Enron Files for Bankruptcy: America's Largest Corporate Fraud Unfolds

Enron filed for Chapter 11 bankruptcy on December 2, 2001, in what was then the largest corporate bankruptcy in American history. The Houston-based energy company had been valued at approximately $70 billion less than a year earlier. When it collapsed, 20,000 employees lost their jobs and many lost their retirement savings, which had been heavily invested in Enron stock that was suddenly worthless. The company had been built by Kenneth Lay in the 1980s through a series of natural gas pipeline mergers. Under CEO Jeffrey Skilling and CFO Andrew Fastow, Enron transformed itself from an energy company into an energy trading company, then into something closer to a financial services firm that happened to deal in energy commodities. The company's reported revenues grew from $31 billion in 1998 to $101 billion in 2000. The problem was that much of the reported revenue was fictitious. Fastow created a network of special purpose entities, essentially shell companies, that Enron used to hide debt and inflate profits. The entities, with names like LJM and Raptors, allowed Enron to move losses off its balance sheet while booking gains on its income statement. Arthur Andersen, the accounting firm that audited Enron, approved the arrangements. When Sherron Watkins, an Enron vice president, raised concerns internally in August 2001, the company's response was to investigate whether she could be fired. A Wall Street Journal investigation in October 2001 exposed the special purpose entities. Enron's stock price collapsed from $90 to less than $1 in a matter of weeks. The company restated its earnings for the previous four years, wiping out $586 million in reported income. Skilling was sentenced to 24 years in prison, later reduced to 14. Fastow received six years. Lay was convicted but died of a heart attack before sentencing. Arthur Andersen, one of the Big Five accounting firms, was convicted of obstruction of justice for shredding documents and effectively dissolved, costing 85,000 jobs worldwide. Congress passed the Sarbanes-Oxley Act in 2002, fundamentally overhauling corporate governance, financial reporting, and auditor independence requirements.