Twenty Years Since The Enron Collapse

bench at the Supreme Court. Bloomberg Law with June Grosso from Bloomberg Radio. Welcome to Bloomberg Law on Bloomberg Radio. I'm Joe Shorts living for Joan Grosso. This month marked twenty years since one of the greatest financial collapses in history, Energy Trading a giant and Ron filed for bankruptcy on December second, two thousand one, becoming a symbol of corporate fraud and accounting malpractice. We're going to take you through the events that led Enron's downfall and talk about the

players involved and what the world has learned since. To begin, I spoke with ed Her as a professor with the Economics department at the University of Houston. Ed served as a consultant to the Justice Department's Enron Task Force. He talked about the rise of Enron and when suspicions about their behavior began. Did Enron revolutionize the trading of of natural gas and electricity? I mean fortune said that they were the most innovative company for six years running up

to two the year two thousand. Well, they the innovations they brought to natural gas occurred in the UH nineteen nineties early nineties. UM. When I came to Houston, one could buy and sell natural gas and there might be a delta of cents or even fifty cents between the bid and the ask. By the time Enron had brought standardization of contracts of of aquidity in a trading platform to natural gas, the margins and had had shrunken dramatically to lessen a penny a contract. And they did this

with electricity. UH, they did this with weather derivatives, heating days and cooling days. And as everyone in finance knows that if we have more liquidity and more transparency in the market, the margins began to shrink. So for Enron to report ever increasing profits, they would have to trade ever increasing numbers of contracts for example, and this was something that that everyone knew could not be sustained. So Enron's approach was to go look for other markets to

apply this innovation too. They tried with paper companies, They tried with hydroelectric power in Bolivia. They tried this with water companies in Brazil. They tried this with power plants in India, and in each market they found they were unable to apply the in Ron recipe and create profits. The challenge was in they had changed their mode of accounting to mark to market and they began to book profits on contracts that the we're maybe ten years into

the future. They were they were going to book them into that financial reporting period. And Ron brought innovation to the market, but as they tried to extend this to other markets, they failed and talked to us about the connection here to the Valhalla scandal. In the late eighties, and Ron announced a one time fifty million dollar after tax loss due to a couple of rogue traders up in New Jersey, New York UH their Valhalla office. UH.

They laid off fifteen hundred workers at the time. My landlord was a senior vice president who had pushed the Majabi pipeline project through for en Ron. You know, an old hard asset guy in the trading circles in Houston at the time, it was known that that one trader in particular had taken a big hit. If you if you just do some back of the envelope math like we did at the restaurant that night, hundred workers, a hundred thousand dollars ahead, hundred fifty million a year, one

point five billion over ten years. That was the math I bet two beers. In two thousand three, the Houston Chronicle reported that the Valhalla scandal had cost in Ron about eight hundred and seventy million dollars after tax um or one point five billion pretexts. So, you know, there was a history of obfuscation, the history of of covering up what was really going on. As you look at how they became the darling of the energy world, how would you describe that the management team had a cultish

type of environment. Uh and Rod would go to the big business schools and outdid the Wall Street banks and um. This of course was during the tech bubble of the late nineties, and they would outbid the tech companies and they thought that they had really assembled a team of the smartest guys in the room, and uh once they were assembled, they certainly didn't want to to say that there was a problem that the CEO didn't have any

clothes on. The diligent exercise of end of quarter into financial uh period transactions that they pursued, you know, really painted a facade of a company that was growing. But all of the transactions that they were reporting again dark fiber water plants in Brazil, um power plants in India, the the old style utility type earnings were certainly there, but but not the mega growth. There's no question that

were really brilliant people working at Enron. The problem was that they had perfected gas trading and electricity trading to a level that they couldn't generate the profits they used to do, and as they looked to go further into different markets, they were flummoxed by the fact that they they were not successful at hers Lecturer, Department of Economics, College of Liberal Arts and Social Sciences at the University of Houston. Appreciate taking time and joining us on Bloomberg Law.

Thank you, Joe. When did the dominoes fall for Enron? Leslie Caldwell is just the person to ask. She's a partner with the law firm Latham and Watkins. She was formerly an Assistant Attorney General for the Criminal Division of the Justice Department, and she let a team of investigators and prosecutors in the Department's Enron Task Force. She talked

to me about how Enron's transgressions were uncovered. When we all hear about Enron and and and it's spectacular collapse, and how it happened in such a really a short period of time. From a prosecutor investigators standpoint, this this essentially this house of card that collapsed. Did that make it easier to investigate or harder? I wouldn't say it made it either. It made it more imperative to investigate, because,

as you said, it was a spectacular collapse. Months before it declared bankruptcy, Enron had been ranked Fortune number seven in US corporations and suddenly it was gone. So that suggested some kind of wrongdoing that really made it critical that there'll be a prompt and thorough investigation. We'll take us to the early days. What were the first few weeks, Like,

what were you doing? So? And Ron was a very large, sprawling corporation with a lot of different business lines and a lot of different interests, and so I guess for the first couple of weeks, our main goal was to assemble a team of the right size and kind of learn the company, understand the company, understand these very complicated

business lines that the company was in. And to get there, the FBI assigned actually hand picked agents from around the country who had experience in some of these very sophisticated financial products and Ron was using, like derivatives and and other products. So there were a bunch of FBI agents who had experience that's a little unusual for an FBI agent, for example, former investment bankers, former securities traders, former derivatives traders.

