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| (Image Credit: Austin Kleon/Flickr) |
For
over 20 years, the documentary Enron: The Smartest Guys in the Room
(2005) has been treasured as the media’s boldest attempt to piece
together Enron’s tricky playbook for fraud and corruption. Despite the
accounting firm, Arthur Andersen, illegally shredding tons of documents,
the documentary courageously forged ahead with the clues available to
piece together corporate crime of epic proportions. Enron: The Smartest
Guys in the Room (2005) reviews the corporate corruption playbook to
enhance the public’s ability to recognize financial abuse and, in turn,
open up a safer economic future for us all.
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| Dick Cheney held tremendous authority as an expert on the economy domestically and internationally. Dick Cheney delivers his speech at the Annual Meeting 2004 of the World Economic Forum in Davos, Switzerland, January 24, 2004. (Image Credit: World Economic Forum/Flickr) |
ENABLING POLITICIANS
Fraudsters finagle ways to place themselves higher on the totem
pole than their “lowly and distressed” victims. The victims of financial
fraud are often voiceless, isolated, and unorganized. Once the
fraudsters complete a campaign to slander and incite hatred against
their victims, ample opportunity opens for the highly organized
financial predators to exploit their disempowered victims. Financial
predators will craft and champion economic philosophies rationalizing
financial abuse to political elites before financial abuse is set to commence. The goal is
to preemptively undermine each victim’s attempt to reach out for help.
The unethical relationship Kenneth Lay, founder and former CEO for Enron Corp., nurtured between Big
Government and Big Energy seemed provincial, uneventful, innocent, and
almost boring. Lay managed to portray his connection to the Bush family
as a genuine friendship based on shared political priorities. He
expunged almost all mentions of money in regards to this convenient
friendship. It was just a coincidence that Lay chose to establish a
relationship with a political family located in Texas, the location of
Enron’s headquarters, and that this family shared the same financial
interest in energy.
According to the documentary, Enron was the largest corporate
donor to former President George W. Bush’s political campaigns. Once
former President Bush was elected as the Governor of Texas, he
aggressively campaigned for Lay’s economic agenda in gratitude for his
generous campaign donations. Bush’s actions implicitly informed key
economic players that Lay was a top priority. As the corrupt bromance
continued to blossom, the Bush family secured billions in subsidies for
Enron Corporation. Bush also supported Lay as an “ambassador for
deregulation.” The bromance, wielded together by money and greed, was in
full bloom, complete with former President George W. Bush affectionately expressing his feelings
of loss upon being notified of executive Rich Kinder’s departure from
Enron. In the video valentine, former President George W. Bush acted like a forlorn suitor, beckoning
Kinder to stay close. Kevin Phillips, author of American Dynasty and
former Republican strategist, speaks on the bromance between Lay and
Bush. “This absolutely has no precedent. This is by far and away the
most important major relationship of a presidential family with a single
corporation in American history.” In another video valentine, former
President George H. W. Bush expressed his heartfelt sentiments to the
Enron executive. “Rich, you have been fantastic to the Bush family. I
don’t think anybody did more than you did to support George. And of
course, at this stage in my life and Barbara’s too, that’s what really
matters: your family and your friends.”
Over time, Lay secured a solid bromance with former President
George W. Bush. He convinced the media that the bromance was a wholesome connection originating from their discipleship in the doctrine of deregulation and unmotivated by money. Lay’s nonstop advocacy for deregulation
drowned out the voices of his victims. As the energy crisis that Enron
Corporation instigated scorched California’s economy, public officials
reached out to former President George W. Bush to beseech him for help. It was too late.
Kenneth Lay already installed himself as the top priority years ago. The
Californians embattled by Enron’s fraud were characterized as weak
liberals who were enemies of business and unwilling to sacrifice for
economic development. Kenneth Lay essentially marched into the White
House and asked Vice President Dick Cheney not to impose federal price
caps in California. His request was granted without much fanfare. Cheney
enabled Enron’s corruption by accepting Enron’s narrative that the
spiraling prices reflected the free market. He adamantly refused to
consider the possibility of unbridled fraud. Cheney proceeded to openly
chide California, “We’re doing everything we can to help California on a
short-term basis. There’s not a lot you can do. You can’t manufacture
kilowatts in the West Wing in the White House.”
