The Norms of the Stockholder Thesis - Essay Example

ENRON The stockholder thesis contends that business entities are expected to safeguard the interest of the stockholders at all times and do their best to ensure that the interest is not compromised in any way during the course of the day-to-day business operations as well as futuristic plans of binding nature. U.S and global giant Enron, which had built a massive reputation as one of the best companies in the world unceremoniously, bit the dust in 2001. It all happened because Enron violated the norms of the stockholder thesis. Enron’s slide towards disaster involved 2 stages. The first comprised milestones that began the rot and the second comprised milestones that marked the rapid spiral towards bankruptcy. The first milestone of the first stage occurred in 1987 when Lou Borget, the man who “created Enron Oil” (McLean et al. 16) was found guilty of fraud and money laundering, resulting in a massive loss of $ 64 million to Enron’s stockholders. That Borget was a part of a wider conniving circle came to light later when Mike Muckleroy, Vice Chairman of Enron Oil in his testimony in “The Enron Movie” accused Kenneth Lay {Chairman and CEO of Enron} of having a significant role in the Borget scandal (Wikipedia.org). Muckleroy eventually turned out to be one of the good guys “who bailed out of the company during the Enron Oil scandal” (McLean et al. Front Matter) while Borget acknowledged his guilt by later testifying that Enron Oil was “the swing entry to meet [Enron] objectives each month” (McLean et al. 19). The second milestone took place in 1998 when Enron executives sanctioned speculative capital-intensive ventures involving water distribution systems and power plants in Brazil (Wikipedia.org). The operation, spearheaded by Enron executive Rebecca Mark {nicknamed the “Empress of Energy” (McLean et al. 75)} misfired because the plants were not “supposed to be operational” for years and “[may never] generate the monster profits Enron was anticipating (McLean et al. 77)}. The third milestone occurred in 1999, although it began 3 years earlier. In 1996, Enron CFO Andrew Fastow manipulated transactions between Enron and “conflict of interest partnerships” (Bethany et al. 386) whereby not only was debt of the former transferred to the latter, but also the CFO and other senior Enron officials made money from the transactions. When the fraud was eventually exposed, Vincent Kamiski went on record to remark that the actions were “so stupid that only Andrew Fastow could have come up with it” (McLean et al. 192). Fastow then formed “a special purpose entity” (McLean et al. 168) called Chewco with the aim of hiding his crime by concealing debt and artificially exacerbating profits. His efforts failed when Chewco did not comply with legal regulations {“Chewco didn’t really qualify as a third party SPE” (McLean et al. 400)} that would allow it to be named as an asset in Enron’s balance sheet (Wikipedia.org). The fact that “one time whiz kid” (McLean et al. Front Matter) Fastow had strong accomplices in Enron was revealed when he was retained in Enron and literally given a pat on the back by Enron’s Board of Directors in 1999 when they waived conflict of interest rules to give him free rein to operate private companies to engage in business transactions with Enron. Fastow created “a private equity fund” (McLean et al. 189) called LJM (Wikipedia.org). The new entity, named after Fastow’s wife Lea and children Jeffrey and Michael, came into existence with active support of Lay and Enron CEO and COO Jeffrey Skilling {“Skilling and Fastow walked over to Ken Lay’s office for a discussion of the deal that would give birth to LJM” (McLean et al. 193)}. LJM was used to purchase badly performing Enron assets, thereby blatantly concealing Enron debt and artificially exacerbating Enron profits with the express aim of supporting the price of its stock (Wikipedia.org). Financial analysts widely believe that this point was the beginning of the spiral “[Fastow was the man] “who first crossed the line” (McLean et al. 133)} that eventually brought Enron crashing down (Wikipedia.org). In fact Fastow shrewdly anticipated this end because he considered LJM as his escape route {“Fastow openly described LJM as his ticket out of Enron” (McLean et al. 215)}. The first milestone of stage 2 {the fast moving spiral towards disaster} started in the year 2000. Lay filed 2 fraudulent returns in quick succession. In March he filed yearly 10-K returns covering 1999, and in August he filed 10-Q returns covering the first half 2000 (Wikipedia.org). Investigator James Chanos described the 10-K returns as “a license to print money” (McLean et al. 336), and the 10-Q returns as showing laudable earnings belied by a controversial massive $ 1.3 billion negative cash flow during that period” (McLean et al. 365). The second {and last} milestone of the spiral towards disaster began in 2001 on a deceptive note soon after Lay and Skilling kept up Enron’s position as “one of George Bush’s strongest supporters” (McLean et al. 87) by attended the January 20 inauguration of Bush and donating $ 100,000 each towards the occasion (Wikipedia.org). Between January 22 and 25, Skilling perpetrated two crimes against Enron stockholders – securities fraud {by not only hiding bad news but also lying about it}, and presentation of incorrect accounting information. On February 5, senior Enron officials were awarded bonus checks {John Wing, Lou Pai, Ken Rice and Rebecca Mark were already millionaires thanks to their Enron compensation deals and huge bonuses” (McLean et al. 138)} out of a “Bonus Plan [that] set aside $ 55 million for the purpose of retaining key people