Richard Causey

Risk management

Before its demise, Enron was lauded for its sophisticated financial risk management tools. Risk management was crucial to Enron not only because of its regulatory environment, but also because of its business plan. Enron established long-term fixed commitments that needed to be hedged to prepare for the invariable fluctuation of future energy prices. Enron's downfall was attributed to its reckless use of derivatives and special purpose entities. By hedging its risks with special purpose entities that it owned, Enron retained the risks associated with the transactions. This arrangement had Enron implementing hedges with itself.

Enron's aggressive accounting practices were not hidden from the board of directors, as later learned by a Senate subcommittee. The board was informed of the rationale for using the Whitewing, LJM, and Raptor transactions, and after approving them, received status updates on the entities' operations. Although not all of Enron's widespread improper accounting practices were revealed to the board, the practices were dependent on board decisions. Even though Enron extensively relied on derivatives for its business, the company's finance committee and board did not have enough experience with derivatives to understand what they were being told. The Senate subcommittee argued that had there been a detailed understanding of how the derivatives were organized, the board would have prevented their use.

Financial audit

Enron's accounting firm, Arthur Andersen, was accused of applying reckless standards in its audits because of a conflict of interest over the significant consulting fees generated by Enron. During 2000, Andersen earned $25 million in audit fees and $27 million in consulting fees (this amount accounted for roughly 27% of the audit fees of public clients for Andersen's Houston office). The auditor's methods were questioned as either being completed solely to receive its annual fees or for its lack of expertise in properly reviewing Enron's revenue recognition, special entities, derivatives, and other accounting practices.

Enron hired numerous Certified Public Accountants (CPAs) as well as accountants who had worked on developing accounting rules with the Financial Accounting Standards Board (FASB). The accountants searched for new ways to save the company money, including capitalizing on loopholes found in Generally Accepted Accounting Principles (GAAP), the accounting industry's standards. One Enron accountant revealed "We tried to aggressively use the literature [GAAP] to our advantage. All the rules create all these opportunities. We got to where we did because we exploited that weakness."

Andersen's auditors were pressured by Enron's management to defer recognizing the charges from the special purpose entities as its credit risks became known. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off, where the value of the entity was removed from the balance sheet at a loss. To pressure Andersen into meeting earnings expectations, Enron would occasionally allow accounting companies Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new company to replace Andersen. Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, it failed to prevent conflict of interest. In one case, Andersen's Houston office, which performed the Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's Chicago partner. In addition, after news of SEC investigations of Enron were made public, Andersen would later shred several tons of relevant documents and delete nearly 30,000 e-mails and computer files, leading to accusations of a cover-up.

Revelations concerning Andersen's overall performance led to the break-up of the firm, and to the following assessment by the Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001): "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron's internal contracts over the related-party transactions".

Audit committee

Corporate audit committees usually meet just a few times during the year, and their members typically have only modest experience with accounting and finance. Enron's audit committee had more expertise than many others. It included:

Robert K. Jaedicke, an accounting professor at Stanford University and former dean of Stanford Business School

John Mendelsohn, President of the University of Texas M.D. Anderson Cancer Center

Paulo Pereira, former president and CEO of the State Bank of Rio de Janeiro in Brazil

John Wakeham, former United Kingdom Secretary of State for Energy and Parliamentary Secretary to the Treasury

Ronnie Chan, Chairman of Hong Kong Hang Lung Group

Wendy Gramm, former Chair of U.S. Commodity Futures Trading Commission

Enron's audit committee was later criticized for its brief meetings that would cover large amounts of material. In one meeting on February 12, 2001, the committee met for an hour and a half. Enron's audit committee did not have the technical knowledge to question the auditors properly on accounting issues related to the company's special purpose entities. The committee was also unable to question the company's management due to pressures on the committee. The United States Senate Permanent Subcommittee on Investigations of the Committee on Governmental Affairs' report accused the board members of allowing conflicts of interest to impede their duties as monitoring the company's accounting practices. When Enron's scandal became public, the audit committee's conflicts of interest were regarded with suspicion.

Speculative business ventures

Enron division Azurix, slated for an IPO, initially planned to bid between $321 million and $353 million for the rights to operate water system services for areas around Buenos Aires. This was at the high end of what Enron's Risk Assessment and Control Group advised. But as pressure to outbid all others and win the deal grew more intense with the approaching IPO, the Azurix executives decided to up their bid. They eventually bid $438.6 million, which turned out to be about twice as much as the next highest sealed bid. But when Enron executives arrived at the Argentine facilities, they found them in shambles, with all of the customer records destroyed.

