158-502: Jeffrey Keith Skilling (born November 25, 1953) is an American businessman who in 2006 was convicted of federal felony charges relating to the Enron scandal . Skilling, who was CEO of Enron during the company's collapse, was eventually sentenced to 24 years in prison, of which he served 12 after multiple appeals. Skilling was indicted on 35 counts of crimes related to the Enron scandal. In 2006 he
316-475: A change in venue on the grounds that "it was impossible to get a fair trial in Houston". Enron's bankruptcy, the largest in U.S. history when it was filed during December 2001, cost 20,000 employees their jobs. In addition, many of them lost their life savings. Investors also lost billions. Skilling and many of the company's executives had sold huge portions of their own Enron stock before the bankruptcy filing, making
474-656: A conflict of interest over the significant consulting fees generated by Enron. During 2000, Andersen earned $ 25 million in audit fees and $ 27 million in consulting fees (this amount accounted for roughly 27% of the audit fees of public clients for Andersen's Houston office). The auditor's methods were questioned as either being completed solely to receive its annual fees or for its lack of expertise in properly reviewing Enron's revenue recognition, special entities, derivatives, and other accounting practices. Enron hired numerous Certified Public Accountants (CPAs) as well as accountants who had worked on developing accounting rules with
632-588: A $ 500 million gain on the swap contracts in its 2000 annual report . The gain was responsible for offsetting its stock portfolio losses and was attributed to nearly a third of Enron's earnings for 2000 (before it was properly restated in 2001). On paper, Enron had a model board of directors comprising predominantly outsiders with significant ownership stakes and a talented audit committee. In its 2000 review of best corporate boards, Chief Executive included Enron among its five best boards. Even with its complex corporate governance and network of intermediaries, Enron
790-417: A 15-day public comment period and a contentious testimony before the U.S. House Financial Services subcommittee, FASB eased the mark-to-market rules through the release of three FASB Staff Positions (FSPs). Financial institutions are still required by the rules to mark transactions to market prices but more so in a steady market and less so when the market is inactive. To proponents of the rules, this eliminates
948-450: A 20-year agreement to introduce on-demand entertainment to various U.S. cities by year's end. After several pilot projects, Enron claimed estimated profits of more than $ 110 million from the deal, even though analysts questioned the technical viability and market demand of the service. But in March 2001, the parties withdrew from the contract. Enron continued to claim future profits, even though
1106-520: A business in the State of Texas. According to the public records available through the Texas Comptroller of Public Accounts , Rebecca Carter, Skilling's wife, is listed as manager of the company. On August 30, 2022 the company became listed as withdrawn. Skilling has a daughter and two sons from his first marriage to Susan Long, which ended in divorce in 1997. His youngest child, John Taylor "JT" Skilling,
1264-521: A company is required or elects to record an asset or liability at fair value. The rule requires a mark to "market", rather than to some theoretical price calculated by a computer — a system often criticized as "mark to make-believe". (Occasionally, for certain types of assets, the rule allows for using a model.) Sometimes, there is a weak market for assets which trade relatively infrequently - often during an economic crisis. During these periods, there are few, if any buyers for such products. This complicates
1422-540: A consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes–Oxley Act , increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients. In 1985, Kenneth Lay merged
1580-547: A cover-up. Revelations concerning Andersen's overall performance led to the break-up of the firm, and to the following assessment by the Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001): "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to
1738-561: A manipulative manner to achieve spurious valuations. The most infamous use of mark-to-market in this way was the Enron scandal . After the Enron scandal, changes were made to the mark to market method by the Sarbanes–Oxley Act in the US during 2002. The Act affected mark to market by forcing companies to implement stricter accounting standards. The stricter standards included more explicit financial reporting, stronger internal controls to prevent and identify fraud, and auditor independence. In addition,
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#17328941480801896-449: A modest average of about 2.1%, and its share price had decreased by more than 30% since the same quarter of 2000. Mark-to-market accounting Mark-to-market ( MTM or M2M ) or fair value accounting is accounting for the " fair value " of an asset or liability based on the current market price , or the price for similar assets and liabilities, or based on another objectively assessed "fair" value. Fair value accounting has been
2054-445: A novel idea: by promoting the company's aggressive investment strategy, the company didn't really need any "assets". This plan helped make Enron the largest wholesaler of gas and electricity, with $ 27 billion traded in a quarter. On February 12, 2001, Skilling was named CEO of Enron, replacing Lay. He was slated to succeed Lay as chairman as well in early 2002, but abruptly resigned six months later on 14 August 2001. Skilling joked about
2212-545: A part of Generally Accepted Accounting Principles (GAAP) in the United States since the early 1990s. Failure to use it is viewed as the cause of the Orange County Bankruptcy , even though its use is considered to be one of the reasons for the Enron scandal and the eventual bankruptcy of the company, as well as the closure of the accounting firm Arthur Andersen . Mark-to-market accounting can change values on
2370-585: A post-mortem interview with The Washington Post , she recalled finding "strange transactions", "erratic cash flow", and "huge debt". The debt was the biggest red flag to McLean; she wondered how a supposedly profitable company could be "adding debt at such a rapid rate". Later, in her book, The Smartest Guys in the Room , McLean recalled speaking off the record with a number of people in the investment community who were growing skeptical about Enron. McLean telephoned Skilling to discuss her findings prior to publishing
2528-432: A recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling stammered, "Well uh ... Thank you very much, we appreciate it ... Asshole." This became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling's offensiveness, with slogans such as, "Ask Why, Asshole",
2686-778: A reporter at The Wall Street Journal bureau in Dallas wrote a story about how mark-to-market accounting had become prevalent in the energy industry. He noted that outsiders had no real way of knowing the assumptions on which companies that used mark-to-market based their earnings. While the story only appeared in the Texas Journal, the Texas regional edition of the Journal, short-seller Jim Chanos happened to read it and decided to check Enron's 10-K report for himself. Chanos did not think it made sense that Enron's broadband unit appeared to far outpace
2844-655: A separate investment. CalPERS was interested in the idea, but only if it could be terminated as a partner in JEDI. However, Enron did not want to show any debt from assuming CalPERS' stake in JEDI on its balance sheet. Chief Financial Officer (CFO) Fastow developed the special purpose entity Chewco Investments, a limited partnership (L.P.) which raised debt guaranteed by Enron and was used to acquire CalPERS's joint venture stake for $ 383 million. Because of Fastow's organization of Chewco, JEDI's losses were kept off of Enron's balance sheet. In autumn 2001, CalPERS and Enron's arrangement
3002-487: A series of rules dictate whether a special purpose entity is a separate entity from the sponsor. In total, by 2001, Enron had used hundreds of special purpose entities to hide its debt. The company used a number of special purpose entities, such as partnerships in its Thomas and Condor tax shelters, financial asset securitization investment trusts (FASITs) in the Apache deal, real estate mortgage investment conduits (REMICs) in
3160-402: A substantial profit. On May 25, 2006, the jury returned with the following findings regarding Skilling: In a front-page interview with The Wall Street Journal on June 17, 2006, Skilling claimed that he had been melancholic after the Enron bankruptcy and that he had considered suicide , but that his indictment actually ended his depression . He also claimed that the worst witness against him
3318-399: A then-troubled broadband industry. He also noticed that Enron was spending much of its invested capital, and was alarmed by the large amounts of stock being sold by insiders. In November 2000, he decided to short Enron's stock. In February 2001, Chief Accounting Officer Rick Causey told budget managers: "From an accounting standpoint, this will be our easiest year ever. We've got 2001 in
