Enron Questions - Professor David Eitle PDF

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Professor David Eitle...

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Know major players and their roles at Enron: o Ken Lay “Kenny Boy” was the founder and Chief Executive Officer (CEO) of Enron and pushed for deregulation of energy markets. o Jeff Skilling was the CEO who hid the financial losses of Enron by using mark to market accounting. Using this method, he transferred the loss to the other companies that he created, resulting in Enron maintaining high stock prices. Additionally, he proposed to find a new way to deliver energy which entailed converting natural energy into financial instruments that could be traded like stocks and bonds. He later switched from mark to market accounting to something called HFV (hypothetic future value), which would further allow them to make more. o Andrew Fastow was Enron’s Chief Financial Officer (CFO) covered up the fact that Enron was becoming a “financial fantasy land”. He issued SPE’s that kept Enron’s failed assets and business ventures, and in turn, would issue common stock to the investors of the SPE’s. He ran partnerships with companies doing business with Enron (was reported in the financial disclosure). o Louis Borget and Tom Mastroeni were traders within Enron. They frequently gambled beyond their limits, destroyed trading reports, and kept two sets of books (one accurate) in order to make it appear as if they were making profit. When was Enron established? o 1985 What was the original industry of Enron? o Natural gas What major initiative was Ken Lay actively lobbying for during the early years of Enron? o Ken Lay was actively lobbying for deregulation of energy. What was the Bahalla Scandal and what did Ken Lay initially do to the traders involved? o Bahalla Scandal is the oil scandal in which two of the traders were pulling in money by trading large amounts of gas or gambling with false names (M. Yass  “My Ass”); Ken Lay did not fire or punish the traders, but instead encouraged them to gamble more in order to to keep making Enron more money. What commodity did Enron begin to market like a stock market (buying and selling)? o Natural gas What is mark to market accounting and what role did it play in the collapse of Enron? o Allowed Enron to book potential future profits on the very day a deal was signed, regardless of how little cash actually came in the door; to the outside world, Enron’s profits could be whatever Enron said they were. Enron would say that they were going to sell energy 10 years in the future for XX amount of money, however there was no way to prove that they could do it What is the pump and dump? Know all of the markets that Enron was involved in or tried to get involved in. o Pump and dump was a tactic in which top executives would push the stock prices up and then cash in their multi-million dollar options. o Enron was involved in (or tried to become involved in):  Bandwidth  Blockbuster (video on demand)

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 Natural gas (power) What is structured finance and what were the major concerns about Andy Fastow’s role in the structured financing scheme at Enron? o Structured financing was a process that Andy Fastow used in order to figure out a way to keep stock prices high while Enron was losing money and was $30 billion in debt. Fastow created hundreds of special companies to create a magic trick: pop-up Enron’s stock to make their financial liablity disappear. Enron was stashing it’s debt in Fastow’s companies, but investors couldn’t see it.

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What state was the target of much of Enron’s price manipulation strategies regarding energy? o California

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Finally, how would you explain to someone who has not taken this class why the Enron collapse is an example of white-collar crime? Keep in mind that the top execs at Enron claimed that what they did was NOT white-collar crime. o The Enron collapse is an example of white-collar crime because those who were involved were in positions of power over others and they blantantly disregarded the fact that the company was losing money, but instead promoted that their profits were as high as ever. They never seemed to lose any money (opposite of primarily all other stocks) and clearly made a false depiction to the public thus encouraging them to purchase Enron stock. Additionally, they commit insider trading by selling large portions of their stock while having knowledge about the financial losses of Enron. White-collar crime occurs when those of high status or responsibility engage in activities that are deceitful to others and for purely financial gain....