It was a hugely successful American corporation, and worth billions of dollars at its peak.
Yet over the course of a few months the roof came crashing down, the company went bankrupt and its executives went to prison.
It's time to learn about the fascinating downfall of Enron.
[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:22] I'm Alastair Budge and today is the start of another three-part mini-series, this time on great American business frauds.
[00:00:33] In this mini-series we are going to look at times when companies, or individuals within companies, committed huge frauds, tricking investors, employees, journalists, while becoming fabulously wealthy in the process.
[00:00:50] In today’s episode, the first episode, we are going to talk about Enron, the mysterious energy trading company that was once the poster child of American success, the company that couldn’t stop making money, but eventually came crashing down, resulting in lengthy prison sentences, billions of dollars wiped out, thousands of jobs lost, and even a suicide.
[00:01:18] Then, in part two, which is going to come out on Friday, we are going to look at Theranos, the company that promised to revolutionise the world of blood testing, and save millions of lives by making it easier to detect diseases.
[00:01:35] A noble mission, of course, but it was a fraud, it was one great lie.
[00:01:41] And in part three, our final part, which will come out next Tuesday, we will end with perhaps the biggest fraudster in history, Bernie Madoff.
[00:01:52] He was the darling of Wall Street, a man who made his clients, and himself, hundreds of millions of dollars.
[00:02:00] But it turned out that he wasn’t so special at all, he was merely the mastermind behind the biggest Ponzi scheme in American history.
[00:02:10] So, that is what you have coming up in the next three episodes.
[00:02:15] Let’s not waste a minute then, and start with the story of Enron.
[00:02:21] Our story starts with a man named Kenneth Lay.
[00:02:25] He was born in Missouri, in the American midwest, in 1942, the son of a baptist minister.
[00:02:34] He grew up in poverty, there was never much money around when he was a child.
[00:02:40] On graduating from university, he took a job at an oil company, before working inside The Pentagon, the heart of the American Defense Department.
[00:02:51] After a couple of years working for the state, he returned to the private sector, taking jobs with a variety of different energy companies, and working his way up the corporate ladder.
[00:03:04] By 1985 he was in control of a company called Houston Natural Gas, which later changed its name to Enron when it was bought by a competitor.
[00:03:16] The 1980s had seen the energy sector in the US opening up, it had seen deregulation.
[00:03:24] What this meant in practical terms was that there was more competition and more room for private companies to step in and make money.
[00:03:33] Kenneth Lay, and his company Enron, were perfectly poised to benefit from this.
[00:03:40] What Enron did, or at least what it started out by doing, was by transporting and selling oil and natural gas.
[00:03:48] It owned around 60,000 kilometres of pipeline, which would be used to transport natural gas around the country, from where it was produced to where it was going to be used.
[00:04:00] All simple so far.
[00:04:02] But this business wasn’t actually very profitable. Enron had been struggling to compete, and was at risk of going bankrupt.
[00:04:12] It was kept afloat, it was kept alive, partly by a new activity, by a new business division.
[00:04:20] Oil and gas trading, speculating on whether the price of oil or gas would rise or fall.
[00:04:27] This was where the real money seemed to lie, and Enron started making vast amounts of cash.
[00:04:35] Oil trading is normally a risky business, because there are all sorts of factors that can influence the price, and the price goes up and down a lot.
[00:04:45] In the 1970s and 1980s there were huge swings, huge variations in the oil price.
[00:04:53] But Enron always seemed to be on the right side, it always seemed to make money.
[00:04:59] This seemed a little suspicious.
[00:05:02] Early warning signs about bad behaviour in the company came in 1987, when it was discovered that a group of Enron traders had been betting vast amounts of money, much more than they should have, on the price of oil, and taking money from the company and putting it into their own hidden bank accounts.
[00:05:24] There were internal investigations and exactly what these traders had been doing was discovered.
[00:05:31] Not only had they been taking this money and putting it into hidden accounts, but they had been destroying documents, destroying evidence.
[00:05:41] It all seemed to be a joke to them, with one trader even sending money to a fake account named M Yass, a joke name, which if you move the position of the y to behind the m becomes “my ass”.
[00:05:58] Yet Ken Lay, the boss of the company, didn’t seem to care.
[00:06:04] The traders weren’t fired, or even disciplined.
[00:06:08] Even though they had been taking money from the company, and behaving in a dishonest way, they were making so much money for Enron that Lay couldn’t bear the idea of losing them.
[00:06:21] If they were sacked, Enron would be in trouble.
[00:06:25] Indeed, the company didn’t fire them, but sent the head trader a letter saying “Please keep making us millions”.
[00:06:34] The traders were allowed to continue working for Enron, and were encouraged to take greater and greater risks, with a view to making larger and larger profits for the company.
[00:06:46] But, as we now know, oil trading was a very risky business, and two months later, after a few risky bets the same trading division that had previously made Enron millions, lost $90 million over the course of five days.
[00:07:04] Even though Enron might have accepted these traders’ excuses, the US government didn’t, and when their actions were discovered also by the SEC, the Securities and Exchange Commission, they were sentenced to jail.
[00:07:21] Enron was suddenly without its top money-makers.
[00:07:25] Ken Lay and Enron corporation needed a new plan.
[00:07:29] And when an American corporation needs a new plan, a new strategy, the tried and tested idea is to fly in management consultants to fix things.