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#17328941480803476-404: A variation on Enron's official slogan "Ask why". By the late 1990s Enron's stock was trading for $ 80–90 per share, and few seemed to concern themselves with the opacity of the company's financial disclosures. In mid-July 2001, Enron reported revenues of $ 50.1 billion, almost triple year-to-date, and beating analysts' estimates by 3 cents a share. Despite this, Enron's profit margin had stayed at
3634-510: A variety of assets including gas pipelines, electricity plants, paper plants, water plants, and broadband services across the globe. Enron also gained additional revenue by trading contracts for the same array of products and services with which it was involved. This included setting up power generation plants in developing countries and emerging markets including the Philippines ( Subic Bay ), Indonesia and India ( Dabhol ). The bull market of
3792-585: A very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code . Enron's $ 63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until the WorldCom scandal the following year. Many executives at Enron were indicted for a variety of charges and some were later sentenced to prison, including former CEO Jeffrey Skilling. Then CEO and Chairman Kenneth Lay
3950-541: Is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions). Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities , commonly known as "FAS 115", is an accounting standard issued during May 1993 by
4108-439: Is an accounting standard issued during November 1995 by FASB, which became effective for entities with fiscal years beginning after December 15, 1995. FAS 124 requires that, for investments in equity securities with readily determinable fair values and for all investments in debt securities, a not-for-profit organization must report them at fair value, with gains and losses included in a Statement of Activities. A narrow exception
4266-479: Is an attorney and assisted his legal team during the criminal trial. In April 2004, Skilling got into a scuffle with patrons of a cigar bar in New York City after a night of drinking. He was not arrested, but he and his wife, Rebecca, who was hurt during the scuffle, were transported to a hospital where a blood test showed Skilling had a blood-alcohol level of 190 milligrams per deciliter (0.19% BAC), as indicated in
4424-446: Is estimated as the present value of net future cash flow. Often, the viability of these contracts and their related costs were difficult to estimate. Owing to the large discrepancies between reported profits and cash, investors were typically given false or misleading reports. Under this method, income from projects could be recorded, although the firm might never have received the money, with this income increasing financial earnings on
4582-448: Is made to allow limited held-to-maturity accounting for a not-for-profit organization if comparable business entities are engaged in the same industry. Statement of Financial Accounting Standards No. 157, Fair Value Measurements , commonly known as "FAS 157", is an accounting standard issued during September 2006 by FASB, which became effective for entities with fiscal years beginning after November 15, 2007. FAS Statement 157 includes
4740-403: Is market-based rather than entity-specific. Thus, the optimism that often characterizes an asset acquirer must be replaced with the skepticism that typically characterizes a dispassionate, risk-averse buyer. FAS 157's fair value hierarchy underpins the concepts of the standard. The hierarchy ranks the quality and reliability of information used to determine fair values, with level 1 inputs being
4898-552: Is not an "orderly" transaction. Further, it clarifies that estimates of fair value can be made using the expected cash flows from such instruments, provided that the estimates represent adjustments that a willing buyer would make, such as adjustments for default and liquidity risks. Section 132 of the Emergency Economic Stabilization Act of 2008 , which passed on October 3, 2008, restated the SEC's authority to suspend
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5056-414: Is performed typically at the end of the trading day, and if the account value decreases below a given threshold (typically a ratio predefined by the broker), the broker issues a margin call that requires the client to deposit more funds or liquidate the account. In Enron's natural gas business, the accounting had been fairly straightforward: in each time period , the company listed actual costs of supplying
5214-414: Is the case, including inability to value the future income and expenses both accurately and collectively, often due to unreliable information, or over-optimistic or over-pessimistic expectations of cash flow and earnings. If an investor owns 10 shares of a stock purchased for $ 4 per share, and that stock now trades at $ 6, the "mark-to-market" value of the shares is equal to (10 shares * $ 6), or $ 60, whereas
5372-670: The California energy crisis at one meeting of Enron employees by asking, "What is the difference between California and the Titanic ? At least when the Titanic went down, the lights were on". Skilling later attributed the remark to frayed relations between Enron and California. His employees, meanwhile, plotted to keep the price of energy high in California. On March 28, 2001, PBS 's Frontline interviewed Skilling, where he claimed for Enron "We are
5530-707: The Financial Accounting Standards Board (FASB), which became effective for entities with fiscal years beginning after December 15, 1993. FAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities . Those investments are to be classified in three categories and accounted for as follows: Statement of Financial Accounting Standards No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations , commonly known as "FAS 124",
5688-618: The Financial Accounting Standards Board (FASB). The accountants searched for new ways to save the company money, including capitalizing on loopholes found in Generally Accepted Accounting Principles (GAAP), the accounting industry's standards. One Enron accountant revealed "We tried to aggressively use the literature [GAAP] to our advantage. All the rules create all these opportunities. We got to where we did because we exploited that weakness." Andersen's auditors were pressured by Enron's management to defer recognizing
5846-692: The Lehman Brothers Repo 105 scheme in the 2008 financial crisis , or the currency swap concealment of Greek debt by Goldman Sachs. In Enron's case, Merrill Lynch bought Nigerian barges with an alleged buyback guarantee by Enron shortly before the earnings deadline. According to the government, Enron misreported a bridge loan as a true sale, then bought back the barges a few months later. Merrill Lynch executives were tried and in November 2004 convicted for aiding Enron in fraudulent accounting activities. These charges were thrown out on appeal in 2006, after
6004-592: The Public Company Accounting Oversight Board (PCAOB) was created by the Securities and Exchange Commission (SEC) for the purpose of overseeing audits. The Sarbanes-Oxley Act also implemented harsher penalties for fraud, such as enhanced prison sentences and fines for committing fraud. Although the law was created to restore investor confidence, the cost of implementing the regulations caused many companies to avoid registering on stock exchanges in
6162-557: The United States Department of Justice reached a deal with Skilling, which resulted in ten years being cut from his sentence, reducing it to 14 years. He was moved to a halfway house in 2018 and released from custody in 2019, after serving 12 years. Jeffrey Keith Skilling was born in Pittsburgh, Pennsylvania , on November 25, 1953, the second of four children of Betty ( née Clarke) and Thomas Ethelbert Skilling, Jr. His father
6320-416: The book value might (depending on the accounting principles used) equal only $ 40. Similarly, if the stock decreases to $ 3, the mark-to-market value is $ 30 and the investor has an unrealized loss of $ 10 on the original investment. This can create problems in the following period when the "mark-to-market" (accrual) is reversed. If the market price has changed between the ending period (12/31/prior year) and
6478-544: The natural gas pipeline companies of Houston Natural Gas and InterNorth to form a multi-billion dollar company. Just a year later, they then changed the name to Enron. In the early 1990s, he helped to initiate the selling of electricity at market prices and, soon after, Congress approved legislation deregulating the sale of natural gas. The resulting markets made it possible for traders such as Enron to sell energy at higher prices, thereby significantly increasing its revenue. After producers and local governments decried
Jeffrey Skilling - Misplaced Pages Continue
6636-575: The "fair value" of a particular asset. Purchasers of distressed assets should buy undervalued securities, thus increasing prices, allowing other Companies to consequently mark up their similar holdings. Also new in FAS 157 is the idea of nonperformance risk. FAS 157 requires that in valuing a liability, an entity should consider the nonperformance risk. If FAS 157 simply required that fair value be recorded as an exit price, then nonperformance risk would be extinguished upon exit. However, FAS 157 defines fair value as