Former President Bush released a pointed statement against
California’s appeals for federal price controls and defended Enron’s
position. It’s almost as if Lay wrote the retort for him. “They know
full well my administration’s belief that price controls will not solve
the problem.” In another media conference, former President George W.
Bush explains his decision using Enron’s economic standpoint as a reference: “As I
said from the very beginning of my administration, we’ll work to help
California in any way we can. And the best way we can is to be good
citizens.” The documentary demonstrates Enron Corporation’s powerful
grip on the federal government. FERC, the Federal Energy Regulatory
Commission, which regulates energy in America, refused to intervene on
California’s behalf to implement federal price controls or even
investigate the prices. Why? Former President Bush installed Pat Wood III as FERC’s chairman at the
recommendation of his rich buddy Kenneth Lay.
MAGIC MATH
Corporate fraudsters tend to introduce “inventive and
innovative” accounting techniques that trick the system with their
complexity and opaqueness. In the documentary, former President Ronald
Reagan spoke highly of the magic of the marketplace and its ability to
facilitate the achievement of the “most spectacular broad-based economic
progress in the shortest period of time.” I’m not totally convinced
Reagan was referring to the magic math that Enron Corporation conjured
and dispensed at their will. I could be wrong. Skilling refused to
onboard at Enron Corporation as CEO without their approval of a new accounting
technique, namely, mark-to-market. Enron and the U.S. Securities and Exchange Commission (SEC) conceded to his
suspicious demand. Enron executives were riveted that Skilling was
onboard with his magic math, or as he characterized in his spoof skit, “Hypothetical Future Value” accounting. Amanda Martin-Brock, a former executive for Enron Corp., recalls the celebrations: “I remember walking in and going, ‘What’s going on?’... I mean, everyone was so excited and in came the
champagne, and we had got mark-to-market accounting treatment. And I
often think about how clear my memory was about that event, and that was
the beginning of a major cog in the downfall, ultimately, of Enron.”
Magic math enabled Enron Corporation to spend invisible money
by “booking stated profits from a deal signed that day” without the
money actually existing in Enron’s coffers. Mike Muckleroy, a former executive for Enron Corp., explains the magic of mark-to-market accounting: “And they
were saying that we’re going to sell power out of this power plant in
ten years for X dollars per kilowatt, and there was no way anybody could
prove that they could do it.”
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| Enron successfully shifted and shielded the public’s focus away from the shell companies through powerful branding, symbolism, and imagery. Enron portrayed themselves as energetic trailblazers on the cusp of innovation. (Image Credit: Hanne Therkildsen/Flickr) |
SHELL COMPANIES
Shell companies are timeless tools for corporate
fraudsters. The spotlight is fixated on visible corporations. So,
corrupt corporations prefer to hide illicit financial activity in the
murky territory of shell companies. Since shell companies exist in the
shadows, financial victims are unable to assemble enough information to
detect any issues. It’s also harder for regulatory bodies to hold these
shadowy entities accountable. Many victims may not even be aware that
these shell companies orbit the corporation as the sacrificial entities
spearheading the bulk of the financial fraud. Keeping in line with
Enron’s mission to be inventive, Andy Fastow, a former chief financial officer for Enron Corp., invented hundreds of fake shell companies. He used
them to cover up, according to the documentary, Enron’s dwindling
profits and $30 billion in debt. Enron: The Smartest Guys in the Room (2005) maps out how Fastow
used this confusing network of shell companies with bizarre names such
as Jedi, Chewco, and Raptors to pretend to be legitimate companies
joining in deals with Enron and to stash the billions in debt.
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| Enron’s Code of Ethics was just one of many convincing props used to bolster Enron’s image as a legitimate corporation and hide their toxic behavior. (Image Credit: Lianza/Flickr) |
TOXIC CULTURE
Enron Trader to another Enron Trader: “Gettin’ Rich?”
