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Enron Bankruptcy December 2, 2001 Arthur Andersen Court Case Winter/Spring 2002 WorldCom Restatement June 25, 2002; Bankruptcy July 21, 2002 Sarbanes-Oxley.

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Presentation on theme: "Enron Bankruptcy December 2, 2001 Arthur Andersen Court Case Winter/Spring 2002 WorldCom Restatement June 25, 2002; Bankruptcy July 21, 2002 Sarbanes-Oxley."— Presentation transcript:

1 Enron Bankruptcy December 2, 2001 Arthur Andersen Court Case Winter/Spring 2002 WorldCom Restatement June 25, 2002; Bankruptcy July 21, 2002 Sarbanes-Oxley Act Signed July 30, 2002 SEC Regulations Stock Exchange Guidance Public outrage grows, governance credibility falls FIGURE 2.1 GOVERNANCE REFORM TIMELINE

2 $ $ $ $ $ $ $ $ $ $ 0.00 Enron Corp. (last price N/A) US Dollars FIGURE 2.2 ENRON STOCK CHART, WEEKLY PRICES, 1997–2002

3 $132 Revolving Credit $240 Loan $11.4 Loan* $11.4$0.125 Source s Bank $251.4 Non-cash Investors 0.1 BARCLAYS BANK PLC KOPPER & DODSON’s Company DODSON Companies ENRON JEDI CHEWCO FIGURE 2.3 CHEWCO FINANCING, IN MILLIONS

4 SPE SCHEMEPURPOSEIMPACT Chewco/JEDI Syndicated investment Off balance sheet liabilities hidden ($628 million) Revenues recognized early Profits on own shares LJM Provided market for assets Artificial profits Off balance sheet liabilities hidden Equity overstated ($1.2 billion) LJM1/RhythmsInvestment “hedge”Unrecognized losses ($508 million) LJM2/RaptorsInvestment “hedge”Unrecognized losses ($544 million) TABLE 2.1 ENRON’S KEY SPECIAL PURPOSE ENTITIES (SPEs)

5 INVESTMENT RETURN, IN MILLIONS OTHER, IN MILLIONS A. Fastow$25,000$ 4.5 in 2 mo.$30 + stock options M. Kopper125, incl. Dodson $2 in fees B. Glisan 5, K. Mordaunt 5, TABLE 2.2 PAYMENTS TO FASTOW & HELPERS

6 BLEW TOACTIONSUBSEQUENTLY Cliff Baxter, Vice Chair LayNoneExercised $32 million in stock options, just agreed to testify to Congress, found shot dead in his car—an apparent suicide—on Jan. 25, 2002 McMahon, TreasurerFastowNoneReassigned, later returned as CEO Kaminski, Risk Mgr.FastowNoneContinued Sherron WatkinsLayNoneDiscussed with Skilling and asked Vinson & Elkins to review TABLE 2.3 ENRON WHISTLE-BLOWERS

7 Lou PaiChairman, Enron Xcelerator$353.7 million Ken LayChairman Rebecca Mark-JusbascheDirector 79.5 Ken HarrisonDirector, Portland General Electrics 75.2 Kenneth RiceChairman, Enron Broadband 72.8 Jeffrey SkillingDirector (former CEO) 66.9 Mark FrevertVice Chairman 50.3 Stanley HortonGlobal Chairman 45.5 Joseph SuttonVice Chairman 40.1 J. Clifford BaxterVice Chairman 35.2 Joseph HircoCEO, Enron Broadband 35.2 Andrew FastowChief Financial Officer 30.5 SOURCE: © 2002 The Washington Post. Reprinted with permission. TABLE 2.4 ENRON STOCK PROCEEDS, OCTOBER 1998 TO NOVEMBER 2001, OVER $30 MILLION

8 FIGURE 2.4 ENRON’S GOVERNANCE AND CONTROL STRUCTURE WAS SHORT-CIRCUITED Outside Law Firm SPEs CEO:Lay, Skilling CFO:Fastow CAO:Causey CRO:Buy Others:Kopper, McMahon, Glisan Watkins, Kaminsky MANAGEMENT BOARD Ken Lay:Chair; Co-Chair ZZZ Committees:Audit and Compliance Compensation, Finance, Nominating Internal Audit … AA Company Policies Code of Conduct Consultant: Arthur Andersen Whistle-blowers AUDITOR Arthur Andersen Missing Guidance Suspended Guidance Missing Compliance LEGEND Financial Reports

9 TABLE 2.5 ENRON’S ACCOMPLICE BANKS’ LAWSUIT SETTLEMENTS $COMMENT Merrill Lynch80mMarch 2003 Fine imposed by the SEC. Four of the Bank’s executives were found guilty of fraud and conspiracy, facing sentences of up to fifteen years in prison (Daniel Bayly, Robert Furst, William Fuhs & James Brown). JPMorgan Chase2.2bn 135m August First Enron-related US Bank settlement. The bank denied wrongdoing. August Fine imposed by the SEC. JPMorgan’s Q2/Q3 profits were $1.83bn. Citigroup1.7bn 120m June Citigroup did not admit liability, and said money already set aside for legal costs would cover the payment. August Fine imposed by the SEC. Citigroup’s Q2/Q3 profits were $4.3bn. Canadian Imperial Bank of Commerce 2.8bn 80m June More than annual profit yr December Fine imposed by the SEC. Two CIBC executives also will pay fines totaling $600,000. Toronto Dominion Bank130mAugust 2005 Royal Bank of Canada25mAugust 2005 Royal Bank of Scotland42mAugust 2005 Sources: SEC files, newspaper articles and Enron’s website at for press releases on Megaclaims settlements.http://www.enron.com

