ColdFusion - Enron - The Biggest Fraud in History

Starting point is 00:00:01 Hi, welcome to another Cold Fusion video. It's a distant fact now, but Enron was once the seventh largest corporation in America. They revolutionized trading and the energy market. They were far smarter than their competitors, and their business was intricate and too complex for the average person to understand. Except, in reality, it was all a big scam filled with lies, fraud, and political manipulation. Enron was the biggest scam in U.S. history. The fallout from the scam was monumental. Billions of dollars stolen, thousands of lost jobs, dozens of convictions, one suicide,

Starting point is 00:00:40 and the unveiling of a very public display of corporate greed that shine directly into the heart of corporate America. This is the story of how one company took 10 years to grow to $60 billion in value, and then, in less than a month, go bankrupt. This is the story of Enron. You are watching Tullfusion TV. Enron began as an energy supply company mainly dealing with natural gas. Eventually, the company moved on to trading, making energy deals in power, and then later moving onto broadband and even trading the weather. There were Wall Street's darling, the company that could never lose,

Starting point is 00:01:28 and its stock price kept growing year on year. The company was also well-connected politically. For example, Enron was the single biggest contributor to, to the George W. Bush campaign. Bush even called Kenneth Lay, the founder of Enron, Kenny Boy. And it's with Kenny Boy that the story starts. Growing up in a poor family, Kenneth Lay's father was a Baptist priest. The young Ken would often ponder about his future, a future where he could escape his current conditions. When he grew up, he became a prominent figure in the deregulation of the energy sector. The PhD graduate spent his time as a financial analyst in the Pentagon before,

Starting point is 00:02:09 climbing the ranks and becoming close friends with George Bush Sr. Ken Lay would even send the Enron corporate jet to take George Sr. and his wife to their son's inauguration. As you'll see later, these favours did not go unreturned. The first red flag for founder of the company Kenneth Lay that something was wrong within the company came during the Valhalla scandal of 1987. Two oil traders working for Enron gambled enormously on the company's behalf, shifting money to fake accounts with names such as M.Y. Arse or My Ars. Worried auditors told Lay that they found the two traders moving money into their own accounts, manipulating earnings and gambling on trades beyond their capacity.

Starting point is 00:02:59 But instead of firing the two rogue traders, Lay made no changes. Didn't seem to matter what they were doing as long as they were making the company money. Enron even sent them a letter saying, Please keep making us millions. Later, the two were convicted of fraud. Ken Lay acted shocked, saying that he was not aware of their reckless gambling and theft. But as revealed later, he actually encouraged it. One of the convicted traders was sent to jail for a year, and this gave Ken Lay a big problem.

Starting point is 00:03:27 One of his main moneymakers was behind bars, and he needed someone new to bring in cash. Enter Jeffrey Skilling. Skilling, Enron's new CEO, was Lay's biggest asset. When he arrived at Enron, he started moving the company in a new direction. Skilling wanted to turn Enron from a gas supply company into a stock market for natural gas. He also introduced the company to Mark to Market accounting, an idea that would allow the company to fraudulently reap billions. So Mark to Market accounting simply allows the company to write down profits in their books on the day that the deal was signed. This meant that if Enron signed a deal worth $50 million over the next 10 years, they could write $50 million in their books that day.

Starting point is 00:04:18 despite not receiving a penny, it didn't even matter if the deal fell through. Effectively, this meant that the company was worth more on paper than it had actually earned. The deals were often subjective. They could be worth whatever Enron thought they were worth. When the Security and Exchange Commission approved the accounting trick of mark-to-market for Enron, the office celebrated. They knew that this was the key to making billions. Meanwhile, Skilling was known for his Darwinian philosophy, survival of the fittest. His favourite book, The Selfist Gene, describes how greed and competition motivate human nature. At Enron, Skilling wanted to unlock these instincts in his employees.

Starting point is 00:05:02 One way he did this was grading all employees on a scale of 1 to 5, with one being the best and 5 being the worst. The thing was, 10% of all employees had to be graded to 5, and when you were greater to 5, you were fired. This created the competition that Skilling was looking for. People began to work 18 hours a day and were ruthless in their efforts to earn the company as much money as possible. Skilling famously said that money was the only thing that motivated people. Unsurprisingly, Skilling was a massive risk taker. He often went on wild adventures with other Enron executives. This includes dirt biking on dangerous trails where people often flip their cars.

Starting point is 00:05:40 An executive even required stitches after a biking accident on one of these trips. Skilling said he liked guys like this, guys with a bit of edge. Lau Pai, a mild-mannered executive, was one of these guys with a bit of edge. Skilling called Lau Pai, his ICBM, Intercontinental ballistic missile. He was CEO of an Enron subsidiary and seemed to be motivated by two things, money and strippers. Pye isn't as mysterious figure as one can be in such a huge scandal. He left Enron in 2001 with $250 million and became the second largest landowner in Colorado. He left his business division with $1 billion of losses and escaped the whole scandal pretty much intact.

