Kenneth Lay was a Ph.D. in economics and was a big supporter of deregulation. He pushed aggressively in Washington to “unbind the chains” that held the energy and natural gas industry together. In Washington Lay became a part of a group of businessmen who campaigned to liberate business from rules and regulations of government.
The Reagan government began to deregulate all sought of industries.
Ken Lay foundered Enron in 1985. Through a merger of vast network of natural gas lines. Lay thought Enron would be poised to take advantage of the government’s decision to let gas prices float with the currents of the market.
Lay was closer to George H W Bush, however when George W Bush was governor of Texas he did many favours for Lay. Early on George H W Bush help secure billions in government subsidies for Enron International. He also help Lay by promoting him to Deregulations Commissioner at Large.
Lay, who President George W Bush affectionately referred to as “Kenny-boy” forged an alliance in the 1990s to advance Bush’s political ambitions and Lay’s business prospects. Lay contributed $122,500 to Bush’s gubernatorial campaigns in Texas. Lay explain to a PBS “Frontline” interviewer that, although he had worked closely with former Texas Governor Ann Richards, the Democrat incumbent who Bush challenged in 1994, he backed the Republican because “I was very close to George W.”
Once Bush became governor, Lay got his phone calls returned. A report issued by Public Citizen in February, 2001, months before the Enron scandal broke, identified Lay as “a long-time Bush family friend and an architect of Bush’s policies on electricity deregulation, taxes and tort reform while Bush was Texas governor.”
No wonder Lay had Enron give $50,000 to pay for Bush’s second inaugural party in Austin in 1999 — a showcase event that was organized by Karl Rove and others to help the Texas governor step onto the national political stage.
By signing legislation that deregulated the state’s electrical markets, Bush gave Enron exactly what it wanted in 1999, Lay then knew he had found his candidate for president.
When Bush announced his intention to run for president, Enron and its employees gave more than $1 million to Bush's 2000 election campaign, and the Republican Party. Bush aides used the Enron corporate jet during the post-election disturbance in Florida.
At Minute Maid Park, in Houston Texas, formerly known as Enron Field, Ken Lay threw out the first pitch at a 2000 exhibition game against the Yankees. George W Bush made a special excursion to be there for his mate Kenny-Boy.
The Enron oil scandal also known as Vahalla Scandal; In 1987, two oil traders made bets for Enron on as to whether the price of oil would rise or fall. Oil trading is like gambling, some time you win other time you lose. Enron Oil seemed to always win.
Mike Muckleroy, Ex-Enron Executive, was suspicious of Enron’s steady high profits. Louis Borget was the President of Enron, he had taken 3 million dollars from Enron and put it into a personal account of his. There were offshore accounts, phony books and a trail that led from Enron Treasurer Tom Mastroeni, to a mysterious Lebanese speculator, Mr M Yass, which nobody could find. M Yass can me retranslated to ‘My Ass’.
Borget and Mastroeni were summon to Houston. First they presented falsified accounts to Enron, then they admitted they had diverted company profits to personal accounts. At the board meeting auditors told Lay that Borget and his traders were manipulating earning, destroying daily trading records and probably gambling way beyond their limits.
The next day Lay gave the order to change nothing, citing that this was the only part of the company that was making money. The traders weren’t fired or even disciplined, instead Lay sent a telex to Borget saying “Please keep making us millions”. Instead of reducing Enron’s risk he encouraged them to trade more. Two month later everything fell apart when they had drawn down 90 million dollar in the last five days.
Muckleroy knew Mastroeni had another set of books, so he flew to New York. Muckleroy would do whatever it took to get them. Mastroeni produced the second set of books, it turned out that the traders had gambled away all of the companies reserves. By acting fast Muckleroy bluffed the market a managed to save the company.
After Vahalla, Ken Lay maintained that he was shocked that the traders had gambled so recklessly. But Lay had known all about the risks that were taken. Borget spent one year in jail while Mastroeni received a suspended sentence.
