Fallout and Legal Consequences

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Visit linkedIn d. com slash no stuff to learn more Hey guys, it's me Josh and for this week's seelect. I've chosen our twenty twenty three episode on the Enron sccandal It's a pretty interesting episode At the very least, just because of the mind bogglingly nut stuff that these guys did All in the pursuit of money and personal gain. Not only did they swindle entire states They also, as a nice cherry on top, wiped out the life savings of thousands of their own employees It's the kind of thing that was such a big deal. It left a stain on American society as a whole by how cynical it made everybody about what people can get away with just in the pursuit of wealth At any rate, I hope you enjoy this episode. It's a good one Welcome to Stuff You should Know, a production of Hart Radio Hey and welcome to the podcast. I'm Josh and there's Chuck and Jerry's here, and it's stuff you should know We mean it, you should know this stuff Becauseuse this is serious corporate malfeasance that I think there's probably not an American over the age of twenty walking around who doesn't know about this somehow some way to some degree. I know they teach about this stuff in business school. It's been written on extensively, but I mean, I didn't understand the ins and outs of it u until I started researching this. And it's quite shocking. And that shocking thing that I'm talking about is the rise and fall of Enron One of the greatest swwindles in corporate American history. mayaybe in corporate history in the world, definitely in corporate American history For sure, I'm really glad you picked this because I didn't know all the ins and outs either uh, because this is You know, when I was a young late twenties, early thirties, something didn't have a care in the world Sure and I finally watched the smartest guys in the room T todayod. Yeah, I saw it last night. Yeah, the documentary based on the book Um And we'll get to the authors and stuff. It was Peter Elkin and Who was a co author? Bethany McLane. Okay who was the lead author, even. Oh Okay. I knew she wrote the original articles. and Forbes so she co authored the book. And she's in the documentary as is Ekland and it really is worth the watch But just want to point out that this is an overview of the Enron scandal. It's pretty clear Once you start poking around that this could be like a ten part series, Yeah, for sure. And there probably is a podcast series out there that covered just Enron So there's lots of sort of ins and outs that we won't be able to touch on But we can definitely give her the overview, which was The Enron was a corporation. Originally it was a natural gas line pipeline operator U, but they quickly, well not quickly they got out of that business almost entirely When certain people were hired and we'll sort of get to all this in a minute too. Certain people' right When certain people were hired that basically said, you know what don We should even be in the pipeline industry. We should invent almost a new kind of industry. which is to use energy as financial instruments and we should become a trading company that trades natural gas and eventually paper pulp and and electricity and You name it, like we'll get into all the things that they sort of pivoted to, but Um En RrM started, I guess we should start at the beginning when they in nineteen eighty five, when Houston Natural Gas Company merged with a company called Inter North And they combined to form this Blarge Energy Corporation in Texas, mainly natural gas u and the chief executive of HNG at the time was a man named McKin or Kenneth Lay, who you might have heard of. And if you haven't prepared to meet Kenle several times across this episode U fromrom the outset, I think Houston natural gas and Inner North were both profitable. but I saw that neither one of the companies really benefited from the merger, although it did expand their pipeline network. Really, it just protected them from a hostile takeover.. But it was just just a standard gas company, you know, no big frills or anything like that. I think the first year, it posted a fourteen million dollars loss Put that in your hat and smoke it later with a pin Okay in that First year Enron was around in nineteen eighty five, it posted a fourteen million dollars loss. Just remember that for later, okay? Yeah. Also something else you should put in your hat for later is the fact that Kenneth Lay, the gentleman I mentioned, who was the CEO of Houston Natural Gas, was also very, very tight with the Bush family. Oh ye. originally the Elder Bush And later on, George W as governor of Texas, big donor to their causes politically, and they ended up having a very sort of you scratch my back, I'll scratch yours kind of relationship. Yeah, it's I mean, like I just started twirling around over and over again out of anger like multiple times throughout the documentary because they really go into some good details about that. But the upshot of the whole thing is George HW and George W. Bush would not probably have been able to help EnRron out as much as they did had it not been for, of course, Ronald Reagan and the sweeping deregulations that occurred in starting in the eighties. There was just a spirit of deregulation, which was this Ronald Reagan said and they quoted in the documentary Government's not the solution to our problems. Government is the problem And there was this idea that was really huge in the eighties um that If you got government out of the way, competition was going to drive innovation, was going to lower prices, was going to benefit society in myriad ways That is not untrue. The problem is when you deregulate fully and just basically say, we're checked out from now on until something really bad happens. somethingomething bad always happens. That's the problem with deregulation in the eighties, Not that there's a problem with deregulation, that it was done incorrectly like it seems to be every single time. Yeah, I mean, Reagan is also in the documentary quoted as talking about the magic of the marketplace And we've talked about this over and over on the show and this is not an attack on conservatism, but deregulation in the marketplace and letting the free market decide things is one of the core tenets of conservatism generally and What we've always kind of hammered home year after year is and you said it in one way, but I'll say it in another is it never takes into account humans are the