Enron - The Biggest Fraud in History

hi welcome to another ColdFusion video it's a distant fact now but Enron was once the seventh largest corporation in America they revolutionized trading and the energy market there were far smarter than their competitors and their business was intricate and too complex for the average person to understand except in reality it was all a big scam filled with lies fraud and political manipulation Enron was the biggest scam in US history the fallout from the scam was monumental billions of dollars stolen thousands of lost jobs dozens of convictions one suicide and the unveiling of a very public display of corporate greed that shined directly into the heart of corporate America this is the story of how one company took ten years to grow to sixty billion dollars in value and then in less than a month go bankrupt this is the story of Enron you are watching ColdFusion TV [Music] Enron began as an energy supply company mainly dealing with natural gas eventually the company moved on to trading making energy deals in power and then later moving on to broadband and even trading the whether there were Wall Street's darling the company that could never lose and a stock price kept growing year-on-year the company was also well-connected politically for example Enron was the single biggest contributor to the George W Bush campaign Bush even called Kenneth Lay the founder of Enron Kenny boy and it's with Kenny boy that the story starts growing up in a poor family Kenneth Leia's father was a Baptist priest the young Ken would often ponder about his future a future where he could escape his current conditions when he grew up he became a prominent figure in the deregulation of the energy sector the PhD graduate spent his time as a financial analyst in the Pentagon before climbing the ranks and becoming close friends with George Bush Senior Ken Lay would even send the Enron corporate jet to take George senior and his wife to their sons inauguration as you will see later these favors did not go unruhe [Music] the first red flag the founder of the company Kenneth lay the something was wrong within the company came during the valhalla scandal of 1987 to oil traders working for Enron gambled enormous Lee on the company's behalf shifting money to fake accounts with names such as my ass or my ass worried auditors told lai that they found the two traitors moving money into their own accounts manipulating earnings and gambling on trades beyond their capacity but instead of firing the two road traders lai made no changes didn't seem to matter what they were doing as long as they were making the company money and run even sent them a letter saying please keep making us Millions later the two were convicted of fraud Ken Lay acted shocked saying that he was not aware of their reckless gambling and theft but as revealed later he actually encouraged it one of the convicted traders was sent to jail for a year and this gave Ken Lay a big problem one of his main moneymakers was behind bars and he needed someone new to bring in cash enter Jeffrey Skilling [Music] skilling Enron's new CEO was leis biggest asset when he arrived at Enron he started moving the company in a new direction skilling wanted to turn Enron from a gas supply company into a stock market for natural gas he also introduced the company to mark to market accounting an idea that would allow the company to fraudulently reap billions so mark-to-market accounting simply allows the company to write down profits in their books on the day that the deal was signed this meant that if Enron signed a deal worth 50 million dollars over the next 10 years they could write 50 million dollars in their books that day despite not receiving a penny it didn't even matter if the deal fell through effectively this myth of the company was worth more on paper than it had actually earned the deals were often subjective they could be worth whatever Enron thought they were worth when the Security and Exchange Commission approved the accounting trick of mark-to-market for Enron the office celebrated they knew that this was the key to making billions meanwhile skilling was known for his Darwinian philosophy survival of the fittest his favourite book The Selfish Gene describes how greed and competition motivate human nature at Enron skilling wanted to unlock these instincts in his employees one way he did this was grading all employees on a scale of one to five with one being the best and five being the worst the thing was 10% of all employees had to be greater to fire and when you were graded a five you were fired this created the competition that skilling was looking for people began to work 18 hours a day and were ruthless in their efforts to earn the company as much money as possible skilling famously said that money was the only thing that motivated unsurprisingly skilling was a massive risk taker he often went on wild adventures with other Enron executives this includes dirt biking on dangerous trails where people often flip their cars an executive even required stitches after a biking accident on one of these trips skilling said he liked guys like this guys with a bit of edge Lao PI a mild-mannered executive was one of these guys with a bit of edge skilling called Lao PI is ICBM intercontinental ballistic missile he will CEO of an Enron subsidiary and seem to be motivated by two things money and strippers PI isn't as mysterious thing as one can be in such a huge scandal he left and on in 2001 with 215 million dollars became the second largest landowner in Colorado he left his business division with 1 