Response: “Tryin’ to.”
Fraudsters enjoy manipulating complex concepts found in biology,
philosophy, or other difficult disciplines to mint a toxic corporate
culture that intellectualizes financial abuse, fraud, and unethical
behavior. These are often principles with a high degree of name-brand
recognition but lack the coinciding level of understanding by the
general public. Skilling’s
misapplication of Darwin’s belief in survival of the fittest animated Enron’s corporate culture. According
to Enron: The Smartest Guys in the Room (2005), the foundation of Enron’s culture was built on his
beliefs that greed and competition are encoded in human DNA to ensure
the passing of our genes. Skilling managed to spin the toxicity into
positivity in an interview. “Our culture is a tough culture. It is a
very aggressive culture,” Skilling boasted.
The Enron traders
were observably the demographic most acculturated by the ideals of
toughness and aggressiveness. Enron’s traders justified abusing
California’s energy system by misapplying Darwinism to justify financial
fraud. As California’s economy and energy industry began to falter from
the fraud, an Enron trader rationalized, “It weeds out the weak people in the
market. Get rid of ‘em, and you know what? The people who are strong
will stick around.” The documentary points to another recording of Enron traders bragging about the theft and exploitation of politically disempowered Californians. “All that money you guys stole from those poor
grandmothers in California.” The abusive chatter among the Enron traders
continues as they convulse into laughter. “Yeah, Grandma Millie, man.” “She’s the one who couldn’t figure out how to fucking vote on the
butterfly ballot.” “Now she wants her fucking money back for all the
power you’ve charged up her ass.”
EXECUTIVE PARACHUTES
“In the Titanic, the captain went down with the ship.
In Enron,
it looks to me like the captain first gave himself and some friends a
bonus, then lowered himself and the top folks down in the lifeboat,
and
then hollered up and said, ‘By the way, everything’s gonna be just fine.’”
North Dakota Senator Byron Dorgan (Democratic)
Executives of corrupt corporations demand assurance that
they can mastermind the raiding of the corporate coffers and the global economy while evading accountability. They demand unfettered and unobstructed access to effective executive parachutes. When the predatory executives feel the weight of the corruption fatally bearing down on the corporation, they want to collect the remaining cash, pull the parachute’s strings, and hop out at their discretion unscathed while their victims suffer from the crash. While other stakeholders are kept in the dark about the
financials, the fraudsters reward themselves with a front seat to the
true financials. They use their access to this information not to save
the company but to calculate the best moment to disinvest. Bill Lerach,
a former attorney for Enron Corp. shareholders, describes this phenomenon: “We
very quickly determined that the insiders had sold off a billion dollars
of their stock in the preceding several months.”
During a Senate
hearing, Skilling was pressured about his $66 million financial escape from Enron’s collapse
as a result of converting stock. Skilling denied knowing these figures
and tried to escape culpability for Enron’s misdeeds. Representatives
also commented on Fastow’s strategic steps for financial
preservation at the expense of others. Rep. Ted Strickland observed how
Fastow stealthily liquidated $30 million. Since the first $30 million failed to satiate Fastow’s appetite, he moved forward with
extracting another $30 million from Enron through dubious side deals.
According to Amanda Martin-Brock, a former executive for Enron Corp. and
attorney from Vinson & Elkins, “Jeff, as time went on, had a harder time
admitting things were wrong. And I have to believe that when the lights
went out at night, he knew what was coming.” Unlike the public, Skilling
had exclusive access to the sham financials and knowledge of Enron’s
crumbling inner workings. Enron tottered
on the edge of bankruptcy without the awareness of rank-and-file
employees. The deceptive depictions of Enron’s grandiosity that shaped
their knowledge of the company betrayed Enron’s true reality. Charles
Wickman, a former energy trader for Enron Corp., speaks about the general reaction to Enron’s eventual
bankruptcy. “There was a lot of disbelief. Very few of the rank-and-file
people ever dreamed that Enron would actually go bankrupt. And then all
of a sudden it was like a ghost town.”