ones that are operating these systems. and When you have money, lots and lots of money and you have humans operating systems, there are inevitably going to be Greedy humans with so much hubris that they sell their souls to make money. and that's That's what happens every single time. yet still lessons are still not learned. there are certain kinds of humans and they always seem to be They always seem to be the ones in charge here of these systems. They will take advantage of them to the detriment of The little guy and the little lady and that is one hundred percent what happened with Enron Yeah, and I don't know if it's always like they're not taking into account human greed. I think most of the people who are powerful enough to deregulate in federal energy regulations don't really care in a lot of cases. They know that they're going to make a boatload of money by the time the thing really kind of blows up sometime down the line.. I think it could be either one But the there was a big sea change in nineteen eighty four, a big change to regulation. The Federal Energy Regulatory Commission said, hey, you can now buy and sell Gas, natural gas from any seller anywhere in the United States. You don't have to just buy and sell within your state. And that opened up an entirely new market. and all of a sudden you can make a lot more money moving this stuff around But like you said They figured out Enron You can make even more money by selling this stuff as commodities and trading on like futures and turning them into financial instruments, not actual just natural gas or oil or electricity, but the concepts of them, the right to sell that or buy that sometime down the road, that changed absolutely everything Yeah, and this is when things when you get into finance like this my It's not that my eyeballs glaze over. It just becomes Almost Uh And I say almost not real because it's it is kind of not real. It's It becomes a form of gambling Right in a way. And that's very much what happened at Enron in a lot of ways and you'll you'll kind of see here and there throughout the episode but they as a company After that eighty four decision made a very faithful decision of their own in nineteen eighty nine, just a few years later When they got a consulting firm on board, McKinzseie and Comany And in particular, a consultant for that company named Jeffrey Skilling. to create what they called the a gas bank which was basically like I said earlier, like, hey, why don't we just be an intermediary between buying and selling of gas And it was going so well that two short years later, Skilling left there and went to work full time at Enron Yeah. That's an ongo theme. Oh, sure. and eventually working his way up. to the CEO of that company. Yes. So he was he, but for the most part, he was the right hand man, but essentially co CEO with Ken Lay, who I think took him on as a protege. And Jeffrey Silling was the one who said, let's set up this market Um, and He also transformed the company's culture. One of the things he came up with wasas it u The idea that every year they should review and rate every employee and the bottom ten percent of employees should be fired. So every year, he was planning on firing ten percent of their workforce. So about two thousand people every year. And the reason he was doing this is because he's saying, we can do better. We can hire the best and the brightest We'll replace those people with much better people And then the ones who are doing really well now will get moved to the back and we'll just constantly be improving on the people that we're hiring It makes sense in a really Machiavellian kind of way, but it's also psychotic as well. Yeah, and the way I understood it from the documentary, it wasn't just like regular upper management reviews of the people that report to them, but it was all the employees rating one another like within their department. Isn't that right? Yeah That's what I took it as too. So I mean You don't have to like be a Sothayer to see where that heads when and it certainly creates competition if that's what they're all about with you know, the sort of the charter of the company creating more competition by deregulating, they sort of did the same thing within the ranks. and created a very I mean, I've seen it described everywhere as It's just overly macho and testosterone fueled. Yeah. It seems like the traders there were hired and kept on that were especially aggressive And there are interviews in the documentary about some of these men who were traitors that were like you would cut the throat of the guy next to you On the trading floor, your fellow employee if you felt like you could make a few extra bucks Yeah, and that was very much encouraged not just by Jeffrey Skilling, but Ken Lay had a history of Um At the very least turning a blind eye, if not actively encouraging people to break the law, do immoral stuff that may or may not have been legal. all in the interest of maximizing profits. Like if you were making money and you got in trouble, you didn't get fired because you made money for the company. That's all that mattered was making money for the company. So in that sense, Jeffrey Skilling was a really great protege for Ken L. But he was like Kenley on steroids. And I get the impression Kenley is always or back in the day, He was a master at presenting this really laid back Almost u attached persona If you watch the documentary and you read about him You really get the impression that he knew exactly what outcome was ten steps down the road. Yeah by just nudging this thing over here, nudging that thing over there, all with plausible deniability. But at the same time presiding over this incredibly complex, complicated, masterful Machination. That was all dedicated to the service of making money for by whatever means possible. Yeah. and Le, I mean, the reason the documentary is called the smartest guys in the room. is because I think unequivocally, everyone would admit that in Lay and Jeffrey Silling and we should introduce you to a younger recruit named Andrew Fastal who was a key player, eventually becoming the CFO and was up to all kinds of shenanigans. But these were brilliant guys with amazing ideas and a lot of the ideas that they had for this company were really good and ahead of their time, but they had the notion that you should be able to trade and make money off of great ideas and not necessarily the results of those great ideas because time and time again, as you'll see, as we tell this