ENRON : ace of diamonds
($) (what do these signs mean?)

Before getting involved in energy futures and derivatives (investments, similar to futures contracts or options, which depend on the upward or downward value of the underlying investment, such as oil) in the early 1990s, Enron began as an energy producer or seller. After gaining the right to sell derivatives, Enron quickly began to manipulate the market in a way that has made them famous today. They set up thousands of little "partnerships" around the world, offshore companies that provided the perfect disguise for Enron's price gouging. Moreover, the company could transfer some of its debts and obligations over to their "partners" and thereby make Enron's value look rosier to traders on Wall Street.

Not so long ago, Enron's name did not carry with it the same connotation it does today. Today, hardly anyone trusts the Enron name because of the evidence that has come out detailing the deceptive and fraudulent practices which has made the company notorious for its brand of crony capitalism. We have nominated Enron to be the Ace of Diamonds for these reasons.

Manipulation of the markets
In 2001, the state of California experienced a power crisis unlike anything anyone has ever seen. Massive blackouts and brownouts occurred all over the state, and the prices of energy soared through the roof. Coupled with an outrageously low supply of energy, the entire situation called for serious attention.

At the center of the crisis were Enron and the other energy producers who manipulated the supply of energy on the market and exacerbated the crisis. According to a story by CBS News, during the crisis companies like Enron kept between 30 and 50 percent of their power off of the market. Moreover, when some of the worst moments of the crisis occurred, they held back even more - anywhere from 55 to 76 percent - in an effort, CBS News learned, to follow schemes which stifle the supply and thereby raise the prices for energy.

See:
http://www.cbsnews.com/stories/2002/09/17/eveningnews/main522332.shtml

Enron was used to giving such schemes names such as "Load Shift" and "Get Shorty." With "Load Shift" Enron allegedly filed false power delivery schedules on transmission lines across California to create the appearance of "congestion" on these lines. That way, when it became necessary to drop or revise deliveries of power to other places which needed the power more, Enron was entitled to compensation from the state. They did so by exploiting a loophole in the ridiculous 1996 legislation in California which somewhat deregulated the energy industry in California.

In the "Get Shorty" scheme, Enron fabricated and sold emergency backup power to California, took the payment, and then cancelled those orders and instead sold them less expensive power from neighboring states. California consumers are still waiting for their refunds from these fraudulent transactions.

See:
http://www.forbes.com/2003/02/05/cx_da_0205topnews.html

The man formerly in charge of Enron's California and Western trading operations admitted as much in federal court. In October 2002, Timothy Belden pleaded guilty to one count of conspiring to commit wire fraud. According to a criminal complaint filed by the Justice Department's Enron task force, the consumers in California during the energy crisis paid more than $9 billion than they should have! According to USA Today, Belden and others allegedly engaged in fraudulent trading which sent energy prices up from $40 a megawatt hour to $1500 a megawatt hour. All of this stolen money was deposited into the coffers of companies like Enron, who knowingly defrauded the citizens of California.

According to the complaint, Enron gained $1.3 billion in revenue from the scheme in 2000 and 2001. Belden's attorney remarked that Belden was simply following "Enron's policy, training and expectations."

See:
http://www.usatoday.com/money/industries/energy/2002-10-17-enron-belden_x.htm

The meltdown
In February, 2001, president and chief operating officer Jeffrey Skilling took over as Enron's CEO. That August, he abruptly resigned after just six months on the job, although he denied knowledge of any wrongdoing by the company or Arthur Andersen, the company's accounting firm. That same day and a couple of weeks later, Lay sent separate emails to company employees, touting the stock and the declaring that the growth of Enron "has never been more certain." However, a day after Lay's first email, a vice president for corporate development, Sherron Watkins, wrote a memo to Lay expressing concern that the company would "implode in a wave of accounting scandals."

See:
http://www.chron.com/cs/CDA/story.hts/special/enron/1246305
http://www.time.com/time/business/article/0,8599,195268,00.html

On the 17th of September, Skilling sold 500 shares in the company. The entire time he was encouraging people to buy shares, he was selling off $66 million of his own. By July, Lay himself had unloaded $21 million in stock that year alone. Even though Lay was selling off millions of stock, he himself was telling his employees that the stock was a "bargain" and would grow in value by 800 percent over the next ten years.

See:
http://www.forbes.com/2002/03/19/jskilling.html

On October 16, the public finally got a hint at what had really been going on. That day, Enron reported a $638 million loss in the third quarter of 2001, and a $1.2 billion loss in shareholder equity, partly related to all of the offshore "partnerships" they were running at the same time. On the 28th of that month, Lay talked to then-Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans about the company's problems. The Administration decided it would be better to not intervene, although they claim they never told Bush of the encounter.

