrongdoing and maintained that he was hired to arrange the offbalance-

sheet financing and that Enron’s board of directors, chair, and CEO directed and

praised his work. He also claimed that both lawyers and accountants reviewed his work

and approved what was being done and that “at no time did he do anything he believed

was a crime.” Jeffrey Skilling, chief operating officer (COO) from 1997 to 2000 before

becoming CEO, reportedly championed Fastow’s rise at Enron and supported his efforts

to keep up Enron’s stock prices.

Fastow eventually pleaded guilty to two counts of conspiracy, admitting to orchestrating

myriad schemes to hide Enron debt and inflate profits while enriching himself with

millions. He surrendered nearly $30 million in cash and property, and agreed to serve

up to ten years in prison once prosecutors no longer needed his cooperation. He was a

key government witness against Lay and Skilling. His wife Lea Fastow, former assistant

treasurer, quit Enron in 1997 and pleaded guilty to a felony tax crime, admitting to helping

hide ill-gotten gains from her husband’s schemes from the government. She later withdrew

her plea, and then pleaded guilty to a newly filed misdemeanor tax crime. In 2005 she was

released from a year-long prison sentence, and then had a year of supervised release.

Fastow

eventually

pleaded guilty

to two counts

of conspiracy

Case 12: Enron: Questionable Accounting Leads to Collapse423

In the end, Fastow received a lighter sentence than he otherwise might have because

of his willingness to cooperate with investigators. In 2006, Fastow delivered an eight-andone-

half-day deposition in his role as plaintiff’s witness. He helped to illuminate how

Enron managed to get away with what it did, including detailing how many major banks

were complicit in helping Enron manipulate its financials to help it look better to investors.

In exchange for his deposition, Fastow’s sentence was lowered to six years from ten for the

fraud he perpetrated while COO at Enron.

The case against Fastow was largely based on information provided by Managing Director

Michael Kopper, a key player in the establishment and operation of several of the off-balancesheet

partnerships and the first Enron executive to plead guilty to a crime. Kopper, a chief

aide to Fastow, pleaded guilty to money laundering and wire fraud. He faced up to fifteen

years in prison and agreed to surrender some $12 million he earned from his illegal dealings

with the partnerships. However, Kopper only had to serve three years and one month of jail

time because of the crucial role he played in providing prosecutors with information. After his

high-powered days at Enron, Kopper got a job as a salaried grant writer for Legacy, a Houstonbased

clinic that provides services to those with HIV and other chronically ill patients.

Others charged in the Enron affair include Timothy Belden, Enron’s former top

energy trader, who pleaded guilty to one count of conspiring to commit wire fraud. He

was sentenced to two years of court-supervised release and required to pay $2.1 million.

Three British bankers, David Bermingham, Giles Darby, and Gary Mulgrew, were indicted

in Houston on wire-fraud charges related to a deal at Enron. They were able to use secret

investments to take $7.3 million in income that belonged to their employer, according to

the Justice Department. The three, employed by the finance group Greenwich National

Westminster Bank, were arrested in 2004 and extradited to America to face sentencing.

They were sentenced to thirty-seven months in prison but were eventually sent back to

Britain to serve out the remainder of their sentencing.

The Chief Executive Officer

Former CEO Jeffrey Skilling, generally perceived as Enron’s mastermind, was the most

difficult to prosecute. At the time of the trial, he was so sure he had committed no crime

that he waived his right to self-incrimination and testified before Congress, saying, “I

was not aware of any inappropriate financial arrangements.” However, Jeffrey McMahon,

who took over as Enron’s president and COO in February 2002, told a congressional

subcommittee that he had informed Skilling about the company’s off-balance-sheet

partnerships in 2000, when he was Enron’s treasurer. McMahon said that Skilling had told

him “he would remedy the situation.”

Calling the Enron collapse a “run on the bank” and a “liquidity crisis,” Skilling said that

he did not understand how Enron went from where it was to bankruptcy so quickly. He

also said that the off-balance-sheet partnerships were Fastow’s creation. During the case,

however, the judge dealt a blow to defendants Lay and Skilling when he told the jury that

they could find the defendants guilty of consciously avoiding knowing about wrongdoing

at the company. Many former Enron employees refused to testify because they were not

guaranteed that their testimony would not be used against them at future trials to convict

them. For this reason, many questions about the accounting fraud remained after the trial.