story these ideas were not making actual money. mayaybe because some of them were ahead of their time, but That didn't matter because they had ways very creative ways to hide those debts and losses and that's man, that's the whole sort of fall of Enron is wrapped up in that statement. But these are all really, really smart guys And they were really, really good at making money. And maybe we should take a break there. It's a nice little setup All right. And we'll come back and talk a little bit more about their lobby to deregulate and then some of the early shenanigans, right after this I should How I SK. Kid if getting way kid It's America's two hundred and fiftieth, but you deserve some presents too. Simon Malls, mills and premium outlets have can't miss sales july third to fifth. Join Simon Plus, our new rewards program for free and get two point five times the points in addition to extra savings, cashback, and offers that also work at shopsimon.ot comot Grab the fan, head to a Simon center and make it a day for the books. It's a celebration thing. Sign up today at Simonplus. comot Rewards program terms apppply, see Simonpllus. com for details. Meet Chris. He's handy with tools and tech and likes turning his skills into extra income That's why he joined Ar Tasker One day, he's assembling furniture. the next, he's setting up a podcast studio or editing photos for a small business. Every job's different And that's what he loves about it. He chooses which tasks to take, when to work, and how much to charge With AirTasker, you're in control, earning flexibly and on your terms o Download the AirTasker app or go to airtasker. comot AirTasker. Did anything done Kea Miller from OK Storytim So I have a furry friend named Mia to me. She's more than a pet, she's practically family Part of that love is what's best for them. And for my dog, that includes the best diet. At Jinx, all dogs deserve to eat well. Jinx has premium all natural food to transform your dog's health and happiness no matter your dog's size or age. Jinx never has any fillers like corn, wheat, or soy. For Mia, she loves the minitti biscuits the most. Jinx offers plenty of healthy and fun options for your dog. Shop at national retailers like Walmart, Petmart, Chheewy, or Amazon W fly tble apply SK is good M better bit better But if should don't better a little bit don't Okay, so after about six years after big deregulation from FERC that said you can buy gas and sell it wherever in the country that opened up a huge market. There was another watershed deregulation that reversed an act that went back to nineteen thirty five. The public utilities Holding Company Act, PCA Love that one That said, if you are generating and selling electricity, you are a local utility and we arere going to regulate you like you are providing the lifeblood of America because they are. Electrical utilities provide the lifeblood of America and have since long before nineteen thirty five. And in nineteen ninety, they managed to get that reversed. and now all of a sudden, anybody could buy an electric utility and Enron definitely jumped on that. Yeah, for sure. They their lobby was strong to put it mildly. they hired lobbyists to lobby different states in those states as no surprise ended up getting millions of dollars flowing back toward Enron Um, I think they hired lobbyists for at least thirty seven states They also helped overturn a law in nineteen eighty eight that said the military has to buyp Um from local utilities and they said, no, let's open that back up. And prettyt soon Enron got a twenty five million dollars contract for supplying electricity to Fort Hamilton in Brooklyn. And these are just twenty five million ends up being peanuts in the grand scheme, but these are just examples. as they sort of ramped up to their schemes, of how they d reggulated or lobbied to get things deregulated such that it was allowed to happen Right. And one of the things, one of the schemes that got the attention of the entire country U in two thousand two thousand one was an electrical scheme in California California had undergone its own electrical deregulation, power deregulation, but it had adopted this weird patchwork compromise law or set of laws It just had loopholes you could drive a truck through and just really created all sorts of legal gray areas And so rather than just kind of like here theyre biting around the edges, seeing what they could do inststead, the energy traders at Enron started Figuring out how to move energy out of the state. wait for the state to be like, hey, we need some energy and move it back at incredibly inflated prices they would purposefully takeake electrical utilities that they own offline to generate more demand, a spike in demand and so they could raise prices again. And they actually Basically cripple California I think I saw that California had a couple dozen blackouts in six months after that deregulation after Enron started coming in and messing with stuff Whereas the six months before deregulation, they had had one blackout So if you watch the documentary and you listen, you know you read some other sources about it. this was an entirely fabricated U a scarcity of electricity. There was plenty of it. Enron just figured out that they could kind of pull this lever in that lever and charge way more by creating this this fake scarcity. Yeah And by pulling a lever like literally sometimes they called up a power company, a power plant and said, pull the lever to the off position. And they they have them on tape, you know, they play this in the documentary well They called one in Las Vegas and said, Hey, man, can you take this thing offline for a few hours and just just make something up because a rolling blackout meant big money. All of a sudden, California again was buying their own energy back at a higher rate and Governor Greay Davis at the time and this is You know, I'm not like giving some full throated endorsement to any Um, effectiveness of Greay Davis as a governor because I really don't know, but He definitely was sort of left holding a bag and scratching his head like what's going on here? Like we've got plenty of energy and it just All through the documentary, people are saying like, this just isn't adding up. in California and some of those tapes that they play of these traitors Like there was that that natural uh wildfire that broke out that jeopardize one of the pipelines. and these guys are you on tape on the phone with each other saying, burn, baby, burn