[00:07:41] And the most prestigious management consultancy, where the advice of a single person can run into the tens of thousands of dollars a day, is called McKinsey & Company, normally just shortened to McKinsey.
[00:07:55] McKinsey was hired by Enron after the 1987 trading scandal to advise on new ways of making money.
[00:08:05] One McKinsey consultant in particular impressed Enron.
[00:08:09] His name was Jeffrey Skilling, and he will have a pivotal role in our story.
[00:08:16] Skilling proposed that Enron become a sort of energy trading house, more like a financial company than an energy company.
[00:08:26] Instead of dealing with the messy work of transporting oil and gas, what if Enron created a sort of stock exchange for energy, a place where buyers and sellers could meet, and Enron would of course take a slice of every transaction.
[00:08:45] Ken Lay, the boss of Enron, knew how profitable the trading business had been for the company, Skilling’s idea came at the right time, and Jeffrey Skilling was hired to start something called Enron bank.
[00:09:01] Skilling’s other major suggestion to Enron was to switch the way it did its accounting.
[00:09:08] Enron had previously used a straightforward, simple way of accounting.
[00:09:14] If it bought or sold oil or gas, or was paid for transporting it, these numbers would be added to its accounts.
[00:09:22] Easy.
[00:09:23] But Skilling proposed that Enron adopt something called market-to-market accounting.
[00:09:30] To put it simply, this meant that Enron could say that it had made money even if it hadn’t actually yet made it.
[00:09:39] It allowed the company to look at deals it had done, value them itself, and book the profits, to account for these profits in its accounts.
[00:09:51] The result of this was that, from an accounting point of view, Enron seemed to be making more and more money, it seemed to be a business that was printing money left right and centre.
[00:10:04] Yet these profits weren’t actually realised profits, they were just estimates of the profits that the business said it would make in the future.
[00:10:14] Why would a company do this, you might ask?
[00:10:18] Well, Enron was a publicly traded company.
[00:10:21] The more money that outsiders thought it was making, the more desirable it would be, and the higher the share price would go.
[00:10:30] Enron executives were normally given large amounts of shares, and so the higher the share price, the more money they made individually.
[00:10:40] In the case of senior executives, these sums were astronomical.
[00:10:46] Kenneth Lay, the boss of Enron, made $220 million in cash and shares in only 3 years, and traders were routinely making tens of millions of dollars a year.
[00:11:00] The other thing that Skilling did was to change the character of the company.
[00:11:06] He was a deeply competitive person, and believed that humans thrive on competition.
[00:11:13] At Enron he fostered a culture of dog-eat-dog, of people competing to be number one, to make the most money for the company.
[00:11:22] There were frequent performance reviews at the company where every employee was given a score of 1 to 5.
[00:11:31] 1 was excellent, and meant you were in line for promotion, and more money.
[00:11:35] 5 was the worst, and if you got a 5 you would be fired.
[00:11:41] 10% of employees had to be given a 5, meaning there was a ruthless culture of employees working all hours of the day to try to make the company as much money as possible, and be ranked higher than their colleagues.
[00:11:57] As all of this was happening, the energy sector was deregulating further.
[00:12:02] Enron’s traders used all sorts of tricks to drive up the price of the energy it was selling, even doing things like moving energy from one state to another, cutting off the power, and then selling it back to states at a higher price when they needed it most.
[00:12:22] It’s estimated that in the state of California alone this kind of unethical behaviour cost the state government $30 billion dollars.
[00:12:33] The late 1990s also saw the dotcom boom, with technology companies going public at huge valuations, and making people vast fortunes in the process.
[00:12:45] Enron wanted to get in on this and it teamed up with Blockbuster, the video rental company, to build a broadband network, and created its own broadband unit.
[00:12:58] As soon as the deal was signed, Enron recorded bumper profits, saying that this broadband unit would be worth $35 billion.
[00:13:10] Yet nobody actually knew what it was worth.
[00:13:13] It certainly seemed unlikely that it was worth anywhere near $35 billion, but this new system of market-to-market accounting meant that Enron was free to claim this as a profit, yet again boosting its share price.
[00:13:30] Enron seemed to be able to do no wrong.
[00:13:34] Its employees were making vast amounts of money, its shareholders were getting rich, and it seemed to be a great success story of the merits of deregulation.
[00:13:46] Ken Lay was a great storyteller, a charismatic man, and he sold the story that Enron was enabling the future.
[00:13:54] Almost everyone bought it, but some didn’t.
[00:13:59] One journalist, a lady named Bethany McLean, even asked an Enron executive “How exactly does Enron make its money?”, to which the answer was–and I’m paraphrasing here– “it’s complicated and I don’t want to tell you”.
[00:14:14] As more people started to look more closely at the inner workings of Enron, they started scratching their heads.
[00:14:22] A lot of it didn’t make a huge amount of sense.
[00:14:26] Then, abruptly in August 2001, Jeff Skilling resigned, citing personal reasons, saying he was leaving for reasons unrelated to the job.
[00:14:38] He had taken over as CEO of Enron 6 months before, and analysts saw that he had sold $33 million worth of shares just before resigning.
[00:14:50] These didn’t seem to be the actions of a man who was really leaving for personal reasons.
[00:14:57] A day later an executive wrote an anonymous letter to Kenneth Lay, saying that the company was about to implode.
[00:15:05] It was the start of the end for Enron.
[00:15:08] In September the New York Times published an article saying “Something is wrong with the state of Enron”.