Skilling was found guilty and sentenced to twenty-four years in prison, which he has been

serving in Colorado. Skilling maintains his innocence and has appealed his conviction. In

2008 a panel of judges sitting in New Orleans rejected his requests for overturning convictions

424Part?: Cases

of fraud, conspiracy, misrepresentation, and insider trading. However, the judges did grant

Skilling one concession. The three-judge panel determined that the original judge had applied

flawed sentencing guidelines in determining Skilling’s sentence. Skilling will be resentenced,

but the reduction in duration will likely be modest, probably fifteen to nineteen years in place

of the original twenty-four. In the years since the trial, this concession constitutes the only part

of the Enron case that has been overturned. The nineteen counts of criminal conviction still

stand. As a result, Skilling has taken his appeal to the U.S. Supreme Court.

The Chair

Kenneth Lay became chair and CEO of the company that was to become Enron in 1986. A

decade later, Lay promoted Jeffrey Skilling to president and chief operating officer, and then,

as expected, Lay stepped down as CEO in 2001 to make way for Skilling. Lay remained as

chair of the board. When Skilling resigned later that year, Lay resumed the role of CEO.

Lay, who held a doctorate in economics from the University of Houston, contended

that he knew little of what was going on, even though he had participated in the board

meetings that allowed the off-balance-sheet partnerships to be created. He said he believed

the transactions were legal because attorneys and accountants approved them. Only

months before the bankruptcy in 2001, he reassured employees and investors that all was

well at Enron, based on strong wholesale sales and physical volume delivered through the

marketing channel. He had already been informed that there were problems with some of

the investments that could eventually cost Enron hundreds of millions of dollars. Although

cash flow does not always follow sales, there was every reason to believe that Enron was

still a company with strong potential. In 2002, on the advice of his attorney, Lay invoked

his Fifth Amendment right not to answer questions that could be incriminating.

Ken Lay was expected to be charged with insider trading, and prosecutors investigated

why Lay began selling about $80 million of his own stock beginning in late 2000, even

while he encouraged employees to buy more shares of the company. It appears that Lay

drew down his $4 million Enron credit line repeatedly and then repaid the company with

Enron shares. These transactions, unlike usual stock sales, do not have to be reported to

investors. Lay says that he sold the stock because of margin calls on loans he had secured

with Enron stock and that he had no other source of liquidity.

Lay was convicted on nineteen counts of fraud, conspiracy, and insider trading.

However, the verdict was thrown out in 2006 after Lay died of heart failure at his home in

Colorado. The ruling protected some $43.5 million of Lay’s estate that the prosecution had

claimed Lay stole from Enron.

Vinson & Elkins

Enron was Houston law firm Vinson & Elkins’ top client, accounting for about 7 percent of

its $450 million revenue. Enron’s general counsel and a number of members of Enron’s legal

department came from Vinson & Elkins. Vinson & Elkins seems to have dismissed Sherron

Watkins’s allegations of accounting fraud after making some inquiries, but this does not

appear to leave it open to civil or criminal liability. Of greater concern are allegations that

Vinson & Elkins helped structure some of Enron’s special-purpose partnerships. Watkins, in

her letter to CEO Ken Lay, indicated that the law firm had written opinion letters supporting

the legality of the deals. In fact, Enron could not have done many of the transactions without

such opinion letters. The firm did not admit liability, but agreed to pay $30 million to Enron

to settle claims that Vinson & Elkins contributed to the firm’s collapse.

Case 12: Enron: Questionable Accounting Leads to Collapse425

Merrill Lynch

The brokerage and investment-banking firm Merrill Lynch, which was in the news for its

high-profile collapse and subsequent acquisition by Bank of America in 2008, also faced

scrutiny by federal prosecutors and the SEC for its role in Enron’s 1999 sale of Nigerian

barges. The sale allowed Enron to improperly record about $12 million in earnings

and thereby meet its earnings goals at the end of 1999. Merrill Lynch allegedly bought

the barges for $28 million, of which Enron financed $21 million. Fastow gave his word

that Enron would buy Merrill Lynch’s investment out in six months with a 15 percent

guaranteed rate of return. Merrill Lynch went ahead with the deal despite an internal

Merrill Lynch document that suggested that the transaction might be construed as aiding

and abetting Enron’s fraudulent manipulation of its income statement. Merrill Lynch

denies that the transaction was a sham and said that it never knowingly helped Enron to

falsify its financial reports.

