Transnational Crime & Laws Project

ENRON SCAM
Project submitted to:Ms. Madhurima De Sarkar
(Criminal Law II (Hons.)
Submitted by:
Shubhankar Thakur
ROLL NO. 149
SEMESTER-VIIth

Hidayatullah National Law University

Raipur, Chhattisgarh

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ACKNOWLEDGEMENTS
First & foremost, I take this opportunity to thank Ms. Madhurima De Sarkar for allotting me this
challenging topic to work on. She has been very kind in providing inputs for this work, by way
of suggestions and providing me resource of her vast knowledge of the subject which helped me
to look at the topic in its very broad sense also to look at some of the very narrow concepts by
expertise view.
I would also like to thank my dear colleagues and friends in the University, who have helped
me with ideas about this work and also a source for constant motivation and hence they were a
guiding force to me in making of this project. Last, but not the least I thank the University
Administration for equipping the University with such good library and IT lab.
My special thank to library staff and IT staff for equipping me with the necessary books and data
from the website.
Shubhankar Thakur
Roll No. 149
Sem- VII

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Declaration of Originality
I, Shubhankar Thakur, have undergone research of the project work titled Enron Scam as a
student of Transnational crimes hereby declare that- this Research Project has been prepared by
the student for academic purpose only, and is the outcome of the investigation done by me and
also prepared by myself under the supervision of Ms. Madhurima De Sarkar, faculty,
Hidayatullah National Law University, Raipur. The views expressed in the report are personal to
the student and do not reflect the views of any authority or any other person, and do not bind the
statute in any manner.
I also declare that this Research Paper or any part, thereof has not been or is not being submitted
elsewhere for the award of any degree or Diploma. This report is the intellectual property of the
on the part of student research work, and the same or any part thereof may not be used in any
manner whatsoever in writing.
Shubhankar Thakur
Roll. No. 149
Sem VII

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TABLE OF CONTENT
ACKNOWLEDGEMENT..............................................................................3
RESEARCH METHODOLOGY....................................................................4
OBJECTIVES.................................................................................................4
ITNRODUCTION..........................................................................................5
CONCLUSION.............................................................................................19
BIBLIOGRAPHY.........................................................................................21

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INTRODUCTION
It was one of the largest securities fraud scandals in history, and the investigation into the extent
of the fraud committed by Enron is still ongoing. The SEC (Securities and Exchange
Commission) has uncovered several instances of financial fraud committed by high-ranking
executives at Enron. Many of the executives have been charged with wire fraud, money
laundering, securities fraud, mail fraud, and conspiracy. As a result, Enron was forced to file for
bankruptcy in December 2001. The Enron scandal, revealed in October 2001, eventually led to
the bankruptcy of the Enron Corporation, an American energy company, and the de
facto dissolution of Arthur Andersen, which was one of the five largest audit and
accountancy partnerships in the world.
As 2002 began, energy trader Enron Corp. found itself at the centre of one of corporate
America's biggest scandals. In less than a year, Enron had gone from being considered one of the
most innovative companies of the late 20th century to being deemed a byword for corruption and
mismanagement. The company introduced a number of revolutionary changes to energy trading.
In 1999 the company launched Enron Online, an Internet-based system, and by 2001 it was
executing on-line trades worth about $2.5 billion a day. By century's end Enron had become one
of the most successful companies in the world, having posted a 57% increase in sales between
1996 and 2000 CITATION Dos10 \l 1033 .
Rumors about Enron's troubles abounded, the firm shocked investors on October 16 when it
announced that it was going to post a $638 million loss for the third quarter and take a $1.2
billion reduction in shareholder equity owing in part to Fastow's partnerships. By October 22 the
Securities and Exchange Commission had begun an inquiry into Enron and the partnerships.
On December 2 Enron, which has a year before touted as the seventh largest company in the
U.S., filed for Chapter 11 bankruptcy protection. Enron's energy-trading business had been sold
CITATION Dos10 \l 1033 www.whatreallyhappened.com/WRHARTICLES/enron