Ken Lay signed Jeffrey Skilling, the guy who supposedly had the answer to what the future of the natural gas industry was supposed to be. Skilling’s idea was for Enron to become a kind of stock market for natural gas. To transfer energy into financial instruments that could be traded like stocks and bonds. In 1992 Enron became the largest buyer and seller of natural gas in North America.
Amanda Martin-Brock, Ex-Enron executive, became part of Skilling’s inner circle, she remembers the partying that took place when Enron was grant Mark-to-market accounting treatment, Arthur Anderson Accountants signed off on it. According to Martin-Brock that was a major cog in the downfall of Enron.
Mark-to-market is the daily revaluation of a security to reflect its current market value instead of its acquisition price or book value. Mark-to-market can change values on the balance sheet as market conditions change. Mark-to-market can become volatile if market fluctuate greatly or change unpredictably. Buyers and Sellers may claim a number of instances where this is the case, including inability to value the future income and expenses of either actively and collectively often due to unreliable information or overoptimistic or over pessimistic expectations.
Mark-to-market allowed Enron to book potential future profits, on the very day the deal was signed, no matter how little cash actually came in the door, and to the outside world Enron’s profits could be whatever Enron said they were. No-one was more aggressive at Enron than the traders.
Lou Lung Pai was a key Skilling lieutenant, he helped out the trading business in the early years. He went on to run the booming ‘Enron Energy Services’ the EES job was to sell energy to industrial companies, however the venture failed. Lou Pai was a mysterious figure at Enron, details didn’t bother Pai, and he was motivated by two things money and strippers. He had an office on the 7th floor which employee say was always empty.
Lou Pai lost all interest in running EES as some as the numbers got high enough. He left Enron with $250 million because he sold all his stock at Enron after he divorce his wife and married the stripper who had had his baby. His exit from Enron was as mysterious as his employment, staff say that one day they were told Pai was no longer the CEO of EES.
The divisions Pai left behind at Enron lost a total of $1 billion although Enron managed to hide that fact. Lou Pai become the second largest land owner in Colorado.
Throughout the 1990’s the stock market just kept going up and with it Enron stocks. Enron stocks posted a 35% gain from web based stock investors.
Enron executives played a game with their stock called ‘pump and dump’ top executives would pump the stock price up, then cash in their multi-million dollar options. People at Enron got paid in large part through stock. Everyone had a huge stake in seeing the stock price go up. It was driven by the profits ever quarter.
They continued to sell the company as a very stable place. Where they could predictively increase profits 10 – 15 percent a year. To get to those numbers everyone was doing all sorts of corrupt things, and taking enormous risks. In reality profit were plummeting.
Enron had built vast natural gas operations all over the world. They had cost billions to build and most performed terribly. They built the Dabhol Power Plant in India. However Enron had failed to see something basic, India couldn’t afford to pay for the power the Enron plant produced.
Now Dabhol is a ruin. Though it lost a billion dollars on the project, Enron paid out multi-million dollar bonuses to executives based on imagined profits that never arrived due to Mark-to-Market expected future profits. No-one knew where was the money to cover these losses going to come from?
Enron bought out Portland General Electric. PGE put Enron in the electricity business Portland’s position on the west coast gave Enron access to the recently deregulated California. Portland’s employees invested all their money in Enron thinking it was a safe place for their money to grow.
Stock market analysts didn’t check anything, they just trusted that what Enron was telling them was true. Any analyst that didn’t buy the company line was an enemy of Enron. Enron CFO, Andy Fastow, had his eye on John Olsen one of the only analyst who was sceptical of the Enron story. Merrill Lynch Olsen’s employer was told by Fastow to fire Olsen, they did. Soon after, Fastow rewarded Merrill Lynch with two investment banking jobs worth $50 million. Analyst were routinely getting large bonuses from the investment banking departments to bring in investment banking deals.
While Enron stock kept rising, its businesses kept losing money. Enron stock soured 32 percent in two todays after it announced a deal to sell bandwidth through Blockbuster who were going to show movies on demand. While Enron was telling everyone that the technology was going great, in reality it didn’t work and Blockbuster had pulled out of the deal. With Mark-to-market Enron had used future projections to make $53 million in earnings from the project.