[00:15:15] The share price crashed, and Enron admitted that various divisions were worth billions of dollars less than it had previously said they were.
[00:15:27] As the curtains were raised on the inner dealings of the company, it was revealed that it had used all sorts of complex structures to pretend that it was making huge amounts of money, and hide how much money it was actually losing.
[00:15:43] Its high-flying CFO, the finance boss, who was described as a man with no moral compass, had created these complex structures which allowed Enron to show its profits and hide its losses, making it look like a flourishing business when in fact it was completely the opposite.
[00:16:03] At the same time, he had paid himself tens of millions of dollars personally to manage these dubious structures on top of the huge salary he was getting from Enron.
[00:16:17] By the end of November, Enron was on its last legs.
[00:16:21] Its share price had tumbled from over $90 in August of 2000 to being worth 61 cents in November a year later, a loss of over 99%.
[00:16:34] And on December 1st the business was officially declared bankrupt.
[00:16:40] Tens of thousands of employees lost their jobs, as well as losing all of their pension money that they had invested in the company.
[00:16:48] Enron executives had persuaded employees to invest their life savings, as well as their pensions, in Enron shares, while knowing full well that it was a huge fraud, that the company had been inflating its profits.
[00:17:05] In the aftermath of the collapse, senior executives including Lay and Skilling were tried in court.
[00:17:13] Lay was charged with 11 counts of fraud, but died of a heart attack before ever spending a night in prison.
[00:17:21] Jeffrey Skilling, on the other hand, was sentenced to 24 years in prison.
[00:17:27] He served 13 years, and was released in 2019.
[00:17:32] Another executive, J. Clifford Baxter, shot himself in the head before he could stand trial.
[00:17:39] The scandal also saw the downfall of one of America’s oldest accounting firms, Arthur Andersen.
[00:17:47] The firm was in charge of Enron’s accounts, so should have seen what was going on.
[00:17:53] Yet Enron was too big, too profitable, and Arthur Anderson didn’t want to lose its golden goose.
[00:18:01] Arthur Anderson wasn’t just guilty of doing nothing, he was actively complicit, and helped Enron shred over a tonne of incriminating evidence, hiding it from investigators.
[00:18:14] And it too collapsed with Enron.
[00:18:17] Since the fall of Enron, there have been numerous new laws implemented to try to avoid a similar situation happening again.
[00:18:27] This might certainly help, but almost all of the individuals responsible for the crimes at Enron are now walking free.
[00:18:36] Indeed, one of the first things that Jeffrey Skilling did, on his release from prison, was start up a new energy trading business.
[00:18:45] He was banned by the government from serving as an officer in a public company, but there is nothing to stop him from working for a private company.
[00:18:54] One has to only hope that his 13 years in prison will have taught him to behave a little bit better this time round.
[00:19:03] Ok then, that is the story of The Enron Scandal, a story of unadulterated greed, a story of financial engineering gone wrong, a story of what can happen when executives become addicted to quarterly earnings reports, and of when profits need to be bigger and bigger every three months.
[00:19:25] It is a fascinating story, and shows the lengths that people will go to to make money, and then try to cover their tracks afterwards.
[00:19:35] As always, I would love to know what you thought of this episode.
[00:19:39] Have there been similar scandals, or frauds in your country? Do you remember the Enron scandal? What do you think it tells us, if anything, about human nature?
[00:19:50] I would love to know.
[00:19:51] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:20:01] And as a reminder, this is part 1 of our 3-part series. Next up we will have Theranos, the blood testing startup, and the lady who went from being the world’s youngest female self-made billionaire to being exposed as a huge fraud.
[00:20:18] And part three will be on the most prolific fraudster of them all, the man who stole $65 billion, Bernie Madoff.
[00:20:28] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:20:33] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
[END OF EPISODE]
[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:22] I'm Alastair Budge and today is the start of another three-part mini-series, this time on great American business frauds.
[00:00:33] In this mini-series we are going to look at times when companies, or individuals within companies, committed huge frauds, tricking investors, employees, journalists, while becoming fabulously wealthy in the process.
[00:00:50] In today’s episode, the first episode, we are going to talk about Enron, the mysterious energy trading company that was once the poster child of American success, the company that couldn’t stop making money, but eventually came crashing down, resulting in lengthy prison sentences, billions of dollars wiped out, thousands of jobs lost, and even a suicide.
[00:01:18] Then, in part two, which is going to come out on Friday, we are going to look at Theranos, the company that promised to revolutionise the world of blood testing, and save millions of lives by making it easier to detect diseases.
[00:01:35] A noble mission, of course, but it was a fraud, it was one great lie.
[00:01:41] And in part three, our final part, which will come out next Tuesday, we will end with perhaps the biggest fraudster in history, Bernie Madoff.
[00:01:52] He was the darling of Wall Street, a man who made his clients, and himself, hundreds of millions of dollars.
[00:02:00] But it turned out that he wasn’t so special at all, he was merely the mastermind behind the biggest Ponzi scheme in American history.
[00:02:10] So, that is what you have coming up in the next three episodes.
[00:02:15] Let’s not waste a minute then, and start with the story of Enron.
[00:02:21] Our story starts with a man named Kenneth Lay.
[00:02:25] He was born in Missouri, in the American midwest, in 1942, the son of a baptist minister.
[00:02:34] He grew up in poverty, there was never much money around when he was a child.
[00:02:40] On graduating from university, he took a job at an oil company, before working inside The Pentagon, the heart of the American Defense Department.
