Enron Corporation, a billion dollar company based in Texas, is famous for the biggest accounting fraud committed by its Directors in a systematic and planned manner. Enron filed for the biggest bankruptcy cases in corporate history that led to thousands of its employees going jobless and many investors penniless. The Enron defrauding started with the Energy crisis in California where there was a significant decrease electricity production and hence its distribution. Enron was also affected by the said crisis and hence with the overall increase in rates of power distribution, rates of power through Enron also increased.
It was later found by the Energy Regulatory Commission that Enron along with other companies played a major role in this manipulation of prices. Such manipulation in prices led to an unprecedented increase in the stock value of Enron stocks. The real reason for this increase in Enron stocks was known only to an eclectic few and the public at large was informed that the company was doing very well and hence its stock prices were increasing (“Western Energy Crisis Chronology”, 2007).
It is further seen that Enron in an attempt to avoid taxes and increase its profits established various entities offshore which led to free movement of money and positioned it amongst the top profit making companies. This public image of the company again contributed to the unprecedented increase in its stock prices and thus increased sale of its stock. Only the employees were aware of the real situation and hence they started selling the stock or became involved in what is known as insider trading.
The public at large was constantly informed by the Directors of the company as well as the auditors through their audit reports that the company was indeed making excellent profits and hence it was worth investing in its stock. With the realization of the California Energy crisis and the manipulative practices used by various companies, the Regulatory Commission ordered probe of the companies. It was during such probative enquiries that the real situation came to light and this led to the decline of stock prices.
However, despite the decline in stock prices, the Directors of Enron went about falsely misrepresenting to the people and the Banks that this was just a minor present problem and it would be rectified and the stock prices would ultimately increase. Thus many investors invested money in the hope that the stock prices would rebound as per the statements of the Directors. In the meantime, the staff of Enron including its Directors, privy to the information regarding the real state of accounts started selling their stocks in large numbers and this further led to decrease in stock value.
It was during that time that Enron’s stock came to an all time low of $15 and about this time Enron filed for Chapter 11 Bankruptcy under the United States bankruptcy laws. This filing for bankruptcy by Enron burst the illusionary bubble and brought to light the various accounting crimes committed by both the Company and its auditors and also brought to light the state of accounting laws in the United States. It was seen that Arthur Anderson were the auditors of Enron and were totally involved in the scandal by creating the image of a profit making company (“Enron”, 2007).
Along with manipulation of energy prices, the former Chairman of the Board and Chief Executive Officers of Enron were indicted, in a separate class action claim, under various financial crimes like fraud, securities fraud, wire fraud, money laundering, insider trading, conspiracy and also making false statements about its finances to various banks and auditors. The various crimes committed and the law used for the indictment in the class action claim forms the crux of this essay. Enron as part of its employee beneficiary programs had created the Enron Corp Savings Plan, Enron Corp.
Employee Stock Ownership Plan, the Cash Balance Plan etc and had also made provision for the employees to receive phantom stock as compensation. The employees were also protected by the Employment Retirement Securities Act, 1974 or ERISA. One of the major cases filed against Enron as an aftermath of this fraud was by its 24000 employees who sought redress against the breach of fiduciary duty by the company. Also the employees alleged violations of provisions of Racketeer Influenced and Corrupt Organizations Act or RICO Act as it is popularly known and also accused the Company for the crime of civil conspiracy and negligence.
It has been alleged that Enron contrary to the internationally acclaimed rules laid down in the Generally Accepted Accounting Principles (GAAP), created various off shore entities and engaged in various partnership oriented activities that helped conceal its debts and losses. The Enron case highlights violations of provisions entailed in Sections 664, 1341, 1343, 1512(b)(2), 1961-1968, 2314 of Title 18, “Crimes and Criminal Procedures” of the United States Code and also Sections 1002, 1104(a)(2), 1109, 1132 of Title 29 “Labor” of the United States Code (Tittle Plaintiffs’ Memorandum, 2002).