The executive started selling their stock in Enron: Kenneth Rice sold $53 million, Ken Lay sold $300 million, Cliff Baxter sold $35 million, and Jeff Skilling $200 million.
In March 2001, a reporter, Bethany McLean, with Fortune magazine first raised the question “How exactly does Enron make its money?” McLean rang Skilling, who was defensive and abusive to her telling her she was being unethical. The day after the meeting Enron sent a ‘hit squad’ to New York for meeting to try and get McLean to change her story. At the end of the meeting Andy Fastow said “I don’t care what you write about the company, just don’t make me look bad”. Skilling dismissed the article as competition between Newsweek and Fortune magazines.
Bethany McLean started analysing cash flows, she looked at 1st quarter, 2nd quarter, 3rd, quarter and end of year cash flows, the financials didn’t make sense.
Andy Fastow was a protégé of Jeff Skilling’s, he was also Enron’s Chief Financial Officer. Enron was losing money year after year, yet it was reporting profits. This was being done by structural finance, and the coordinator of that was Andy Fastow. To please Skilling, Fastow had to keep the stock price up while hiding that Enron was $30 billion in debt. Fastow create 100’s of companies to prop up Enron’s stock thus making Enron’s debt disappear. To outside investors it looked like cash was coming in. in reality Enron was just hiding its debt in Fastow’s companies where investors couldn’t see it. LJM was Fastow’s most ambitious creation.
LJM worked like magic for Fastow, and allowed him to make $45 million for himself. Skilling, Lay and the entire Enrol board had signed off on all Fastow’s funds. They saw the benefits of letting Fastow do deals with himself. Fastow pitched the investment to bankers who invested in LJM a company that only does business with Enron. He was General Partner at LJM while the same time he was CFO at Enron. So in every financial transaction he decided whether he was looking after Enron or one of his partner companies.
Fastow was using Enron stock to back his debt laden companies. With the prospect of returns that would exceed 2000 percent 96 individual bankers invested in LJM a non-company that only dealt with Enron. America’s major banks put up as much as $25 million each. All this money was going to companies that were worth billions of dollars in debt, they didn’t produce anything and their only client was Enron. Enron had billions of dollars of debt, no assets that came near to paying the debt and were making money off banks investing in these debt laden non-companies. Enron was preying on Wall Streets greed to get money out of them.
There are supposed to be checks and balances in the system. The lawyer are supposed to say no, the accountants are supposed to say no, the banker are supposed to say no but no-one did. They all took their share of the money from the fraud and said nothing. Enron paid its advisors well. In 2001 the accounting firm Arthur Andersen received $1 million a week. Enron’s law firm Vinson & Elkins did nearly as well.
According to Amanda Martin-Brock “everyone had their hand out at the table, they were all being paid as long as Enron continued they received their fees, they were a part of the process so it’s hard now to say, oh, we didn’t know anything”. At the Senate enquiry into Enrol all the big banks, J.P. Morgan Chase, Merrill Lynch and Citigroup denied knowing anything was wrong. Email trails proved that the banks knew what Enron was up to.
California had 26 thousand miles of Californian power lines yet they kept having rolling blackouts.. Loretta Lynch, California Public Utilities Commissioner said “we need 28 to 30 megawatts in December, we have an installed capacity in California at the time of 45 thousand megawatts plenty of power to meet our electric demand, of course we had blackout in December”
“I knew that there was illegality going on, I could feel it, I could smell it, I could sense it, and there was no other explanation because the numbers just didn’t add up we had enough power in California, I was never about lack of supply”
Joseph Dunn, California State Senator said “California was selected by Enron as the prime place to experiment with this new concept of deregulated electricity.”
In 1996, under pressure from energy companies, Governor Pete Wilson and the Californian Legislature passed a bill allowing for the deregulation of electricity. None of them had any idea how a deregulated electricity industry should work. The law was convoluted and confusing.
Timothy Norris Belden ran the Enron West Coast Trading Desk. He poured over the Californian Electricity legislature looking for loophole that would make Enron money. He found plenty. Rolling blackouts were seen as a way of making abnormal amounts of money. In the midst of the energy shortages the Enron traders started to export power out of the state. When prices sawed they brought it back in.