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off to the European bank UBS Warburg. The majority of Enron's employees were unemployed,
and their stock plans had become almost worthless.
Arthur Anderson was convicted in federal court of obstruction of justice, while many other
American companies scrambled to reexamine or explain their own accounting practices.
Investigations continued into Enron's financial dealings, government connections, and possible
involvement in California's energy problems.
Ultimately, though, former Enron CEO Jeffrey Skilling received the harshest sentence of anyone
involved in the Enron scandal. In 2006, Skilling was convicted of conspiracy, fraud, and insider
trading. Skilling originally received a 24-year sentence, but in 2013 his sentence was reduced by
ten years.
Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world. Since
Enron was the largest corporate bankruptcies. The Enron scandal drew attention to accounting
and corporate fraud, as its shareholders lost $74 billion in the four years leading up to its
bankruptcy, and its employees lost billions in pension benefits.

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RESEARCH METHODOLOGY
Problem of the Study
Bankruptcy fraud is a white-collar crime that takes four general forms. First, debtors
conceal assets to avoid having to forfeit them. Second, individuals intentionally file false
or incomplete forms. Third, individuals sometimes file multiple times using either false
information or real information in several states. Bankruptcy fraud is a Federal crime.
The crime occurs when a defendant undertakes a fraud scheme against anyone and then
carries out or conceals the scheme by filing for bankruptcy or by filing any documents in
the bankruptcy. I am going to deal in this project about the famous Enron Scam case
because in that, company when went to huge loss due to fraudulent work of some
officials filed the leave under Bankruptcy under Chapter 11 of Bankruptcy Code.
1. This project has been pursued on the basis secondary sources of information. This
includes books, textbooks, and articles from newspapers and downloaded from
WebPages.
2. The project is based on analytical and descriptive study.

OBJECTIVES

To understand the concept of Fraudulent Bankruptcy

To study the facts of the Enron Scam.

To study the reason for the debacle of the assets of the Enron company.

To discuss the report of investigation and decision by the government.

To discuss how this case gets in relation with bankruptcy.

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Review of Literature
1. Peter C. Fusaro, Ross M. Miller, What Went Wrong at Enron ,E-Book

Nature of Study
The nature of the study is based on analytical and descriptive study. This project is based
secondary & electronic sources of data have been referred to a great extent. Books, case laws,
journals & other reference as guided by faculty of Transnational Crime and Laws are primarily
used for the completion of this project.

Fraudulent Bankruptcy
The globalization of commerce has turned the once local crime of fraudulent bankruptcy into a
transnational crime. Once again, anecdotal evidence suggests that this form of criminality is
linked to the money laundering phenomenon. Washed funds may be used to acquire a business
for the purpose of bankrupting it at considerable profit. Currently, no quantification is possible,
although there is a room for several doctoral dissertations looking at the transnational aspects of
seemingly local, but large, international bankruptcies CITATION Dos10 \l 1033 .
Fraudulent bankruptcy, infiltration of legal business, and corruption and bribery of public
officials. These wide-ranging offences can be grouped according to the general definition of

CITATION Dos10 \l 1033 Pg.16, Combating Transnational Crime: Concepts,

Activities and Responses
Routledge Research in Information Technology and E-Commerce
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organized crime presented in Chapter 1

CITATION Dos10 \l 1033

. It can be seen that most of the

transitional crimes which is identified by the United Nations are forms of organized crime. Other
transnational crimes, such as terrorist activities and aircraft hijacking are not necessarily
organized crime (although they can be when they meet the general definition of organized crime
provide in Chapter 1).
It is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In
most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
Bankruptcy is not the only legal status that an insolvent person or other entity may have, and the
term bankruptcy is therefore not a synonym for insolvency. In some countries, including the
United Kingdom, bankruptcy is limited to individuals, and other forms of insolvency
proceedings (such as liquidation and administration) are applied to companies. In the United
States, bankruptcy is applied more broadly to formal insolvency proceedings
Bankruptcy fraud is a Federal crime. The crime occurs when a defendant undertakes a fraud
scheme against anyone and then carries out or conceals the scheme by filing for bankruptcy or by
filing any documents in the bankruptcy. Section 157 of Title 18, United States Code, punishes a
defendant found guilty under this section with imprisonment of not more than five
years CITATION Dos10 \l 1033 .
Bankruptcy fraud is a white-collar crime that takes four general forms. First, debtors conceal
assets to avoid having to forfeit them. Second, individuals intentionally file false or incomplete
forms. Third, individuals sometimes file multiple times using either false information or real
information in several states. The fourth kind of bankruptcy fraud involves bribing a courtappointed trustee. Commonly, the criminal will couple one of these forms of fraud with another