6794-405: The 1980s the practice spread to major banks and corporations, and beginning in the 1990s mark-to-market accounting began to result in scandals. To understand the original practice, consider that a futures trader, when beginning an account (or "position"), deposits money, termed a " margin ", with the exchange. This is intended to protect the exchange against loss. At the end of every trading day,
6952-495: The 1990s helped to fuel Enron’s ambitions and contributed to its rapid growth. Enron's stock increased from the start of the 1990s until year-end 1998 by 311%, only modestly higher than the average rate of growth in the Standard & Poor 500 index . However, the stock increased by 56% in 1999 and a further 87% in 2000, compared to a 20% increase and a 10% decrease for the index during the same years. By December 31, 2000, Enron's stock
7110-478: The Enron scandal. He surrendered to the Federal Bureau of Investigation on February 19, 2004, and pleaded not guilty to all charges. The indictments emphasized his probable knowledge of, and likely direct involvement with, the fraudulent transactions within Enron. About a month after quitting Enron, Skilling sold almost US$ 60 million of his stake in the company (in blocks of 10,000 to 500,000 shares), resulting in
7268-1099: The Financial Accounting Standards Board (FASB) voted on and approved new guidelines that would allow for the valuation to be based on a price that would be received in an orderly market rather than a forced liquidation, starting during the first quarter of 2009. Although FAS 157 does not require fair value to be used on any new classes of assets, it does apply to assets and liabilities that are recorded at fair value in accordance with other applicable rules. The accounting rules for which assets and liabilities are held at fair value are complex. Mutual funds and securities companies have recorded assets and some liabilities at fair value for decades in accordance with securities regulations and other accounting guidance. For commercial banks and other types of financial services companies, some asset classes are required to be recorded at fair value, such as derivatives and marketable equity securities. For other types of assets, such as loan receivables and debt securities, it depends on whether
7426-514: The Merrill Lynch executives had spent nearly a year in prison, with the 5th U.S. Circuit Court of Appeals in New Orleans calling the conspiracy and wire fraud charges "flawed". Expert observers said that the reversal was highly unusual for the 5th Circuit, commenting that the conviction must have had serious issues in order to be overturned. The Justice Department decided not to retry the case after
7584-595: The PRC process as "the most important process we conduct as a company". Dawkins has distanced himself from Enron and Skilling, saying that Skilling misunderstood his book. Dawkins has said that he has never advocated selfishness as a means of progression. On October 13, 2009, the Supreme Court of the United States agreed to hear two questions presented by Skilling's appeal. The Court subsequently scheduled and heard argument March 1, 2010. The first challenge by Skilling's defense
7742-514: The Skilling case back to the lower court for further proceedings to decide which charges must now be dismissed as the result of the invalidation of the honest services statute. In April 2011, a three-judge panel of the Fifth Circuit Court of Appeals ruled that since the jury was presented with "overwhelming evidence" that Skilling conspired to commit conspiracy fraud, the verdict would have been
7900-627: The Steele deal, and REMICs and real estate investment trusts (REITs) in the Cochise deal. The special purpose entities were Tobashi schemes used for more than just circumventing accounting conventions. As a result of one violation, Enron's balance sheet understated its liabilities and overstated its equity , and its earnings were overstated. Enron disclosed to its shareholders that it had hedged downside risk in its own illiquid investments using special purpose entities. However, investors were oblivious to
8058-532: The United States. Internal Revenue Code Section 475 contains the mark to market accounting method rule for taxation. Section 475 provides that qualified securities dealers who elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account for that year. The section also provides that dealers in commodities can elect mark to market treatment for any commodity (or their derivatives) which
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#17328941480808216-707: The account, the trader must immediately pay additional margin into the account in order to maintain the account (a " margin call "). (The Chicago Mercantile Exchange , doing even more, marks positions to market twice a day, at 10:00 am and 2:00 pm.) Over-the-counter (OTC) derivatives , in contrast, are formula-based financial contracts between buyers and sellers, and are not traded on exchanges, so their market prices are not established by any active, regulated market trading. Market values are, therefore, not objectively determined or available readily (purchasers of derivative contracts are typically furnished with computer programs which compute market values based upon data input from
8374-407: The accounting employed when a company issues stock at a public offering , then booked the notes payable issued as assets on its balance sheet while increasing the shareholders' equity for the same amount. This treatment later became an issue for Enron and its auditor Arthur Andersen , as removing it from the balance sheet resulted in a $ 1.2 billion decrease in net shareholders' equity. Eventually
8532-519: The accounting method for Enron in its trading of natural gas futures contracts on January 30, 1992. However, Enron later expanded its use to other areas in the company to help it meet Wall Street projections. For one contract, in July 2000, Enron and Blockbuster Video signed a 20-year agreement to introduce on-demand entertainment to various U.S. cities by year's end. After several pilot projects, Enron claimed estimated profits of more than $ 110 million from
8690-411: The active markets and the provided formulas). During their early development, OTC derivatives such as interest rate swaps were not marked to market frequently. Deals were monitored on a quarterly or annual basis, when gains or losses would be acknowledged or payments exchanged. As the practice of marking to market became more used by corporations and banks, some of them seem to have discovered that this
8848-609: The agent model. Enron's method of reporting inflated trading revenue was later adopted by other companies in the energy trading industry in an attempt to stay competitive with the company's large increase in revenue. Other energy companies such as Duke Energy , Reliant Energy , and Dynegy joined Enron in the largest 50 of the revenue-based Fortune 500 owing mainly to their adoption of the same trading revenue accounting as Enron. Between 1996 and 2000, Enron's revenues increased by more than 750%, rising from $ 13.3 billion in 1996 to $ 100.7 billion in 2000. This expansion of 65% per year
9006-411: The amount of funds available is more than the value of cash (or equivalents). The credit is provided by charging a rate of interest and requiring a certain amount of collateral, in a similar way that banks provide loans. Even though the value of securities (stocks or other financial instruments such as options ) fluctuates in the market, the value of accounts is not computed in real time. Marking-to-market
9164-632: The appearance of reported earnings to meet Wall Street's expectations. Stock tickers were installed in lobbies, elevators, and on company computers. At budget meetings, Skilling would develop target earnings by asking, "What earnings do you need to keep our stock price up?" and that number would be used, even if it was not feasible. On December 31, 2000, Enron had 96 million shares outstanding as stock option plans (approximately 13% of common shares outstanding). Enron's proxy statement stated that, within three years, these awards were expected to be exercised. Using Enron's January 2001 stock price of $ 83.13 and
9322-620: The application of FAS 157, and Section 133 required a report by the SEC which was delivered December 30, 2008. On October 10, 2008, the FASB issued further guidance to provide an example of how to estimate fair value in cases where the market for that asset is not active at a reporting date. On December 30, 2008, the SEC issued its report under Sec. 133 and decided not to suspend mark-to-market accounting. On March 16, 2009, FASB proposed allowing companies to use more leeway in valuing their assets under "mark-to-market" accounting. On April 2, 2009, after
9480-542: The article, but he called her "unethical" for not properly researching his company. Fastow claimed that Enron could not reveal earnings details as the company had more than 1,200 trading books for assorted commodities and did "... not want anyone to know what's on those books. We don't want to tell anyone where we're making money." In a conference call on April 17, 2001, then-Chief Executive Officer (CEO) Skilling verbally attacked Wall Street analyst Richard Grubman, who questioned Enron's unusual accounting practices during
