Money & Finance › Fraud, scams & enforcement › Securities fraud: lying to investors and rigging markets
Enron's accounting fraud (2001)
Collapsed Dec 2001· Fraud or scheme
Fact, law or dataA rule, statute, definition or measured number.
Enron, a Houston energy trader ranked the seventh-largest US company by revenue, hid debt and faked profits until it collapsed in December 2001.
See it on the Money & Finance map →How it works
Enron booked the projected lifetime profit of long contracts up front ('mark-to-market' accounting) and parked debt and losing assets in off-books partnerships, many run by finance chief Andrew Fastow, who skimmed tens of millions. In October 2001 it reported a $618 million quarterly loss; in November it restated earnings back to 1997. The stock fell from about $90 in 2000 to under $1. It filed for bankruptcy on December 2, then the largest in US history.
Why it matters
Thousands of employees lost jobs and retirement savings held in Enron stock, its auditor Arthur Andersen collapsed, and Congress answered with Sarbanes–Oxley.
Think of it like
Like booking ten years of projected rent as this year's income, and parking the building's mortgage in a friend's LLC so lenders never see it.
Facts, rules and data
Bankruptcy examiner reports, Senate hearings and trials: Jeffrey Skilling was convicted in 2006 and served about 12 years; Ken Lay was convicted but died before sentencing. Banks paid about $7 billion to settle shareholder suits.
Debates and risks
How much chairman Ken Lay knew is still argued, as is how much blame belongs to loose accounting rules rather than lies. Andersen's conviction was overturned in 2005, too late to save it.
Inside this (1)
Connections (3)
▸Short selling: betting a stock will fall helped expose Enron's accounting fraud (2001)Fact, law or data
The connection
Short sellers profit only when a stock falls, so they have a reason to dig into accounts others accept. Jim Chanos of Kynikos Associates saw that Enron earned low returns on its capital and generated weak cash, shorted it from late 2000, and shared his doubts with journalists, including Fortune's Bethany McLean.
When and why
New York and Houston, late 2000 to 2001; McLean's March 2001 Fortune article 'Is Enron Overpriced?' raised the first prominent public doubts.
How we know
Chanos described his analysis to Congress in 2002, and McLean has credited the tip; the stock slid for months before the fraud was admitted.
Debates and risks
How much credit short sellers deserve, versus reporters, whistleblower Sherron Watkins and Enron's own trading losses, is debated.
▸Enron's accounting fraud (2001) led to Sarbanes–Oxley Act (2002)Fact, law or data
The connection
Enron showed executives could hide debt with help from an auditor that also earned consulting fees from them. WorldCom's roughly $11 billion fraud, exposed in mid-2002, removed resistance. Congress answered point by point: executive certifications, internal-control audits, an auditor regulator, limits on auditor consulting, and harsher penalties for destroying documents.
When and why
Washington, early 2002 to July 30, 2002, when President George W. Bush signed it.
How we know
Congressional hearings and committee reports explicitly cite Enron, Andersen's document shredding and WorldCom.
Debates and risks
How much Enron alone drove the law, versus WorldCom's collapse weeks before the vote, is debated.
▸Enron's accounting fraud (2001) is a textbook case of Securities fraud: lying to investors and rigging marketsFact, law or data
The connection
Securities fraud means lying to investors about what they are buying. Enron's reports hid billions in debt and invented profits, so investors priced the stock on false numbers. Executives sold shares while assuring employees and the public all was well.
When and why
Houston, mainly 1997–2001; charges against more than 20 people followed from 2002 to 2006.
How we know
Guilty pleas from Fastow and others, the 2006 Lay and Skilling verdicts, and shareholder settlements of about $7 billion.
Debates and risks
Skilling's 2010 Supreme Court appeal narrowed 'honest services' fraud, part of a long debate over how far fraud laws should reach.