Monday, May 12, 2008

Legal Thriller Style Scam Classic: The Enron Implosion

--New Records Set for Audacious Fraud in Enron Case--Still Emerging after 2-year Closure

An extroverted accountant looks at your shoes while talking to you instead of his own. This is the kind of tame "accountant joke" that Enron blew right out of the water with its scandal, the classic corporate con job of all time that pulled down its accounting firm right along with it.

Shots will ring out as shots are wont to do. Didn't Enron's Execs hear them? The infectious sludge of their financial hanky-panky was so thick it was not even cleanable with flea and tick soap. This mess came out in the wash as such a monumental assault on logical thought
that it put all similar legal thriller fictional plots to shame.

Built entirely around deceptive accounting practices, the extent of this paper-Mache empire creation was awesome. It included not only the shrouded concealment of debt, but the outright production of pulled-from-a-hat earnings, and the manufacture, from thin air, of cash flow. Twenty three individuals have been convicted, or pled guilty. Leading the parade were CFO, Andrew Fastow, who got 6 years in a Federal slammer, and CEO, Jeffrey Skilling, who checked in for an extended stay of 24 years, longest stretch of the bunch. (Ample time to pray for forgiveness of his sins.)

When your wild oats turn to shredded wheat, what solace do you have left? Jesus loves me; it's everybody else who thinks I'm an ass? What kind of looney bin thinking ruled the day? It's crazy.

Dummy corporations so dotted Enron's landscape that even now fraud experts, analysts, and investigators are still trying to piece together and trace just how this master Bobby Fischer-style chess game was played out. Bouncing money from one offshore entity to another, adding paper profits along the way at every turn, Fastow and Skilling created a magician's dream: A dynasty which was simply not there.

Now? Poof! Sha-zam! Gone! And, along with it, the life's savings and pension funds of employees, numbering in the 10,000s, and the disappearance of shareholders' equity holdings numbering in the 100,000s.

Is a workable falsehood more useful than a complex set of lies? Or, somewhere along the line, did the two meld? That seemed to be the case.

Principle legacy of this debacle was little more than this bewildering stretch of a (sick) joke--titled, The Enron View of Capitalism--which, as re-constructed, goes something like this:

You have 2 cows. You sell all 3 of them to yourself through letters of credit to your brother-in-law. You then execute a debt / equity swap to get all 4 cows back. Next you claim a tax exempt;tion for 5 cows, and transfer the milk rights of the 6 cows via an intermediary to a Cayman Islands holding company owned by a majority shareholder who sells the rights to all 7 cows back to your listed company. With this sale you add an option to buy an 8th cow, leaving you with 9 cows to appear on your balance sheet. You end all of these transactions when the public buys your bull.

Will we ever see another Enron?

56 comments:

Rosemary said...

Great article. But I really hope we never ever see another Enron again. I always knew of scams and thefts but it is when the Enron collapse happened and I realized why it collapsed that it really sent shivers up my spine that even multi-million dollar, Harvard Graduates can be involved in such horrendous scams. We cannot even be safe now in our jobs or whatever little investments we make blindly believing stats given by the so-called respected members of our society.

Terry said...

I see you have pushed your humour button and have your wit going in high gear Jack...reading this was just like reading your book which I had to bookmark several times for fear I would die of a stroke laughing.

Ione Hesber said...

You have a nice knack for taking an important subject and not only making it informative, but humourous as well. While this post tickled me it also made me understand some, of what went on with Enron...this was something I was not clear on.

Helen D said...

My sister worked for Enron and lost everything she had in her pension fund, plus some extra Enron stock she had. All these years later she is still sick about it.

Benny Greenberg said...

This was great - the problem is - from somewhere out ther ein the world of business - and other Enron is forming - not only that - but you gave them the model :)

I loved it!

Ben

Mel Turner said...

I agree on all counts.

Tricia said...