given the uncertainty surrounding the Company’s business” (McLean et al. 420)}. Although the Fortune Magazine article “Is Enron Overpriced?” that hit the stands on February 19 hinted at the underlying rot, it did not prove too effective, raising “far more questions than it answered” (McLean et al. 339). The article however did precipitate a massive stock selling spree by top Enron officials. Lou Pai, CEO of Enron Xcelerator {and “one of [Skilling’s] most trusted deputies” (McLean et al. 171)} sold $ 1.1 million worth of stock between May 18 and 19. Jim Derrick, Enron General Counsel, sold 160,000 Enron shares between June 6 and 16 (Wikipedia.org). Derrick conspired with Lay to “quickly make arrangements to have [Vice President of Corporate Development, Sherron] Watkins’ allegations [of improper Enron accounting practices] investigated by an outside law firm Vinson and Elkins” (McLean et al. 373) which expectedly delivered a good report on October 15 that Enron was guilty of nothing and that Arthur Andersen had approved of Enron’s accounting system (Wikipedia.org). Ken Rice, CEO of Enron Broad Band Services {Skilling’s “golden boy” (McLean et al. 350)} probably acted on his mentor’s advice during special “lunch sessions on consecutive days” (McLean et al. 361) by selling 386,000 Enron shares on a single day {June 13} (Wikipedia.org). The price of Enron shares that fell rapidly in 2001 from $ 80 to $ 60 (McLean et al. 360), dropped to below $ 47 on June 23. Enron Director Robert Belfer sold 100,000 Enron shares on July 27 (Wikipedia.org). Citing “personal reasons” (McLean et al. 363), Jeff Skilling resigned from Enron on August 14, an act that led Wall Street Journal to suspiciously note: “no matter what the real condition of Enron’s business, if the stock had continued to climb, Skilling would not have quit” (McLean et al. 366). Lay exercised in 25,000 share options at $ 20.78 on August 20 - the same day Enron stock price hit the $ 36.25 trigger. The next day Lay exercised in 68,620 share options at $ 21.56, causing Enron stock price to slightly recover to $ 36.88. Lay misled Enron employees by sending a circular email saying he completed the two deals so as to return stockholders’ trust in Enron. It was later learnt that not only was his statement totally false, but he did not in fact sell the second lot of 68,620 shares in order to hide their near worthless value at that time (Wikipedia.org). Jeff Skilling sold 500,000 Enron shares on September 17. This sale, coming on top of his previous sale of “450,000 share in May 2000,” took the overall total to “over $ 70 million” (McLean et al. 366). Robert Belfer sold a second lot of 109,000 Enron shares on September 21 (Wikipedia.org). Lay then effectively stabbed Enron employees in the back on September 26 by declaring that not only was Enron’s accounting system legally proper and accurate, but it was also his personal belief that Enron shares were “an incredible bargain at current prices” (McLean et al. 383) especially during an anticipated booming third quarter due to which he and other Enron officials had been purchasing Enron stock heavily during the previous 2 months (Wikipedia.org). Lay’s misleading statement is all the more vicious considering that Enron had always “repeatedly encouraged [its employees] to buy Enron shares; on average, they kept more than half their 401(k) retirement holdings in Enron shares” (McLean et al. 125). The Securities and Exchange Commission {SEC} started a formal investigation of Enron’s accounting system on October 22 (Wikipedia.org). On that same day, instigated by one of its lawyers Nancy Temple, Enron auditors Arthur Andersen revealed its complicity in the scandal by allowing her to conspire with Andersen partner in charge of Enron account David Duncan to shred Enron documents (Wikipedia.org), thereby “destroying evidence [amounting to] thousands of pages of Enron related material” (McLean et al. Back Matter). Pressurized by the SEC demand in the first week of November to make “painful disclosures immediately” (McLean et al. 409), Enron admitted on November 8 that it overstated profits to the tune of $ 586 million over a 5 year span (Wikipedia.org), effectively erasing 20 percent of Enron’s previously reported net income (McLean et al. 410). Enron’s final spin towards bankruptcy occurred on Sunday December 2, 2001 when “electronically at 2 A.M. Enron’s lawyers filed the greatest bankruptcy in U.S. history” (McLean et al. 421). In an overall summation of the scandal, Joseph Berardino, CEO of Arthur Andersen made 3 statements after Enron’s bankruptcy. He said: “Enron failed because the economics didn’t work” (McLean et al. Back Matter). In a second statement made during his testimony before the U.S Congress on December 12, he said the cause was “violation of securities laws” (Wikipedia.org). In a third, very controversial statement made on June 15, 2002, he declared: “Today’s [court] verdict is wrong. The reality here is that this verdict represents only a technical conviction” (McLean et al. Back Matter), a clear and blatant admission that in the wake of the greatest fraud the world has ever witnessed, nobody is really sorry (McLean et al. Back Matter) except of course the betrayed employees of Enron and the unfortunate stockholders of Enron whose thesis was so brutally violated by the company voted “the most innovative company in America” for 6 consecutive years by Fortune Magazine, the last year being the same in which it became bankrupt (Wikipedia.org). References: McLean, Bethany and Elkind, Peter. “Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron.” USA: Portfolio. 2003. “Timeline of the Enron Scandal.” Wikipedia.org. 2007. 16 Dec. 2007. Read More