FINAL REQUIREMENT IN MARKETING MANAGEMENT

Question Number 1: RESEARCH FOR AND WRITE DOWN EVERYTHING YOU FOUND
ABOUT ENRON CORPORATION

Answer:

1. HISTORICAL BACKGROUND: Enron Corporation

Enron Corporation was an American energy commodities and services company found in Houston,
Texas. It had employed 29,00 stand and was a major electricity, natural gas, communications and
pulp and paper company, with claimed revenues of nearly $101 billion during 2000, before its
bankruptcy on December 3, 2001. It's said to be the largest bankruptcy and stock collapse in US
history up to that time, due to institutionalise, systematic and creatively planned accounting fraud,
thus becoming a well known example of corporate fraud and corruption.

It was founded in 1985 as a merger between Houston Natural Gas and InterNorth, both relatively
small regional companies. Kenneth Lay, who had been the chief executive officer (CEO) of
Houston Natural Gas, became Enron's CEO and chairman. Lay quickly rebranded Enron into an
energy trader and supplier. It’s original goal was to create the country's longest natural-gas pipeline
network. It had been renamed Enron in 1986, the company transformed itself in the 1990s from a
gas-pipeline business into a natural-gas and electricity trading giant. In 1989 Enron launches Gas
Bank, that will be run by CEO Jeff Skilling in 1990, which allows gas producers and wholesale
buyers to purchase firm gas supplies and hedge the price risk at the same time. Transwestern
Pipeline Company, owned by Enron, is the first merchant pipeline in the United States to stop
selling gas and become a transportation only pipeline. By 2000 it was the seventh largest U.S.
corporation.

2. Analysing the Fraud: Timeline and Financial Highlights

Enron's leadership fooled regulators with fake holdings and off-the-books accounting practices.
Independent partnerships to which Enron sold assets were created, enabling Enron to convert loans
and assets burdened with debt obligations into income, but the contracts with the partnerships
contained guarantees and risky buy-back conditions that had potentially disastrous consequences
for Enron. Enron also booked projected long-term income from trading contracts when those
contracts were signed, but the income projections were often overly optimistic and inflated. By
2000, Enron was starting to crumble under its own weight. CEO Jeffrey Skilling hid the financial
losses of the trading business and other operations of the company using mark-to-market
accounting. the company would build an asset, such as a power plant, and immediately claim the
projected profit on its books, even though the company had not made one dime from the asset. If
the revenue from the power plant was less than the projected amount, instead of taking the loss,
the company would then transfer the asset to an off-the-books corporation where the loss would
go unreported. To cope with the mounting liabilities, Andrew Fastow, developed a deliberate plan
to show that the company was in sound financial shape despite the fact that many of its subsidiaries

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were losing money. They orchestrated a scheme to use off-balance-sheet special purpose
vehicles (SPVs), also known as special purposes entities (SPEs), to hide its mountains of debt and
toxic assets from investors and creditors. The primary aim of these SPVs was to hide accounting
realities rather than operating results. Enron would transfer some of its rapidly rising stock to the
SPV in exchange for cash or a note. The SPV would subsequently use the stock to hedge an asset
listed on Enron's balance sheet.

Enron's accounting firm Arthur Andersen LLP and partner David B. Duncan oversaw Enron's
accounts and as one of the five largest accounting firms in the United States at the time, Andersen
had a reputation for high standards and quality risk management. Even with Enron's poor
accounting practices, Arthur Andersen offered its stamp of approval, signing off on the corporate
reports for years. By 2001, CEO Kenneth Lay had retired, turning over the position to Jeffrey
Skilling. In August 2001, Skilling resigned as CEO citing personal reasons. Around the same time,
analysts began to downgrade their rating for Enron's stock, and the stock descended to a 52-week
low of $39.95, many analysts then started to question Enron's earnings and the company's
transparency. By October 16, the company reported its first quarterly loss and closed its "Raptor"
SPV so that it would not have to distribute 58 million shares of stock, which would further reduce
earnings. This action caught the attention of the SEC, which shortly after, had announced it was
investigating Enron and the SPVs created by Fastow. Fastow was fired from the company that day.
Also, the company restated earnings going back to 1997. Enron had losses of $591 million and
had $628 million in debt by the end of 2000. The final blow was dealt when Dynegy
(NYSE: DYN), a company that had previously announced would merge with Enron, backed out
of the deal on November 28. By December of 2001, Enron had filed for bankruptcy.

3. Key Management at Enron

1. Kenneth L. Lay, Enron chairman and CEO; served as Enron's CEO from 1985 until Jeffrey
Skilling's election in early 2001; re-elected by board after Skilling's resignation in August.
Lay helped to transform Enron from a regional natural gas pipeline company to global energy
behemoth.
2. Jeffrey Skilling, former Enron president and CEO; resigned in August 2001 for what he said
were personal reasons after more than a decade at the company.
3. Mark Frevert, Enron vice chairman.
4. Lawrence 'Greg' Whalley, Enron president and chief operating officer.
5. Jeffrey McMahon, Enron chief financial officer.
6. Andrew Fastow, former Enron chief financial officer, ousted in October. He is one of Mr.
Skilling's first hires at Enron in 1990, proved his importance to the company in another way:
he raised the huge amounts of capital that Enron needed as it moved beyond its roots in the
natural gas business to blaze trails as an innovative energy powerhouse. After Mr. Fastow
acknowledged in his guilty plea, he also worked with other senior officers to disguise Enron's
deteriorating finances. Specifically, he helped to set up complex off-the-books partnerships
that Enron used to avoid disclosing losses. He also used the partnerships, he admitted, to
defraud Enron of millions of dollars for his own benefit.
7. Robert Bennett, the attorney representing Enron in Washington, who also represented
President Bill Clinton in the Paula Jones case.