9638-415: The assets are held for trading (active buying and selling) or for investment. All trading assets are recorded at fair value. Loans and debt securities that are held for investment or to maturity are recorded at amortized cost, unless they are deemed to be impaired (in which case, a loss is recognized). However, if they are available for sale or held for sale, they are required to be recorded at fair value or
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#17328941480809796-463: The attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron's internal contracts over the related-party transactions". Corporate audit committees usually meet just a few times during the year, and their members typically have only modest experience with accounting and finance. Enron's audit committee had more expertise than many others. It included: Enron's audit committee
9954-402: The bag." On March 5, Bethany McLean 's Fortune article "Is Enron Overpriced?" questioned how Enron could maintain its high stock value, which was trading at 55 times its earnings, arguing that analysts and investors did not know exactly how the company made money. McLean was first drawn to the company's financial situation after Chanos suggested she view the company's 10-K for herself. In
10112-431: The balance sheet as market conditions change. In contrast, historical cost accounting, based on the past transactions, is simpler, more stable, and easier to perform, but does not represent current market value. It summarizes past transactions instead. Mark-to-market accounting can become volatile if market prices fluctuate greatly or change unpredictably. Buyers and sellers may claim a number of specific instances when this
10270-510: The board of directors, as later learned by a Senate subcommittee. The board was informed of the rationale for using the Whitewing, LJM, and Raptor transactions, and after approving them, received status updates on the entities' operations. Although not all of Enron's widespread improper accounting practices were revealed to the board, the practices were dependent on board decisions. Even though Enron extensively relied on derivatives for its business,
10428-433: The books. However, because in future years the profits could not be included, new and additional income had to be included from more projects to develop additional growth to appease investors. As one Enron competitor stated, "If you accelerate your income, then you have to keep doing more and more deals to show the same or rising income." Despite potential pitfalls, the U.S. Securities and Exchange Commission (SEC) approved
10586-785: The chairman of Enron in its last few years, and approved of the actions of Skilling and Fastow, although he did not always inquire about the details. Skilling constantly focused on meeting Wall Street expectations, advocated the use of mark-to-market accounting (accounting based on market value, which was then inflated) and pressured Enron executives to find new ways to hide its debt. Fastow and other executives "created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them." Enron earned profits by providing services such as wholesale trading and risk management in addition to building and maintaining electric power plants, natural gas pipelines, storage, and processing facilities. When accepting
10744-449: The change in the market value of their account in cash. For Over-The-Counter (OTC) derivatives, when one counterparty defaults, the sequence of events that follows is governed by an ISDA contract. When using models to compute the ongoing exposure, FAS 157 requires that the entity consider the default risk ("nonperformance risk") of the counterparty and make a necessary adjustment to its computations. For exchange traded derivatives, if one of
10902-470: The charges from the special purpose entities as its credit risks became known. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off , where the value of the entity was removed from the balance sheet at a loss. To pressure Andersen into meeting earnings expectations, Enron would occasionally allow accounting companies Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create
11060-455: The committee. The United States Senate Permanent Subcommittee on Investigations of the Committee on Governmental Affairs ' report accused the board members of allowing conflicts of interest to impede their duties as monitoring the company's accounting practices. When Enron's scandal became public, the audit committee's conflicts of interest were regarded with suspicion. Commentators attributed
11218-503: The company became public in October 2001, the company filed for bankruptcy and its accounting firm, Arthur Andersen —then one of the five largest audit and accountancy partnerships in the world—was effectively dissolved. In addition to being the largest bankruptcy reorganization in U.S. history at that time, Enron was cited as the biggest audit failure. Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth . Several years later, when Jeffrey Skilling
11376-445: The company create a forward market in natural gas . Skilling impressed Kenneth Lay in his capacity as a consultant, and was hired by Lay during 1990 as chairman and chief executive officer of Enron Finance Corp. In 1991, he became the chairman of Enron Gas Services Co., which was a result of the merger of Enron Gas Marketing and Enron Finance Corp. Skilling was named CEO and managing director of Enron Capital and Trade Resources, which
11534-454: The company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance. Furthermore, some speculative business ventures proved disastrous. The combination of these issues later resulted in the bankruptcy of Enron, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Skilling, Andrew Fastow and other executives such as Rebecca Mark . Lay served as
11692-401: The company's finance committee and board did not have enough experience with derivatives to understand what they were being told. The Senate subcommittee argued that had there been a detailed understanding of how the derivatives were organized, the board would have prevented their use. Enron's accounting firm, Arthur Andersen, was accused of applying reckless standards in its audits because of
11850-465: The company's financial statement footnotes. The special purpose entities had been used to pay for all of this using the entities' debt instruments . The footnotes also declared that the instruments' face amount totaled $ 1.5 billion, and the entities notional amount of $ 2.1 billion had been used to enter into derivative contracts with Enron. Enron capitalized the Raptors, and, in a manner similar to
12008-476: The company, and people with internal connections. Employees' bonuses often rested significantly on their ranking, and those with the lowest ratings were supposed to be fired. The rankings were assigned on a curve at Skilling's direction, meaning that ten percent of people had to be graded five, regardless of absolute performance. They were given two weeks to try to find another job at Enron or be fired. The scheme came to be known as "rank and yank". Skilling described
12166-409: The contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. In contrast, if the market price of his contract has decreased, the exchange charges his account that holds the deposited margin. If the balance of this account becomes less than the deposit required to maintain
12324-447: The corporation. Then-chairman Kenneth Lay, who previously served as CEO for 15 years, returned as CEO until the company filed for bankruptcy protection during December 2001. When brought in front of congressional committees , Skilling stated that he had "no knowledge" of the complicated scandal that would eventually result in Enron's bankruptcy . Skilling was indicted on 35 counts of fraud , insider trading , and other crimes related to
12482-492: The counterparties defaults in this periodic exchange, that counterparty's account is immediately closed by the exchange and the clearing house is substituted for that counterparty's account. Marking-to-market virtually eliminates credit risk, but it requires the use of monitoring systems that usually only large institutions can afford. Stock brokers allow their clients to access credit via margin accounts. These accounts allow clients to borrow funds to buy securities. Therefore,
12640-671: The customer records destroyed. At the beginning of 2001, the Enron Corporation, the world's dominant energy trader, appeared unstoppable. The company's decade-long effort to persuade lawmakers to deregulate electricity markets had succeeded from California to New York. Its ties to the Bush administration assured that its views would be heard in Washington. Its sales, profits and stock were soaring. —A. Berenson and R. A. Oppel, Jr. The New York Times , October 28, 2001. On September 20, 2000,
