Enron and the SPEs – 2001

For five years straight, Fortune magazine named it ‘most innovative company of the year’. By then Enron was a colossus, one of the world’s top seven financial services groups, and the accolade was a stunned acknowledgement of Enron’s peak – $100 billion revenues and soar away $90 share price. Enron’s winning formula baffled the shrewdest financial minds, who in any case preferred to get in on the action instead of digging too deep.

Protected by its success, wealth, and stockholders representing every level of political clout up to the White House itself, Enron’s only Achilles’ heel was its imitators. Many companies had tried to follow Enron without understanding what it actually did – and their mistakes provoked Federal agencies to speculate more closely on Enron’s slick operations. Like Al Capone, Enron was taken down by tax accountants.

Enron’s Innovations’ were twofold. Firstly, it refined old-style creative accounting to a new art form. Secondly, it used a perfectly ordinary financing technique that would attract no attention, in a novel way and on a scale without precedent. ‘Special Purpose Entities’ (SPEs) enable a company to lessen risk by placing assets in a smaller partnership that can be sold independently. Enron placed only assets that were already losing money in such partnerships; and instead of isolating the SPE from the parent company as the law required, continued to run them with its own managers, and back them with its own stock.

When federal auditors insisted that Enron treat over 4000 SPEs as part of Enron, the resulting $1.1 billion ‘charge against earnings’ caused the whole financial house of cards to collapse. Ten years later, charges of wire fraud, securities fraud, mail fraud, money-laundering and conspiracy are still hitting senior executives – including the same 140 people who took home $680 million in the year before Enron’s bankruptcy, knowing at the time that, apart from everything else, the 21,000 lesser employees’ retirement fund had been wiped out.

When: 2001

Where: Houston, Texas, USA

Toll: Arthur Andersen, one of the world’s ‘big five’ accounting firms, shriveled in size and reputation, the first of over 700 companies required ‘to restate their earnings’ in the light of their creative accounting. The scandals, rip-offs and prosecutions brought legislation, passed by the US Congress in 2002, intended to reform corporate ethics and protect ‘the little guy’. Enron links to Dick Cheney and the Bush administration have allegedly slowed the reform process.

You should know: Ken Lay. CEO and then Chairman of Enron, was George W Bush’s biggest private contributor, giving $2 million. He took home $67 million in 2000. CEO Jeffrey Skilling took $42 million and was so adept at selling that 13 of the 16 analysts who covered Enron were still advising investors to buy, a month before its bankruptcy.