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Enron – One of the Biggest Stock Market Scams of All Time

In 2001 Enron Corp. was one of the high-flying U.S. corporations. An innovator, a leader with an impeccable team at the helm and with billions coursing through its veins.

The company was the pioneer in introducing several crucial changes in the energy sector which was liberalized in the early 90s.

Enron was the first and best at creating natural gas and electricity contracts that reflected the delivery according to the end destination of the two resources. This was a first for a company in the energy business and resulted in what was practically a nationwide network for trading energy.
One that would later serve as the blueprint for a global one.

They were at the forefront of implementing the internet for executing trades online with a volume of $2.5 billion every single day.

Enron - One of the Biggest Stock Market Scams of All Time 3

The Good Times for Enron

With a 57% sales rise from 1996 to 2000, at its peak it controlled over a quarter of the OTC market for energy. They had identified and created the role of power broker by bypassing the slow exchanges of the past.

As a result their stock was trading at $90.56 in Q3 of 2000. Not bad for a company that was nothing more than a natural gas provider when it was created from a merger in 1985.

But their upturn came from trading energy commodities which were allowed after the deregulation of the sector. That same thing business, combined with a series of accounting tricks and downright crimes, would eventually be their downfall.

Enron - One of the Biggest Stock Market Scams of All Time 2

The Bad Times

Even at their peak the balance sheet they presented to shareholders was a bit blurry to put it mildly. Much of the company’s debt was actually moved offshore in partnerships that Andrew Fastow, the company’s CFO, had created. Simultaneously the company was including its client’s revenue as their own, instead of only the fee they took from them.

Another trick they were emplyoing was to use the aforementioned partnerships through which the company would buy and sell energy from itself, increasing its revenue even more. A real house of cards.

There were initial inquiries, the most vocal coming (anonymously) from Sherron Watkins, a company vice-president, who had noticed the questionable partnerships and warned that they could lead to a potential disaster.

Rumours of this started to spill out and on October 16 the company decided to announce a $638 million loss. The very next day the company’s auditor Arthur Andersen LLP began destroying documents.

Six days later the SEC began an investigation into Enron. Fastow left his position and CEO Kenneth Lay started calling the FED Chairman Alan Greenspan, as well as the Treasury Secretary Paul O’Neill and Commerce Secretary Donald Evans.

In general he was just reporting what the situation was but in one of the conversations he actually asked for a favour from Evans, that would help Enron with a potential downgrade to a junk stock. That request was denied.

In the space of a month, on November 8th, they tried to come clean and revised their financial reports for the last five years. This gave a chance for an acquisition by Dynergy, a competitor at the time but that ultimately fell apart, as the potential buyer understood more and more about what they were being sold.

The stock dropped below $1 in the next three weeks and was finally delisted in January, 2002.

By the middle of 2002 the company was in the doldrums. Falling down from the 7th largest company in corporate America, it was sold to UBS Warburg and both Lay and Fastow were subponead and then imprisoned.

What does Enron have to do with the Elliott Wave Principle? Nothing, except that it shows that you should never take anything for granted in the financial markets, even if it is the high-flying stock of the 7th largest company in the U.S.

You can watch a full documentary about the whole scandal on YouTube, it has a great title: “The Smartest Guys in the Room“. You can also check out our other articles in our History Lessons section.



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