Starting point is 00:06:27 Pye would come back later into this story a few decades after the dust settles. Front online will change the markets for many, many commodities. It is creating an open, transparent marketplace that replaces the dark, blind system that existed. It is real simple. It turn on your computer and it's right there. And if you want to do business, you push the button. That's our vision. We're trying to change the world.

Starting point is 00:07:09 And it wasn't just internet companies feeling the fever. Enron's stock had tripled in the space of two years. Everyone with a little bit of spare cash was playing the stock market game. Enron knew that as long as the company met or exceeded endless expectations, the stock price would keep rising. And somehow, they always met or exceeded those expectations. During this time, while Jeff Skilling stood at the company's conventions telling his staff to put more of their 401k into Enron, he knew that the profits were actually going in the opposite direction. Around the world, they were losing billions on natural gas projects. Enron had poured billions of dollars into a plant in India, only to realize that India couldn't afford to buy the electricity.

Starting point is 00:07:53 The site lay in ruins, but that didn't stop the executives at Enron, writing down future profits for the project into their books and handing them. themselves massive bonuses. The analysts, the very people who were supposed to stop the corruption, fell under the spell of skilling. The complexity of the company and the charisma of skilling made analysts simply take him at his word. In fact, the ones that didn't were fired. The company soon began trading bandwidth after some dot-com inspiration. They made a deal with Blockbuster to provide streaming services, but the technology just simply didn't work well enough yet. The deal fell through, but Enron still wrote 53 million. dollars in their books for it. Things began to get out of control and Enron soon began trading

Starting point is 00:08:39 weather, yes, the weather, like sunshine and rain. They would soon sell futures on the weather, essentially gambling what the temperature would be. You would probably imagine that most people would be skeptical of this, but it was activities like this that led Enron to being listed on the 14500's most innovative companies list. But one reporter at Fortune would soon start asking questions. And this would later lead to the company's demise. Bethany McLean, a reporter at Fortune, was doing a piece on Enron. She had a phone call with John Skilling, where she asked some simple questions like, How exactly does Enron make its money?

Starting point is 00:09:20 Skilling said he couldn't answer because he wasn't an accountant, so he sent a few finance guys, including Andy Fustow, the CFO, to answer her questions the next day. They sat in the office for three hours pouring over documents. At the end, as others had left the room, Andy turned to the reporter and said, I don't care what you write about the company, just don't make us look bad. Andy Fostow was a character described as having no moral compass. He made Enron debts disappear by moving them to shell company so that on paper, Enron was profitable. He even set up his own fraudulent firm just to buy Enron assets.

Starting point is 00:09:55 This fraudulent firm was called LJM. Andy would later convince 96 bankers to invest in the scam LJM. M firm. LJM would make Andy Fostow $45 million, but it seemed that the banks were in on the deal too. Merrill Lynch bought three Nigerian barges from Enron and sold them back five months later. This was to help Enron cook their books, and later, several bankers would go to jail for this. Both Skilling and Lay knew that even this couldn't last forever. They needed a new gold mine, and then they turned their eyes to the golden state, California. Now, skilling became increasingly volatile, arriving at work unshaved and red-eyed.

Starting point is 00:10:40 On a 2001 investor's call, he even called an investor an A-Hull. A brash reaction from a Fortune 500 CEO. The pressure was getting to him. The company had to keep making quarterly targets, despite their businesses failing at home and abroad. California was going to be their next big score. Enron merged with Pacific Gas and Electric, which gave them access to the Californian grid. Once this was achieved, strange things began to happen. In the newly deregulated electricity market of California, rolling blackouts became common, but strangely,

Starting point is 00:11:15 the state had almost double the capacity than there was demand. So why was this happening? It turns out Enron traders were manipulating the market. They moved electricity out of state to increase demand, and when the price got high enough, they would move it back in. They even called power plants and asked them to make a excuses to shut down for a few hours, increasing the price as there was less demand. Traders had energy maps and the control to move the energy. They knew exactly how to squeeze every last dollar from the people of California. While the state faced blackouts causing unknown tolls on the lives of Californians,

Starting point is 00:11:52 the Enron traders were high-fiving themselves over their bonuses. Ken Lay even said, It doesn't matter how many rules you Californians make, I got a bunch of smart people here that will figure out how to make money anyway. The year-long ordeal would cost California $30 billion. But why didn't the state put a stop to it? Well, the law states that it's a federal government issue, and it's their responsibility to take care of it. And guess who the president was at the time?

Starting point is 00:12:21 That's right, Lay's good friend, George W. Bush. Bush refused to step in, saying that it was his administration's belief that intervention would not solve anything. The Federal Energy Regulation Commission also didn't step in until the Senate forced them to. The chairman of the commission was personally recommended by Kenneth Lay. This whole ordeal caused the people of California to turn on their governor and appoint a new one. One that was more suitable for the role, the Terminator. One day in 2001, out of the blue, Skilling, suddenly resigned. Perhaps he figured he could leave the company years before it imploded.