because that's good for business if it knocks something offline And is, you know, make laughing at like you know, old grandmas like sweating in the summer heat because they can't get air conditioning, like the most vile reprehensible kind of stuff in the name of making me all mighty dollar that you could imagine. What's also interesting is they don't really go into detail about it, but it's it appears to have also been a coup to get rid of Greay Davis. and replace him with Arnold Schwarzenegger. Yeah becausecause Ken L held a meeting at the Peninsula Hotel in Los Angeles. Um, and He invited Arnold Schwarzenegger This was long before Arnold Schwarzenegger was known to have had like real political aspirations. He wasn't governor yet, wasn't running for governor over a problem that Enron created. It was like that level of in addition to also just making billions and billions of dollars by strangling the state. They also managed to replace the executive of the state as well to somebody who was much more friendly to them. Yeah and get rid of and of course they didn't like knock them off or anything. But in California you can you can ever recall. It seems to come up every twelve years or so where Californians aren't happy with the governor. And so if recall voting passes, you can have a an election out of nowhere uh and replace that governor.m, while this is going on, you know, Ken Le stands on a stage and says we're making money in spite of California, not because of California So just lying through their teeth on stage to their shareholders And all, you know, all these little schemes had little nicknames, the one where they energy out of California just to make them bu back was called Ricochet. There was one called Death Star And they're on tape like joking about like, hey, let's have a nice friendly name for this one, like Death Star. So they're just they're playing games with people's livelihood, essentially And lives, you can make a case as well. for sure So three of those traders pled guilty. Jeffrey Richter, John Fney, and Timothy Belden were three of those traders who manipulated California's energy market, costing the state between forty and forty five billion dollars in retrospect of unnecessary electrical prices and costs U All right, so Enron is doing great. They're making a lot of money. Um, and We should point out that this is just you know, Ricochet was just one little scheme. They had all sorts of schemes along the way to Well, we'll get to those. Between ninety six though and two thousand one, like as far as The stock market world was concerned, inr run was a darling Fortune named them, I think six years straight, America's most innovative company every single year in a row. Yeah, but what was going on behind the scenes is these ideas and these investments and uh schemes that they had You know, some of them made money, but a lot of them didn't make any money at all, and they just became really, really good at hiding that fact. Yes That was the whole thing. Like they were very innovative. They were ahead of their time in a lot of ways. like they got into building broadband high speed internet access. in like two thousand or two thousand one, something like that And this was I looked it up. It wasn't until two thousand seven that half of all US interternet users had broadband. So this was way ahead. it's time And then also, they also got into the video on demand market. They tried to partner with blockbuster. And these things were basically like the progenitor of Zoom and Netflix. But these guys were trying this in two thousand two thousand one. So it's visionary The problem is They were ahead of their time. The infrastructure wasn't there. the I think the customer base even wasn't there So their stuff that they were doing wasn't making money, which is not bad in and of itself. What was bad was when they were covering it up And the schemes that they use to cover it up. are so involved and complex, but also so fascinating that they would they would have the audacity to do this because there's no There's no fudging it. There's no like, oh, this is kind of questionable. This was just fleecing All of their investors, all of their employees fleecing the entire world. There was a handful of executives at Enron who were fleecing the entire world to the tune of tens and tens and tens of billions of dollars every year in revenue apparently didn't actually exist Yeah, it's pretty clear that a certain point they lost their way and that they weren't as concerned about being a company that made money and the only thing that mattered was that as a corporation was that they kept their stock price high. Right because that's where that's where all the money was. They had as long as they could keep that stock price high and keep shareholders, especially their employees encouraging their employees to get, you know, get paid in company stock, like Use every penny of your paycheck that you can to buy this company stock And Enron stock was soaring. It was doing really, really well And all the while, it, you know, it was called pump and dump. They would drive up the value of their stock and then the upper echelon. and you see this time and time again in the corporate world, the CEO's And the CFOs and the upper management are the on who then sell off their stock and walk away with, you know some of them hundreds of millions of dollars. And you know, some of the schemes that you talked about was they found ways to move debt around. We mentioned Fastile was one of their hires And he was hired I think his late twenties, early thirties and quickly rose up the ranks to CFO. and he started a company called LSM, which stood for Leah Jeffrey and Matthew, which are named after his wife and kids, sort of ironically It was like such a sweet tribute to them And the only purpose of this company was to have all kinds of sort of little subcompanies that would absorb the debt and where they could move debt around from Enron to make it invisible to the shareholders. Right. So they could prove On a balance sheet that you had this money coming in in the way of you know, people investing in the company But then you're hiding the losses. and so everyone thinks you're doing great. So the way that I saw it explain, Investopedia actually has a couple of really good articles about this that are just wonky enough to like understand it, but also not so wonky that you're just like, I have no idea what I'm reading and And the way they put it was basically If Enron had, like a