CITATION Dos10 \l 1033

www.whatreallyhappened.com/WRHARTICLES/enron
CITATION Dos10 \l 1033
www.investopedia.com/updates/enron-scandal-summary
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crime, such as identity theft, mortgage fraud, money laundering, and public corruption. Nearly
70% of all bankruptcy fraud involves the concealment of assets CITATION Dos10 \l 1033 .
As 2002 began, energy trader Enron Corp. found itself at the centre of one of corporate
America's biggest scandals. In less than a year, Enron had gone from being considered one of the
most innovative companies of the late 20th century to being deemed a byword for corruption and
mismanagement CITATION Dos10 \l 1033 .

ENRON SCAM CASE

CITATION Dos10 \l 1033
http://edition.cnn.com/2013/07/02/us/enron-fast-facts
CITATION Dos10 \l 1033
y.howstuffworks.com/cooking-books7
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It is said that the criminals of Enron scam was actually the white-collar criminals.
Embezzlement, fraud, and dishonest business schemes are representative of the white collar
criminal. These non-physical types of crimes normally involve large sums of money that end up
in the hand of the criminal. CITATION Dos10 \l 1033 There is an understanding of who and what are the
white-collar criminal, to represents we can look at Enron. Enron was an American energy,
commodities, and service based company out of Texas. During the early 2000s they claimed revenues
that topped $100 Billion dollars, and even had a six year streak as Americas most innovative company.

Enron was founded in 1985 and eventually became one of the worlds leading electric, natural
gas, communication, and paper companies. Having their hands in many resourceful revenue
producers they saw annual revenue of 9 Billion in 1985 climb to over 100 Billion in the early
2000s. It was the abilities of the their individuals that allowed Enron to capitalize on new
markets, and become what was one of the most innovative companies in existence at their times
of success. In the late 1990s and the early 2000s the internet boom became prominent in
business expansion as it allowed companies to reach new areas, without actually being there.
Enron capitalized on the boom, as well as, becoming a leader in broadband services.
CITATION Dos10 \l 1033

Due to the magnitude of their success the executives of Enron reached top compensation levels
within their industries in a very short period of time. The company introduced a number of
revolutionary changes to energy trading, abetted by the changing nature of the energy markets,
which were being deregulated in the 1990s and thus opening the door for new power traders and
suppliers CITATION Dos10 \l 1033 .
CITATION Dos10 \l 1033
(www.legal-dictionary.com)
CITATION Dos10 \l 1033
(Li, 2010)
CITATION Dos10 \l 1033
http://edition.cnn.com/2013/07/02/us/enron-fast-facts
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In the mid 1990s a stock price of $90 was so successful that it allowed Enron to pay its
executives bonuses in the six to eight figure ranges. The success level that Enron was enjoying
seemed too good to be true. Luckily, in the age of the internet boom regulatory agencies were
a step behind and Enron was able to cook the books i.e. they alter facts or figures dishonestly
or illegally behind the scenes. CITATION Dos10 \l 1033
In the case, Enron the executives became enamored with the success. They went from the classic
domestic energy provider to a global icon in the energy world. The success was seen by many,
but most importantly by investment banks and industry analysts thus allowing Enron numerous
refinancing opportunities, which consequently put their stock price in a position of power. Little
did they know, it was this happening that caused them to lose concentration on the success and
their focus moved solely to the keeping the stock price up. In the case of Enron this is where the
white collar crime began CITATION Dos10 \l 1033 .
The main Business area of Enron was with the Transmission and Distribution of Electricity and
Natural Gas throughout U.S. Later on it was in trading of 30 different products. Till 2000-2001
Enron was performing well. But, from the early 2001 Speculation started i.e. the company is
keeping Wall Street in dark. By the fall of 2000, Enron was starting to crumble under its own
weight CITATION Dos10 \l 1033 . CEO Jeffrey Skilling had a way of hiding the financial losses of the
trading business and other operations of the company; it was called mark-to-market accounting.
This is a technique used when trading securities where you measure the value of a security based