[00:02:51] After a couple of years working for the state, he returned to the private sector, taking jobs with a variety of different energy companies, and working his way up the corporate ladder.
[00:03:04] By 1985 he was in control of a company called Houston Natural Gas, which later changed its name to Enron when it was bought by a competitor.
[00:03:16] The 1980s had seen the energy sector in the US opening up, it had seen deregulation.
[00:03:24] What this meant in practical terms was that there was more competition and more room for private companies to step in and make money.
[00:03:33] Kenneth Lay, and his company Enron, were perfectly poised to benefit from this.
[00:03:40] What Enron did, or at least what it started out by doing, was by transporting and selling oil and natural gas.
[00:03:48] It owned around 60,000 kilometres of pipeline, which would be used to transport natural gas around the country, from where it was produced to where it was going to be used.
[00:04:00] All simple so far.
[00:04:02] But this business wasn’t actually very profitable. Enron had been struggling to compete, and was at risk of going bankrupt.
[00:04:12] It was kept afloat, it was kept alive, partly by a new activity, by a new business division.
[00:04:20] Oil and gas trading, speculating on whether the price of oil or gas would rise or fall.
[00:04:27] This was where the real money seemed to lie, and Enron started making vast amounts of cash.
[00:04:35] Oil trading is normally a risky business, because there are all sorts of factors that can influence the price, and the price goes up and down a lot.
[00:04:45] In the 1970s and 1980s there were huge swings, huge variations in the oil price.
[00:04:53] But Enron always seemed to be on the right side, it always seemed to make money.
[00:04:59] This seemed a little suspicious.
[00:05:02] Early warning signs about bad behaviour in the company came in 1987, when it was discovered that a group of Enron traders had been betting vast amounts of money, much more than they should have, on the price of oil, and taking money from the company and putting it into their own hidden bank accounts.
[00:05:24] There were internal investigations and exactly what these traders had been doing was discovered.
[00:05:31] Not only had they been taking this money and putting it into hidden accounts, but they had been destroying documents, destroying evidence.
[00:05:41] It all seemed to be a joke to them, with one trader even sending money to a fake account named M Yass, a joke name, which if you move the position of the y to behind the m becomes “my ass”.
[00:05:58] Yet Ken Lay, the boss of the company, didn’t seem to care.
[00:06:04] The traders weren’t fired, or even disciplined.
[00:06:08] Even though they had been taking money from the company, and behaving in a dishonest way, they were making so much money for Enron that Lay couldn’t bear the idea of losing them.
[00:06:21] If they were sacked, Enron would be in trouble.
[00:06:25] Indeed, the company didn’t fire them, but sent the head trader a letter saying “Please keep making us millions”.
[00:06:34] The traders were allowed to continue working for Enron, and were encouraged to take greater and greater risks, with a view to making larger and larger profits for the company.
[00:06:46] But, as we now know, oil trading was a very risky business, and two months later, after a few risky bets the same trading division that had previously made Enron millions, lost $90 million over the course of five days.
[00:07:04] Even though Enron might have accepted these traders’ excuses, the US government didn’t, and when their actions were discovered also by the SEC, the Securities and Exchange Commission, they were sentenced to jail.
[00:07:21] Enron was suddenly without its top money-makers.
[00:07:25] Ken Lay and Enron corporation needed a new plan.
[00:07:29] And when an American corporation needs a new plan, a new strategy, the tried and tested idea is to fly in management consultants to fix things.
[00:07:41] And the most prestigious management consultancy, where the advice of a single person can run into the tens of thousands of dollars a day, is called McKinsey & Company, normally just shortened to McKinsey.
[00:07:55] McKinsey was hired by Enron after the 1987 trading scandal to advise on new ways of making money.
[00:08:05] One McKinsey consultant in particular impressed Enron.
[00:08:09] His name was Jeffrey Skilling, and he will have a pivotal role in our story.
[00:08:16] Skilling proposed that Enron become a sort of energy trading house, more like a financial company than an energy company.
[00:08:26] Instead of dealing with the messy work of transporting oil and gas, what if Enron created a sort of stock exchange for energy, a place where buyers and sellers could meet, and Enron would of course take a slice of every transaction.
[00:08:45] Ken Lay, the boss of Enron, knew how profitable the trading business had been for the company, Skilling’s idea came at the right time, and Jeffrey Skilling was hired to start something called Enron bank.
[00:09:01] Skilling’s other major suggestion to Enron was to switch the way it did its accounting.
[00:09:08] Enron had previously used a straightforward, simple way of accounting.
[00:09:14] If it bought or sold oil or gas, or was paid for transporting it, these numbers would be added to its accounts.
[00:09:22] Easy.
[00:09:23] But Skilling proposed that Enron adopt something called market-to-market accounting.
[00:09:30] To put it simply, this meant that Enron could say that it had made money even if it hadn’t actually yet made it.
[00:09:39] It allowed the company to look at deals it had done, value them itself, and book the profits, to account for these profits in its accounts.
[00:09:51] The result of this was that, from an accounting point of view, Enron seemed to be making more and more money, it seemed to be a business that was printing money left right and centre.
[00:10:04] Yet these profits weren’t actually realised profits, they were just estimates of the profits that the business said it would make in the future.
[00:10:14] Why would a company do this, you might ask?
[00:10:18] Well, Enron was a publicly traded company.
