Few corporate collapses move as quickly as Enron’s did, and Kenneth Lay sat at the centre of it from the first warning to the last congressional hearing. Analysts note that the firm began as something solid: Houston Natural Gas merged with Omaha-based InterNorth to form the modern Enron, an interstate and intrastate gas pipeline company with 37,000 miles of pipe.
Trading boom
Enron then began trading natural gas as a commodity and soon became the largest gas merchant in North America and the United Kingdom. It launched Enron Online, an internet-based system that let customers see its traders’ prices in real time and transact instantly. Within two years the platform averaged 6,000 transactions a day worth about $2.5bn.
Shares hit a record $84.87, making Enron the seventh most valuable company in the United States.
Warning signs
Lay stepped down as chief executive but stayed on as chairman, handing the job to president Jeffrey Skilling. Skilling resigned after just six months, and Lay went back to running the company day to day. Then Enron employee Sherron Watkins wrote to Lay warning of accounting irregularities that could threaten the firm.
Lay exercised share options worth $519,000, and later some worth just under $1.48m. Andersen, Enron’s accounting firm, began destroying documents relating to its audits, and kept doing so until the company received a subpoena from the Securities and Exchange Commission.
Unravelling
Enron reported losses of $638m for the period between July and September and cut shareholder equity by $1.2 billion. The reduction traced to partnerships set up and run by chief financial officer Andrew Fastow. The SEC opened an inquiry into a possible conflict of interest, and on a conference call Lay tried to reassure investors and defended Fastow.
He also worked the phones in Washington. He rang Treasury Secretary Paul O’Neill about the company’s troubles, twice, and O’Neill said he declined to help because he saw no ripple effects in financial markets. Lay also asked Commerce Secretary Don Evans whether he could influence a Moody’s decision to downgrade Enron’s credit rating. Evans refused, saying it would be inappropriate to sway a private rating agency. An earlier call to Evans, officials said, concerned a troubled Enron energy project in India and not the company’s finances.
The SEC upgraded its inquiry to a formal investigation. Enron restated five years of results and admitted it had actually lost $586m rather than booking the large profits it claimed. Rival Dynegy agreed to buy it for more than $8bn in shares, but pulled out after Enron’s credit rating fell to junk status. The share price dropped nearly 23% in one day, then a further 15% to $4.01, and finally below $1 on record trading volume.
Collapse
Enron filed for Chapter 11 bankruptcy protection and sued Dynegy for wrongful termination of the merger. Employees were barred from selling company shares locked in their retirement plans. The Justice Department began a criminal investigation, the White House confirmed that Lay had lobbied for government support shortly before the collapse, and Andersen acknowledged that its staff had destroyed some Enron documents.
Lay resigned as chairman and chief executive. About 400 current and former staff sued him, Skilling, Andersen and others for the money lost in the employee share scheme. When congressional hearings opened, Lay refused to testify, with his lawyer citing a “prosecutorial climate”.