CITATION Dos10 \l 1033

(Li, 2010)
CITATION Dos10 \l 1033
y.howstuffworks.com/cooking-books7
CITATION Dos10 \l 1033
www.global-ethic-now.de/gen-eng/0d_weltethos-und-wirtschaft/0d-01-globalewirtschaft/0d-01-203-enron-folgen.php
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on its current market value, instead of its book value. This can work well for securities, but it can
be disastrous for other businesses CITATION Dos10 \l 1033 .
In Enron's case, the company would build an asset, such as a power plant, and immediately claim
the projected profit on its books, even though it hadn't made one dime from it. If the revenue
from the power plant were less than the projected amount, instead of taking the loss, the
company would then transfer these assets to an off-the-books corporation, where the loss would
go unreported. This type of accounting enabled Enron to write off losses without hurting the
company's bottom line. The mark-to-market practice led to schemes that were designed to hide
the losses and make the company appear to be more profitable than it earlier.

Later in the mid of 2001, the following came up as a problem CITATION Dos10 \l 1033 :
1. Irregularities in investments come to light.
2. Overstated revenues and understated liabilities.
3. Sudden change in management.
In the Late 2001 due to these problems, Investors confidence declines and stocks started falling.
The company admitted accounting errors and filed for Chapter 11 Bankruptcy protection of the
U.S. Bankruptcy code. In January 2002 U.S. Justice department launches criminal
investigation CITATION Dos10 \l 1033 .

CITATION Dos10 \l 1033

www.investopedia.com/updates/enron-scandal-summary
CITATION Dos10 \l 1033
y.howstuffworks.com/cooking-books7
CITATION Dos10 \l 1033
www.global-ethic-now.de/gen-eng/0d_weltethos-und-wirtschaft/0d-01-globalewirtschaft/0d-01-203-enron-folgen.php
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Reason for the debacle

Poor Accounting Practices- Mark-to-Market Accounting- 1) It requires that a long-term

contract once signed, 2) Income would be recorded, 3) The present value of net future

cash flows
Extensive reliance on SPEs (Special Purpose Entities)
1) Shell companies with distinct legal identity,
2) Created to fulfill narrow, specific or temporary objectives,
3) SPEs are typically used by companies to isolate the firm from financial risk.
Focus of CEO Jeff Skilling towards melting wall Street Expectations
Poor performance in low margin, high risk diversified business.

Way of Enron of Working

1.
2.
3.
4.
5.

Enron registered huge revenues with the help of Mark-to-market accounting.

It used off-balance sheet entities to hide debts/liabilities.
It inflated revenues using SPEs by showing loans as sales.
Booked costs of cancelled projects as assets.
Stretched accounting practices by complex business models.

The Investigation and Fault

Enron was a company that had value in many different areas: energy, broadband internet, and
trade. The diversified portfolio along with complicated and confusing accounting practices
allowed the executives, the accountants, and the consultants to commit the crime.
The investigation was carried out by the FBI over a five year period beginning in
2002 CITATION Dos10 \l 1033 . It was the largest white collar crime investigation in FBI history. A unique
task force was built to dive into the books of Enron, look at the balance sheets and follow the
money. CITATION Dos10 \l 1033 It was the trail that led them to the fraudulent acts and helped them build
the case against Enron. The investigation eventually led to the convictions of Enrons top
CITATION Dos10 \l 1033
http://edition.cnn.com/2013/07/02/us/enron-fast-facts
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executives, as well as, Arthur Anderson. In the end the authorities seized over $168 million
dollars in assets that were found to be obtained through the fraudulent acts CITATION Dos10 \l 1033 .
The complicated world of energy commodities has equal value when the company and the
shareholders are working in unison, but Enron was not playing that game. Arthur Anderson was
a consultant to Enron, an auditor to Enron but more importantly the head of the accounting firm
on retainer. Mr. Anderson put the interests of the Enron management team, along with himself
ahead of the business for the sole purpose of maximizing personal profit. The shareholders had
no idea what was happening and they could not see what was coming.
The slick maneuvering of Mr. Anderson i.e. move skilfully or carefully, fabricating the
accounting numbers kept Enrons stock price constant or on the rise, allowing the shares to
continue to sell.