good example is they built a power station in India, that was a huge loss. It was just a generally bad idea and they sunk billions of millions of dollars into this power station without realizing any money whatsoever, I think they abandoned it before it even came online They would take this and sell it to one of these special purpose vehicles or special purpose entities which was a tangentially related company that the company, Enron was not on the hook to pay off its debts for, right And they would take that And then that special purpose vehicle would go out and try to sell it, sell that terrible toxic asset U and they would use Enron stock as the collateral, right And because Enron's stock was just through the roof, everybody was saying, sure, we'll give you a loan. Sure, we'll give you some money for that terrible idea of a power plant that you abandoned because you're backing it up with Enron's stock. And as long as the time that that stock came due was far enough away And as long as Enron's stock kept going up This house of cards could be held together, but that's not at all how it worked. upshot of it is that They could take toxic assets, move them off of their books to these special purpose entities. and then they would take the money that these special purpose entities would go borrow against like that toxic asset and they would count that on their books as revenue. So they were hiding debt boosting their revenues to just ridiculous heights for stuff that just should not have been counted as revenue Yeah. And just to be clear, they didn't invent the special purpose entity and an SPE is not some evil creation in and of itself. It is It's an entity that a lot of corporations and businesses use. where it's just it sort of like has a very narrow purpose in that they create this thing when they might use it to purchase an asset or to move an asset. So the company as a whole may not be on the hook if anything goes wrong. It sort of mitigates risk. So it's not some evil purpose in and of itself, but they were manipulating these such and starting all of these things under Fast's guidance with his LSM sort of subcporation and eventually LSM two, I think, uh that they were making I think They hit ninety dollars August of two thousand u market cap of the whole company at's seventy billion which made it the seventh largest publicly traded company in the world at that point. Yeah So that's a market cap of seventy billion doars. Remember in nineteen eighty five, its first year, it posted losses of fourteen million do. Within fifteen years, they posted revenue of one hundred billion dollars hundred billion dollars in fifteen in yeah, in sales in fifteen years. That's what happened to that company when they brought Jeffrey Skilling on board, Jeffrey Silling brought Andrew Fastu on board and people just started going nuts making money any way they could Yeah, the other thing we should mention too is another sort of slick trick is that Skilling's idea and they got approval and I wasn't ar how or where this approval comes from But to use something called mark to market accounting which is basically when you can where you can rate the financial health of your company based on And not theorized, but just on future earnings basically and not necessarily what they're worth that day. So anticipated future value instead of its purchase costs Did you get how that they were approved because it seemed like they were all like, suuper psyched that they got approval for mark to market accounting Yeah, that would have been the SEC, the Scurities and Securities Exchange Commission who would have given that approval? And just like a special purpose entity Mark to market accounting it's totally legitimate. It's recognizes generally accepted accounting principle But There's a lot of room for temptation. to just basically say This deal with blockbuster We haven't made a penny off of it, but we can cite the future earnings from it Now, now that we booked this deal And I think it'll probably be worth a billion dollars sust a total guess And you're not supposed to do it like that. You're supposed to do it much more realistically and legitimately, but they had enough leeway that they were able to take mark to market accounting and use it their to their benefit in that way. And in doing that, they pumped up their their revenues through the roof Like the deal would just be inked. they wouldn't have seen a penny from it, and they would add it to their balance sheets as revenue It would become part of the ledger before like a real penny was made. Exactly. and sometimes the pennies weren't made. and if the pennies weren't made, don't forget, those debts would be moved to a special purpose entity. so they wouldn't have these toxic assets on their books, even though they very much owned and were indebted for these toxic assets still Yeah, I mean Like I said, these were brilliant people and like they had all their bases covered except for the fact that we all know that a house of cards will eventually fall it's that hubris thing that just blinds people into thinking that It will always like when that when that kind of money is rolling in I think it blinds certain people so much that they don't understand A who it's hurting at the time or they don't care or they think it's always going to be rolling in like this Or they think, hey, I'm going to get mine now Be there were people in Enron. I mean, we'll talk about a whistleblower that eventually sort of came out and journalists who were poking around, but there were people that started looking at this company the darling of Wall Street and saying, something's not right here. like something's not adding up. like you can't even explain how your cash flows through your business in a way that makes any kind of coherent sense And anyime they were confronted with this skilling and his cronies would They would get very haughty about it and just be like, well, what do you mean we can't explain that? Like, sure we can. It's really easy. You just can't understand it. Yeah, you just can't understand it Right, it makes your blood boil Let' Let's take a break and then we'll come back and talk about the downfall. How about that? Yeah, the downfall I has Kid Kid didn kid It's America's two hundred and fiftieth, but you deserve some presents too. Simon Malls, mills, and premium outlets have can't miss sales july third to fifth. Join Simon Plus, our new awwards program for free and get two point five times the points in addition to extra savings, cashback, and offers that also work at shopsimon.ot comot Grab the fan, head to a Simon center and make it a day for the books. It's a celebration thing. Sign up today at Simonplus dot com rewards progr terms apply, See Simonpllus d. com for details. Meet Chris. He's handy with tools and tech and likes earning extra income on his own terms. With Air Tasker, he chooses which tasks he wants, when to work, and names his price. Download the Air Tasker app or go to airtasker. com Air Tasker. get anything done This is Kea Miller from OK Storyime So I have a furry friend named Mia She's literally a bundled of joy and love who can never get enough pets, cuddles, and attention. To me She's more than a pet, she's practically family I love my pets. Part of that love is what's best for them And for my dog, that includes the best diet A jins, all dogs deserve to eat well. 