Again Jack, excellent post. I am a skeptic at heart, but I feel that there are probably already companies operating exactly like Enron. Corporate greed has just become such a huge problem. I just don't know how we can ever really trust what's going on with the powers that be. Anyway, thanks for the information and delivering it with a laugh!

timethief said...

I particularly like the "cow" paragraph but the whole posts was excellent. You have a great writing style and a really clever mind. :)

RainforestRobin said...

Boy, Jack that was some article. I hope there NEVER is another Enron, but that's like saying the sun won't rise. I mean I'd read of scams before but the whole Enron thing REALLY scared me. I mean it was like something you'd only see in a movie and then walk away and say to yourself, "At least it was only a movie." Only in this case we couldn't do that. It sure changes how we look at the world. You are such a great writer. Very intelligent and witty to the extreme. I am always impressed. Thank you Jack.

Lynne said...

a childhood buddy of mine was totally entraped by the Enron scandal. He was working his way up psst middle management, and had every penny he had saved invested in Enron. No diversification at all,and he lost everything.

Jack Payne said...

Rosemary, the bigger they come the harder they fall--that's an old axiom that has some truth in it. In Enron's case that's exactly what happened, fall, they did.

Terry and Ione: I always try to keep my finger on the humour button.

Helen and Lynn: This sounds like a classic example of the dangers of the "all eggs in one basket" syndrome.

A bunch of other companies--big ones--have already followed the Enron model, Benny. Look for more of it. The waters are not fully tested, yet.

Jack Payne said...

Tricia, T.T., Robin: I always try to inject a little humour in everything I write. Why? I dunno. I guess it's because that's the kind of thing I like to read myself. I like to get a lot of worthwhile information and get the bonus of a few laughs along the way.
Keeps the pot boiling, and is a little more stimulating.

Tamera said...

I think there are too many "Enrons" out there, so we haven't seen the last of them. I got to see a few signs of the riches hidden down in Cayman.

Bern said...

Around and around we go, Jack. You have given us a lot of scam and fraud stories that we should all be aware of, and with a twist of humour. But I don't know, this Enron thing signals a giant scam that's almost unimaginable. It is evidently the worst kind. Keep reporting Jack, I will sure keep reading. For some reason I soak this stuff up.

Dee said...

Jack I'm in tears and I wish I could say it was because I'm saddened for the conned employees and duped shareholders but no Jack Payne you just cracked me up more than you have ever done before.

Seriously though high level corporate scams are so rife it's coming so that we'll be heading back to those days where banking our savings right under the mattress will seem the safest bet. That and becoming self employed.

What about the lawyer who looks at his client's shoes?

Larry L said...

What hope is there when everything so tricky and hard to figure out? It all just don't seem right.

Chris said...

I was wondering if anyone know of any other companies like Enron. Honestly so many people including my relatives lost their life savings in Enron and a lot of us have made it a mission to learn about other scamming companies like Enron and warn everyone. Great article btw.

Da Old Man said...

Unfortunately, Enron is just one more in a long line of scams. Robber Barons were given that name because they were, well, robbers who lived like barons.

Your cow description explains perfectly exactly what Goldman Sachs did just before the Great Depression back in the 20's as they turned shares selling for $10 into penny stocks almost overnight.

doug said...

Great post Jack! There are other companies out there like Enron. I used to work for one called VoIP, Inc. and although it was not along the same lines as Enron they still screwed investors out of a lot of money. Eventually they had to close their doors but not after all the execs ran away with millions from their options.

Jack Payne said...

You saw signs in Cayman of these riches, Tamera? Wow!
How did these manifest?

Questions! Questions! Dee--with the shoes thing--do you mean there are a lot of introverted lawyers, too?

Chris, I've been amazed at the number of emails I've received (as well as a few comments here), as a result of this article, from folks who've had friends and relatives involved with these Garantuan Enron losses. Apparently there are more victims out there than even I realized.

Sorry, Old Man, but I never caught up with what you say about Goldman Sachs and the 1929 stock market crash. Details would be really interesting.