CITATION Dos10 \l 1033

Now, it is unfair to put all of the responsibility on Arthur

Anderson, he may have been the brains behind the accounting piece but it was the high ranking
executives at Enron.

The Downfall
1)
2)
3)
4)

With the help of SPEs, company raised debt finance for its non-core business.
It reported some of its debts and had hid the others.
The situation was good until the Stock Price remained high.
When the Stock Prices fell, the off-balance-sheet liabilities put pressure on debt

agreements.
5) Causing downgrade of credit ratings.
6) With business with thin margins, a lower credit rating increased the cost of borrowings to
the point that the company fell in a liquidity trap
7) And that how company was brought claiming huge amount of assets to bankruptcy.
CITATION Dos10 \l 1033
(Crime in the Suites: A look back on the Enron case, 2006)
CITATION Dos10 \l 1033
www.global-ethic-now.de/gen-eng/0d_weltethos-und-wirtschaft/0d-01-globalewirtschaft/0d-01-203-enron-folgen.php
CITATION Dos10 \l 1033
(Ablander, 2005)
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The following executives of Enron were also found to be at fault:

Kenneth Lay

Jeffrey Skillings

Andrew Fastow

These three individuals that represented the white-collar criminal at Enron. They took part in
insider trading, they ordered employees to commit an act they knew was wrong, they transferred
property illegally, and most importantly they acted unethically both internally and externally.
The shareholders lost millions of dollars, employees lost their jobs and their pensions, all due to
the greed of a few individuals. In many ways they took the approach of mark to market, which
in turn meant to cover up losses for the sake of continuing to look profitable and productive. The
accounting methods allowed this to happen as there were not many regulations that regulated the
accuracy of reporting.

The actions taken again Enron and its executives led to the companys share price dropping to
$0.26 per share in November and it inevitably led to the company filing Chapter 11 Bankruptcy.
Trading of Enron shares was suspended. CITATION Dos10 \l 1033 The large scale financial catastrophe
made many investors hesitant to hand their money over. The government was forced to take
CITATION Dos10 \l 1033
(Dossani, 2010)
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action as the passed the Sarbanes-Oxley act, which was put in place to stop accounting fraud.
CITATION Dos10 \l 1033

Enron made a name for itself in Corporate America and forced government intervention. In the
end they were caught, they were punished, but there were still many people who suffered due to
the veracity of a few individuals.
After several years of international and domestic expansion involving complicated deals and
contracts, Enron was billions of dollars into debt. All of this debt was concealed from
shareholders through partnerships with other companies, fraudulent accounting, and illegal
loans CITATION Dos10 \l 1033 .
In this case the white-collar criminal was the business executive. As stated in the beginning the
white collar criminal could be in your day-to-day life, it could be someone you know, or it could
be someone you work with. As seen in the Enron case this type of criminal is just as dangerous
as the conventional criminal as they have the ability to affect ones life financially.

CITATION Dos10 \l 1033

(Dossani, 2010)
CITATION Dos10 \l 1033
y.howstuffworks.com/cooking-books7
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By the summer of 2001, Enron was in a free fall. CEO Ken Lay had retired in February, turning
over the position to Skilling, and that August, Jeff Skilling resigned as CEO for "personal
reasons." Around the same time, analysts began to downgrade their rating for Enron's stock, and
the stock descended to a 52-week low of $39.95

CITATION Dos10 \l 1033

. By Oct.16, the company

reported its first quarterly loss and closed its "Raptor" SPE, so that it would not have to distribute
58 million shares of stock, which would further reduce earnings. This action caught the attention
of the SEC CITATION Dos10 \l 1033 .
A few days later, Enron changed pension plan administrators, essentially forbidding employees
from selling their shares, for at least 30 days. Shortly after, the SEC announced it was
investigating Enron and the SPVs created by Fastow. Fastow was fired from the company that
day. Also, the company restated earnings going back to 1997. Enron had losses of $591 million
and had $628 million in debt by the end of 2000. The final blow was dealt when Dynegy (NYSE:
DYN), a company that had previously announced would merge with the Enron, backed out of its
offer on Nov. 28. By Dec. 2, 2001, Enron had filed for bankruptcy CITATION Dos10 \l 1033 .