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Why were people even investing in buying shares of this This company U when it was just so fraudulent and just ridiculously fraudulent too, not even subtly fraudulent And the answer is be The company was such a Wall Street darling that financial analysts would not understand what they were hearing on these earnings reports, but would still give it a stamp of like, byy The other thing that really really helped banks Wall Street banks were very much complicit in this as well. and then The thing that helped the most was Arthur Anderson The venerable eighty plus year old accounting firm. The oldest one in the country That was a third party accountant to Enron was so cozy that they actually hired all of Enron's internal auditing staff made them Arthur Anderson staff and then opened one hundred and fifty person office for Enron in Enron's in Enron's headquarters, an Arthur Anderson office in Enron's headquarters, made up of former Enron auditors That's who was watching. the show. And so Arthur Anderson had such a good reputation that because they were signing off on this, because the Wall Street analysts were saying, yeah,' to buy, people were just like I'm buying, I'm buying and it kept the stock prices going up and up and up because nobody was paying atttention enough Yeah, there was one person in the dock that said that kind of crystallized it, which was like I'm paraphrasing, but he was talking about the fact that when this kind of stuff pops up in corporations, like It's not like this The Nrs are everywhere. There is all kinds of malfeasance for sure in the corporate world. but He basically said somewhere along the way It doesn't get this big because a legal team says you can't do this or your accountants say you can't do this or the bank say, we can't get involved in this And Enron seemed to be one of those sort of unicorns where every person along the way just zipped their mouth shut, even though the numbers weren't adding up and was complicit in this There's a traitor that was interviewed in the documentary who said like it was ironic that Enron's slogan was ask why, like why does something happen like that? Why can't we do it that way? And that this traitor said I didn't ask myself why? Be I didn't want to know. I suspected things were weird or Rye, and I just didn't want to know because it was my job. I was making tons of money. And I think you could probably get that excuse out of just about anybody who is complicit in this large or small But Arthur Anderson, that was the one that really, really helped things along. And as we'll see, they they didn't manage to survive the scandal Yeah, there were man, there was that one part of the documentary where they were talking about uh, fast sts you know, shell companies and he was in a meeting that was secretly taped and they're basically like, well, wait a minute, it looks like You're on the buying and selling sides of these transactions And he wass like, yeah. Basically, but I've always got LMJ's interest at heart And the whole time, he's skimming money and they believe that skilling and Lay knew that like, hey, I'm sure that Fastle is skimming money off the top for himself. R. Who cares because this guy' taking care of business for us. Exactly. And I think he skimmed about thirty five million dollars For himself he stole from Emron and they looked the other way because the stuff he was doing was so unethical, so illegal that He basically earned it as far as they were concerned to have his hand in the cookie jar like that So I think you kind of mentioned. there were some people who were like, wait, what's going on here One of the first people was Bethany McLain, the journalist who ended up writing the smartest guys in the room. She's awesome. She is awesome. She started out writing a story for Fortune magazine back in March of two thousand one titled Is Enron oververpriced? And she was one of the first people to publicly say, how is Enron making its money? But she wasn't the first to hit on this. There' another guy named Jim Chanos of knecose seecurities, I think, maybe. And I think he's in the documentary, but he started shorting Enron in two thousand because he noticed very simply The cost of capital, so the cost of doing business was more than their return on investment automatically means that they were not a profitable company, which totally was contradicted by all of their earnings reports and filings And he saw this and he said This is this is This is not right and I'm going to start making money off of the future downfall of this company and made hundreds and hundreds of millions of dollars shorting Enron stock starting in two thousand Yeah, the whistleblower too was an executive manain named Sharon Watkins. And she pops up a lot in the documentary, obviously is key to the story. She didn't whistlebow while this was all going on, it was sort of after the ship started sinking U, but we'll talk a little bit about how that all happened and where she ended up But what happened in August of twenty twenty one Skilling had replaced Le as CEO in February of that year And on august fourteenth, twenty twenty one, Silling out of nowhere and he had just taken the reins you know, a handful of months before He Skilling quits out of nowhere. He resigns He cited personal reasons And what was going on was the You know, the Titanic sprung a leak And as they described in the documentary, he was one of the first rats to try and get off the sinking ship. Yeah, and it's like if you are a CEO of a huge company, Don't just leave like that. That is an enormous red flag. There's like a