There are also allegations that Merrill Lynch replaced a research analyst after his coverage

of Enron displeased Enron executives. Enron reportedly threatened to exclude Merrill Lynch

from a coming $750 million stock offering in retaliation. The replacement analyst is reported

to have then upgraded his report on Enron’s stock rating. Merrill Lynch maintains that it did

nothing improper in its Enron business dealings. However, the firm agreed to pay $80 million

to settle SEC charges related to the questionable Nigerian barge deal.

Arthur Andersen LLP

In its role as Enron’s auditor, Arthur Andersen was

responsible for ensuring the accuracy of Enron’s

financial statements and internal bookkeeping.

Potential investors used Andersen’s reports to judge

Enron’s financial soundness and future potential

before they decided whether to invest, and current

investors used those reports to decide if their funds should remain invested there. These

investors expected that Andersen’s certifications of accuracy and application of proper

accounting procedures would be independent and without any conflict of interest. If

Andersen’s reports were in error, investors could be seriously misled.

However, Andersen’s independence was called into question. The accounting firm

was a major business partner of Enron, with more than one hundred employees dedicated

to its account, and it sold about $50 million a year in consulting services to Enron.

Some Andersen executives even accepted jobs with the energy trader. In March 2002,

Andersen was found guilty of obstruction of justice for destroying Enron-related auditing

documents during an SEC investigation of Enron. As a result, Anderson has been barred

from performing audits.

It is still not clear why Andersen auditors failed to ask Enron to better explain its

complex partnerships before certifying Enron’s financial statements. Some observers

believe that the large consulting fees Enron paid Andersen unduly influenced the

company’s decisions. An Andersen spokesperson said that the firm looked hard

at all available information from Enron at the time; but shortly after speaking to

Enron CEO Ken Lay, Vice President Sherron Watkins took her concerns to an

Andersen audit partner, who reportedly conveyed her questions to senior Andersen

management responsible for the Enron account. It is not clear what action, if any,

Andersen took.

Potential investors used Andersen’s

reports to judge Enron’s fi nancial

soundness and future potential

426Part?: Cases

THE FALLOUT

Enron’s demise caused tens of billions of dollars of investor losses, triggered a collapse of

electricity-trading markets, and ushered in an era of accounting scandals that precipitated

a global loss of confidence in corporate integrity. Now companies must defend legitimate

but complicated financing arrangements. Legislation like Sarbanes-Oxley, passed in the

wake of Enron, has placed more restriction on companies. On a more personal level, four

thousand former Enron employees had to struggle to find jobs, and many retirees lost their

entire retirement portfolios. One senior Enron executive committed suicide.

In 2003 Enron announced its intention to restructure and pay off its creditors.

It was estimated that most creditors would receive between 14.4 cents and 18.3 cents

for each dollar they were owed—more than most expected. Under the plan, creditors

would receive about two-thirds of the amount in cash and the rest in equity in three new

companies, none of which would carry the tainted Enron name. The three companies

were CrossCountry Energy Corporation, Prisma Energy International Inc., and Portland

General Electric.

CrossCountry Energy Corporation would retain Enron’s interests in three North

American natural gas pipelines. In 2004, Enron announced an agreement to sell

CrossCountry Energy to CCE Holdings LLC for $2.45 billion. The money was to be used

for debt repayment, and represented a substantial increase over a previous offer. Similarly,

Prisma Energy International Inc., which took over Enron’s nineteen international power

and pipeline holdings, was sold to Ashmore Energy International Limited. The proceeds

from the sale were given out to creditors through cash distributions. The third company,

Portland General Electric (PGE), Oregon’s largest utility, emerged from bankruptcy as an

independent company through a private stock offering to Enron creditors.

All remaining assets not related to CrossCountry, Prisma, or Portland General

were liquidated. Although Enron emerged from Chapter 11 bankruptcy protection in

2004, the company was wound down once the recovery plan was carried out. That year

all of Enron’s outstanding common stock and preferred stocks were cancelled. Each

record holder of Enron Corporation stock on the day it was cancelled was allocated an

uncertified, nontransferable interest in one of two trusts that held new shares of the Enron

Corporation.