Enron Gets a New Name

Once Enron's Plan of Reorganization was approved by the U.S. Bankruptcy Court, the new board
of directors changed Enron's name to Enron Creditors Recovery Corp. (ECRC). The company's
new sole mission was "to reorganize and liquidate certain of the operations and assets of the 'prebankruptcy' Enron for the benefit of creditors." The company paid its creditors more than 21.7
billion from 2004-2011. Its last payout was in May 2011 CITATION Dos10 \l 1033 .
Enron Execs and Accountants Prosecuted
CITATION Dos10 \l 1033
finance.laws.com/enron-scandal-summary
CITATION Dos10 \l 1033
http://content.time.com/time/specials/packages/0,28757,2021097,00.
CITATION Dos10 \l 1033
www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron
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Once the fraud was discovered, two of the preeminent institutions in U.S. business, Arthur
Andersen LLP, and Enron Corp. found themselves facing federal prosecution. Arthur Andersen
was one of the first casualties of Enron's prolific demise. In June 2002, the firm was found guilty
of obstructing justice for shredding Enron's financial documents to conceal them from the SEC.
The conviction was overturned later, on appeal; however, despite the appeal, like Enron, the firm
was deeply disgraced by the scandal.
Enron's former star CFO Andrew Fastow plead guilty to two counts of wire fraud and securities
fraud for facilitating Enron's corrupt business practices. He ultimately cut a deal for cooperating
with federal authorities and served a four-year sentence, which ended in 2011.

Ultimately, though, former Enron CEO Jeffrey Skilling received the harshest sentence of anyone
involved in the Enron scandal. In 2006, Skilling was convicted of conspiracy, fraud, and insider
trading. Skilling originally received a 24-year sentence, but in 2013 his sentence was reduced by
ten years. As a part of the new deal, Skilling was required to give $42 million to the victims of
the Enron fraud and to cease challenging his conviction. Skilling remains in prison and is
scheduled for release on Feb. 21, 2028 CITATION Dos10 \l 1033 .
The Enron scandal resulted in other new compliance measures. Additionally, the Financial
Accounting Standards Board (FASB) substantially raised its levels of ethical conduct. Moreover,
company's boards of directors became more independent, monitoring the audit companies and
quickly replacing bad managers. These new measures are important mechanisms to spot and
close the loopholes that companies have used, as a way to avoid accountability.
At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial
world. Since then, WorldCom, and Washington Mutual have surpassed Enron as the largest
CITATION Dos10 \l 1033
edition.cnn.com/2013/07/02/us/enron-fast-facts
CITATION Dos10 \l 1033
http://content.time.com/time/specials/packages/0,28757,2021097,00
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corporate bankruptcies. The Enron scandal drew attention to accounting and corporate fraud, as
its shareholders lost $74 billion in the four years leading up to its bankruptcy, and its employees
lost billions in pension benefits. As one researcher states, the Sarbanes-Oxley Act is a "mirror
image of Enron: the company's perceived corporate governance failings are matched virtually
point for point in the principal provisions of the Act." (Deakin and Konzelmann,
2003) CITATION

Dos10 \l 1033

. Increased regulation and oversight have been enacted to help prevent

corporate scandals of Enron's magnitude.

CONCLUSION
It was one of the largest securities fraud scandals in history, and the investigation into the extent
of the fraud committed by Enron is still ongoing. The SEC (Securities and Exchange
Commission) has uncovered several instances of financial fraud committed by high-ranking
CITATION Dos10 \l 1033
http://www.mademan.com/mm/enron-scandal-summary
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executives at Enron. Many of the executives have been charged with wire fraud, money
laundering, securities fraud, mail fraud, and conspiracy. As a result, Enron was forced to file for
bankruptcy in December 2001. Bankruptcy fraud is a Federal crime

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