We were looking at the whole ENRON matter from the viewpoint of Skilling and Lay the last time we discussed things. Now, ENRON is sort of a "code word" in contemporary society for fraud in general, so I could spend the rest of my life just writing about this one subject and still not run out of things to say. But, fraud and white-collar crime in general is so much more than ENRON, at some point we would have to move on.
Getting back to Skilling and Lay - they claimed that they were themselves the victims of a "run on the bank" and they were caught by surprise as much as anyone else about the whole thing. A run on the bank, a holdover term from the Depression (if not earlier), means that suddenly investors take their money from the bank in great numbers and soon the number of withdrawals exceeds the number of deposits and credits with the bank. This usually happens when the bank is viewed by all parties as a bad investment or unsafe depository and people lose confidence in the bank, or other financial institution. During the Great Depression, it was not uncommon for banks to suddenly become insolvent this way.
Usually, an event or some other news item occurs before a run on the bank happens. In other words, there has to be a triggering event before a bank is viewed as a bad place to store money (or invest). Was there such a triggering event for ENRON? Again, Wikipedia:
By the end of August 2001, his company's stock still falling, Lay named Greg Whalley, president and COO of Enron Wholesale Services and Mark Frevert, to positions in the chairman's office. Some observers suggested that Enron's investors were in significant need of reassurance, not only because the company's business was difficult to understand (even "indecipherable") but also because it was difficult to properly describe the company in financial statements. One analyst stated "it's really hard for analysts to determine where [Enron] are making money in a given quarter and where they are losing money." Lay accepted that Enron's business was very complex, but asserted that analysts would "never get all the information they want" to satisfy their curiosity. He also explained that the complexity of the business was due largely to tax strategies and position-hedging.Lay's efforts seemed to meet with limited success; by September 9, one prominent hedge fund manager noted that "[Enron] stock is trading under a cloud." The sudden departure of Skilling combined with the opacity of Enron's accounting books made proper assessment difficult for Wall Street. In addition, the company admitted to repeatedly using "related-party transactions," which some feared could be too-easily used to transfer losses that might otherwise appear on Enron's own balance sheet. A particularly troubling aspect of this technique was that several of the "related-party" entities had been or were being controlled by CFO Fastow.
Now, this "run on the bank defense" would seem to have some triggering point, so perhaps Lay and Skilling had some merit to their argument (although, as seen from the outcome at trial, the jury certainly did not buy it). But, notice the wording in the article - the triggering event appears to have been that the investors suddenly, or not so suddenly, realized that they did not know how ENRON was making its money. Lay did nothing to dispel this by saying the "business...was due largely to tax strategies and position hedging." This obviously does nothing to reassure investors.
Why did the investors become concerned about ENRON's complexity? That, of course, is another story and another post.
As always, have a safe and fraud-free day.
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