Corporate Fraud

The collapse of Enron Corporation in 2001 led to massive investigations involving allegations of a range of criminal activities perpetrated by some of the company's top executives. In January 2002, the U.S. JUSTICE DEPARTMENT announced that it had formed an Enron Task Force consisting of a team of federal prosecutors and under the supervision of the department, agents of the FEDERAL BUREAU OF INVESTIGATION, and agents of the criminal division of the INTERNAL REVENUE SERVICE. The scandal developed into a case study of corporate fraud, poor management decisions, and faulty accounting practices.

Enron had built itself into the seventh largest company in the United States, with annual revenues of $100 billion. In December 2000, the company's stock sold for as much as $84.87 per share. However, stock prices fell throughout much of 2001. In October, the company announced that it had overstated its revenues, claiming losses of $638 million during the third quarter of 2001 alone. Stock prices then plunged, hurting investors and employees with retirement plans that were tied into company stock. By the beginning of December, Enron's stock prices had fallen to below $1 per share. Enron filed for Chapter 11 BANKRUPTCY protection on December 2, 2001. To date, the event constituted the largest bankruptcy in U.S. history.

Much of the early investigation into the Enron fiasco focused on the company's financial reporting practices. Though the company followed generally accepted accounting principles (GAAP), these practices gave the false impression that the company was more profitable and more secure than it really was. The company reported revenues that were actually funds flowing through transitional transactions with related companies. Moreover, the company hid its losses and debts in partnerships that did not appear on Enron's financial statements.

The first criminal charges were filed against Enron's accounting firm, Arthur Andersen, L.L.P. The Justice Department brought charges that the accounting firm had destroyed thousands of documents, including computer files, related to its dealings with Enron. Anderson was also convicted for doctoring a memo and misstating a news release related to Enron. The company was found guilty of OBSTRUCTION OF JUSTICE in June 2002—an appeal is still pending as of September 2003. It was placed on PROBATION for five years and required to pay a fine of $500,000. Analysts questioned whether the accounting firm would survive after the conviction. In addition to its role as accountant, Arthur Andersen had served as a consultant to Enron for a number of years, thus raising conflicts of interest questions.

Because the Justice Department had not moved forward with criminal indictments against Enron officials, several critics charged that the federal government under President GEORGE W. BUSH was protecting top Enron executives. Several of these executives were questioned by the Senate Commerce Committee in February 2002, but no charges were filed. Several of Enron's senior executives reportedly had personal interests in certain risky transactions. These executives even sold Enron stock while at the same time convincing employees to hold their stock. The board of directors of the company also allegedly failed to provide significant oversight regarding the auditing and reporting by the company.

The first major criminal charges involving an Enron executive were brought against Michael Kopper, who had served as an aide to chief financial officer Andrew Fastow. Kopper pleaded guilty to charges of MONEY LAUNDERING and conspiracy to commit FRAUD in August 2002. Kopper implicated Fastow, claiming that Fastow had conducted transactions on behalf of Enron for the benefit of third-party partnerships owned by Fastow.

The Justice Department then focused its attention on Fastow, who allegedly had $12.8 million in funds and was constructing a $2.6 million house. The government alleged that Fastow and Kopper had accumulated $22 million from illegal Enron deals. In November 2002, the Justice Department indicted Fastow on 78 counts, including fraud, money laundering, and obstruction of justice. The criminal indictment did not include former CEO Kenneth Lay, former CEO Jeffrey Skilling, or any other top executives. The Justice Department also announced that it could file a superseding indictment with additional charges. This superseding indictment might name additional defendants as well.

Fastow appeared before the SECURITIES AND EXCHANGE COMMISSION in December 2002 but invoked his FIFTH AMENDMENT PRIVILEGE AGAINST SELF-INCRIMINATION. In several trade publications in the late 1990s, Fastow had discussed his accounting practices at Enron, including methods for keeping funds off of Enron's books. According to several commentators, Fastow could represent a "fall guy" for the Enron fiasco, as it was probable that other executives and members of the board were aware of these reporting practices.

Others involved in Enron transactions were also brought up on criminal charges. In July 2002, three British bankers were charged with wire fraud for their dealings with Enron. The Justice Department subsequently focused its attention on Enron Broadband Services, an INTERNET division of the company. The Houston Chronicle reported in April 2003 that executives of that branch were likely to be indicted for insider trading, fraud, and money laundering.

As of the end of April 2003, twelve charges had been filed relating to the Enron fiasco, though only seven were filed against company insiders.