The stock option boom of the 1990s proved that a lot of Execs could get away with raiding corporate coffers, Doug. Apparently, as you say, some in the oil business did too. Enron got nailed though, big time.

Terry said...

I thought I'd just check back in to say that I have a relative too who worked for Enron and got wiped out. He's a distant cousin, third or fourth or something like that...but he got cleaned out and is still hurting.

Dee said...

Re lawyers: Maybe the poker face can't stick long enough or maybe they 're looking at some real funny shoes.

Jack have you been over to Bizop News. They have reprinted your post.
http://www.bizop.ca/blog2/ponzi-schemes/scam-classic-the-enron-implosi.html

Harley said...

It's nice to see an update on these big corporate corruption cases that go back five years or more. I've wondered about Enron, as well as Global Crossing, and this big telecom outfit run by Bernie Ebbers who got sent up for 140 years or some horrendously long period of time. Would like to see more of this kind of thing.

Alice M said...

I believe that's right - corporate huffy puffy is long. But, the big question is what to do about it?

Diane said...

Your analogy was beautiful, sad beyond belief, but beautiful. Where are we all headed? And are we all just going to go along for the ride...

Earl T. Clydson said...

It's so sad to see all these people still seeking restitution from all of these defunct corporations after all these years. Is it that hope never dies or something like that?

HEALTH NUT WANNABEE MOM said...

That is just awful. How could anyone have been so awful and selfish. I am just glad they did not get away with it. I always enjoy your posts!

Jack Payne said...

Never thought of the poker face possibility, Dee. But, come to think of it, that makes no sense either. Do Poker-playing card sharks look at their shoes? But, funny shoes do make sense.
On Biz Op, they picked up a few of my pieces last year. But, it's been some time ago. Glad to see they are back.
Thanks for the heads-up.

Heidi, most of these most recent big corporate scams were not gotten away with.
That's right. These were committed in the 1990s, during the dot.com boom, and came out from 2001-2003, after the dot.com collapse.

The Aphasia Decoder.... said...

"When your wild oats turn to shredded wheat, what solace do you have left? Jesus loves me; it's everybody else who thinks I'm an ass? What kind of looney bin thinking ruled the day? It's crazy."

That was the funniest paragraph I've read in weeks....and so true.

Great blog entry. Let's all hope that Enron is a classic and does not become the norm.

McAlee said...

Is a workable falsehood more useful than a complex set of lies -that was the line that got me into some deep thinking.

Jack Payne said...

I don't think the Enron pattern is going to become the norm, Jean. the Feds are on to this pattern now. But, alas, there will be many variations tried--to fool the boys in the pinstripe suits in D.C. Glad you enjoyed my zany attempt to decipher this nuttier-than-a-fruitcake madness.

Jack Payne said...

I believe Enron played both deception cards, McAlee, but the workable falsehood was lessor to the complex set of lies. And, I think it was the complex set of lies--the more likely card--that tripped them up.

Scrieber said...

Hey, Jack, do you really think the Feds learned anything from Enron? For years they turned over all responsibility for stock fraud crackdowns to Elliott Spitzer, state of New York. I might be more the cynic than even you.

Terry said...

I had to come back and chime in with Scrieber...I don't think they Feds know what they are doing either.

Jack Payne said...

Oh, come on, Norm, give the Feds a little credit. They've sent a lot of wayward corp. execs up the river since Enron. Also, how does anyone who can't even spell his own name have any credibility? You left out the h.

Terry, I thought you were a loyalist. You're always here, you bought my book, and you're usually supportive. I feel betrayed that you would side with a guy who can't even spell his own name. Give the striped pants boys in D.C. a little credit. Actually, the S.E.C. has done a pretty good job lately.

Warren M said...

My favorite line this week is, Jesus loves me; it's everybody else who thinks I'm an ass.

Manheim & Randler said...

The F.B.I. now has 46,000 cases pending along with cases against 19major corporations in various sub-prime mortgage scandals. What I can't understand is, how do these companines, like Enron, get away with these crimes for so long before the law catches up with them?