And then we also were putting together a team of prosecutors from around the country with with significant experience in significant cases, which was important because could it was clear that this is going to be not only complicated, but very high profile. So we wanted to make sure we had the right team when this assignment came to you in two thousand two. In the beginning, you know of an investigation, you often think you know what you have.

Many times you think you know what you have, and then when would you end up with is very different. I guess I'm curious is when you look at the you know what you when you were handed this in two thousand two and what you ended up with, how

how different a picture was that. It was the kind of thing that when we started, all we really knew other than learning about Enron's business, was that this very large and powerful and influential and well regarded company was very very important and well regarded and connected senior executives had literally collapsed, apparently overnight, and there have been some murmurings in the press about potential shenanigans involving some off

books entities, but we really didn't know. I mean, there are a lot of reasons why a business can collapse besides criminal activity, and we were concerned that the haste with and the degree to which Enron collapse suggested that there must be some kind of wrongdoing, but we really

didn't know. Um. One thing we didn't know until we really rolled up our sleeves and got into it was just how much the kind of unfortunately corrupt leadership culture and messages UH infected so many different corners of the company. And that was what we took a bit of time to unravel over the next couple of years, take us deeper than you're not getting cooperations from key players. The

Board of Directors has prepared a report. What happened next, Well, we kind of looked through the report that the board had prepared and figured out different potential lines of inquiry, assigned different teams to those different lines. So one group would be in charge of um looking into the broadband business, one group would be in charge of looking into other aspects of the company, and then they would all kind

of work and we would coordinate. And my role was to make sure everyone was doing what they were supposed to be doing and that things were moving forward, and that we were all coordinating in terms of understanding what each group was finding and making adjustments accordingly. So we started, We looked at a lot of documents, We interviewed people, We educated ourselves about the business models, and I say models because there were very several different business models in play.

We looked at third parties who may have been culpable in some fashion in supporting Enron's fraud or leading to its collapse. And so it was really we had a bunch of different work streams going at the same time, when did you have an AHA moment? As you were doing your investigation. At the very beginning, there was a massive document destruction across the board at Arthur Anderson involving members of the Enron team in different different geographies. That

was of immediate interest. UM. We were very interested right off the bat in some special purpose entities that were being used by the company to move under performing or negative assets off their books so they could continue to report favorable financial results. We saw some specific transactions UM that looked very suspicious that we focused more deeply on. We were able to get a conviction in the Anderson case. We then we're able to bring charges against three British

bankers and begin extradition proceedings involving them. And around that same time, which would have been about July of two thousand two, we got the first significant cooperating Enron insider witness who has with somebody who was kind of a right hand man to the chief financial officer, Andy fast Out, his sort of principal deputy right hand man, decided to cooperate with us, and that helped tremendously in advancing our understanding of internal discussions and who knew what when at Enron,

and that was tremendously helpful. And from then, which was as I said about July of two thousand two, there was a fairly quick momentum change and additional people started cooperating UM and providing information and the case the case started moving, as you know, in the way we wanted it to more quickly, Sarbanes Oxley. You know it came as a result of this. Did this make the world

safer from situations like Cameron? I think the collapse of Enron and the sort of the associated shock of that collapse and the magnitude of that collapse did actually get people's attention and it made a difference. Obviously, it helps

spawn Sarbanes Oxley, which I think has been useful. But I think more importantly, the fact that there was a company that had corruption at the highest levels and in the c suite, which is something frankly you very rarely see, was really appalling and shocking and has led to an entire new outlook in corporate America and globally about the importance of culture and tone at the top and compliance controls and integrity UM, all of which I think has

been a net plus for for the for the economy. Um, I'm not going to say that Enron changed the world, but it was certainly a wake up call for the need for companies to take compliance much more seriously and focus much more on the top messages coming from their top people. Leslie Caldwell, partner with the law firm Latham and Watkins. We appreciate you taking time and joining us today on Bloomberg Law. Thank you my pleasure. That's it

for this edition of the Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law podcast. You can find them on Apple Podcast, Spotify and on www dot Bloomberg dot com slash podcast Slash Law, and remember to tune into The Bloomberg Law Show every night at ten pm Wall Street Time. The show is produced by Eric Mallow for Bloomberg Radio. I'm Joe Shortsley.

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