12798-451: The deal resulted in a loss. Enron used special purpose entities—limited partnerships or companies created to fulfill a temporary or specific purpose to fund or manage risks associated with specific assets . The company elected to disclose minimal details on its use of "special purpose entities". These shell companies were created by a sponsor, but funded by independent equity investors and debt financing. For financial reporting purposes,
12956-479: The deal, even though analysts questioned the technical viability and market demand of the service. When the network failed to work, Blockbuster withdrew from the contract. Enron continued to claim future profits, even though the deal resulted in a loss. Former Federal Deposit Insurance Corporation Chair William Isaac placed much of the blame for the subprime mortgage crisis on the Securities and Exchange Commission and its fair-value accounting rules, especially
13114-406: The definition as outlined does introduce certain important differences. First, it is based on the exit price (for an asset, the price at which it would be sold (bid price)) rather than an entry price (for an asset, the price at which it would be bought (ask price)), regardless of whether the entity plans to hold the asset for investment or resell it later. Second, FAS 157 emphasizes that fair value
13272-438: The derivative contracts worth $ 2.1 billion lost significant value. Swaps were established at the time the stock price achieved its maximum. During the ensuing year, the value of the portfolio under the swaps fell by $ 1.1 billion as the stock prices decreased (the loss of value meant that the special purpose entities technically now owed Enron $ 1.1 billion by the contracts). Enron, using its mark-to-market accounting method, claimed
13430-498: The directors' beneficial ownership reported in the 2001 proxy, the value of director stock ownership was $ 659 million for Lay, and $ 174 million for Skilling. Skilling believed that if Enron employees were constantly worried about cost, it would hinder original thinking. As a result, extravagant spending was rampant throughout the company, especially among the executives. Employees had large expense accounts and many executives were paid sometimes twice as much as competitors. In 1998,
13588-455: The equity, also contributed $ 22 million to fund the entities. Enron transferred to "Raptor I-IV", four LJM-related special purpose entities named after the velociraptors in Jurassic Park , more than "$ 1.2 billion in assets, including millions of shares of Enron common stock and long term rights to purchase millions more shares, plus $ 150 million of Enron notes payable " as disclosed in
13746-559: The fact that the special purpose entities were actually using the company's own stock and financial guarantees to finance these hedges. This prevented Enron from being protected from the downside risk. In 1993, Enron established a joint venture in energy investments with CalPERS , the California state pension fund, called the Joint Energy Development Investments (JEDI). In 1997, Skilling, serving as Enron's chief operating officer (COO), asked CalPERS to join Enron in
13904-411: The firm might never have received the money, with this income increasing financial earnings on the books. However, because in future years the profits could not be included, new and additional income had to be included from more projects to develop additional growth to appease investors. As one Enron competitor stated, "If you accelerate your income, then you have to keep doing more and more deals to show
14062-538: The first nonfinancial company to use the method to account for its complex long-term contracts. Mark-to-market accounting requires that once a long-term contract has been signed, income is estimated as the present value of net future cash flow. Often, the viability of these contracts and their related costs were difficult to estimate. Owing to the large discrepancies between reported profits and cash, investors were typically given false or misleading reports. Under this method, income from projects could be recorded, although
14220-408: The following: FAS 157 defines "fair value" as: "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". FAS 157 only applies when another accounting rule requires or permits a fair value measure for that item. While FAS 157 does not introduce any new requirements mandating the use of fair value,
14378-426: The gas and actual revenues received from selling it. However, when Skilling joined the company, he demanded that the trading business adopt mark-to-market accounting, claiming that it would represent "true economic value". Enron became the first nonfinancial company to use the method to account for its complex long-term contracts. Mark-to-market accounting requires that once a long-term contract has been signed, income
14536-550: The good guys. We are on the side of angels". On April 17, 2001, Skilling made what became an infamous comment during a conference call with financial analysts. In response to fund manager Richard Grubman saying "You know, you are the only financial institution that can't produce a balance sheet or cash flow statement with their earnings", Skilling replied: "Thank you very much, we appreciate that... asshole." Skilling unexpectedly resigned on August 14 of that year, citing personal reasons, and he soon sold large amounts of his shares in
14694-506: The government's motion to modify conditions of Skilling's pretrial release order. Prosecutors moved against Skilling, asking a judge to increase his $ 5 million bond to $ 7 million, restrict his travel to Texas and impose a curfew. They argued that Skilling violated his bond's terms by drinking excessively and failing to report his contact with police to federal pretrial services authorities. The trial began on January 30, 2006, in Houston, despite repeated protests from defense attorneys calling for
14852-608: The illusion of hiring a new company to replace Andersen. Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, it failed to prevent conflict of interest. In one case, Andersen's Houston office, which performed the Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's Chicago partner. In addition, after news of SEC investigations of Enron were made public, Andersen would later shred several tons of relevant documents and delete nearly 30,000 e-mails and computer files, leading to accusations of
15010-458: The interviewer that it secured his place at the school. He earned his MBA from Harvard Business School in 1979, graduating in the top 5% of his class as a Baker Scholar. After graduation, Skilling became a consultant at McKinsey & Company in the energy and chemical consulting practices. He eventually became one of the youngest partners in the history of McKinsey. As a consultant for McKinsey, Skilling worked with Enron during 1987, helping
15168-401: The invariable fluctuation of future energy prices. Enron's downfall was attributed to its reckless use of derivatives and special purpose entities. By hedging its risks with special purpose entities which it owned, Enron retained the risks associated with the transactions. This arrangement had Enron implementing hedges with itself. Enron's aggressive accounting practices were not hidden from
15326-409: The issues. Shareholders filed a $ 40 billion lawsuit (and were eventually partially compensated with $ 7.2 billion), after the company's stock price, which achieved a high of US$ 90.75 per share in mid-2000, plummeted to less than $ 1 by the end of November 2001. The Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at
15484-525: The judge and the selection process were appropriate. Sri Srinivasan , a partner at O'Melveny & Myers , was Skilling's Washington defense attorney, and Justice Department lawyer Michael Dreeben argued for the government. On June 24, 2010, in an opinion by Justice Ruth Bader Ginsburg , the Supreme Court unanimously nullified Skilling's honest services fraud conviction, finding that "Skilling's misconduct entailed no bribe or kickback". The Court remanded
15642-557: The largest seller of natural gas in North America by 1992, its trading of gas contracts earned $ 122 million (before interest and taxes), the second largest contributor to the company's net income. The November 1999 creation of the EnronOnline trading website allowed the company to better manage its contracts trading business. In an attempt to achieve further growth, Enron pursued a diversification strategy. The company owned and operated
15800-406: The latter is shares of a privately owned company the value of which is based on projected cash flows. Problems can occur when the market-based measurement does not accurately represent the underlying asset's true value. This can occur when a company is forced to calculate the selling price of these assets or liabilities during unfavorable or volatile times, such as a financial crisis. For example, if
15958-424: The liquidity is low or investors are fearful, the current selling price of a bank's assets could be much less than the value under normal liquidity conditions. The result would be a lowered shareholders' equity. This case occurred during the financial crisis of 2008/09 where many securities held on banks' balance sheets could not be valued efficiently as the markets had disappeared from them. During April 2009, however,