Investors' confidence declines

By the end of August 2001, his company's stock value still falling, Lay named Greg Whalley, president and COO of Enron Wholesale Services, to succeed Skilling as president and COO of the entire company. He also named Mark Frevert as vice chairman, and appointed Whalley and Frevert to positions in the chairman's office. Some observers suggested that Enron's investors were in significant need of reassurance, not only because the company's business was difficult to understand (even "indecipherable") but also because it was difficult to properly describe the company in financial statements. One analyst stated "it's really hard for analysts to determine where [Enron] are making money in a given quarter and where they are losing money." Lay accepted that Enron's business was very complex, but asserted that analysts would "never get all the information they want" to satisfy their curiosity. He also explained that the complexity of the business was due largely to tax strategies and position-hedging. Lay's efforts seemed to meet with limited success; by September 9, one prominent hedge fund manager noted that "[Enron] stock is trading under a cloud." The sudden departure of Skilling combined with the opacity of Enron's accounting books made proper assessment difficult for Wall Street. In addition, the company admitted to repeatedly using "related-party transactions", which some feared could be too easily used to transfer losses that might otherwise appear on Enron's own balance sheet. A particularly troubling aspect of this technique was that several of the "related-party" entities had been or were being controlled by CFO Fastow.

After the September 11 attacks, media attention shifted away from the company and its troubles. A little less than a month later, Enron announced its intention to begin the process of selling its lower-margin assets in favor of its core businesses of gas and electricity trading. This policy included selling Portland General Electric to another Oregon utility, Northwest Natural Gas, for about $1.9 billion in cash and stock, and possibly selling its 65% stake in the Dabhol project in India.

Enron

Fastow and his wife, Lea, both pleaded guilty to charges against them. Fastow was initially charged with 98 counts of fraud, money laundering, insider trading, and conspiracy, among other crimes. Fastow pleaded guilty to two charges of conspiracy and was sentenced to ten years with no parole in a plea bargain to testify against Lay, Skilling, and Causey. Lea was indicted on six felony counts, but prosecutors later dismissed them in favor of a single misdemeanor tax charge. Lea was sentenced to one year for helping her husband hide income from the government.

Lay and Skilling went on trial for their part in the Enron scandal in January 2006. The 53-count, 65-page indictment covered a broad range of financial crimes, including bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, conspiracy, and insider trading. United States District Judge Sim Lake had previously denied motions by the defendants to have separate trials and to relocate the case out of Houston, where the defendants argued the negative publicity concerning Enron's demise would make it impossible to get a fair trial. On May 25, 2006, the jury in the Lay and Skilling trial returned its verdicts. Skilling was convicted of 19 of 28 counts of securities fraud and wire fraud and acquitted on the remaining nine, including charges of insider trading. He was sentenced to 24 years and 4 months in prison. In 2013 the United States Department of Justice reached a deal with Skilling, which resulted in ten years being cut from his sentence.

Lay pleaded not guilty to the eleven criminal charges, and claimed that he was misled by those around him. He attributed the main cause for the company's demise to Fastow. Lay was convicted of all six counts of securities and wire fraud for which he had been tried, and he was subject to a maximum total sentence of 45 years in prison. However, before sentencing was scheduled, Lay died on July 5, 2006. At the time of his death, the SEC had been seeking more than $90 million from Lay in addition to civil fines. Linda Lay sold roughly 500,000 shares of Enron ten minutes to thirty minutes before the information that Enron was collapsing went public on November 28, 2001. Linda was never charged with any of the events related to Enron.

Although Michael Kopper worked at Enron for more than seven years, Lay did not know of Kopper even after the company's bankruptcy. Kopper was able to keep his name anonymous in the entire affair. Kopper was the first Enron executive to plead guilty. Rick Causey was indicted with six felony charges for disguising Enron's financial condition during his tenure. After pleading not guilty, he later switched to guilty and was sentenced to seven years in prison.