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8. Ben F. Glisan Jr., he joined Enron in 1996 after a brief stint at Arthur Andersen, where he
worked primarily on the Enron account. He became part of the inner circle and helped
conceive and execute several financing schemes that hid company losses. Originally indicted
on more than 24 charges of conspiracy, fraud and money laundering, Mr. Glisan pleaded
guilty in 2003 to one count of conspiracy to commit wire and securities fraud. He is serving
a five-year sentence at a federal penitentiary in Beaumont, Tex.
9. Lou Lung Pai had headed several divisions at Enron, including Enron Energy Services,
which sold contracts to provide natural gas and electricity to companies for long periods.
Born in Nanjing, China, he emigrated with his parents to the United States when he was 2.
He earned a master's degree in economics at the University of Maryland and worked for the
Securities and Exchange Commission before joining Enron in 1986. Mr. Pai's take, more
than $271 million, is the largest of any former Enron employee and has made him the target
of several shareholder lawsuits.

4. ENTRON TRIALS

By the end of November 2001, Enron's stock price had fallen from over $90 per share to just
pennies. On December 2, 2001, the company filed for bankruptcy. In the wake of Enron's downfall,
federal investigators discovered evidence of corporate arrogance, greed, and fraud of an
unprecedented level. In 2006, the two highest ranking Enron executives involved in the scandal,
Ken Lay and Jeff Skilling, facing charges of fraud, insider trading, and conspiracy, would have
their fates determined by a Houston jury. The trial of Kenneth Lay, former chairman and CEO of
Enron, and Jeffrey Skilling, former CEO and COO, was presided over by federal district court
Judge Sim Lake in 2006. Prosecution argues that leaders lied to Wall Street and investors about
"crumbling finances”. Eight former Enron executives testified, the star witness being Andrew
Fastow, against Lay and Skilling, their former employers. Investigators focused considerable
attention on the activities of Chief Financial Officer Andy Fastow who, they realized, was the
central figure in Enron's illegal activities. Although it was not a crime, however ethically troubling,
for someone in Fastow's position to have created his own personal investment company, LJM, to
buy underperforming (and often near worthless) assets of Enron in order to get them off the
company's financial reports, it was a crime for him to secure promises from Enron that the assets
would later be bought back from him at an inflated price to protect him from any financial risk.
Prosecutors came to see Fastow, someone close to Skilling and Lay and in a strategic position
within Enron, as the possible star witness in any prosecution of the firm's two top executives. In
the words of one member of the DOJ task force, "In mafia cases, you flip capos against bosses.
Fastow, we believed, was an Enron capo."

Question Number 2: WHAT IS YOUR IMMEDIATE REACTION ON WHAT HAPPENED TO EC

BEING A STUDENT OF MARKETING MGT. AND BASED ON YOUR READING
OF THE STORY OF ENRON CORPORATION, SPECIFICALLY, GIVE YOUR
THOUGHTS ON THE FOLLOWING:
1. EMPLOYEE –EPLOYER RELATION IN ENRON CORPORATION
2. BUSINESS ETHICS AND CSR OF EC.

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Answer:

1. EMPLOYEE –EMPLOYER RELATION IN ENRON CORPORATION (EC)

A. Diversification - The huge losses suffered by workers at Enron and at other corporations whose
now worthless retirement plans were heavily invested in company stock could have been
avoided by diversification. This point is obvious, but it is made even more urgent by the
additional risk that workers face due to the fact that their investments of human capital are
unavoidably undiversified. Many jobs require workers to obtain special training, assimilate
into a unique fabric of co-workers, and acquire knowledge about a particular company’s
culture. Because job requirements and work environments differ in important ways, workers
cannot readily transfer these kinds of investment to a new employer.
B. Control - Enron should remind worker ownership proponents of the dangers posed by
ownership without control. While lower-level workers were committing their retirement assets
to Enron’s apparently bright future, management was engaged in elaborate financial shell
games, deceitful accounting practices, and increasingly risky projects, all designed to maintain
earnings growth at all costs.
C. Information - Enron should also remind advocates of worker ownership of the risks involved
in holding company stock in the absence of adequate information about the company’s
prospects. Federal securities laws mandate extensive disclosure requirements. As shareholders,
Enron’s employees had access to this information. Unfortunately, this proved to be of very
limited value because Enron’s accounting practices and public statements were designed to do
whatever was necessary to encourage continued confidence in Enron stock.

2. BUSINESS ETHICS AND CSR OF EC.

The leadership at Enron operated counter to CSR tenets. For example, the executives at Enron
were not concerned with representing the company's financial situation truthfully. Instead, they
were more concerned with hiding the company's debts and losses behind mark-to-market
accounting coupled with special purpose entities. Note that the SEC did approve of mark-to-market
accounting. In addition, Arthur Anderson, the accounting firm which was responsible for auditing
Enron's business, had espoused the financial reporting methods.

Question Number 3: HOW DO YOU SUPPOSE TO RELATE THE ABOVE TWO TO SOUND/GOOD
MARKETING MANAGEMENT PRINCIPLES IN GENERAL?

Answer:

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Question Number 4: HOW COULD SOUND/PROFESSIONAL MARKETING MANAGEMENT
PRACTICE HAVE SAVED EC FROM COLLAPSE? DISCUSS SUBSTANTIALLY

Answer

Prepared by:

Malilay, Arnel A.
Malilay, Ma. Lourdes C.

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