[00:10:21] The more money that outsiders thought it was making, the more desirable it would be, and the higher the share price would go.
[00:10:30] Enron executives were normally given large amounts of shares, and so the higher the share price, the more money they made individually.
[00:10:40] In the case of senior executives, these sums were astronomical.
[00:10:46] Kenneth Lay, the boss of Enron, made $220 million in cash and shares in only 3 years, and traders were routinely making tens of millions of dollars a year.
[00:11:00] The other thing that Skilling did was to change the character of the company.
[00:11:06] He was a deeply competitive person, and believed that humans thrive on competition.
[00:11:13] At Enron he fostered a culture of dog-eat-dog, of people competing to be number one, to make the most money for the company.
[00:11:22] There were frequent performance reviews at the company where every employee was given a score of 1 to 5.
[00:11:31] 1 was excellent, and meant you were in line for promotion, and more money.
[00:11:35] 5 was the worst, and if you got a 5 you would be fired.
[00:11:41] 10% of employees had to be given a 5, meaning there was a ruthless culture of employees working all hours of the day to try to make the company as much money as possible, and be ranked higher than their colleagues.
[00:11:57] As all of this was happening, the energy sector was deregulating further.
[00:12:02] Enron’s traders used all sorts of tricks to drive up the price of the energy it was selling, even doing things like moving energy from one state to another, cutting off the power, and then selling it back to states at a higher price when they needed it most.
[00:12:22] It’s estimated that in the state of California alone this kind of unethical behaviour cost the state government $30 billion dollars.
[00:12:33] The late 1990s also saw the dotcom boom, with technology companies going public at huge valuations, and making people vast fortunes in the process.
[00:12:45] Enron wanted to get in on this and it teamed up with Blockbuster, the video rental company, to build a broadband network, and created its own broadband unit.
[00:12:58] As soon as the deal was signed, Enron recorded bumper profits, saying that this broadband unit would be worth $35 billion.
[00:13:10] Yet nobody actually knew what it was worth.
[00:13:13] It certainly seemed unlikely that it was worth anywhere near $35 billion, but this new system of market-to-market accounting meant that Enron was free to claim this as a profit, yet again boosting its share price.
[00:13:30] Enron seemed to be able to do no wrong.
[00:13:34] Its employees were making vast amounts of money, its shareholders were getting rich, and it seemed to be a great success story of the merits of deregulation.
[00:13:46] Ken Lay was a great storyteller, a charismatic man, and he sold the story that Enron was enabling the future.
[00:13:54] Almost everyone bought it, but some didn’t.
[00:13:59] One journalist, a lady named Bethany McLean, even asked an Enron executive “How exactly does Enron make its money?”, to which the answer was–and I’m paraphrasing here– “it’s complicated and I don’t want to tell you”.
[00:14:14] As more people started to look more closely at the inner workings of Enron, they started scratching their heads.
[00:14:22] A lot of it didn’t make a huge amount of sense.
[00:14:26] Then, abruptly in August 2001, Jeff Skilling resigned, citing personal reasons, saying he was leaving for reasons unrelated to the job.
[00:14:38] He had taken over as CEO of Enron 6 months before, and analysts saw that he had sold $33 million worth of shares just before resigning.
[00:14:50] These didn’t seem to be the actions of a man who was really leaving for personal reasons.
[00:14:57] A day later an executive wrote an anonymous letter to Kenneth Lay, saying that the company was about to implode.
[00:15:05] It was the start of the end for Enron.
[00:15:08] In September the New York Times published an article saying “Something is wrong with the state of Enron”.
[00:15:15] The share price crashed, and Enron admitted that various divisions were worth billions of dollars less than it had previously said they were.
[00:15:27] As the curtains were raised on the inner dealings of the company, it was revealed that it had used all sorts of complex structures to pretend that it was making huge amounts of money, and hide how much money it was actually losing.
[00:15:43] Its high-flying CFO, the finance boss, who was described as a man with no moral compass, had created these complex structures which allowed Enron to show its profits and hide its losses, making it look like a flourishing business when in fact it was completely the opposite.
[00:16:03] At the same time, he had paid himself tens of millions of dollars personally to manage these dubious structures on top of the huge salary he was getting from Enron.
[00:16:17] By the end of November, Enron was on its last legs.
[00:16:21] Its share price had tumbled from over $90 in August of 2000 to being worth 61 cents in November a year later, a loss of over 99%.
[00:16:34] And on December 1st the business was officially declared bankrupt.
[00:16:40] Tens of thousands of employees lost their jobs, as well as losing all of their pension money that they had invested in the company.
[00:16:48] Enron executives had persuaded employees to invest their life savings, as well as their pensions, in Enron shares, while knowing full well that it was a huge fraud, that the company had been inflating its profits.
[00:17:05] In the aftermath of the collapse, senior executives including Lay and Skilling were tried in court.
[00:17:13] Lay was charged with 11 counts of fraud, but died of a heart attack before ever spending a night in prison.
[00:17:21] Jeffrey Skilling, on the other hand, was sentenced to 24 years in prison.
[00:17:27] He served 13 years, and was released in 2019.
[00:17:32] Another executive, J. Clifford Baxter, shot himself in the head before he could stand trial.
[00:17:39] The scandal also saw the downfall of one of America’s oldest accounting firms, Arthur Andersen.
[00:17:47] The firm was in charge of Enron’s accounts, so should have seen what was going on.
