From its beginnings in 1985, when Kenneth Lay merged Houston Natural Gas and Omaha-based Internorth, Enron opened as an interstate pipeline company. Enron, headed at this time by Kenneth Lay, looked to be very promising and began bringing in major profits. The oil industry was very confusing and Enron was able to bring in many unexplained profits. One of its first major cash flows came from Enron Oil, whose trading offices where in Valhalla, N.Y. In 1987 Enron Oil’s president, Louis Borget, and his treasurer, Thomas Mastroeni, were caught scamming the oil market. Borget and Mastoeni created fraudulent oil companies with whom Borget and Mastoeni routinely made phony contracts with in order for Enron to appear profitable. When the scandal broke in 1987, Kenneth Lay was afraid to shut down his main cash flow and told Borget and Mastoeni to continue making him millions. However Borget and Mastoeni were found guilty of using false means of making Enron look profitable to investors and both were sentenced to jail time. Kenneth Lay now had problem, the cash flow from Enron Oil had been cut off. Kenneth Lay began looking for someone new; someone who, like Borget and Mastoeni, could make him millions. And he found Jeff Skilling; the man who Lay believed held the answers to the future of the gas business. (Forbes 169, no. 4 (February 18, 2002): 40. MAS Ultra - School Edition, EBSCOhost)
Jeffrey Skilling was a visionary who envisioned a new way to deliver energy that would take Enron to the height of its power. Skilling even eventually replaced Lay as the CEO of Enron. In 1992 Skilling made Enron the largest buyer and seller of natural gas in North America. One of Jeffrey’s innovative ideas was to use Mark to Market Accounting. Mark to Market Accounting consists of marking down future, planned profits instead of actual profits that were actually made. Mark to Market allowed Enron to write profits down even if the business venture failed and Enron acquired debt instead of profit. Skilling also began to use a Performance Review Center, PRC, which was brought about by his Darwinian view on life. Skilling investigate the productivity of his employers and fire the bottom five percent of the performers in order to bring more productive workers in. PRC was also known as Crank and Yank because it was so unconventional to fire the bottom five percent of your employees. Under Skilling’s guidance Enron began to flourish and started branching out into new fields. With their slogan “Ask Why”, Enron began to concoct new ways things could be done more profitably and efficient.
Enron Online, one of the new ways of doing things, made Enron an internet monster. Enron Online enabled Enron and its consumers to buy and sell oil and energy online, a lot easier than the current ways. Selling more than 800 billion dollars worth of goods online, Enron trumped even Amazon in just two years. Enron’s influence and power grew over markets all over the world grew because Enron was now personally in control of all their transactions. This idea of trading energy like stocks was Jeffrey Skilling’s one big idea and drastically changed the market. (N.A. "Enron Joins IBM, AOL in Online Electric-, Gas-Sales Venture." Houston Chronicle. Newspaper Source, EBSCOhost)
All of this success began to go to Skilling’s and Lay’s head. “We are never satisfied with stock prices, it should always be higher.” Ken Lay said in one of his meetings (Smartest Men in the Room). Because of this pride Enron began to do whatever it could in order to meet analyst’s projections for quarterly earnings. Enron’s employees were largely paid through stock in Enron so obviously the continual raise of stock market prices was widely promoted throughout. Enron began to “pump and dump” the market, which meant executives would raise the stock prices and then cash in on their paycheck. Because of both these reasons, projections for quarterly earnings and personal gain, Enron used questionable means of raising their stock prices. To the public Enron appeared to be great, when in actuality Enron was doing the exact opposite. (Enron: The Smartest Guys in the Room. DVD. Directed by Alex Gibney. Los Angeles: Magnolia, 2005 )
Now that Enron had become a “fantasy wasteland” (Smartest Guys in the Room) Skilling had to look for someone to cover that up. Andy Fastow was that guy. In order to keep the stock price high skilling had to hide the fact that Enron was 30 million dollars in debt. Through hundreds of made up companies Fastow created Enron stashed their debt in these companies while to the outside world it just looked like profit. One of these made up companies was LJM. Fastow played a two parts as the head of LJM and Enron’s CFO, so every single transaction that went through LJM went through Fastow. Because of this Fastow was able to look of for Enron’s best interest over LJM. In the classic “I’ll scratch yours back if you scratch mine” relationship, Fastow sold LJM too many major investment banks. The investment banks were able to get their cut out of their transactions with LJM no matter if the company they had advised their investors to invest in and so when the company failed it was no skin off of the investment bankers’ back. (Enron: The Smartest Guys in the Room. DVD. Directed by Alex Gibney. Los Angeles: Magnolia, 2005)
In 2000 and 2001 Enron found a great opportunity to pay off their debt. California was in the midst of an energy crisis and was enduring many blackouts due to a lack of energy. Also illuminating California as Enron’s bail out came from the deregulation of electricity in 1996. Because of deregulating energy rules had many loop holes California became a play toy for Enron. California legislation was bewildered by the energy crisis because California had enough energy to run off of. Enron became suspect for these unexplained blackouts. Through the black outs and need for electricity, Enron was able to raise their prices. Through the loop holes in California’s deregulated system Enron used many schemes to keep their prices high. Buying energy for lower prices in the Northwest Enron would then sell it to California for higher prices. Enron would also create the false appearance of electricity shortages by exporting electricity from California. Then making the electricity appear as though it came from somewhere else Enron shipped it back into California at higher prices. The profit Enron acquired from both these schemes was then used to keep Enron’s stock prices from falling. ("Testimony details Enron scheme / Architect of plan says California paid inflated prices during the 2000-01 energy crisis. Newspaper Source, EBSCOhost)
If there are so many systems set up in order to stop and spot this kind of fraudulent behavior, such as auditors who inspect companies for fraud? Enron was able to bring these people practically into the circle of fraud by paying them off with the profit Enron made from them overlooking the fraud. If these auditors were to release Enron’s real numbers the money they received from Enron would stop. Through this Enron was able to hide the massive hole they were truly in from the public.
No finger can be pointed at one person for the collapse of Enron because it was obviously the work of many people. However many of the executive officers in Enron have been found guilty of fraud. However, according to CNN both Lay and Skilling were found guilty of fraud and conspiracy; Lay was found guilty of six counts and Skilling 19. (Business, financial, personal finance news - CNNMoney.com.)