billion dollars of losses and escaped the whole scandal pretty much intact pi would come back later into this story a few decades after the dust settles Enron online will change the markets for many many commodities it is creating an open transparent marketplace that replaces the dark blind system that existed it is real simple to turn on your computer and it's right there and if you want to do business you push the button that's our vision and we're trying to change the world [Music] and it wasn't just Internet companies feeling the fever and run stock had tripled in the space of two years everyone with a little bit of spare cash was playing the stock market game and run knew that as long as the company met or exceeded endless expectations the stock price will keep rising and somehow they always met or exceeded those expectations during this time while Jeff Skilling stood at the company's conventions telling his staff to put more of their 401k in to Enron he knew that the profits were actually going in the opposite direction around the world they were losing billions on natural gas projects Enron had poured billions of dollars into appliance in India you need to realize that India couldn't afford to buy the electricity the site lay in ruins but that didn't stop the executives at Enron writing down future profits for the project into their books and handing themselves massive bonuses the analyst the very people who were supposed to stop the corruption fell under the spell of skilling the complexity of the company and the charisma of skilling made analysts simply take him at his word in fact the ones that didn't were fired the company soon began trading bandwidth after some calm inspiration they made a deal with blockbuster to provide streaming services but the technology just simply didn't work well enough yet the deal fell through but Enron still rode fifty three million dollars in their books for things began to get out of control and Enron soon began trading weather yes the weather like sunshine and rain they would soon sell futures on the weather essentially gambling what the temperature would be you would probably imagine that most people would be skeptical of this but it was activities like this that led and run to being listed on the fortune 500s most innovative companies list but one reporter at fortune would soon start asking questions and this would later lead to the company's demise Bethany McLean a reporter at fortune was doing a piece on Enron she had a phone call with John skilling where she asked some simple questions like how exactly does Enron make its money skilling said he couldn't answer because he wasn't an accountant so he sent a few finance guys including Andy fust our the CFO to answer her questions the next day they sat in the office for three hours poring over documents at the end as others had left the room and he turned to the reporter and said I don't care what you write about the company just don't make us look bad Andy Foster was a character described as having no moral compass he made Enron deaths disappear by moving them to show companies so that on paper and run was profitable he even set up his own fraudulent firm just to buy an Iran assets this fraudulent firm was called ljm Andy would later convince ninety-six bankers to invest in the scam ljm firm ljm would make Andy Faust our forty five million dollars but it seemed to that the banks were in on the deal too Merrill Lynch bought three Nigerian barges from Enron and sold them back five months later this was to help anyone cook their books and later several bankers would go to jail for this both skilling him lay knew that even this couldn't last forever they needed a new gold mine and then they turned their eyes to the Golden State California now skilling became increasingly volatile arriving at work unshaved and retired on a 2001 investors call he even called an investor in a hole a brash reaction from a fortune 500 CEO the pressure was getting to him the company had to keep making quarterly targets despite their businesses failing at home and abroad California was going to be their next big score Enron merged with Pacific Gas & Electric which gave them access to the Californian grid once this was achieved strange things began to happen in the newly deregulated electricity market of California rolling blackouts became common but strangely the state had almost doubled the capacity than there was demand so why was this happening it turns out Enron traders were manipulating the market they moved electricity out of state to increase demand and when the price got high enough they would move it back in they even called power plants and asked them to make excuses to shut down for a few hours increasing the price as those less demand traders had energy maps and the control to move the energy they knew exactly how to squeeze every last dollar from the people of California while the state faced blackouts causing unknown holes on the lives of Californians the Enron traders were high-fiving themselves over their bonuses Ken Lay even said it doesn't matter how many rules you Californians make I've got a bunch of smart people here that will figure out how to make money anyway the year-long ordeal would cost California 30 billion dollars but why didn't the state put a stop to it well the law states that it's the federal government issue and it's their responsibility to take care of it and guess who the president was at the time that's right leis good friend George W Bush Bush refused to step in saying that it was his administration's belief that intervention would not solve