See:
http://www.usatoday.com/money/energy/2002-01-14-enron.htm

Three days later, Enron announced a formal investigation by the SEC into possible conflicts of interest posed by the company's thousands of offshore "partnerships." A week later, Enron filed documents with the SEC revising its financial statements for the previous five years. This erased $586 million in profits and added $2.5 billion in debts. By the end of the month, Enron's credit rating was downgraded to junk bond status, and its stock began trading below $1 a share. The next week, Enron filed for Chapter 11 bankruptcy protection, making it the largest bankruptcy in U.S. history, and it fired some 5,000 of its employees in the U.S. and Europe.

At the beginning of 2002, the Justice Department acknowledged it had begun a formal criminal investigation into the company. The company's auditor, Arthur Andersen, admitted it had destroyed some of its Enron documents. The White House admitted Lay had sought the administration's help shortly before Watkins' premonition came true. In the investigation, Attorney General John Ashcroft had to recuse himself because he, like many other Republicans, had received significant contributions from Enron and its associates in his 2000 race for Senate from Missouri.

On the 19th of January, the White House acknowledged that Dick Cheney intervened to help Enron secure payment on a $64 million debt owed to it by an Indian energy project. Two weeks later, the General Accounting Office sued the White House to obtain potentially incriminating documents detailing the influence Enron had on the Bush Administration's national energy policy, which according to the Seattle Post-Intelligencer, benefited Enron in 17 different ways.

See:
http://seattlepi.nwsource.com/national/54921_energy18.shtml

In February 2002, a special committee set up by Enron itself admitted to an elaborate scheme involving "partnerships" which allowed the executives at Enron to fraudulently inflate earnings and profits by more than a billion dollars, pocketing millions in cash in the process. By that March, the U.S. government suspended all outstanding contracts with Enron and its accounting firm, Arthur Andersen, which had been indicted by a federal grand jury in February for "knowingly, intentionally and corruptly" persuading employees to shred Enron documents back in October 2001 when Enron first admitted to inflating profits to shareholders and Wall Street.

See:
http://www.dailyenron.com

White House influence
Throughout his career, Enron has been the single largest contributor to George W. Bush's multiple campaigns. From 1993 to 2001, associates of Enron as well as the company's Political Action Committee gave more than $700,000 to Bush. For Bush's nominating convention in 2000, Enron gave $200,000 to the Republican national Committee.

See:
http://www.fec.gov
http://www.opensecrets.org

When George W. Bush moved onto 1600 Pennsylvania Ave, his friend since the 1980s and Enron CEO Kenneth Lay was given a position on the Bush transition team where he worked along with Dick Cheney in helping to develop national energy policies. In fact, some 50 former Enron executives, lobbyists, lawyers or large shareholders ended up working in the Bush Administration. For example, Bush's former chief economic advisor Lawrence Lindsey and the U.S. Trade Representative Robert Zoellick both served on Enron's advisory board.

See:
http://www.beaufortgazette.com/24hour/politics/story/217715p-2099162c.html

Between 1989 and 2001, Enron and its employees gave more than $5.95 million in hard and soft money contributions to federal candidates and parties. Of these, nearly three-quarters went to the Republican party. One of the largest beneficiaries of this money was House Majority Leader Tom DeLay along with his political network, which have collected over $200,000 in Enron's money. According to the National Journal, DeLay's connections to Enron are so strong that some call him "the congressman from Enron."

See:
http://www.rollcall.com, 02/25/02 (subscription required)
http://nationaljournal.com, 06/03/00 (subscription required)

And Karl Rove, Bush's chief political adviser - or as some call him "Bush's Brain" - refused to sell some $250,000 worth of Enron stock until June of 2000, despite having met with Ken Lay about the administration's energy policy before his sale of the stock. What Karl Rove's case indicates is a White House that is closely tied to the fallen giant and which, for self-interested reasons, refuses to create an independent energy policy which places the national interest ahead of the interest of corporate cronies of the administration.

See:
http://news.bbc.co.uk/hi/english/static/in_depth/business/2002/enron/20.stm

For more information:

Some news sources have some excellent sections of their web pages devoted to news on Enron. Obviously this list is not exhaustive, but these couple sources are very good sites for Enron information:

http://news.bbc.co.uk/hi/english/static/in_depth/business/2002/enron/default.stm
http://www.chron.com/content/chronicle/special/01/enron/../index.html