Starting point is 00:13:04 Then he could say, well, it was fine. when I left it. Regardless, Kenneth Lay took over the CEO role. Just one day later, Sharon Watkins, who worked under the company CFO, Andrew Fostow, sent a letter to Kenneth Lay, detailing the staggering amount of corruption and fraud that she'd found within the company. The Wall Street Journal would write a piece about some of Andy's dealings, and soon, the SEC would launch an informal inquiry. At this point, investors began to feel nervous. Kenneth Lay tried to bring calm and reassurance to investors and employees. While he was addressing the company's issue to a speech to employees, just several blocks away, Enron's accounting firm was busy shredding documents.

Starting point is 00:13:49 One of the accounting firms shred one ton of paper on October the 23rd, but it was too late. The walls began to fall, and over the course of a month, the company went from that healthy appearance of one of the leading innovators to total bankruptcy. You want us to believe that you sat there in your office and had no clue that this place was about to collapse. On the day I left on August 14th, 2001, I believe the company was in strong financial condition. I did not do anything that was not in the interest in all the time that I worked for Enron Corporation that was in the interest of the shareholders of the company. If I could go back and redo things, I would not now. For the thousands of people who held Enron stock, the market was frozen at the $32 mark, and when it reopened, it was $9 a share.

Starting point is 00:14:43 Meanwhile, Enron executives had a fire sale of all of their stock. In the months leading up to the bankruptcy, Skilling told his employees to buy more stock, while he sold all of his. As the media began circling the story, criminal investigations were launched. Cliff Baxter, a trader who often went on Skilling's wild adventures, cashed in $30 million from Enron. After being called to testify in court, Baxter got in his Mercedes, drove down a quiet street and shot himself.

Starting point is 00:15:13 Andy Fostow, the former CFO, pleaded guilty to conspiracy to commit wire fraud. He ratted out and cut himself a deal to testify against other Enron executives. He was sentenced to 10 years but only served 6 and paid $23 million in fines. Enron's accounting firm, Arthur Anderson, the one that, shredded one ton of paper was convicted of obstructing justice. America's oldest accounting firm collapsed due to the loss of reputation. 29,000 people lost their jobs. Ken Lay earned 300 million from Enron. He was found guilty of 10 counts a securities fraud and was facing 45 years in prison but died of a heart attack a month before his sentencing.

Starting point is 00:15:58 20,000 people at Enron... Staples Preferred Business Membership. Built busy business owners, because you've got bigger things to think about. With Staples Preferred, get free delivery. No minimums. Staples Preferred unlocks up to 3% back. Plus 10% savings on print and exclusive wireless offers. One less thing on your plate. Actually, a lot less. Visit staples.ca.ca. That was easy. Lost their jobs and medical insurance with an average severance pay of only

Starting point is 00:16:33 $4,500. Executives were paid $55 million during the bankruptcy and cashed a further $774 million in the year before the collapse. Skilling, the mastermind behind Enron, was convicted of 19 counts of security and wire fraud. He was sentenced to 24 years and 180 million in fines. While in jail, his parents and his son passed away. He only served 12 years of his 24-year sentence and was. released in early 2019, but this isn't where the story ends. Skilling is hoping that he can get a

Starting point is 00:17:12 second chance. He appears to be plotting a return to the energy sector. Only two months after his prison release in early 2019, Skilling was entered as a manager of the new company which he founded a few years ago. Lau Pai, the former Enron executive who sailed off into the sunset with his $250 million, is reported to be helping Skilling regain connections and funding. According to the Wall Street Journal, skilling has been holding meetings with former Enron executives in relation to starting a new venture. This may be difficult for him as obviously his reputation has been massively smeared. But apart from people's perception, there's technically nothing stopping him. The SEC has banned Skilling from being an officer of any public company,

Starting point is 00:17:53 so as long as his venture stays private, he can do whatever he wants. So that is the story of Enron with a not-so-typical ending. Despite being one of the biggest players in the biggest scam in US history, resulting in billions of dollars and losses for average people, tens of thousands of lost jobs, and executives reaping in billions. Skilling is out of jail and free to start again. Enron's motto was Ask Why.

Starting point is 00:18:20 During its astronomical rise, it seemed that no one bothered to ask why, how, or where the money was coming from. And now, with Skilling out of jail and trying to re-enter the business world, maybe once again, we should ask, why. So that wraps up our look at Enron. Thanks for watching this video.

Starting point is 00:18:43 I hope you enjoyed it. If you want to see stuff like this or much more, you should definitely consider subscribing to this channel. If you want to see my last video on business fraud, which was The Theranos story, I'll leave a link for that after this. Interestingly enough, Elizabeth Holmes' dad was a former executive at Enron.

Starting point is 00:18:59 I'll say no more. Anyway, that's it. Thanks for watching. This has been Dago and you've been watching Cold Fusion and I'll see you again soon for the next video. Cheers, guys. Have a good one. Old fusion. It's me thinking.

ColdFusion - Enron - The Biggest Fraud in History

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