anything the Federal Energy Regulation Commission also didn't step in until the Senate forced them to the chairman of the Commission was personally recommended by Kenneth Lay this whole ordeal caused the people of California to turn on their governor and appoint a new one one that was more suitable for the role the Terminator one day in 2001 out of the blue skilling suddenly resigned perhaps he figured he could leave the company years before it imploded then he could say well it was fine when I left it regardless Kenneth Lay took over the CEO role just one day later Sharon Watkins who worked under the company CFO Andrew foster sent a letter to Kenneth Lay detailing the staggering amount of corruption and fraud that she'd found within the company The Wall Street Journal would write a piece about some of Andy's dealings and soon the SEC would launch an informal inquiry at this point investors began to feel nervous Kenneth Lay tried to bring calm and reassurance to investors and employees while he was addressing the company's issue to a speech to employees to several blocks away and runs accounting firm was busy shredding documents one of the accounting firms shred one ton of paper on October the 23rd but it was too late the walls began to fall and over the course of a month the company went from that healthy appearance of one of the leading innovators to total bankruptcy you want us to believe that you sat there in your office and didn't and had no clue that this place was about to collapse on the day I left on August 14 2001 I believe the company was in strong financial condition I did not do anything right that was not in the interest and all the time I worked for an run corporation that was in the interest of the shareholders of the company if I could go back and redo things I would not know for the thousands of people who held Enron stock the market was frozen at the $32 mark and when it reopened it was nine dollars a share meanwhile andron executives had a fire sale of all of their stock in the months leading up to the bankruptcy skilling told his employees to blame or stock while he sold all of his as the media began circling the story criminal investigations were launched cliff Baxter a trader who often went on Skilling's wild adventures cashed in 30 million dollars from Enron after being called to testify in court Baxter Cod in his Mercedes drove down a quiet street and shot himself Andy Foster the former CFO pleaded guilty to conspiracy to commit wire fraud he ratted out and cut himself a deal to testify against other Enron executives he was sentenced to 10 years but only served six and paid 23 million in fines and runs accounting firm Arthur Andersen the one that shredded one ton of paper was convicted of obstructing justice America's oldest accounting firm collapsed due to the loss of reputation 29,000 people lost their jobs Ken Lay earned 300 million from Enron he was found guilty of 10 counts of securities fraud and was facing 45 years in prison but died of a heart attack a month before his sentencing 20,000 people at Enron lost their jobs and medical insurance with an average severance pay of only $4,500 executives were paid 55 million dollars during the bankruptcy and cashed a further 774 million in the year before the collapse skilling the mastermind behind Enron was convicted of 19 counts of security and wire fraud he was sentenced to 24 years and 180 million in fines while in jail his parents and his son passed away I only served 12 years of his 24 year sentence and was released in early 2019 but this isn't where the story ends [Music] skilling is hoping that he can get a second chance he appears to be applying a return to the energy sector only two months after his prison release in early 2019 skilling was entered as a manager of a new company which he founded a few years ago Lau PI / former Enron executive who sailed off into the sunset with us 250,000,000 is reported to be helping skilling regain connections and funding according to The Wall Street Journal skilling has been holding meetings from former Enron executives in relation to starting a new venture this may be difficult for him as obviously his reputation has been massively smeared but apart from people's perception there's technically nothing stopping him the SEC has banned skilling from being an officer if any public company so as long as this venture stays private he can do whatever he wants so that is the story of Enron with a not so typical ending despite being one of the biggest players in the biggest scam in the US history resulting in billions of dollars in losses for average people tens of thousands of lost jobs and executives reaping and billions skilling is out of jail and free to start again Enron's motto was asked why during his astronomical rise it seemed that no one bothered to ask why how or where the money was coming from and now with skilling out of jail and trying to re-enter the business world maybe once again we should ask why [Music] so that wraps up our look at Enron thanks for watching this video I hope you enjoyed it if you want to see stuff like this or much more you should definitely consider subscribing to this channel if you want to see my last video on business fraud which was the fairness story I'll leave a link for that after this interestingly enough Elizabeth Holmes as dad was a former executive at Enron I'll say no more anyway that's it thanks for watching this has been - gogo and you've been watching cold fusion and I'll see you again soon for the next video cheers guys have a good one [Music] cold fusion it's me thinking [Music] you