16116-420: The lower of cost or fair value, respectively. (FAS 65 and FAS 114 cover the accounting for loans, and FAS 115 covers the accounting for securities.) Notwithstanding the above, companies are permitted to account for almost any financial instrument at fair value, which they might elect to do in lieu of historical cost accounting (see FAS 159, "The Fair Value Option"). Thus, FAS 157 applies in the cases above where
16274-538: The margin call. Markdowns may also reduce the value of bank regulatory capital, requiring additional capital raising and creating uncertainty regarding the health of the bank. It is the combination of the extensive use of financial leverage (i.e., borrowing to invest, leaving limited funds in the event of recession), margin calls and large reported losses that may have exacerbated the crisis. If cash flow-derived value — which excludes market judgment as to default risk but may also more accurately represent "actual" value if
16432-446: The market is sufficiently distressed — is used (rather than sale value), the size of market-value adjustments required by the accounting standard would be typically reduced. On September 30, 2008, the SEC and the FASB issued a joint clarification regarding the implementation of fair value accounting in cases where a market is disorderly or inactive. This guidance clarified that forced liquidations are not indicative of fair value, as this
16590-508: The market – and cash-generating assets, like securities, which are still worth something for as long as they earn some income from their underlying assets. The latter cannot be marked down indefinitely, or at some point, can create incentives for company insiders to buy them from the company at the under-valued prices. Insiders are in the best position to determine the creditworthiness of such securities going forward. In theory, this price pressure should balance market prices to accurately represent
16748-517: The marking process. In the absence of market information, an entity is allowed to use its own assumptions, but the objective is still the same: what would be the current value of a sale to a willing buyer. In developing its own assumptions, the entity can not ignore any available market data, such as interest rates, default rates, prepayment speeds, etc. FAS 157 does not distinguish between non cash-generating assets, i.e., broken equipment, which can theoretically have zero value if nobody will buy them in
16906-456: The mismanagement behind Enron's fall to a variety of ethical and political-economic causes. Ethical explanations centered on executive greed and hubris, a lack of corporate social responsibility, situation ethics, and get-it-done business pragmatism. Political-economic explanations cited post-1970s deregulation, and inadequate staff and funding for regulatory oversight. Enron made a habit of booking costs of cancelled projects as assets, with
17064-415: The most attention. Justices Stephen Breyer and Sonia Sotomayor seemed especially bothered by the questioning of one potential juror who reported that she had lost from $ 50,000 to $ 60,000 in the Enron debacle. "How can we be satisfied that a fair and impartial jury was picked when the judge doesn't follow up when the juror said, 'I'm a victim of this crime, ' " Sotomayor asked. The government maintained that
17222-411: The most reliable and level 3 inputs being the least reliable. Information based on direct observations of transactions (e.g., quoted prices) involving the same assets and liabilities, not assumptions, offers superior reliability; whereas, inputs based on unobservable data or a reporting entity's own assumptions about the assumptions market participants would use are the least reliable. A typical example of
17380-408: The notes taken from FBI agents during interviews with Andrew Fastow be given to the defense. A number of inconsistencies in the notes were discovered soon after. On April 3, 2008, Skilling's defense attorney, Daniel Petrocelli, argued with government prosecutors that Skilling's trial and the conviction itself was based on honest services fraud , which he said did not apply to Skilling. This argument
17538-471: The office from other departments (instructing them to pretend to work hard) to create the appearance that the division was larger than it was. This ruse was used several times to fool analysts about the progress of different areas of Enron to help improve the stock price. Enron division Azurix, slated for an IPO , initially planned to bid between $ 321 million and $ 353 million for the rights to operate water system services for areas around Buenos Aires . This
17696-501: The only things that motivated people. Soon after being hired at Enron, he set up the Performance Review Committee (PRC), a twice-yearly process in which employees were publicly graded by management panels on a scale from 1 to 5, 5 being lowest. Ratings were ostensibly based on job performance and feedback from colleagues and supervisors, but in reality, the highest grades were typically assigned to people bringing in money to
17854-591: The opening market price of the following year (1/1/current year), then there is an accrual variance that must be taken into account. In the 1800s in the U.S., marking to market was the usual practice of bookkeepers . This has been blamed for contributing to the frequent recessions up to the Great Depression and for the collapse of banks. The Securities and Exchange Commission told President Franklin Roosevelt that he should get rid of it, which he did in 1938. But in
18012-515: The original statement with regards to nonperformance risk (paragraphs C40-C49). In response to the rapid developments of the financial crisis of 2007–2008 , the FASB is fast-tracking the issuance of the proposed FAS 157-d, Determining the Fair Value of a Financial Asset in a Market That Is Not Active. Under Accounting Standards Codification , FASB's fair value accounting guidance has been codified as Topic 820. IFRS 13 , Fair Value Measurement ,
18170-461: The outside equity investor needed for the special purpose entities that were being used by Enron. Fastow had to go before the board of directors to receive an exemption from Enron's code of ethics (as he had the title of CFO) in order to manage the companies. The two partnerships were funded with around $ 390 million provided by Wachovia , J.P. Morgan Chase , Credit Suisse First Boston , Citigroup , and other investors. Merrill Lynch, which marketed
18328-400: The price at which you would transfer a liability. In other words, the nonperformance that must be valued should incorporate the correct discount rate for an ongoing contract. An example would be to apply higher discount rate to the future cash flows to account for the credit risk above the stated interest rate. The Basis for Conclusions section has an extensive explanation of what was intended by
18486-429: The prosecution team of misconduct. Federal judge Simeon T. Lake III , who had presided over Skilling's 2006 trial, accepted the deal on June 21, 2013. Jeffrey Skilling was released from federal custody on February 21, 2019, after 12 years in federal prison. In June 2020, Skilling was reported by Reuters to be fundraising for launch of an online oil and gas trading platform named Veld LLC. In August 2021, Veld LLC filed as
18644-465: The prosecutors' allegation that he sold those shares with inside information of Enron's impending bankruptcy. Skilling's main attorney was Daniel Petrocelli , the 52-year-old civil litigator who represented Ron Goldman 's father in his successful civil suit against O. J. Simpson for negligent death. Skilling spent $ 40 million in preparation for the trial , of which at least $ 23 million went to his defense lawyers' retainer. Skilling's younger brother Mark
18802-572: The quality of cash flow or profits, in order to get a better rating for their performance review. Additionally, accounting results were recorded as soon as possible to keep up with the company's stock price. This practice helped ensure deal-makers and executives received large cash bonuses and stock options. Enron was constantly emphasizing its stock price. Management was compensated extensively using stock options , similar to other U.S. companies. This policy of stock option awards caused management to create expectations of rapid growth in efforts to give
18960-543: The rationale that no official letter had stated that the project was cancelled. This method was known as "the snowball", and although it was initially dictated that such practices be used only for projects worth less than $ 90 million, it was later increased to $ 200 million. In 1998, when analysts were given a tour of the Enron Energy Services office, they were impressed with how the employees were working so vigorously. In reality, Skilling had moved other employees to
19118-463: The requirement for banks to mark their assets to market, particularly mortgage-backed securities (MBS) . A review found little evidence that fair-value accounting had caused or exacerbated the crisis. The debate occurs because this accounting rule requires companies to adjust the value of marketable securities (such as the MBS) to their market value. The intent of the standard is to help investors understand
