The Enron bankruptcy was one of the most controversial corporate bankruptcies in the history on the U.S. Not only was it the largest Chapter 11 bankruptcy of all time (which has since been surpassed by both Worldcom and Lehman Brothers) by clocking in with $63.4 billion in assets but the company’s downfall was due to fraudulent accounting practices, which lost the company’s shareholders almost $11 billion.
Enron was one of the largest energy trading, natural gas and electric utilities companies in the world, employing almost 22,000 people and claiming revenues of nearly $101 billion in 2000. Enron was no stranger to scandal, as they created the California electricity crisis of 2000 and 2001 to help drive up the price of electricity to nearly nine times its cost. They did this by getting “creative” in shutting down multiple energy plants for repairs. At one point 30-50% of California’s energy industry was shut down by Enron from time to time.
Unfortunately, Enron’s unethical practices extended beyond the plants and into their accounting books. Enron and their accounting firm Arthur Anderson (one of the world’s top accounting firms) had created special partnerships or “special purpose entities” to keep millions of dollars of debt off its book, which kept their credit rating very high. This high credit rating and false profit to debt ratio helped Enron rank as a “blue chip company,” which is a company considered to fare well in the stock market during both good and bad times.
This “blue chip” rating led thousands of companies and individuals to invest in Enron, with many businesses investing their employee pension programs, feeling it was a good investment. By October 2001, the company made the alarming announcement that it was worth $1.2 billion less than they previously claimed. As the scandal unraveled Enron’s stock dropped from over $85 a share to $0.30 by the end of November. The U.S. Securities and Exchange Commission began investigating and Houston competitor saw a golden opportunity to purchase the company for a very small price.
Unfortunately, the deal fell through and Enron proceeded to file Chapter 11 bankruptcy on December 2, 2001. While millions of people were affected by the Enron and never saw much recompense, there were new regulations enacted to prevent any futures scandals similar to Enron’s. The Sarbanes-Oxley Act expanded its consequences for defrauding stockholders. It also increased the accountability of auditing firms to remain unbiased and independent of their clients.
While the Waco and Killeen bankruptcy attorneys of Jeff Davis Law Firm hate to see such a scandal happen, we know that these events can set off a domino series of financial disasters for too many people. If you find yourself caught in your own financial problems, please contact a bankruptcy attorney to learn about your rights.