These provisions entail the various provisions made by the United States government against crimes committed by employers against employees as well as major corporations or companies against the public at large. Section 664 of Title 18 of the US Code deals with theft or embezzlement from employee benefit plan wherein the punishment awarded for such theft is five years. In the present Enron case it is seen that the Enron directors willfully made the employees invest in various benefit plans announced by the companies despite having full knowledge of the actual state of affairs.
According to this section, if any employer wrongly and willfully embezzles, steals or appropriates any funds deposited in the employee benefit scheme for his or her own personal use then it would amount to a crime under this provision. In this case, it has been seen that the money deposited by the various employees have been transferred for the personal use of the Directors of the Company and in fact some have been given to charitable organizations. Section 1002 of Sub Chapter 1 of Chapter 18 of Title 29 of the US Code states the various definitions and provisions for employment retirement income security program.
This lays the basis for various companies to adopt and provide for employees after retirement. Enron too in its efforts to provide for its employees announced for several plans including those mentioned above like the Enron Corp Savings Plan, Enron Corp. Employee Stock Ownership Plan, the Cash Balance Plan etc. Enron, however, manipulated its accounts such that its employees who participated in its employee benefit plans also lost their savings along with their employments and were left in very dire straits.
In a claim made by the employees , they alleged that the Company Directors had a fiduciary duty to disclose the true affairs of the company and not falsely induce them to make more investments in their dying stock (Rohrback, n. d. ). The details of the case show that the company not only intended to defraud its employees but also wanted to defraud its bankers and the public at large. The Directors of the company made various statements in public to the effect that the company was indeed making excellent profits, when in reality the position was different.
With a view to get more money into the company, it inflated its assets and manipulated its accounting principles and induced various banks to lend to the company for its various off shore activities. Enron is not only guilty of committing frauds against its employees but also has committed frauds against banks and the Directors are indicted under the various provisions of the US Code relating to Bank Fraud, Wire Fraud etc. Another major accusation against Enron was the violation of the provisions of the RICO Act.
Section 1961-1968 of Title 18 of the US Code deals with the various provisions of the RICO Act. Enron has in its efforts to portray a profit making picture invested the moneys collected from the local banks and investors in various off shore companies in direct contravention of the provisions of the US Code, this constitutes a crime under Sec. 1962 of Chapter 96 of Title 18 of the US Code. Enron by the admission of its own Directors has stated that indeed the funds procured from various bank loans and investments made by the employees and the public have been used to create and establish offshore entities.
One of the main organizations involved in helping Enron with its offshore activities has been the World Bank which has given money as loan to Enron to set up energy manufacturing units in various developing nations. In addition to the violation of provisions under RICO, Enron is also accused of committing the crime as entailed in Sec. 2314 of Title 18 of the US Code which states that any person who has intentionally and willfully transported or transferred any material or money etc that has been acquired fraudulently to a foreign state and used it in the establishment of commerce in that foreign state should be punished.
It is seen that there has been a systematic effort on the part of Enron to dupe its employees and innocent investors. Various class action suits have been filed against Enron separately by its investors and its employees. A further reading of the suits filed against Enron brought to light various malpractices in the auditing sector. In the present Enron case, as mentioned above it is clear that Enron needed new capital to stay afloat and the only way it could attract new capital was by making false claims regarding its assets and profits and by concealing its debts.
This was done with the help of its auditors Arthur Anderson who helped Enron in manipulating its accounts and presenting a profit making picture before the public. The case against Enron brought to light such manipulative tactics used by auditors who were both consultants to the public company in question and were also internal auditors appointed by the Government to audit the public company’s accounts. This actually led to a conflict in interest and there was no provision in the law whereby such conflict can be addressed or avoided.
In a case against Arthur Anderson, the plaintiffs argued that Arthur Anderson was responsible for not informing the public about Enron’s true picture and for drafting and preparing false statements of accounts and also helping create false documentation. They defended this accusation by stating a United States Supreme Court decision in 1994, which stated that as per the provisions in Sec. 10 (b) of the Securities Exchange Act, 1934 “secondary actors are not held liable for abetting or aiding primary violators”.