The Enron Creditors Recovery Corporation was formed to help Enron creditors. It

states that its mission is “to reorganize and liquidate the remaining operations and assets

of Enron following one of the largest and most complex bankruptcies in U.S. history.” In

the very unlikely event that the value of Enron’s assets would exceed the amount of its

allowed claims, distributions were to be made to the holders of these trust interests in the

same order of priority of the stock they previously held. According to the Enron Creditors

Recovery Corporation, over $128 million was distributed to creditors, which brings the

total amount of recovery to $21.549 billion.

In addition to trying to pay back its jilted shareholders, Enron also had to pay

California for fraudulent activities it committed against the state’s citizens. The company

was investigated in California for allegedly colluding with at least two other power sellers in

2000 to obtain excess profits by submitting false information to the manager of California’s

electricity grid. In 2005, Enron agreed to pay California $47 million for taking advantage

of California consumers during an energy shortage. This serves to prove further that

Enron’s corporate culture was inherently flawed, with the company promoting profits at

the expense of stakeholders.

Case 12: Enron: Questionable Accounting Leads to Collapse427

LEARNING FROM ENRON

Enron was clearly the biggest business scandal of its time. Officials swore that such a disaster

would never occur again and passed legislation like the Sarbanes-Oxley Act to prevent future

business fraud. Yet, did the business world truly learn its lesson from Enron’s collapse?

The answer would be a resounding no, as the 2008–2009 financial crisis attested. The

crisis made the Enron scandal look small in comparison and was the worst financial disaster

since the Great Depression. Like the Enron scandal, the financial crisis largely stemmed from

corporate misconduct. Corporations rewarded performance at all costs, even when employees

cut ethical corners to achieve high performance. In the mortgage market, companies like

Countrywide rewarded their sales force for making risky subprime loans, going so far as to

approve loans that they know contained falsified information in order to make a quick profit.

Other companies traded in risky financial instruments like credit default swaps (CDSs) when

they knew that buyers did not have a clear understanding of the risks of such instruments.

Although they promised to insure against default of these instruments, the companies did not

have enough funds to cover the losses after the housing bubble burst.

The bankruptcy of Enron was nothing compared to how many companies and individuals

were negatively affected by the financial crisis. The resulting crisis affected the entire world,

bankrupting such established companies as Lehman Brothers and requiring government

intervention in the amount of nearly $1 trillion in

TARP (Troubled Asset Referendum Program) funds to

salvage numerous financial firms. The U.S. government

put forth $180 billion to rescue American International

Group Inc. (AIG), and both Fannie Mae and Freddie

Mac were placed in conservatorship of the Federal

Housing Finance Industry. Merrill Lynch, who faced

scrutiny during the Enron scandal, could not survive

the crisis and was forced to sell to Bank of America.

The 150-year-old company Lehman Brothers, which had survived the Great Depression, was

forced to file for bankruptcy with $613 billion in debt. The losses from the crisis total in the

hundreds of billions and probably will not be known for years to come.

The misconduct of corporate officers like Ken Lay and Jeffrey Skilling has not

disappeared in the ensuing years. Many of the failures during the financial crisis stemmed

from the same types of crimes as those in the Enron debacle, and in many ways the scandals

were a lot worse. Much like Ken Lay, Richard Fuld of Lehman Brothers has become the

epitome of corruption in the eyes of the public. He was forced to testify before Congress

as to why he received hundreds of millions of dollars in salary, bonuses, and stock options

since 2000. He was also called to explain his part in the bankruptcy and was forced to defend

himself against accusations that he misled stockholders, just days before the company filed

for bankruptcy, into thinking that the company was doing well. Additionally, the crimes of

Ken Lay and Jeffrey Skilling are overshadowed by the likes of Bernie Madoff, who operated

a $65 billion Ponzi scheme that cheated many thousands out of their savings.

It is an unfortunate fact that the enormity of the Enron scandal did not hinder this

misconduct. Despite legislation that was passed as a result of the Enron scandal, corporate

corruption continued on a massive scale. Like Lay, many Wall Street CEOs attempted to

portray their companies as doing well even as they were floundering. They relied on risky

financial instruments and in some cases false financial reporting to make a quick profit

and inflate earnings.

Like the Enron scandal, the

fi nancial crisis largely stemmed

from corporate misconduct.

428Part?: Cases

However, Enron does not have to be reduced to a mere page in a history book. Although

it did