19276-405: The resultant price volatility and asked for increased regulation, strong lobbying on the part of Enron and others prevented such regulation. Enron changed from being a natural gas producer and supplier to a trader of energy derivative contracts with the assistance of Jeffrey Skilling, who joined the company as a consultant before rising to the position of chief operating officer. As Enron became
19434-414: The reversal of the verdict. In Enron's natural gas business, the accounting had been fairly straightforward: in each time period , the company listed actual costs of supplying the gas and actual revenues received from selling it. However, when Skilling joined Enron, he demanded that the trading business adopt mark-to-market accounting, claiming that it would represent "true economic value". Enron became
19592-412: The risk of buying and selling products, merchants are allowed to report the selling price as revenues and the products' costs as cost of goods sold. In contrast, an " agent " provides a service to the customer, but does not take the same risks as merchants for buying and selling. Service providers, when classified as agents, may report trading and brokerage fees as revenue, although not for the full value of
19750-555: The same even if the honest services theory had never been presented, and Skilling's conviction was confirmed. The case in the Fifth Circuit is United States of America v. Jeffrey K. Skilling , 06-20885. Skilling appealed this new decision to the Supreme Court, but was denied certiorari . In 2013, Skilling's lawyers and the Justice Department reached a deal that called for Skilling's sentence to be reduced to 14 years. The reduction
19908-404: The same or rising income." Despite potential pitfalls, the U.S. Securities and Exchange Commission (SEC) approved the accounting method for Enron in its trading of natural gas futures contracts on January 30, 1992. However, Enron later expanded its use to other areas in the company to help it meet Wall Street projections. For one contract, in July 2000, Enron and Blockbuster Video signed
20066-428: The time that the criminal case was brought. The SEC case was stayed, however, pending resolution of the criminal case. On December 8, 2015, federal judge Melinda Harmon granted summary judgment to the SEC and permanently barred Skilling from serving as an officer or director of a public company. Skilling was released from federal custody on February 21, 2019. Prior to the trial, attorneys for Skilling requested that
20224-454: The top 200 highest-paid employees received $ 193 million from salaries, bonuses, and stock. Two years later, the figure jumped to $ 1.4 billion. Before its demise, Enron was lauded for its sophisticated financial risk management tools. Risk management was crucial to Enron not only because of its regulatory environment, but also because of its business plan . Enron established long-term fixed commitments which needed to be hedged to prepare for
20382-400: The transaction. Although trading companies such as Goldman Sachs and Merrill Lynch used the conventional "agent model" for reporting revenue (where only the trading or brokerage fee would be reported as revenue), Enron instead elected to report the entire value of each of its trades as revenue. This "merchant model" was considered much more aggressive in the accounting interpretation than
20540-404: The transactions were approved by the Enron board, the asset transfers were not true sales and should have been treated instead as loans. In 1999, Fastow formulated two limited partnerships: LJM Cayman. L.P. (LJM1) and LJM2 Co-Investment L.P. (LJM2), for the purpose of buying Enron's poorly performing stocks and stakes to improve its financial statements. LJM 1 and 2 were created solely to serve as
20698-578: The typically lesser sale value was used as the market value rather than the cash flow value. Many large financial institutions recognized significant losses during 2007 and 2008 as a result of marking-down MBS asset prices to market value. For some institutions, this also triggered a margin call , such that lenders that had provided the funds using the MBS as collateral had contractual rights to get their money back. This resulted in further forced sales of MBS and emergency efforts to obtain cash (liquidity) to pay off
20856-533: The unnecessary " positive feedback loop" that can result in a weakened economy. On April 9, 2009, FASB issued an official update to FAS 157 that eases the mark-to-market rules when the market is unsteady or inactive. Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009. It was anticipated that these changes could significantly increase banks' statements of earnings and allow them to defer reporting losses. The changes, however, affected accounting standards applicable to
21014-413: The value of these assets at a specific time, rather than just their historical purchase price. Because the market for these assets is distressed, it is difficult to sell many MBS at other than prices which may (or may not) be representative of market stresses, which may be less than the value that the mortgage cash flow related to the MBS would merit. As initially interpreted by companies and their auditors,
21172-409: The verdict would have been the same despite the legal issues being discussed, and Skilling's conviction was confirmed; however, the court ruled Skilling should be resentenced. Skilling appealed this new decision to the Supreme Court, but the appeal was denied. In 2013, following a further appeal, and earlier accusations that prosecutors had concealed evidence from Skilling's lawyers prior to his trial,
21330-528: Was a member of the Beta Theta Pi fraternity. Skilling initially studied engineering before changing to business. After graduating in 1975, he went to work as a corporate planner for First City Bancorporation of Houston, Texas. He quit by 1977 to attend Harvard Business School . According to Skilling, during his admissions interview for Harvard Business School, he was asked if he was smart, to which he replied, "I'm fucking smart." This apparently so impressed
21488-547: Was a sales manager for an Illinois valve company. His older brother, Tom Skilling , later became chief meteorologist at WGN-TV in Chicago . Skilling grew up between New Jersey and Aurora, Illinois . When he was 16 years old, he worked at WLXT-TV (channel 60), a UHF television station in Aurora. He graduated from West Aurora High School and received a full scholarship to Southern Methodist University in Dallas, Texas , where he
21646-427: Was a tempting way to commit accounting fraud , especially when the market price could not be determined objectively (because there was no real day-to-day market available or the asset value was derived from other traded commodities, such as crude oil futures), so assets were being " marked to model " in a hypothetical or synthetic manner using estimated valuations derived from financial modeling , and sometimes marked in
21804-601: Was adopted by the International Accounting Standards Board on May 12, 2011. IFRS 13 provides guidance for how to perform fair value measurement under International Financial Reporting Standards and took effect on January 1, 2013. It does not provide guidance as to when fair value should be used. The guidance is similar to the US GAAP guidance. In marking-to-market a derivatives account, at pre-determined periodic intervals, each counterparty exchanges
21962-539: Was at the high end of what Enron's Risk Assessment and Control Group advised. But as pressure to outbid all others and win the deal grew more intense with the approaching IPO, the Azurix executives decided to up their bid. They eventually bid $ 438.6 million, which turned out to be about twice as much as the next highest sealed bid. But when Enron executives arrived at the Argentine facilities, they found them in shambles, with all of
22120-536: Was based on the idea that, even though Skilling committed illegal financial maneuvers, he did so in order to save the company and did not profit from it. This was cited as a possible basis for overturning some or all of his convictions; however, the chances of this were considered to be very narrow. Experts believed Skilling's best chance was in citing a parallel appeals court decision that had dismissed guilty verdicts on three Merrill Lynch bankers accused of helping Enron to inflate profits. On October 30, 2008, Skilling
22278-521: Was denied by Judge Patrick Higginbotham of the Fifth Circuit Court of Appeals on December 12, 2006. In ordering Skilling's immediate imprisonment, the judge wrote, "Skilling raises no substantial question that is likely to result in the reversal of his convictions on all of the charged counts," although the order also noted "serious frailties" were possible in some (but not all) of the convictions. Skilling began his sentence on December 13, 2006, and
22436-524: Was discovered, which required the discontinuation of Enron's prior accounting method for Chewco and JEDI. This disqualification revealed that Enron's reported earnings from 1997 to mid-2001 would need to be reduced by $ 405 million and that the company's indebtedness would increase by $ 628 million. Whitewing was the name of a special purpose entity used as a financing method by Enron. In December 1997, with funding of $ 579 million provided by Enron and $ 500 million by an outside investor, Whitewing Associates L.P.