The defendants also stated that the plaintiffs did not meet the requirements as mentioned in the provisions of Private Securities Litigation Reform Act, 1995 (Allegaert, Craco & Tinkelman, 2004). The Court took into consideration the two view points held by Courts in general regarding interpretation of Sec. 10(b) of the 1934 Act. The first view point which is narrow states that in order to establish responsibility the plaintiffs must prove that the defendants made a misrepresentation and such a misrepresentation must be attributed to a specific person.
The broad view point states that substantial participation or involvement is sufficient to attribute action under this provision. The Securities Exchange Commission, who joined as amicus curiae in this case, urged the Court to take a broader view of the provisions as enumerated in Section 10(b) of the Securities and Exchange Act, 1934 in order to provide safety to all investors in the future. The SEC stated that the word “makes” in the provision should be interpreted to include “creates” and as in this present case, Arthur Anderson has helped create false accounts statements they should be held responsible under the provisions of the Act.
The Court very broadly held that a corporate advisor who deceives the public at large with full knowledge regarding such deceit then such advisors can be sued under the federal laws. The Court stressed on the point that in order to prove responsibility, the persons alleging must prove that such misrepresentations were made in a manner that induced the public to act on the basis of the statements made by the Corporate Advisor.
However, the Court held that law firms do not have any fiduciary relationship with non clients and hence cannot be held responsible for any such acts or claims made by them (Allegaert et al, 2004). With respect to the second defense, the Court held that the Private Securities Litigation Reform Act, 1995 did state that the plaintiffs must be very specific in their allegations and cannot broadly make any accusations against persons they feel were involved in the fraud.
For a plaintiff to prove a case against a defendant under this law, the plaintiff requires to state very clearly the misrepresentation, the reasons for it being a misrepresentation, the action taken by the plaintiff and the proof that the defendant made the misrepresentation and also show the state of mind of the defendant while making such a misrepresentation. Without all these factors, any broad statement made by the plaintiff will not account for any action under the provisions of this Act (Allegaert et al, 2004).
It has been seen that the Enron litigation has brought to light that companies can easily induce the investors to make wrong investments and can get away scot-free and has thus highlighted the loopholes in the Private Securities Litigation Reform Act. Civil Securities fraud or investment fraud is a white collar crime committed by the Enron Directors has led to widespread losses suffered by the common man who believing the statements made by the company to be true invested their hard earned money in the Company.
Various amendments have been proposed in this Act after the realization of the problems with the Act. The Enron debacle led to an awakening amongst the financial sector and the Securities Exchange Commission regarding the various accounting practices and the loopholes in the same. In a public statement made by the Chairman of United States Securities and Exchange Commission, it was made clear that there was a need for more discipline, quality control and transparency in the auditing systems set up in the United States (Pitt, 2002).
The various cases filed against Enron are pending final settlement and the Court has approved of the partial settlement proposed by the Directors from their property with respect to the ERISA Case. It has been stated that various investors will also benefit as a settlement proposal is being finalized. However, first institutional investors will be given priority and after that the individual investors can stake their claim in the remaining assets. Various claimants are still waiting for the final settlement to be announced by the Court in respect of their claims but are not very optimistic.
It is seen that various assets of the persons pleading guilty have been frozen by the Court in order to pay the claimants from the sale of these assets. Claimants include not only investors or employees but also lawyers who have pleaded and argued the cases for various parties and also the Securities Exchange Commission and various banks (Flood, 2005). Lack of stringent laws or lack of enforcement mechanisms has been the prime reason for the Enron fraud which has been termed as the biggest fraud in the history of United States.
This case has made the public aware that this is not a one stop fraud but only the tip of the iceberg so to speak and it therefore calls for immediate measures to be taken in terms of legislating for such offences. It is therefore pertinent to note that this Enron fraud and conspiracy brought to light the manipulative and fraudulent accounting practices used by various companies to stay afloat in the stock market and thus led the United States Government to formulate what is now known as the Sarbanes Oaxley Act which has brought significant changes in the law related to securities.
Along with transparency, this Act provides for stringent measures to be adopted against violators of legal provisions for maintaining and publishing accounts. This act provides for more transparency in the working of the public companies, imposes severe penalties for frauds committed by companies and also lays stress on the necessity to audit and report the procedures of financial internal control adopted by any public company.