Traders soon discovered that by shutting down power plants they could create artificial shortages, which would push prices even higher. Enron traders would call the energy company and ask then to shut down the power supply for four hour and they would do it.
This a transcript from a conversation between two Enron traders, which was read into the government inquiry: What we did was overbook the line we had the rights on during a shortage or in a heat wave,'" one trader said. "We did this in June 2000 when the Bay Area was going through a heat wave and the ISO (Independent System Operator) couldn't send power to the North. The ISO has to pay Enron to free up the line in order to send power to San Francisco to keep the lights on. But by the time they agreed to pay us, rolling blackouts had already hit California and the price for electricity went through the roof."
Former Governor Grey Davis “When you see two or three energy companies with 30, 35 percent of their entire capacity down for maintenance on a single day and as a result the price of electricity is skyrocketing three or four hundred percent and then a week later someone else does it up in Northern California you begin to believe something's not smelling right here.”
Loretta Lynch “Those guys at the flip of a switch could just yank the California economy on its leash whenever they wanted to. And they did it, and they did it, and they did it. And they made so much money.”
These strategies made some money for Enron, but the real money was made by betting that the price of energy would go up. It did, and the west coast traders made nearly two billion dollars for Enron.
The yearlong energy crisis of 2000 and 2001 cost the state of California $30 billion.
When the wave of public backlashes started to grow Ken Lay flew out to California and convened a meeting which included Arnold Schwarzenegger the notes of that meeting have never surfaced. However Ken Lay had a trick up his sleeve, his good buddy George Walker Bush had just become President of the United States. On 17th April 2001, Ken Lay met with Vice-President Dick Cheney and strongly argued against the imposition of federal price caps in California.
At the time the Whitehouse was pretending that the shortage were not manufactured and were due to increases in shortage of supply in California. It didn’t matter what Governor Davis and his team did the power broker were determined to get him out of power.
One of the reason being, Davis was a likely candidate to run against George W Bush in the next election. However the media in California blamed Davis for the blackout and never tried to look beyond him for the real reasons. Meanwhile power-brokers like the Rothschilds and Warren Buffett were planning on installing Schwarzenegger as the next governor of California.
Bush came out publically on the subject as if on cue and said “they know full well my administration belief that price controls will not solve the problem” Davis pointed out to Bush that the Californian law says that the Federal government regulates the electricity problem.
FERC the Federal Energy Regulatory Commission were in on the conspiracy and refused to intervene. The chairman of FERC was Pat Wood a man Ken Lay had personally recommended for the job. It was easy for FERC to do Enron’s bidding because all they had to do was do nothing. It took a Democratic Senate who forced FERC to impose regional price caps. That ended the energy crisis but not the political one. Schwarzenegger won a recall election and became governor.
On 14th August 2001, Jeff Skilling announced he was stepping down as CEO of Enron. Carol Coale a former Stock analyst with Prudential Securities, met with Lay and Skilling to tell them she was preparing to downgrade the stock. Skilling claimed he left the position for personal reason, despite the fact that the company was imploding around him. After Skilling left Enron Chairman Ken Lay took over as CEO.
Sharon Watkins, Ex-Vice President, Enron Corporation, discovered what Fastow had been doing regarding his partnerships. Fastow had guaranteed Enron’s future on the hope that its stock would never fall. Sharon Watkins became the Enron whistle-blower.
The SEC (Securities and Exchange Commission) launched an enquiry into Enron when The Wall Street Journal published articles about Fastow’s shady deals. Investors started to worry that millions in Mark-to-market profits were really losses. Ken Lay was giving a ‘reassuring’ speech to his staff, while a few miles away Arthur Andersen Accountants were shedding all its Enron files.
On 23rd October 2001, Andersen shredded more than one tonne of documents. Despite Lays speeches in September and October, Lay cashed in $26 million in Enron stock. During his speech to staff on 23rd October, Lay said he had every faith in Fastow. The next Fastow was fired when the Enron board ‘discovered’ that he had made more than $45 million from his LJM Partnerships.
