Have you heard the Enron stock story? What was once the favorite of Wall Street is now a disgraced company that’s no more. The accounting scandal rocked the investing world. Shareholders and workers lost a lot in the fraud that was committed.
Bring up the name Enron to anyone who was tapped into the stock market in the early nineties and you’ll likely get a groan. In fact, they don’t even need to be investors to know about Enron’s infamous corporate downfall.
The company was established in 1985 when Houston Natural Gas merged with InterNorth; a natural gas firm based out of Omaha, Nebraska. On their own, the two companies were small and far from spectacular. Once merged together as Enron, the new entity became one of the most powerful energy companies in the country.
Enron did more than energy though as it branched out into sectors like communications, electricity, and pulp and paper. It became so diversified so fast, that Fortune awarded Enron as America’s ‘most innovative company’ for six straight years.
Enron was indeed riding high and was one of the more prominent companies on Wall Street as well. So how did this story start here and end in complete disaster? The Enron stock story is a story of human greed and shareholder manipulation. It’s the poster child for corporate fraud and changed the laws and regulations of the SEC forever.
The Enron Scandal: Kenneth Lay
Everything that happened to Enron started with the CEO himself Kenneth Lay. Lay was the former CEO of Houston Natural Gas and resumed the helm of CEO of the newly formed Enron. He came from humble beginnings in rural Missouri. His family would later relocate to Columbia, Missouri where he would later attend high school and eventually the University of Missouri.
Lay studied economics and received his Bachelor’s degree and Master of Arts from the school. Eventually, he would attend the University of Houston where he earned a Ph.D. in economics in 1970.
He worked on and off as an economic analyst in the oil and gas industry, aside from a brief stint with the US Navy. In this position, Lay would work closely with the Pentagon and act as a special advisor to the Navy Comptroller.
His political ties would continue beyond the Pentagon as he was friends with former President George HW Bush, as well as former President Bill Clinton. Lay was an avid contributor to political campaigns and donated millions of dollars to both parties.
But the Enron stock story scandal is really what gave Lay his notoriety, as he was charged with ten counts of securities fraud after his trial. Lay will go down in history as one of the worst CEOs of any company, and will always be synonymous with fraud and deceit.
Even though Lay was found guilty by a grand jury, he never served a day in prison. While vacationing in Aspen, Colorado in July of 2006, Lay passed away suddenly due to a heart attack. His charges were abated due to his death. As a result, thousands of shareholders were never able to see justice served.
What Did Kenneth Lay Do as CEO?
Lay used his position to orchestrate one of the largest fraudulent companies in US history. So, what exactly did Lay do that was so illegal? In this Enron stock story, Lay performed illegal accounting practices that managed to hide billions of dollars in debt.
Lay’s bookkeeping practices included accounting loopholes, special purpose entities, and false and inaccurate accounting. Lay and his team managed to trick shareholders, private investors, and the SEC for years.
Unfortunately for accounting firm Arthur Andersen, the scandal proved to be too damaging for it to recover from. The firm was running the books for Enron and told by Lay and others to look the other way.
The results from Lay’s fraudulent bookkeeping were immense and led to the company going bankrupt. In 2002, Arthur Andersen also closed shop as the fallout from the Enron scandal was too much for it to overcome. Lay deliberately implemented a complex financial system to fool shareholders and analysts alike.
Numbers were fudged and money was created by bookkeeping tricks. The fraud became so bad that rumor has it that Lay’s entire fortune was fabricated by the company. Lay was reportedly worth hundreds of millions, if not billions, of dollars. Although as the stock tumbled so did his net worth.
The tactics and deceit used by Enron is said to be like the scandal that rocked Lehman Brothers in 2005. It’s also in the same vein as the fraud reported in the currency swap concealment of Greek debt by Goldman Sachs. As Enron’s bookkeeping practices continue to garner concerns from shareholders the company saw its revenue grow by more than 750% between 1996 and 2000. It’s hard to argue with stock going up when you know it will eventually fall back down.
How Was Enron’s Scandal Discovered?
A lot of corporate fraud gets discovered even if you alter the financials of the company. For this Enron stock story, it was a total lack of accountability for the executive team under Lay.
Nobody was really doing the work to cover up the paper trail or account for anomalies that could be found if investigated.
On top of that, SEC scrutiny and audits were happening at a rapid pace following the dotcom crash in 2000. All eyes were on publicly traded companies as the market attempted to recover.
Some caught on to how some of Enron’s segments were performing well despite the stock market crashing. Others noted that Enron should be profitable when looking at its historical financials.
But the company continued to pile up debt. Enron was also terrible at answering questions about its financial situation. The company would often erroneously enter figures; which eventually led to its downfall and bankruptcy.
Lay and other executives were also selling stock at a rapid pace. As if they knew that the end was coming. In 2001, articles began to flood the market questioning Enron’s profitability. Analysts explained that they literally had no idea how Enron was making any money. Which is usually a dead giveaway that something fraudulent is afoot.
The stock started to tumble. And within weeks had fallen from its all-time high price of $90.75 per share. Some of Enron’s own accountants who weren‘t involved in the fraudulent activity began to see some issues as well. Enron accountant Wanda Curry noted that some numbers in the retail division weren’t adding up. As the scheme slowly started to unravel, Enron didn’t even have the cash to pay back creditors from which the company had taken out loans.
What Was the Fallout from the Enron Scandal?
The fallout of this Enron stock story was swift and brutal, mostly for shareholders of the company. The executive team quickly unraveled. And even after a fraudulent but positive earnings call, the stock price didn’t budge. In fact, the stock plummeted from its all-time high to a share price of less than a dollar by the time Enron filed for bankruptcy. Nearly all of the executives that were in on the scandal were arrested and quickly found guilty of multiple different charges.
I already mentioned that Lay had passed away before he ever spent a day in prison. The public was certainly not satisfied with that and filed a $40 billion class action lawsuit. Shareholders wanted heads to roll but were provided no justice when Lay prematurely passed away. Over 4,000 employees of Enron lost their jobs and after being given notice, had 30 minutes to vacate the building. Accounting firm Arthur Andersen closed down and went out of business as well, causing even more jobs to be lost.
That’s the Enron stock story that rocked Wall Street and the nation. Perhaps worst of all, the trust between shareholders and corporations was lost and damaged forever. At the time, Enron’s bankruptcy was the largest in US history. Although it was surpassed by WorldCom the very next year.
Enron is still the standard as to which bankruptcies and fraud are measured. Especially those that involve shareholder deceit. The loss in stock price cost shareholders $74 billion in the four years before the company finally filed for bankruptcy. It also devastated pension plans for hard-working Americans, wiping out billions of dollars in a matter of years.
Finally, Enron’s fraudulent activity led the SEC to drastically improve its regulatory watch over companies. It also introduced the Sarbanes-Oxley Act which implemented harsher penalties for destroying or altering records and paperwork needed for SEC investigations. It also called upon increased accountability for firms that audit publicly traded companies. The fallout and ramifications of Enron were massive. It’s still used today as an example of not trusting public companies.