Enron: The Smartest Guys in the Room (2005) describes how top Enron executives watched the victims of their fraud fall to their financial ruin without intervening. “While Enron stock was plummeting, the retirement accounts of
Enron’s rank-and-file workers were frozen.” According to an employee
from the Portland General Electric Company of the Gresham Service
Center, “We were frozen out of our accounts. It was right about $32, I
believe, and over that time from when it was frozen to when it opened
up, I think it went down to nine dollars and we could not access it. And what
came up later that was so bad was the fact that Ken Lay and Skilling and
all the top people were moving their money then, but we couldn’t.”
While Enron executives continued to advertise themselves as innovators and
inventors who were bubbling with a ton of money-making ideas, they
slowly cashed out. At the conclusion, Ken Rice had sold stock
totaling $53 million, Ken Lay sold $300 million, Cliff Baxter sold $35
million, and Jeff Skilling sold $200 million.
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| After covering Kenneth Lay’s astronomical rise, the media also covered his dramatic downfall. (Image Credit: MyEyesSees/Flickr) |
MEDIA ADULATION
Enron spent substantial amounts of money to grab headlines accompanied by gripping tales about Enron’s admirable leadership. These tales energized the manipulation of the investor
community. The documentary showcases a flurry of media outlets selling
Enron to the investor community. Enron tasked the media industry to
camouflage their press releases featuring optimistic numbers as
well-researched news articles. These were the same media outlets that
the community depended on and trusted as unbiased sources of
information. The headline, “It took Enron four years to add $50 billion
in market cap,” overlaid on a dramatic chart to appear mathematical. The
USA Today headlined Enron in the Money section with a bold quote
proclaiming, “Saying Enron trades gas and power is like saying Edison
sold records. Enron invented the very concept.” In this instance,
Enron’s skyrocketing profits are associated with science.
The Global 500 depicted Enron executives as bold “Power Players.” The author, Harry Hurt III, starts off the article with Enron’s supposed innovation. “Enron has shaken up the sleepy gas pipeline and power businesses by aggressively embracing risk and continually remaking itself. So what’s not to like?” The idea of mysterious men playing with my power unsettles me, but corporate America and the investor community largely accepted these facts without question because, in the words of Hurt III, “What’s not to like?” Another publication, “The Dynamo at Enron,” included a section in the article, “Key Achievements,” to promote Lay. It was littered with false facts. “Earnings should jump 32% for 1999, to $902 million, on revenue of $42 billion.” “Shares rose about 50 percent last year, quadrupling the S&P Natural Gas Index.” This publication portrayed Kenneth Lay as a humble Republican fundraiser who chose to “rub shoulders with the rank-and-file.” Businessweek introduced Jeffrey Skilling as a “Power Broker.” The publication enabled his fraud by undermining the crisis Enron created. “California’s energy crisis has put deregulation under fire. But Enron’s Jeffrey Skilling remains a true believer.” The media continued to repeat the same narrative about Jeffrey being powerful, electric, and a true embodiment of a power player. Another publication headlined “Power Play: Enron, the nation’s largest energy merchant, won’t let California stand in its way,” scolds California as an enemy of progress.
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| A line graph of Enron’s closing stock price from 1997 to 2002 shows how quickly Enron spiraled downward. Data from Enron Securities Litigation. (Image Credit: 0xF8E8/CC BY-SA 4.0/Wikimedia Commons) |
ILLUSIONARY PROFITS
“[Bethany] asked a simple question in the article that no
one could seem to answer:
How Exactly Does Enron Make their Money?”
California Representative Henry Waxman (Democratic)
The standard procedure adopted by white collar criminals
from all industries is to convince targets that they will soon be rich
beneficiaries from their share of the generous profits. Enron is no
exception. The illusionary profits Enron touted tricked the market into
sending their stock prices soaring. Enron’s fake quarterly profits
always seem to mysteriously meet or exceed projections. This continually
pushed Enron’s stock price upward to unsustainable levels. Enron
reportedly nurtured an unhealthy obsession with their stock performance.