whole process and procedure for finding your replacement, grooming them, introducing them to the rest of the world. You don't just leave like that And that was such a red flag that that whistleblower was's her name Sharon Watkins? Yeah She wrote an anonymous letter to Lay, basically saying, hey, there's a lot of fishy stuff going on around here. and now that skilling suddenly departed, like everyone's going to start having questions and this whole House of cards is going to fall And Lei apparently didn't do much about it. And she came to Lay later on and said I'm the person who wrote that anonymous letter and I'm really concerned about this and ended up trying to keep it in the company because I think I get the impression that she thought It was something, especially now that skilling was gone that could be resolved internally. I think she really underestimated the extensiveness of the corruption and yeah at the company and thought it was a few people when really it was a large cadra of people who all were complicit in this. And I get the impression that's why she didn't really blow the whistle publicly at that point But apparently Ken Le once he found out that It was Saron Watkins consulted legal counsel to figure out how to fire her legally. Yeah the same day that Silling resigned on august fourteenth, the Broadband division that we talked about earlier reported one hundred thirty seven million dollars loss analysts and we should point out too as far as the analysts go, they were always installing friendly analyst and only working with friendly analysts But they finally got the clue. They dropped their ratings for the stock. The end came very, very swiftly for Enron on october twelfth Arthur Andersons I mean, you still remember all the shredding jokes on late night TV that ran for months and months. Arthur Anderson's legal counsel said Everybody shred everything, Destroy every file that you have on Enron. and in one day, they shredded literally one ton of paper Yeah, and that was just one day. They apparently shredded around the clock from october twenty second to november eighth And that was just one ton one day. they shredded literal tons of documents.ust shred, shred, shred. If you were an executive Anderson, you were probably working a late night shift shredding alongside everybody else It was like that. And it was apparently at a time where you could legally do that and not be, you know indicted for it. Um But that was not a good look when it came out Arthur Anderson was the auditors of this company were shredding tons of documents. And the SAC got wind into this and they said that they're going to start investigating finally the special purpose entities that Fasto had set up And so Enron fired Fastile that same day And I think that was in November. or late October of two thousand two thousand one And right after that, on november eighth And Ron said, Hey everybody Do you remember all of our all that money we said we made Going back to nineteen ninety seven, we're going to need to restate our earnings One of the first things they did was they reported a six hundred eighteen million dollars loss Q three of two thousand one Q one, they posted a four hundred six million dollars profit Q two, a four hundred four million dollars profit, Q three, a six hundred eighteen million dollars loss. So they finally came clean. They finally said, this accounting is off and this is how radically it's off Yeah, I mean, that is u if a company is restating their earnings for that period of time right at all like mistakes can happen, but that's a that's a real bad sign. Yeah. They almost Got a lifeline in I guess late October of that year when they tried to merge with a company called Dynagy Incorporated And that deal That deal fell apart on november twenty eighth. They backed out of the deal, Day did And then What is this four days later on december second, Enron filed for the largest Chapter eleven bankruptcy in US history Up to that time, sixty five point five billion dollars company. filed for bankruptcy, that just did not happen. If you had that kind of money, you could have a fire sale and sell off stuff for way less than you paid for it, but you could still survive And that just goes to show you like just how fraudulent this company was. They couldn't have a fire sale and make up that kind of that kind of debt that they owed, I think was seventy two billion dollars, I think, in debt that they finally were found to have owed. And at the time it was the biggest in two thousand eight, we saw what big really was. Yeah. Lehman Brothers, for example, had six hundred thirty nine billion dollars in assets when it filed for bankruptcy and went under But at the time, Enron was like Eye popping as far as bankruptcies went for corporations. Can you imagine The wave of relief that swept through Dyagy Incorporated. Yeah and R. decclared bankruptcy a few days later after they backed out Yeah, that one just offhand conversation at the vending machine over a packet of check mix like save Dyage forever, you know This seems like a bad deal to me, Crunch Crunch.ight. And Dyagee, by the way, went on to become Apple, right. so the fallout from this, there are a lot of victims, twenty thousand employees, twenty thousand employees. lost their job in How long did they have to get out? What did it say in the day? I think they had the day. I think it was less than that. I feel like it was hours or something. Basically pack your S and get out of here, everybody. Yeah. And like literally this huge tall building has thousands of people just leaving all day with bankers' boxes with their contents of their desk in it, like the ultimate movie trope U every employee that had been told for years and years Hey, you got to invest everything you can in that for because Enron is I mean, look at the stock.re we're going places and that money will be safe there They obviously lost almost everything. There was a, you know, the rank and file employees. There was one in the documentary that said He had about close to three hundred fifty thousand dollars in stock that he ended up dumping for tw thousandelve hundred dollars uh, they froze the stock accounts of the rank and file while Upper management was actively still cashing out Yeah, that was a really scummy move. They I'm sure purposefully changed four hundred one K providers in the midst of all this. And when you do that, there's a minimum thirty day freeze as you transfer assets over. So these poor emmployees couldn't sell their