[00:17:53] Yet Enron was too big, too profitable, and Arthur Anderson didn’t want to lose its golden goose.
[00:18:01] Arthur Anderson wasn’t just guilty of doing nothing, he was actively complicit, and helped Enron shred over a tonne of incriminating evidence, hiding it from investigators.
[00:18:14] And it too collapsed with Enron.
[00:18:17] Since the fall of Enron, there have been numerous new laws implemented to try to avoid a similar situation happening again.
[00:18:27] This might certainly help, but almost all of the individuals responsible for the crimes at Enron are now walking free.
[00:18:36] Indeed, one of the first things that Jeffrey Skilling did, on his release from prison, was start up a new energy trading business.
[00:18:45] He was banned by the government from serving as an officer in a public company, but there is nothing to stop him from working for a private company.
[00:18:54] One has to only hope that his 13 years in prison will have taught him to behave a little bit better this time round.
[00:19:03] Ok then, that is the story of The Enron Scandal, a story of unadulterated greed, a story of financial engineering gone wrong, a story of what can happen when executives become addicted to quarterly earnings reports, and of when profits need to be bigger and bigger every three months.
[00:19:25] It is a fascinating story, and shows the lengths that people will go to to make money, and then try to cover their tracks afterwards.
[00:19:35] As always, I would love to know what you thought of this episode.
[00:19:39] Have there been similar scandals, or frauds in your country? Do you remember the Enron scandal? What do you think it tells us, if anything, about human nature?
[00:19:50] I would love to know.
[00:19:51] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:20:01] And as a reminder, this is part 1 of our 3-part series. Next up we will have Theranos, the blood testing startup, and the lady who went from being the world’s youngest female self-made billionaire to being exposed as a huge fraud.
[00:20:18] And part three will be on the most prolific fraudster of them all, the man who stole $65 billion, Bernie Madoff.
[00:20:28] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:20:33] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
[END OF EPISODE]
[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:22] I'm Alastair Budge and today is the start of another three-part mini-series, this time on great American business frauds.
[00:00:33] In this mini-series we are going to look at times when companies, or individuals within companies, committed huge frauds, tricking investors, employees, journalists, while becoming fabulously wealthy in the process.
[00:00:50] In today’s episode, the first episode, we are going to talk about Enron, the mysterious energy trading company that was once the poster child of American success, the company that couldn’t stop making money, but eventually came crashing down, resulting in lengthy prison sentences, billions of dollars wiped out, thousands of jobs lost, and even a suicide.
[00:01:18] Then, in part two, which is going to come out on Friday, we are going to look at Theranos, the company that promised to revolutionise the world of blood testing, and save millions of lives by making it easier to detect diseases.
[00:01:35] A noble mission, of course, but it was a fraud, it was one great lie.
[00:01:41] And in part three, our final part, which will come out next Tuesday, we will end with perhaps the biggest fraudster in history, Bernie Madoff.
[00:01:52] He was the darling of Wall Street, a man who made his clients, and himself, hundreds of millions of dollars.
[00:02:00] But it turned out that he wasn’t so special at all, he was merely the mastermind behind the biggest Ponzi scheme in American history.
[00:02:10] So, that is what you have coming up in the next three episodes.
[00:02:15] Let’s not waste a minute then, and start with the story of Enron.
[00:02:21] Our story starts with a man named Kenneth Lay.
[00:02:25] He was born in Missouri, in the American midwest, in 1942, the son of a baptist minister.
[00:02:34] He grew up in poverty, there was never much money around when he was a child.
[00:02:40] On graduating from university, he took a job at an oil company, before working inside The Pentagon, the heart of the American Defense Department.
[00:02:51] After a couple of years working for the state, he returned to the private sector, taking jobs with a variety of different energy companies, and working his way up the corporate ladder.
[00:03:04] By 1985 he was in control of a company called Houston Natural Gas, which later changed its name to Enron when it was bought by a competitor.
[00:03:16] The 1980s had seen the energy sector in the US opening up, it had seen deregulation.
[00:03:24] What this meant in practical terms was that there was more competition and more room for private companies to step in and make money.
[00:03:33] Kenneth Lay, and his company Enron, were perfectly poised to benefit from this.
[00:03:40] What Enron did, or at least what it started out by doing, was by transporting and selling oil and natural gas.
[00:03:48] It owned around 60,000 kilometres of pipeline, which would be used to transport natural gas around the country, from where it was produced to where it was going to be used.
[00:04:00] All simple so far.
[00:04:02] But this business wasn’t actually very profitable. Enron had been struggling to compete, and was at risk of going bankrupt.
[00:04:12] It was kept afloat, it was kept alive, partly by a new activity, by a new business division.
[00:04:20] Oil and gas trading, speculating on whether the price of oil or gas would rise or fall.
[00:04:27] This was where the real money seemed to lie, and Enron started making vast amounts of cash.
[00:04:35] Oil trading is normally a risky business, because there are all sorts of factors that can influence the price, and the price goes up and down a lot.
[00:04:45] In the 1970s and 1980s there were huge swings, huge variations in the oil price.
[00:04:53] But Enron always seemed to be on the right side, it always seemed to make money.
[00:04:59] This seemed a little suspicious.
[00:05:02] Early warning signs about bad behaviour in the company came in 1987, when it was discovered that a group of Enron traders had been betting vast amounts of money, much more than they should have, on the price of oil, and taking money from the company and putting it into their own hidden bank accounts.