Channel: ColdFusion

Views: 3,751,632

Rating: 4.9093184 out of 5

Keywords: Coldfusion, TV, Dagogo, Altraide, Technology, Apple, Google, Samsung, Facebook, Tesla, Enron, Jeffery, Skilling

Id: e5qC1YGRMKI

Length: 19min 4sec (1144 seconds)

Published: Fri Aug 30 2019

Reddit Comments

[u/elfmeh]

Something about the video editing is making this difficult to watch for me...

Anyways, I highly recommend the documentary "Enron: The Smartest Guys in the Room" for anyone who's interested in this.

[u/afty]

My best friend's dad used to work for Enron. A year or two before they collapsed, Enron rented out Astroworld for it's employees for an entire day and I got invited along. It was one of the coolest days of my young life. There were practically no lines of any kind in the park and we just rode the rides we liked over and over and over. He lost his job when it all went down. I also remember going on a field trip to "Enron Field" the first year it opened and what a huge deal that was.

I couldn't have told you what their company did at the time, but even at that very young age I felt their power and excess.

[u/zethien]

1. the best kept secret here is that there's not a whole lot of difference between what Eron did and what any other capital management company on wallstreet. Its just they got caught. The line between fraudulent and non fraudulent is really blurry.
2. the selfish gene is about genes that seek to preserve themselves, not about a gene that makes people selfish.

[u/holodayinexpress]

Just watch the movie

[u/matt_the_non-binary]

I really like learning about cases like Enron. One of my personal favorites though is the story of Phar-Mor.

For the uninitiated, Phar-Mor was an discount drug store chain here in the USA, based out of Youngstown, OH. They grew ridiculously fast within less than a decade, to the point where Sam Walton (founder of Walmart) stated that they were the only retailer he feared, simply because he couldn't understand how rapidly Phar-Mor grew in such a short time. How they did this was through selling large quantities of merchandise with a small profit margin.

In 1992, when the chain was at its peak with over 300 stores and 25,000 employees, the founder/CEO Michael Monus, and his CFO, Patrick Finn were accused of embezzlement. Allegedly, the two hid losses and moved more than $10 million into a basketball league founded by Monus. Phar-Mor borrowed millions, based on deceptive data and inventory, to "finance their growth". However, the money was actually being used to pay off suppliers. This resulted in Phar-Mor filing bankruptcy, and having to cancel construction on several stores while also closing 55, resulting in nearly 5,000 layoffs.

The auditors wound up getting involved too, as they were sued by investors. A jury decision stated that the accountants violated federal securities laws and common law, by falsely representing that they had done audits when they actually hadn't.

Finn testified against Monus, receiving 33 months in prison. Monus' first trial wound up ending in a hung jury, but a second trial produced a conviction. Monus was convicted on 107 federal counts mostly related to fraud, earning 17 years and 7 months in a federal prison. This would be reduced to only 9 years after being appealed.

Phar-Mor emerged from bankruptcy in January 1995, but due to chains like Walmart and Target opening up pharmacies in their own stores, they wound up going into bankruptcy again in September of 2001. During the final years, Phar-Mor wound up competing with Walgreens and CVS, both of whom had better locations than Phar-Mor had. This would be the end for Phar-Mor, as in 2002, a judge approved the sale of the chain's $141 million in assets and inventory. By this time, only 73 stores remained, all of which would began liquidation that same year.

[u/turbodude69]

i'll upvote any cold fusion video. that dude kills it.

[u/Sheikhyarbouti]

Big but not the biggest fraud

[u/peacefinder]

Give it time!

[u/lord_kennedy]

Lucy Prebble wrote a great play about this - It's on Audible and worth a listen.