Images of Enron’s stock price besieged Enron employees at the workplace. The stock price
ominously stalked them everywhere.
Enron’s playbook for fraudulently
increasing the stock price included a template for hiding the billions
that were lost globally due to poor performance. The archive footage
shows Skilling lying about these costly international failures. “But in other
places in the world, in India, a great quarter and a great year in India.”
This was an easy scam because they knew that most investors and
rank-and-file employees were unfamiliar with international markets.
The Dabhol plant in India lost $1 billion, yet Enron managed to
distribute millions of bonuses to executives based on imaginary profits.
According to the documentary, after another deal soured with
Blockbusters, Enron shuffled along and used “future projections to book
$53 million in earnings on a deal that didn’t make a penny.”
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| Former Chairman of the Federal Reserve Alan Greenspan, receiving a Presidential Medal of Freedom in 2005. In November 2001, Kenneth Lay presented the Enron Prize to Alan Greenspan, Chairman of the Federal Reserve for distinguished public service at the Baker Institute for Public Policy, Rice University. |
INSTITUTIONAL RECOGNITION
Corporate corruption cannot survive in a vacuum. Corrupt corporations attach themselves to an ecosystem of renowned organizations to drain resources and support. Even
if the fraud is blatant, corrupt corporations thrive when status,
legitimacy, and trust are conferred to them by a multitude of honored
establishments, institutions, and gatekeepers. It is difficult for the
fraudulent dealings of a corrupt corporation to arouse suspicion if the
general public is bombarded with images of trusted organizations
willingly engaging with corrupt corporations and treating them as
resourceful partners. Wall Street stock analysts were the gatekeepers of
the investor community who held tremendous influence. They privileged
Enron with their approval. According to Bethany McLean, co-author of The
Smartest Guys in the Room, these stock analysts electrified the Enron
frenzy with an exciting flow of “buy ratings or strong-buy ratings on
the company stock.”
In an Enron hearing regarding their bankruptcy, Senator Joseph Lieberman pressed for answers, “Why were the analysts blinded to the company’s deceit?” Curt Launer, analyst for CS First Boston, responded confidently, “We relied on the information that was available at the time.” What information, you ask? Well, according to Ray Niles, an analyst at Salomon Smith Barney, “They trust the integrity of the company’s certified financial statements and the representations of the company’s management.” Chanos recalled the sell-side stock analysts’ reliance on Skilling and their tendency to echo his outlook on Enron. Whenever they couldn’t answer a question, the typical response was, “I’ll give Jeff a call. I’ll run this by Jeff.”
DISCOURAGE ACCOUNTABILITY
“Wheel Out”, “Get Shorty”, “Fat Boy”, “Death Star” , “Ricochet”
Tim Belden outlines “super smart” strategies to exploit California’s deregulated energy market in a confidential memo.
Corrupt corporations are the most successful at fraud if they
are able to seduce the victims into internalizing intellectual
arguments against accountability, instill fear to terrify
potential whistleblowers into silence, and promise vast rewards to
manipulate victims into not questioning the lies. Peter Elkind,
co-author of The Smartest Guys in the Room, describes Lay as a “real
apostle for deregulation.” Lay pushed his stance on deregulating the
energy market as a visible deregulation advocate in Washington, D.C. By push,
I mean he donated strategically to key political campaigns and the
Republican Party. Public officials shaped policy to reflect Lay’s
viewpoint that the natural gas industry was “shackled by deregulation.”
The documentary explains further, “In Washington, Lay became part of the
new crusade to liberate businessmen from the rules and regulations of
government.”
Although most analysts would not dare utter a word against
Enron and incite the ire of Enron’s executives, some bolder analysts
quickly turned into Enron’s enemies by challenging their numbers, such
as John Olson, stock analyst at Sanders Morris Harris. Andy Fastow, a former CFO for Enron Corp., targeted Olson for refusing to be “on board with Enron’s
story.” Merrill Lynch understood that angering Enron meant losing their
business. According to the documentary, the fear of losing profits
motivated Merrill Lynch to fire Olson. Olson refused to divvy out the
strong buy recommendations needed to enhance the “Enron Illusion.”