[00:05:24] There were internal investigations and exactly what these traders had been doing was discovered.
[00:05:31] Not only had they been taking this money and putting it into hidden accounts, but they had been destroying documents, destroying evidence.
[00:05:41] It all seemed to be a joke to them, with one trader even sending money to a fake account named M Yass, a joke name, which if you move the position of the y to behind the m becomes “my ass”.
[00:05:58] Yet Ken Lay, the boss of the company, didn’t seem to care.
[00:06:04] The traders weren’t fired, or even disciplined.
[00:06:08] Even though they had been taking money from the company, and behaving in a dishonest way, they were making so much money for Enron that Lay couldn’t bear the idea of losing them.
[00:06:21] If they were sacked, Enron would be in trouble.
[00:06:25] Indeed, the company didn’t fire them, but sent the head trader a letter saying “Please keep making us millions”.
[00:06:34] The traders were allowed to continue working for Enron, and were encouraged to take greater and greater risks, with a view to making larger and larger profits for the company.
[00:06:46] But, as we now know, oil trading was a very risky business, and two months later, after a few risky bets the same trading division that had previously made Enron millions, lost $90 million over the course of five days.
[00:07:04] Even though Enron might have accepted these traders’ excuses, the US government didn’t, and when their actions were discovered also by the SEC, the Securities and Exchange Commission, they were sentenced to jail.
[00:07:21] Enron was suddenly without its top money-makers.
[00:07:25] Ken Lay and Enron corporation needed a new plan.
[00:07:29] And when an American corporation needs a new plan, a new strategy, the tried and tested idea is to fly in management consultants to fix things.
[00:07:41] And the most prestigious management consultancy, where the advice of a single person can run into the tens of thousands of dollars a day, is called McKinsey & Company, normally just shortened to McKinsey.
[00:07:55] McKinsey was hired by Enron after the 1987 trading scandal to advise on new ways of making money.
[00:08:05] One McKinsey consultant in particular impressed Enron.
[00:08:09] His name was Jeffrey Skilling, and he will have a pivotal role in our story.
[00:08:16] Skilling proposed that Enron become a sort of energy trading house, more like a financial company than an energy company.
[00:08:26] Instead of dealing with the messy work of transporting oil and gas, what if Enron created a sort of stock exchange for energy, a place where buyers and sellers could meet, and Enron would of course take a slice of every transaction.
[00:08:45] Ken Lay, the boss of Enron, knew how profitable the trading business had been for the company, Skilling’s idea came at the right time, and Jeffrey Skilling was hired to start something called Enron bank.
[00:09:01] Skilling’s other major suggestion to Enron was to switch the way it did its accounting.
[00:09:08] Enron had previously used a straightforward, simple way of accounting.
[00:09:14] If it bought or sold oil or gas, or was paid for transporting it, these numbers would be added to its accounts.
[00:09:22] Easy.
[00:09:23] But Skilling proposed that Enron adopt something called market-to-market accounting.
[00:09:30] To put it simply, this meant that Enron could say that it had made money even if it hadn’t actually yet made it.
[00:09:39] It allowed the company to look at deals it had done, value them itself, and book the profits, to account for these profits in its accounts.
[00:09:51] The result of this was that, from an accounting point of view, Enron seemed to be making more and more money, it seemed to be a business that was printing money left right and centre.
[00:10:04] Yet these profits weren’t actually realised profits, they were just estimates of the profits that the business said it would make in the future.
[00:10:14] Why would a company do this, you might ask?
[00:10:18] Well, Enron was a publicly traded company.
[00:10:21] The more money that outsiders thought it was making, the more desirable it would be, and the higher the share price would go.
[00:10:30] Enron executives were normally given large amounts of shares, and so the higher the share price, the more money they made individually.
[00:10:40] In the case of senior executives, these sums were astronomical.
[00:10:46] Kenneth Lay, the boss of Enron, made $220 million in cash and shares in only 3 years, and traders were routinely making tens of millions of dollars a year.
[00:11:00] The other thing that Skilling did was to change the character of the company.
[00:11:06] He was a deeply competitive person, and believed that humans thrive on competition.
[00:11:13] At Enron he fostered a culture of dog-eat-dog, of people competing to be number one, to make the most money for the company.
[00:11:22] There were frequent performance reviews at the company where every employee was given a score of 1 to 5.
[00:11:31] 1 was excellent, and meant you were in line for promotion, and more money.
[00:11:35] 5 was the worst, and if you got a 5 you would be fired.
[00:11:41] 10% of employees had to be given a 5, meaning there was a ruthless culture of employees working all hours of the day to try to make the company as much money as possible, and be ranked higher than their colleagues.
[00:11:57] As all of this was happening, the energy sector was deregulating further.
[00:12:02] Enron’s traders used all sorts of tricks to drive up the price of the energy it was selling, even doing things like moving energy from one state to another, cutting off the power, and then selling it back to states at a higher price when they needed it most.
[00:12:22] It’s estimated that in the state of California alone this kind of unethical behaviour cost the state government $30 billion dollars.
[00:12:33] The late 1990s also saw the dotcom boom, with technology companies going public at huge valuations, and making people vast fortunes in the process.
[00:12:45] Enron wanted to get in on this and it teamed up with Blockbuster, the video rental company, to build a broadband network, and created its own broadband unit.
[00:12:58] As soon as the deal was signed, Enron recorded bumper profits, saying that this broadband unit would be worth $35 billion.