StansStand said...

I like the opening line, the extroverted accountant - that's my CPA, he's always got to know the color shoe laces I'm wearing.

Jack Payne said...

Yeah, M & R, I'm aware of those 46,000 backlogged cases the FBI has pending in the sub-prime mortgage mess. They are tremendously backlogged because of the front-and-center necessity of terrorism combat. All that can be said is this slows everything down, no doubt the same reason Enron was so slow in coming to justice.

Jack Payne said...

Sorry, Warren and Stan, but I'm not going to get into any favorite line contests. These things just come off the top of my head, and often it's a case of: What did I say?; I wasn't listening.

Jane @ Kidzarama said...

The only good thing that came out of this is that the public has seen that *anyone* can be a carpet~bagging con~artist.

That and the fact that they went to jail.

Here in Australia, it seems almost impossible that convicted business fraudsters will ever be forced to pay for their crimes. Just look at good ol' Alan Bond.

Agrande said...

Deceptive accounting practices. This reason is old as the hills...it has been used from the beginning of time as a way to every kind of fraud.

Jack Payne said...

Am not really up to snuff on what's going on with Australian coporate scams, Jane. Thanks for bringing this to my attention.

No doubt about it, Agrande. deceptive accounting practices make up the screen behind which much corporate crime has been committed. But, Enron spit polished this concept and brought it to a brilliant shine. Some the variations they came up with, for use of their myriad offshore, dummy companies were brilliant adjuncts. Just one was use of the Debt / Equity Swap. Many others.

Mary L said...

I must join those who most appreciate the opening line. My accountant is very shy. He still looks at his own shoes.

Morrison said...

This is a most interesting post. Can you give us a little preview of what's coming next?

Jack Payne said...

Coming up soon: a scam that could dwarf Enron in size. So big that the F.B.I. is really worried about it. I'm researching it now, and hope to have an article posted on it in the next few weeks.

Erik Johnels said...

Fantastic Writing, I was in stitches about the "Cow example"

Fortunately, Enron has made it more difficult to do things like this.

Unfortunately, there will always be con-men out there in every level of the corporate world eager to find the next great scam.

Terry said...

This is a great piece...one of your best. What do you have coming up next, Jack?

Terry said...

What's coming up next?

Jack Payne said...

Terry, you're repeating yourself. Oh, well, Morrison wants to know too. So...here's a peek at some of the stuff I'm working on now, which will be up in the next few weeks.

Jury selection scam...Grand jury selection scam...Foundations used for con jobs...House theft (a particularly bad con that has the FBI stirred up)...Medical Labs on Wheels...Medical equipment scams. To name a few.

Dee said...

Can't wait Jack.

I know more about jury selection than medical lab on wheels but I am sure it is good.

Swubird said...

Jack:

Great article on this historic business story.

Enron must have restored hope and enthusiasm for the thousands of big time con artists out there who might have thought that there were no more super scams left - with computers and high-tech communications, security was just too tight. Enron execs proved that you could still full some of the people some of the time - but not always. Ultimately, the company was brought down, of course, but high-tech wasn't the reason. It was by dedicated, hard working forensic accountants. The guy in charge of the books will get you every time.

Love your articles.

Have a great day.

Dr. Rob said...

Wow. . . what a way with words. You seem to effortlessly paint a picture with sattire, wit, and drama. Enjoyed the read very much. Very cool!

Benny T said...

Enron was such a nightmare but what is even worse is that everyone agrees Enron wont be the last company to scam innocent people. There are many many more companies like that out there and quite frankly it disgusts me to know that somewhere out there a company is right now working on some kind of a major scam and there will be thousands of innocent victims again pretty soon.

plazma kesme makinası said...

thanks for the article

The Logisitician said...

I have now read three of your articles, and is the case upon reading each one, I absolutely can not stop laughing. It is amazing what folks do in the name of business. Unfortunately, it makes you laugh so hard that you have to cry.