Skilling denigrated another analyst during an Enron Conference Call on
April 17, 2001, after he questioned, “You’re the only financial
institution that can’t produce a balance sheet or cash flow statement
with their earnings.” Instead of answering the question, Skilling
stumbled into offering a thank you and appreciation as fake as Enron’s
shell companies and then slipped in the snide insult, “asshole.”
Enron finally had the chance to dig their fangs into
California’s newly deregulated energy markets and bite a generous chunk
out of the economy through a buyout of Portland General Electric. In response to
the energy industry hungrily circling California’s energy market,
California Governor Pete Wilson and the California Legislature passed the Electric Utility Industry Restructuring Act (Assembly Bill 1890) in 1996 “allowing for the deregulation of electricity.” Harvey
Rosenfield, a consumer advocate, detailed how Enron instigated an energy
crisis in California that cost the state $30 billion over the year.
Deregulation granted Enron traders the freedom to move power around the
western energy grid in bad faith. Traders forced artificial price
increases by exporting power out of California and arbitrarily shutting down power
plants. Traders unleashed despotic power over California’s power without
accountability. Deregulation hindered the capacity of public
institutions to rein in the maniacal greed of ruthless Enron traders and
executives. Loretta Lynch, California Public Utilities Commissioner,
observed, “Those guys, at the flip of a switch, could just yank the
California economy on its leash whenever they wanted to, and they did it
and did it, and they made so much money.” The fraud allowed Enron to
haul in $2 billion by distracting the public with the reasoning that
California’s chaotic energy crisis would eventually find a resolution
through market correction.
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| Mug shot of Jeffrey Skilling. Penalty: 14 years in federal prison (originally 24 years), $45 million fine. (Image Credit: United States Marshals Service/Flickr) |
CHARISMATIC LEADER
Just like cults, corporate scam operations are dependent on
charismatic leaders who are adept at gently misleading the public. It
was noted in the documentary that Skilling drove the “Enron Illusion.” Jim Chanos, President of Kynikos Associates, recounted how Jeff
Skilling’s untimely departure from Enron reverberated across Enron, Wall
Street, and the investor community. Sherron Watkins, a former Vice President for Enron Corp., explains further, “August 14, 2001, Jeff Skilling abruptly resigns, and that made me angry. It made loads of employees
angry. I mean, there was a real sense of betrayal by the employees.
This was Jim Jones feeding us the Kool-Aid and then deciding
not to drink it himself.” The Jim Jones reference is an eerily appropriate comparison.
Skilling wasn’t a relatively unknown CEO who settled with anchoring the
corporation from behind the scenes. He clamored for more
star power, more trust, more influence, more fame, and more adulation
from the public. He latched onto the dual roles as a charismatic corporate titan and celebrity CEO who embodied Enron’s beating heart. Therefore, the departure of Enron’s charismatic leader
signaled that something was offbeat. The company could not last long
without Skilling at the helm to steer the “Enron Illusion.” The day after
Skilling departed, Sherron Watkins, a former Vice President for Enron Corp.,
delivered an anonymous memo to Kenneth Lay detailing that the
irregularities in Enron’s numbers indicated immense fraud and crime.
About six weeks after Skilling ceased commanding Enron’s playbook for
strategic manipulation and scheming, Enron began to implode. Then, short
four months later, on December 2, 2001, Enron declared bankruptcy.
Overall, greedy Enron executives cannibalized the U.S. economy
and caused retirees to lose $2 billion in pension and retirement funds;
20,000 employees lost jobs; and employees lost $1.2 billion in
retirement funds. Although not necessarily exhaustive, Enron: The
Smartest Guys in the Room (2005) provides a comprehensive list of the
signs to watch for to detect corporate fraud.
Further Exploration:
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