[00:13:10] Yet nobody actually knew what it was worth.
[00:13:13] It certainly seemed unlikely that it was worth anywhere near $35 billion, but this new system of market-to-market accounting meant that Enron was free to claim this as a profit, yet again boosting its share price.
[00:13:30] Enron seemed to be able to do no wrong.
[00:13:34] Its employees were making vast amounts of money, its shareholders were getting rich, and it seemed to be a great success story of the merits of deregulation.
[00:13:46] Ken Lay was a great storyteller, a charismatic man, and he sold the story that Enron was enabling the future.
[00:13:54] Almost everyone bought it, but some didn’t.
[00:13:59] One journalist, a lady named Bethany McLean, even asked an Enron executive “How exactly does Enron make its money?”, to which the answer was–and I’m paraphrasing here– “it’s complicated and I don’t want to tell you”.
[00:14:14] As more people started to look more closely at the inner workings of Enron, they started scratching their heads.
[00:14:22] A lot of it didn’t make a huge amount of sense.
[00:14:26] Then, abruptly in August 2001, Jeff Skilling resigned, citing personal reasons, saying he was leaving for reasons unrelated to the job.
[00:14:38] He had taken over as CEO of Enron 6 months before, and analysts saw that he had sold $33 million worth of shares just before resigning.
[00:14:50] These didn’t seem to be the actions of a man who was really leaving for personal reasons.
[00:14:57] A day later an executive wrote an anonymous letter to Kenneth Lay, saying that the company was about to implode.
[00:15:05] It was the start of the end for Enron.
[00:15:08] In September the New York Times published an article saying “Something is wrong with the state of Enron”.
[00:15:15] The share price crashed, and Enron admitted that various divisions were worth billions of dollars less than it had previously said they were.
[00:15:27] As the curtains were raised on the inner dealings of the company, it was revealed that it had used all sorts of complex structures to pretend that it was making huge amounts of money, and hide how much money it was actually losing.
[00:15:43] Its high-flying CFO, the finance boss, who was described as a man with no moral compass, had created these complex structures which allowed Enron to show its profits and hide its losses, making it look like a flourishing business when in fact it was completely the opposite.
[00:16:03] At the same time, he had paid himself tens of millions of dollars personally to manage these dubious structures on top of the huge salary he was getting from Enron.
[00:16:17] By the end of November, Enron was on its last legs.
[00:16:21] Its share price had tumbled from over $90 in August of 2000 to being worth 61 cents in November a year later, a loss of over 99%.
[00:16:34] And on December 1st the business was officially declared bankrupt.
[00:16:40] Tens of thousands of employees lost their jobs, as well as losing all of their pension money that they had invested in the company.
[00:16:48] Enron executives had persuaded employees to invest their life savings, as well as their pensions, in Enron shares, while knowing full well that it was a huge fraud, that the company had been inflating its profits.
[00:17:05] In the aftermath of the collapse, senior executives including Lay and Skilling were tried in court.
[00:17:13] Lay was charged with 11 counts of fraud, but died of a heart attack before ever spending a night in prison.
[00:17:21] Jeffrey Skilling, on the other hand, was sentenced to 24 years in prison.
[00:17:27] He served 13 years, and was released in 2019.
[00:17:32] Another executive, J. Clifford Baxter, shot himself in the head before he could stand trial.
[00:17:39] The scandal also saw the downfall of one of America’s oldest accounting firms, Arthur Andersen.
[00:17:47] The firm was in charge of Enron’s accounts, so should have seen what was going on.
[00:17:53] Yet Enron was too big, too profitable, and Arthur Anderson didn’t want to lose its golden goose.
[00:18:01] Arthur Anderson wasn’t just guilty of doing nothing, he was actively complicit, and helped Enron shred over a tonne of incriminating evidence, hiding it from investigators.
[00:18:14] And it too collapsed with Enron.
[00:18:17] Since the fall of Enron, there have been numerous new laws implemented to try to avoid a similar situation happening again.
[00:18:27] This might certainly help, but almost all of the individuals responsible for the crimes at Enron are now walking free.
[00:18:36] Indeed, one of the first things that Jeffrey Skilling did, on his release from prison, was start up a new energy trading business.
[00:18:45] He was banned by the government from serving as an officer in a public company, but there is nothing to stop him from working for a private company.
[00:18:54] One has to only hope that his 13 years in prison will have taught him to behave a little bit better this time round.
[00:19:03] Ok then, that is the story of The Enron Scandal, a story of unadulterated greed, a story of financial engineering gone wrong, a story of what can happen when executives become addicted to quarterly earnings reports, and of when profits need to be bigger and bigger every three months.
[00:19:25] It is a fascinating story, and shows the lengths that people will go to to make money, and then try to cover their tracks afterwards.
[00:19:35] As always, I would love to know what you thought of this episode.
[00:19:39] Have there been similar scandals, or frauds in your country? Do you remember the Enron scandal? What do you think it tells us, if anything, about human nature?
[00:19:50] I would love to know.
[00:19:51] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:20:01] And as a reminder, this is part 1 of our 3-part series. Next up we will have Theranos, the blood testing startup, and the lady who went from being the world’s youngest female self-made billionaire to being exposed as a huge fraud.
[00:20:18] And part three will be on the most prolific fraudster of them all, the man who stole $65 billion, Bernie Madoff.
[00:20:28] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:20:33] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
[END OF EPISODE]
