7 July, 2004 When the firm reported its third quarter results in October 2001, it revealed a large black hole that sent its share price tumbling. The US financial regulator - the Securities Exchange Commission (SEC) - started an investigation into the firm and its results. Enron admitted it had inflated its profits, and filed for bankruptcy on 2 December that year. It transpired that millions of dollars of debt had been hidden in a complex web of transactions. Congressional hearings and regulatory investigations were launched, culminating in a criminal inquiry to try and find out who the main players were in Enron's demise. Investigators have been looking into allegations senior executives may have been involved in fraud. Former Enron chairman Kenneth Lay has finally been indicted, and will go before a court in Houston on Thursday. It is not yet known what charges he will face. Last month Mr Lay spoke about Enron's collapse for the first time when he gave an interview to the New York Times. Previously, in the immediate aftermath of Enron's collapse, Mr Lay refused to testify before various committees and inquiries on Capitol Hill and has limited his comments about the Enron affair to simply expressing his "profound sadness". To the New York Times he blamed former Enron finance chief Andrew Fastow and insisted that he, Mr Lay, was one of the 98% of Enron staff who were "good, honest, hardworking individuals". Mr Fastow is indeed widely seen as the mastermind of Enron's false accounting, but it has been extensively reported that middle-managers warned Mr Lay about what was going on. Former Enron chief executive Jeff Skilling surrendered himself to the FBI back in February. Mr Skilling was chief executive for just six months from January to August 2001, when he suddenly resigned saying he wanted time to enjoy life. He had been with Enron since 1990, and had risen quickly through the company. Mr Skilling is now awaiting trial. His surrender to the FBI came a month after former finance chief Andrew Fastow pleaded guilty to two fraud charges stemming from his role in the collapse. Mr Fastow has agreed to pay fines of about $23m, and could face up to 10 years in prison. His wife Lea, who also worked for Enron, initially pleaded guilty to a tax fraud charge as part of a plea bargain that would have seen her face five months in prison, and a $250,000 fine. Yet this was rejected by a judge in April, Mrs Fastow changed her plea to not guilty, and is now still awaiting trial. To disguise its true balance sheets, the firm used complex financial partnerships to conceal mounting debts. And many of the company's executives allegedly raked in massive profits, selling their shares before the stock collapsed. Millions of dollars were also allegedly funnelled to top executives, their families and selected friends, and into partnerships they controlled. It began life as an energy producer, moved to become an energy trader, and ended up an energy "bank" providing guaranteed quantities at set prices over the long term. Enron owned power plants, water companies, gas distributors and other units involved in the delivery of services to consumers and businesses. But it was the first to realise energy and water could be bought, sold, and hedged just like shares and bonds. Enron became a huge "market-maker" in the US, acting as the main broker in energy products, also taking financial gambles far bigger than its actual core business. Its trading operations relied heavily on complicated transactions, many relating to deals many years in the future. It is alleged many of these gambles on the future energy prices were losing money, and to disguise this a network of dubious "partnerships" were created - Enron devices for keeping debts off the balance sheet. It is said these partnerships would buy business from Enron to boost the balance sheet. After a while the losses were being shuttled around corners of the empire to keep them hidden; eventually coming to light in 2001. Enron left behind $15bn of debts, its shares become worthless, and 20,000 workers around the world lost their jobs. Many banks were exposed to the firm, from lending money and trading with it. JP Morgan admitted to $900m of exposure, and Citigroup to nearly $800m. Former high-ranking Merrill Lynch bankers have been charged with fraud in connection with Enron transactions. Andersen, which failed to audit the Enron books correctly, collapsed with the loss of 7,500 jobs in the US, and 1,500 in the UK. Many corporate governance and accounting reforms have been enacted in the US in the wake of the collapse. The Sarbanes-Oxley Act brought in stiff penalties for violations of US securities laws. Chief executives and chief financial officers of companies required to restate their results due to "material non-compliance" will have to repay bonuses and any profits from share sales over the previous 12 months. Other new rules prohibit loans from public companies to their directors. And chief executives of every public American company will have to certify in writing that their results comply fully with the rules and fairly present the group's financial condition. In the UK, the Department of Trade and Industry (DTI) brought in new regulations for the accounting industry following the scandal. Under new rules regulators will have wider powers to investigate companies, and the Inland Revenue can pass on information about suspect accounts. Directors who refuse to declare that they have not held back relevant information from their auditors could face huge fines.
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