10 TABLE 2.6 ENRON KEY EXECUTIVE INDICTMENTS INDICTED BYFORPLEA/ COOPERATE  RESULT Ken Lay, Chair, Chair and CEO Jul 2004, 2 trials: 1 jury, 1 judge Conspiracy, fraud & false statements Not guilty Guilty in both trials, but died before sentencing, so verdicts vacated Jeffrey Skilling, CEOFeb 2004 Conspiracy, fraud, false statements, insider trading Not guilty24 yr, 4 month sentence Restitution $45 million Andrew Fastow, CFOJan 2004Securities fraudPlea agreement (guilty)  10 yr sentence, later reduced to 6 yrs, forfeit $23.8 mil Lea Fastow, Assistant Treasurer May 2004Tax fraudPlea agreement (guilty)  1yr sentence Richard Causey, CAODec 2005Securities fraudPlea agreement (guilty)  7yr sentence Forfeit $1.25 million Michael KopperAug 2002Fraud and money laundering Plea agreement (guilty)  37 month sentence Forfeit $12 million Mark Koenig Investor Relations Aug 2004Securities fraudPlea agreement (guilty) 18 month sentence Forfeit $1.49 million Ben Glisan, TreasurerDec 2002 Sep 2003Fraud Denied wrongdoing, later 5yr sentence, later brought favors, forfeit $625,000. Kenneth Rice, CEO Broadband Services Apr 2005Securities fraudPlea agreement (guilty)10yr sentence Forfeit $29.4 million Kevin HannonSep 2005Securities fraudGuilty5yr sentence Forfeit $250,000 Timothy Despain Assistant Treasurer Apr 2004Securities fraudPlea agreement (guilty)  5yr sentence, released on $100,000 bail Enron Board of Directors (18 members) Jan 2005Breach of Fiduciary Duty Settlement $168 million; $155 million covered by insurance Source: SEC Files, newspaper articles, see also  = Cooperates with prosecutors

11 Summary Income Statement (millions) Revenues$101,789$40,112$31,260 Operating income1, ,378 IBIT2,4821,9951,582 Net Income before Cumulative Accounting Changes9791, Net Income EPS (in dollars) - basic diluted Detail of IBIT (millions) Transport & distribution Trans. Services$391$380$351 Portland General Wholesale Services2,2601, Retail Energy Services165(68)(119) Broadband Services(60) Exploration & prod Corporate and other(615)(4)(32) IBIT2,4821,9951,582 Summary Balance Sheet (billions) Current assets$30.4$7.3 Investments, other Property, plant, equip, net Total Assets Current liabilities Long-term Debt Deferred credits and other Shareholders’ Equity Total Liabilities & Shareholders’ Equity TABLE 2.7 SELECTED ENRON FINANCIAL STATEMENT DETAILS

12 ANNOUNCEDSOURCE OF CHANGE 1994 The Dey Report, “Where were the Directors?,” Toronto Stock Exchange To review corporate governance and make recommendations for best practice. 1999Five Years to the Dey Report on Corporate Governance, Toronto Stock Exchange and The Institute of Corporate Directors To survey and analyze governance procedures at TSE companies. May 2000The Combined Code: Principles of Good Governance and Principles of Best Practice Based on the Hempel (1998), the Cadbury (1992) and Greenbury Reports (1995), used by companies listed on the London Stock Exchange. 2000Guidance for Directors on the Combined Code, The Turnbull Report. See Combined Code purpose. Nov. 21, 2001The Saucier Report, “Beyond Compliance: Building a Governance Culture,” Joint Committee on Corporate Governance, CICA/TSE To review the current state of corporate governance in Canada, compare Canadian and international best practices, and make recommendations for changes that will ensure Canadian corporate governance is among the best in the world. Apr. 26, 2002Toronto Stock Exchange (TSX) Guidelines Amended Revisions effective Dec.31, 2002 to adopt some Saucier Report recommendations. Apr. 4, 2002SEC Blue Ribbon Committee Discussions 2002 VariousBusiness Roundtable—various statements June 6, 2002NYSE Corporate Governance Listing Requirements, Effective Aug. 2002, after SEC approval A review at the request of Harvey Pitt, SEC Chairman, to enhance the accountability, integrity, and transparency of companies listed on the NYSE. June 28, 2002SEC Order effective Aug, 14, 2002 CEO and CFO to certify 8-K, quarterly and annual financial reports. July 9, 2002President George Bush’s Proposals Speech Visit the text’s website for links to the organizations’ websites TABLE 2.8 KEY CHANGES IN GOVERNANCE GUIDELINES AND REGULATIONS

13 TABLE 2.9 ORGANIZATION OF THE SARBANES-OXLEY ACT of 2002 SECTIONSTITLE 1, 2, 3Short Title, Definitions, Table of Contents 101–109IPublic Company Oversight Board 201–209IIAuditor Independence 301– IIICorporate Responsibility Public Company Audit Committees (including whistle-blower encouragement) Corporate Responsibility for Financial Statements (including CEO and CFO certification) 401– IVEnhanced Financial Disclosures Management Assessment of Internal Controls Code of Ethics for Senior Financial Officers 501VAnalyst Conflicts of Interest 601–604VICommission Resources and Authority 701–705VIIStudies and Reports 801–807VIIICorporate Criminal Fraud Accountability 901–906IXWhite Collar Crime Penalty Enhancements 1001XCorporate Tax Returns 1001–1007XICorporate Fraud and Accountability


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