Lay didn’t accept responsibility for anything, he blamed the whole company collapse on Andy Fastow. Enron filed for bankruptcy on 2nd December 2001.
Cliff Baxter Enron Corporation executive who resigned in May 2001. Baxter committed suicide on 25th January 2002. Prior to his death he had agreed to testify before Congress in the case of Enron. Baxter was being sued personally for $30 million after the bankruptcy due to his selling of $30 million worth of Enron stock in the months prior to Enron's bankruptcy.
Andy Fastow pled guilty to conspiracy to commit wire fraud. He agreed to forfeit $23 million in assets. His sentence was reduced to ten years in exchange for testifying against other Enron executives.
In 2004 Jeff Skilling was indicted for insider trading and conspiracy to defraud investors. Pleading innocent he paid his attorneys a retainer of $23 million to represent him. In 2006, he was convicted of 19 counts of securities fraud, conspiracy, insider trading, and lying to auditors. He received 24 years jail. Skilling then cut a deal to have 10 years cut off his sentence because made $40 million in restitution to Enron victims and ended his appeal of his conviction. He literally bought his way out of prison, because he had so much money he just kept filing appeals until the justice system just gave up and sold-out. Skilling is now due for release in 2017.
Arthur Andersen Accounting firm was convicted of obstructing justice. With its reputation destroyed Americas oldest accounting firm fell along with Enron. 29 thousand people lost their jobs.
Criminal Charges were fifteen guilty pleas, six convictions, and one acquittal.
Enron shareholders sued Enron and its banks for $20 billion. The case ended with decision that Enron shareholders and investors will split more than $7.2 billion from financial institutions accused of playing a role in the Enron downfall. About 1.5 million people and entities were eligible to share in the distribution of the money.
Investors got an average of $6.79 per share of common stock and an average of $168.50 per share of preferred stock. To be eligible for the settlement, investors and shareholders needed to have purchased Enron or Enron-related securities between September 9, 1997, and December 2, 2001. The settlement included payments of $2.4 billion from CIBC, $2.2 billion from JPMorgan Chase and $2 billion from Citigroup, according to court documents. Smaller amounts come from Arthur Andersen, Lehman Brothers and Bank of America.
Ken Lay was also indicted for conspiracy to commit fraud. Lay was charged with 11 counts of securities fraud, wire fraud, and making false and misleading statements. The trial commenced on January 30, 2006, in Houston.
Kenneth Lay pled not guilty to the 11 criminal charges and faced up to 175 years in jail if convicted for the Enron fraud.
On May 25, 2006, Lay was found guilty on six counts of conspiracy and fraud by the jury. In a separate bench trial, Judge Lake ruled that Lay was guilty of four additional counts of fraud and making false statements. Sentencing was scheduled for September 11, 2006 and rescheduled for October 23, 2006.
Lay never faced the charges he supposedly died of a heart attack while awaiting trial. Bloggers, have floated the idea that the Enron founder’s powerful friends helped him fake his death to escape sentencing in one of the biggest corporate frauds in U.S. history.
One conspiracy theory finds it too convenient that former Secretary of State, Colin Powell, was treated for altitude sickness at the same Aspen hospital where Lay was pronounced dead the day before. Powell was in the resort town to participate in a panel discussion, but the theory purports that he was actually there to bring Lay passports, other ID and an escape plan.
20 thousand Enron employees lost their jobs, and medical insurance. The average severance pay was $4500. Top executives were paid bonuses totalling $55 million. In 2001 Employees lost $1.2 billion in retirement funds. Retirees lost $2 billion in pension funds. Enron’s top executives cashed in $116 million in stock.
(Enron – Smartest Guys in the Room / CNN / NBC / Wikipedia / The Age / The Young Turks / thenation.com / truth-out.org / YouTube – Various news reports)
Lou Lung Pai
Dabhol Power Plant
Warren Buffet, Arnold Schwarzenegger & Jacob Rothschild
Arthur Andersen Emblem
George W Bush