OK - getting back to ENRON again - how and why did the investors in ENRON suddenly get "spooked?" Why did they suddenly decide that there was something wrong with ENRON that would lead to them beginning to question the company? After all, ENRON was doing incredibly well (at one point, it was the 7th largest company in the world and ranked as the most innovative company by Forbes magazine).
ENRON always had its detractors. Some investment advisors refused to do business with ENRON because they did not know how ENRON made its money.
Once again, from Wikipedia: On March 5 (2001) , 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. She pointed out how analysts and investors did not know exactly how Enron was earning its income. McLean was first drawn to the company's situation after an analyst suggested she view the company's 10-K report, where she found "strange transactions", "erratic cash flow", and "huge debt." She called Skilling to discuss her findings prior to publishing the article, but he brushed her off, calling her "unethical" for not properly researching the company.
This, of course, in hindsight is the first clue. When one of the most senior ranking people in the company starts to have an adversarial relationship with the press, especially when the reporter is asking a very reasonable question, something is definitely up.
But, it gets more interesting.
Once again, from Wikipedia: In a conference call on April 17, 2001, now-Chief Executive Officer (CEO) Skilling verbally attacked Wall Street analyst Richard Grubman, who questioned Enron's unusual accounting practice during 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 replied "Well, thank you very much, we appreciate that ... asshole."
This, of course, became the start of a series of events that would lead to the loss of investor trust in ENRON. And, when this begins to happen, the company better start explaining what it is doing or have some plan to restore trust in the company.
We're going to put ENRON on the back burner for now and talk about other things. We'll get back to it later.
Here is some reading for today about Medicare fraud: http://www.lasvegassun.com/news/2011/may/18/judge-sentences-woman-medicaid-fraud/
As always, have a great and fraud-free day.
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