shares, like you said, wow. the executives were making tens and tens of millions of dollars worth of option trades I mean, it's just mind boggling. That to me is probably the worst part of the whole thing. Well, and you know, tie with that. The severance package averaged about four thousand five hundred dollars for the average employees while management bonuses totaled more than fifty five million. And that's just bonuses. That's not cashing out stocks.. And Livia who helped us put this together, great job on this article. Yeah, agreed. pointed out something like other fallout like you'd never even think about, which was Enron was a very big investor and donor in local nonprofits in Houston. And all of a sudden all that money is cut off. And like the Red Cross chapter had to cut its budget from twelve million dollars to nine million dollars in one year largely because the money dried up from Enron. So the fallout was far and wide and that's not even mentioning like we're talking about the employees who had stock in the company and like, Every other human being that had just stock in Enron that had nothing to do with it lost all their money I mean, the stock price was at ninety at one point and it dropped down to I think forty something cents in like a year, basically So yes, the employees in particular and the retirees who had already left and whose pension funds were just totally evaporated, meaning you're going to have to go get a job as a Walmart greeter now because you can't afford anything They are definitely the greatest victims of all this. I saw Ken Ligh's lawyer afterward portray Ken Ligh as the greatest victim of all of it because he apparently lost a few hundred million dollars Um, and He I he didn't say it himself, but he definitely tried to say like, I lost so much money, There's no way I could have known what was going on and that fell on deeaf ears. And that same defense was used by Jeffrey Skilling too. I didn't know what was going on. And so what they tried to do was pin the whole thing on Andrew Fastow, who had been fired who had skimmed thirty something million dollars himself, so had proven demonstrated he was a criminal They made it. They tried to play like he was a rogue CFO that had done all of this under the very nose of Jeffrey Skilling and Ken Lay and that they hadn't known. And the public Congress, the courts. Juries, everybody said you have to be kiding us Yeah. and they were right in the end fastle plead guilty to two counts of wire fraud and securities fraud in return for being a witness against skilling and Lay I think had a ten year sentence for what was going to be a much larger sentence ended up serving five years And then got out into twenty eleven and started you know, getting paid as a speaker to corporations about business ethics. uh, you know, to his credit, I guess Uh twenty years on, he he came out officially and apologize for everything seemems to really have turned the corner and learned a lesson, although you never knows what is going on in someone's heart from the outside Arthur Anderson completely went away, the oldest counting form accounting firm in the country never recovered, completely folded and went out of business. The Sarbanes Oxley Act was enacted basasically because of Enron in two thousand two. Yeah, which was and I remember I remember years ago when we were working in our early days at How Stuff Ws, there was a lot of like Sarbanes, Oxley talk Do you remember that stuff? Yeah, because they came up with the Frank Dodd act to basically undo or combat against future stuff from the two thousand eight financial crisis. Yeah This was the same thing six years prior. L Enron had such a huge effect that they passed a law that basically point for point outlawed all the stuff that Enron had done. They did the same thing with the Dodd Frank actor. they tried to And of course, you know, certain people will say Sarbanes actually has no real teeth anymore because they're not even funding the oversight that they promised, other people, you know the die hard free marketers will say That's actually too restrictive We're not able to be competitive anymore because you've got all these rules now to make sure we're not defrauding people of billions of dollars. Right. Yeahah. you're making it's hard to exploit people Yeah So u There was actuallyual convictions. like this is crazy. And one of the heartening things, Chuck is if you watch like these congressional hearings on this People from both sides of the aisle are grilling these guys. Oh yeah No one was apologizing to them for their, you know, their colleague from the other side of the aisle asking, you know, mean questions. Everyone was mad at these guys. The whole world hated Jeffrey Skilling and Ken Lay and Andrew Fastle. He was so smug up there, man, answering those questions. Oh in the face of all that, he was still so smug about it I looked up whether he ever apologized and I could not find it. I don't think Jeffrey Skilling ever apologized. I think he went throughout his entire time in prison basically saying like he was a victim that this is unfair But he was imprisoned. He was an executive that was in prison. That just does not happen lately. He was convicted of nineteen countounts fraud conspiracy insider trading. He got twenty four years in prison and ended up serving twelve which is I mean, yeah, that sucks, but' nothing to sneeze at. No, for sure. That's a long time to do in the clink And then Ken Lay, he was convicted on ten counts But he wasn't able to be sentenced because he died of a heart attack six weeks after being convicted. And I think his conviction was vacated Yeah, Skilling. now is out and works at an oil and gas analytics startup Uh, it seems that other people, um I think weah, I mentioned that Fastial was on the speaker circuit U the whistleblower Ms Watkins was n times person of the year In two thousand two And I believe is also now a paid speaker. and executive in residence at Texas State University And then there was a matter of Becauseuse I was like, Livia didn't get to it, but I was like, well, surely there was some sort of U making it right for these people who lost all this money right And there were lawsuits that came out and settlements that came out differenterent people ended up paying different things. I think it was a seven point two billion dollars setettlement from Enron Um, I believe the banks were on the hook I can't tell if the banks were on the hook for some of that or if it was a separate thing.