22594-418: Was driven in part by a 2009 appeals court ruling that ordered a recalculation of Mr. Skilling’s sentence because of a mistake made by the judge in interpreting the federal sentencing guidelines. In exchange for his reduced sentence, Mr. Skilling gave up about $ 42 million, to be distributed to victims of Enron’s fraud. He also agreed not to pursue any further legal appeals, including a claim that would have accused
22752-504: Was extraordinary in any industry, including the energy industry, which typically considered growth of 2–3% per year to be respectable. For just the first nine months of 2001, Enron reported $ 138.7 billion in revenues, placing the company at the sixth position on the Fortune Global 500 . Enron also used creative accounting tricks and purposefully misclassified loan transactions as sales close to quarterly reporting deadlines, similar to
22910-408: Was formed. Two years later, the entity's arrangement was changed so that it would no longer be consolidated with Enron and be counted on the company's balance sheet. Whitewing was used to purchase Enron assets, including stakes in power plants, pipelines, stocks, and other investments. Between 1999 and 2001, Whitewing bought assets from Enron worth $ 2 billion, using Enron stock as collateral . Although
23068-537: Was found dead from a drug overdose at age 20 in his apartment in Santa Ana, California on February 3, 2011. In March 2002, Skilling married Rebecca Carter, a former vice president for board communications and board secretary at Enron. Enron scandal The Enron scandal was an accounting scandal involving Enron Corporation , an American energy company based in Houston , Texas. When news of widespread fraud within
23226-429: Was found guilty of conspiracy , insider trading , making false statements , and securities fraud . He was sentenced to 24 years in prison and fined $ 45 million. The US Supreme Court heard arguments in the appeal of the case in 2010, vacated part of Skilling's conviction, and transferred the case back to the lower court for resentencing. In 2011, a three-judge panel of the Fifth Circuit Court of Appeals ruled that
23384-442: Was himself, and that he would be able to survive a long prison term as long as he is given "something to do, something to accomplish" while in prison. On October 23, 2006, Skilling was sentenced to 24 years and four months in prison, and was fined US$ 45,000,000 (equivalent to $ 68,012,545 in 2023). All of his convictions save one were ultimately upheld on appeal, as was his sentence. Skilling's request to remain free during appeal
23542-458: Was hired, Lay developed a staff of executives that – by the use of accounting loopholes, the misuse of mark-to-market accounting , special purpose entities , and poor financial reporting – were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives misled Enron's board of directors and audit committee on high-risk accounting practices and pressured Arthur Andersen to ignore
23700-611: Was housed at the Montgomery Federal Prison Camp , Maxwell Air Force Base , Montgomery, Alabama until 2018. According to the Federal Bureau of Prisons , he was scheduled for release on February 21, 2019, but on August 30, 2018 Skilling was released from prison and sent to a halfway house in Texas to serve out his prison sentence. The Securities and Exchange Commission had sued Skilling for his misdeeds in February 2004, around
23858-525: Was indicted and convicted, but died before being sentenced. Arthur Andersen LLC was found guilty of illegally destroying documents relevant to the SEC investigation, which voided its license to audit public companies and effectively closed the firm. By the time the ruling was overturned at the Supreme Court , Arthur Andersen had lost the majority of its customers and had ceased operating. Enron employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As
24016-420: Was later criticized for its brief meetings that would cover large amounts of material. In one meeting on February 12, 2001, the committee met for an hour and a half. Enron's audit committee did not have the technical knowledge to question the auditors properly on accounting issues related to the company's special purpose entities. The committee was also unable to question the company's management due to pressures on
24174-408: Was moved to a low-security prison near Littleton, Colorado , as his original prison, FCI Waseca , was being converted to an all-female facility. Richard Dawkins ' book The Selfish Gene was Skilling's favorite book and served as the foundation of his managerial philosophy. Skilling held, by his own interpretation, a Darwinian view of what makes the world work. He believed that money and fear were
24332-589: Was priced at $ 83.13 and its market capitalization exceeded $ 60 billion, 70 times earnings and six times book value , an indication of the stock market's high expectations about its future prospects. In addition, Enron was rated the most innovative large company in America in Fortune' s Most Admired Companies survey . Enron's complex financial statements were confusing to shareholders and analysts. In addition, its complex business model and unethical practices required that
24490-539: Was still able to "attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels." Although Enron's compensation and performance management system was designed to retain and reward its most valuable employees, the system contributed to a dysfunctional corporate culture that became obsessed with short-term earnings to maximize bonuses. Employees constantly tried to start deals, often disregarding
24648-468: Was the subsidiary responsible for energy trading and marketing. He was promoted to president and chief operating officer of Enron during 1997, second only to Lay, while remaining the manager of Enron Capital and Trade Resources. During Skilling's management, Enron adopted " mark-to-market " accounting , in which anticipated future profits from any deal were accounted for by estimating their present value rather than historical cost. Skilling began advocating
24806-617: Was whether or not the federal "honest services fraud" statute (title 18 of the United States Code , section 1346) required the government to prove that Skilling's conduct was intended to achieve "private gain" (instead of being intended to advance his employer's interests); and, if not, if this statute is unconstitutionally vague. The Court heard two other cases about the same statute on December 8, several months before it heard Skilling's appeal: Black v. United States and Weyhrauch v. United States . The second issue – "in-house judging" –
24964-411: Was whether or not, when a presumption of jury prejudice arises because of the widespread, community effect of the defendant's alleged conduct, plus, widespread, inflammatory pretrial publicity, the government may rebut that presumption; and, if so, if the government must prove beyond a reasonable doubt that no juror was actually prejudiced. In the arguments on March 1, the issue of jury selection received
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