How Enron's Collapse Actually Helps Investors, 14 Years Later

In the 14 years since Enron's collapse, the company's name has become shorthand for corporate fraud.

When the Houston, Texas-based energy trader sought bankruptcy protection on Dec. 2, 2001, its assets of $65.5 billion made it the largest company in U.S. history to do so, according to Fortune magazine.

It was eclipsed less than a year later by WorldCom ($103.9 billion) and dwarfed during the financial crisis by the bankruptcies of Washington Mutual ($327.9 billion) and Lehman Brothers ($691 billion), according to Fortune's ranking.

Still, the fallout from Enron's demise was outsized and long-lasting, giving it an afterlife in U.S. courtrooms from Texas to Washington, D.C., in literature and even on the Broadway and London stages.

For investors, the impact was particularly dramatic: Enron stock slid from a 2000 high of $90.75 to 12 cents a share when the company filed for bankruptcy. The savings of many employees were wiped out, while high-ranking executives were imprisoned after regulatory probes found that the company had hidden debt and write-offs, creating the appearance of stable growth and a healthy cash flow that vastly inflated its stock price.

Litigation in the case stretched out for more than a dozen years and included one-time CEO Jeff Skilling's appeal of his criminal conviction to the U.S. Supreme Court.

But there were some benefits for investors, too.

Enron's collapse, combined with the subsequent bankruptcy of WorldCom, prompted Congress to pass significant new protections through the Sarbanes-Oxley Act, which then-President George W. Bush hailed as "the most far-reaching reform of American business practices since the time of Franklin Delano Roosevelt."

Roosevelt, the 32nd president, signed into law the Securities Act of 1933 following the stock market crash of 1929 that helped tip the country into the Great Depression. One of the industry's regulatory foundations, the law required the registration of most securities with the government so that investors would have access to relevant financial information, and it outlawed deceit and fraud in securities sales.

Sarbanes-Oxley's provisions, nearly 70 years later, quadrupled the maximum prison term for common types of fraud to 20 years. It also made standards for disclosures such as financial statements more rigorous and required corporate CEOs and finance chiefs to personally vouch for the truthfulness of them.

New funding for investigators at the Securities and Exchange Commission was authorized, too, as was the creation of a board to regulate accounting companies -- a move that reflected the failure of accounting firm Arthur Andersen to bring Enron's fraud to light. Andersen was convicted of destroying documents related to Enron in 2001, when investigations were looming, but the U.S. Supreme Court overturned the verdict in May 2005.

Additionally, Sarbanes-Oxley barred auditing firms from offering consulting services that created conflicts of interest with the businesses they audited.

"This law says to every dishonest corporate leader: You will be exposed and punished; the era of low standards and false profits is over; no boardroom in America is above or beyond the law," Bush promised when he signed the bill in July 2002.

While the law failed to live up to that vision, as illustrated in the financial crisis and its aftermath, including the exposure of putative investment guru Bernie Madoff's Ponzi scheme, it did have significant effects.

Enron's collapse was driven by governance weaknesses, auditing inefficiencies and accounting problems, and significant strides were made afterward in correcting the first two of those problems, said Baruch Lev. An accounting and finance professor at New York University's Stern School of Business, Lev testified before Congress after Enron's fall and has written five books including Winning Investors Over, published in 2012.

"Corporate boards are now more independent than they used to be, and they have committees that are completely composed of independent board members, like the audit committee," he noted.

With accounting and financial reporting, though, more rigid standards on what companies had to disclose simply increased the volume of information, which in many cases has obscured the performance of a business rather than making it more transparent.

Insurance company Allstate, for example, filed an annual report of 294 pages for 2014 and international bank HSBC holds what's probably the record with a report of 488 pages, he said. That abundance of data can overwhelm ordinary shareholders who don't have a finance background.

Such reports are "so incredibly complex, incredibly noisy, that it bewilders investors and makes it extremely difficult for them to fully understand what managers are doing," Lev said. "This web of complexity allows companies' managers much more freedom than if the report were simple and transparent."

One of the more noteworthy aspects of Enron's collapse -- particularly given the dearth of prosecutions after the 2008 financial crisis -- may have been the criminal investigations of top executives, including chairman Kenneth Lay, whose mergers, in effect, created the company; Skilling, Lay's longtime second-in-command; and Chief Financial Officer Andrew Fastow.

Lay, the son of a Baptist minister in Missouri, died in 2006 just six weeks after his conviction in federal court on charges including conspiracy, fraud and lying to banks in connection with Enron's collapse, according to his obituary in the New York Times.

Lay's fall had been precipitous: In the 1980s, his connections included a friendship with then-Vice President George H.W. Bush and he was considered by Bush's son, President George W. Bush, for the post of Treasury Secretary, the Times reported.

Skilling, his deputy, was initially sentenced in 2006 to serve more than 24 years in prison for securities fraud, insider trading and making false statements to auditors.

After numerous appeals, he reached an agreement with federal prosecutors in May 2013 to serve a lesser sentence in exchange for waiving future appeals and not contesting a restitution order. That June, he was resentenced to 14 years in prison and ordered to forfeit about $42 million, which would be returned to Enron fraud victims, the Justice Department said.

Skilling remains incarcerated at a minimum-security prison camp in Montgomery, Ala., according to the Federal Bureau of Prisons, and will be eligible for release in February 2019.

Last month, after more than 10 years, the Securities and Exchange Commission finally resolved a separate claim against Skilling, when U.S. District Judge Melinda Harmon granted the agency's motion to end the case and bar Skilling from serving as an officer or director in any publicly traded company.

Fastow, the finance chief who helped obscure the reality of Enron's failing business to investors, pleaded guilty to two counts of conspiracy to commit securities and wire fraud in 2004 and agreed to cooperate with federal investigators.

He was released from prison almost four years ago, in December 2011, according to the Federal Bureau of Prisons, and has since given speeches to university students around the country about Enron's collapse, his role in it and how to prevent such crimes in the future.

The things Fastow did at Enron "are being done today, and in many cases are being done in a manner that make me blush," he told the Association of Certified Fraud Examiners at a 2013 conference, according to the group's Fraud magazine.

"I thought I was being smart by doing these deals," he added. "But the filter I used was: Am I following the rules? Am I getting permission? The filter I never used was: Is this the purpose of the rule? Is this the point of the rule? Is this the right thing to do? And that's where I made my mistake. And it was a very big mistake."


Read more of TheStreet's Enron coverage here:

Enron's own dot-com bubble finally pops
Dynegy pulls the plug on Enron
Enron files for Chapter 11 bankruptcy protection
Enron 10 years after - from bad to worse
Enron bankruptcy examiner lays much blame with banks
Citigroup settles Enron bankruptcy disputes
How your retirement plan is changing because of Enron


If you liked this article you might like

Reshaping the Fed: What You Need to Know About Trump's Latest Pick

Reshaping the Fed: What You Need to Know About Trump's Latest Pick

Senate's Dodd-Frank Revision Moves in the Right Direction, Yellen Says

Senate's Dodd-Frank Revision Moves in the Right Direction, Yellen Says

Trump's Fed Pick Deflects Tax-Cut Queries but Worries About U.S. Debt

Trump's Fed Pick Deflects Tax-Cut Queries but Worries About U.S. Debt

Live Blog: Trump's Fed Chair Pick Grilled by Senate Committee

Live Blog: Trump's Fed Chair Pick Grilled by Senate Committee

Trump's Consumer Bureau Turmoil Won't Confuse Wall Street for Long

Trump's Consumer Bureau Turmoil Won't Confuse Wall Street for Long