All told, sixteen people pleaded guilty for crimes committed at the company, and five others, including four former Merrill Lynch employees (three of whose convictions were subsequently overturned on appeal), were found guilty. Eight former Enron executives testified—the main witness being Fastow—against Lay and Skilling, his former bosses. Another was Kenneth Rice, the former chief of Enron Corp.'s high-speed Internet unit, who cooperated and whose testimony helped convict Skilling and Lay. In June 2007, he received a 27-month sentence.

Michael W. Krautz, a former Enron accountant, was among the accused who was acquitted of charges related to the scandal. Represented by Barry Pollack, Krautz was acquitted of federal criminal fraud charges after a month-long jury trial.

Arthur Andersen

Arthur Andersen was found guilty of obstruction of justice on June 15, 2002 for shredding the thousands of documents and deleting emails and company files that tied the firm to its audit of Enron.

Legal department member Nancy Temple and David Duncan, the lead partner for the Enron account, were cited as the responsible managers in the scandal because they ordered subordinates to shred relevant documents. Duncan himself pleaded guilty in federal court in Houston to obstruction of justice on April 10, 2002, saying that he had ordered the destruction of documents and also personally destroyed documents.

Although only a small number of Arthur Andersen's employees were involved with the scandal, the firm was effectively put out of business; the SEC is not allowed to accept audits from convicted felons. The company surrendered its CPA license on August 31, 2002, and 85,000 employees lost their jobs. The conviction was later overturned by the U.S. Supreme Court due to the jury not being properly instructed on the charge against Andersen. The Supreme Court ruling theoretically left Andersen free to resume operations. However, the damage done to the Andersen name was so great (not just from the Enron scandal but others involving Andersen accounting malpractice such as WorldCom a year after Enron) that it did not return as a viable business even on a limited scale in the years after the ruling.

However, in 2014, Wealth Tax and Advisory Services (WTAS), a tax and consulting firm started by several former Andersen partners, changed its name to Andersen Tax after acquiring the rights to the Andersen name. It also rebranded its year-old international arm from WTAS Global to Andersen Global.

NatWest Three

Giles Darby, David Bermingham, and Gary Mulgrew worked for Greenwich NatWest. The three British men had worked with Fastow on a special purpose entity he had started called Swap Sub. When Fastow was being investigated by the SEC, the three men met with the British Financial Services Authority (FSA) in November 2001 to discuss their interactions with Fastow. In June 2002, the U.S. issued warrants for their arrest on seven counts of wire fraud, and they were then extradited. On July 12, a potential Enron witness scheduled to be extradited to the U.S., Neil Coulbeck, was found dead in a park in north-east London. Coulbeck's death was eventually ruled to have been a suicide. In a plea bargain in November 2007, the trio pleaded guilty to one count of wire fraud while the other six counts were dismissed. Darby, Bermingham, and Mulgrew were each sentenced to 37 months in prison. In August 2010, Bermingham and Mulgrew retracted their confessions.

Criticism of the Bush administration

Kenneth Lay was a longtime supporter of U.S. president George W. Bush and a donor to his various political campaigns, including his successful bid for the presidency in 2000. As such, critics of Bush and his administration attempted to link them to the scandal. A January 2002 article in The Economist claimed that Lay had been a close personal friend of Bush's family and had backed him financially since his unsuccessful campaign for Congress in 1978. Allegedly, Lay was even rumored at one point to be in the running to serve as Secretary of Energy for Bush.

In an article that same month, Time magazine accused the Bush administration of making desperate attempts to distance themselves from the scandal. According to author Frank Pellegrini, various Bush appointments held connections to Enron, including deputy White House Chief of Staff Karl Rove as a stockholder, Secretary of the Army Thomas E. White Jr. as a former executive, and SEC chairman Harvey Pitt, a former employee of Arthur Andersen. Former Montana governor Marc Racicot, whom Bush considered for appointment for Secretary of the Interior, briefly served as a lobbyist for the company after leaving office. After opening a criminal investigation into the scandal, Attorney General John Ashcroft recused himself and his chief of staff from the case when Democratic Congressman Henry Waxman accused Ashcroft of receiving $25,000 from Enron for his failed reelection campaign to the Senate in 2000. As Pellegrini wrote, "The Democrats will have the company-he-keeps, guilt-by-association thing on their side, and with all the... general whiff of rich man's cover-up about the whole affair, they'll have a class warfare card to play this spring."

Ken Lay had made phone calls to then-Treasury Secretary Paul H. O'Neill.