LOVELY PROFESSIONAL UNIVERSITY

SUBJECT:TERM PAPER OF COMPANY LAW

TOPIC:CASES REGARDING ENRON SUBMITTED BY: ANKUR SOOD 10800039 R1813B47 SUBMITTED TO: H KAUR AVINAS

BRIEF HISTORY OF ENRON

Enron Complex in Downtown Houston Enron traces its roots to the Northern Natural Gas Company, which was formed in 1932 in Omaha, Nebraska. It was reorganized in 1979 as the leading subsidiary of a holding company, InterNorth. In 1985, it bought the smaller and less diversified Houston Natural Gas.[4] The separate company initially named itself "HNG/InterNorth Inc.", even though InterNorth was the nominal survivor. It built a large headquarters complex in Omaha. However, the departure of exInterNorth and first CEO of Enron Corp Samuel Segnar six months after the merger allowed former HNG CEO Kenneth Lay to become the next CEO of the newly merged company. Lay soon moved Enron's headquarters to Houston after swearing to keep it in Omaha and began to thoroughly re-brand the business. Lay and his secretary, Nancy McNeil, originally selected the name "Enteron" (possibly spelled in camelcase as "EnterOn"); but when it was pointed out that the term approximated a Greek word referring to the intestines, it was quickly shortened to "Enron". The final name was decided upon only after business cards,

stationery, and other items had been printed reading Enteron. Enron's "crooked E" logo was designed in the mid-1990s by the late American graphic designer Paul Rand. Enron was originally involved in transmitting and distributing electricity and natural gas throughout the United States. The company developed, built, and operated power plants and pipelines while dealing with rules of law and other infrastructures worldwide. Enron owned a large network of natural gas pipelines which stretched ocean to ocean and border to border including Northern Natural Gas, Florida Gas Transmission, Transwestern Pipeline company and a partnership in Northern Border Pipeline from Canada. In 1998, Enron moved into the water sector, creating the Azurix Corporation, which it part-floated on the New York Stock Exchange in June 1999. Azurix failed to break into the water utility market, and one of its major concessions, in Buenos Aires, was a large-scale money-loser. After the move to Houston, many analysts[who?] criticized the Enron management as swimming in debt. The Enron management pursued aggressive retribution against its critics, setting the pattern for dealing with accountants, lawyers and the financial media.

REASONS FOR ENRONS SUCCESS

Enron grew wealthy due largely to marketing, promoting power and its high stock price. Enron was named "America's Most Innovative Company" by Fortune magazine for six consecutive years, from 1996 to 2001. It was on the Fortune's "100 Best Companies to Work for in America" list in 2000, and had offices that were stunning in their opulence. Enron was hailed by many, including labor and the workforce, as an overall great company, praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud. The first analyst to publicly disclose Enron's financial flaws was Daniel Scotto, who in August 2001 issued a

report entitled "All Stressed up and no place to go" which encouraged investors to sell Enron stocks and bonds at any and all costs.

DISCUSSION ON ENRONS FRAUDLENT

As was later discovered, many of Enron's recorded assets and profits were inflated, or even wholly fraudulent and nonexistent. Debts and losses were put into entities formed "offshore" that were not included in the firm's financial statements, and other sophisticated and arcane financial transactions between Enron and related companies were used to take unprofitable entities off the company's books. Its most valuable asset and the largest source of honest income, the 1930s-era Northern Natural Gas, was eventually purchased back by a group of Omaha investors, who moved its headquarters back to Omaha, and is now a unit of Warren Buffett's Mid-American Energy Holdings Corp. NNG was put up as collateral for a $2.5 billion capital infusion by Dynegy Corporation when Dynegy was planning to buy Enron. When Dynegy looked closely at Enron's books, they backed out of the deal and fired their CEO, Chuck Watson. The new chairman and head CEO, the late Daniel Dienstbier, had been president of NNG and an Enron executive at one time and an acquaintance of Warren Buffett. NNG continues to be profitable today.

FORMER MANAGEMENT
BOARD OF DIRECTOR

Robert A. Belfer: Chairman, Belco Oil and Gas Corp

Norman P. Blake Jr.: Chairman, President and CEO, Comdisco, Inc. Ronnie C. Chan: Chairman, Hang Lung Group John H. Duncan: Former Chairman of The Executive Gulf and Western Industries Inc. Wendy L. Gramm: Former Chairman of US Commodity Futures Trading Commission Ken L. Harrison: Former Chairman and CEO of Portland General Electric Robert K. Jaedicke: Professor of Accounting at Emeritus Charles A. LeMaistre: President Emeritus, University of Texas M.D. Anderson Cancer Center John Mendelsohn: President, University of Texas M.D. Anderson Cancer Center Jerome J. Meyer: Chairman, Tektronix Paulo V. Ferraz Pereira: Executive Vice President if Group Bozano Frank Savage: Chairman: Alliance Capital Management John A. Urquhart: Senior Advisor to the Chairman of Enron John Wakeham: Former U.K. Secretary of State for Energy Herbert S. Winokur Jr.: President of Winokur Holdings Inc.

TRADING PRODUCT OF ENRON

Enron traded in more than 30 different products, including the following:

Products traded on EnronOnline o Petrochemicals o Plastics o Power o Pulp and paper o Steel o Weather Risk Management Oil & LNG Transportation Broadband Principal Investments Risk Management for Commodities Shipping / Freight Streaming Media Water & Wastewater

It was also an extensive futures trader, including sugar, coffee, grains, hog, and other meat futures. At the time of its bankruptcy filing in December 2001, Enron structured into seven distinct business units.

Energy and commodities services

Enron Power (electricity wholesaling) Enron Natural Gas (natural gas wholesaling) Enron Pulp and Paper, Packaging, and Lumber (risk management derivatives for forest products industry) Enron Coal and Emissions (coal wholesaling and CO2 offsets trading)

Enron Plastics and Petrochemicals (price risk management for polymers, olefins, methanol, aromatics, and natural gas liquids) Enron Weather Risk Management (Weather Derivatives) Enron Steel (financial swap contracts and spot pricing for the steel industry) Enron Crude Oil and Oil Products (petroleum hedging) Enron Wind Power Services (wind turbine manufacturing and wind farm operation) MG Plc. (U.K. metals merchant) Enron Energy Services (Selling services to industrial end users)

Enron International (operation of all overseas assets)

Principal assets
At the time of bankruptcy, Enron owned all of or interests in the following major assets: Power plants Enron owned or operated 38 electric power plants worldwide:

Teesside (United Kingdom)at the time of commission in 1992, at 1750 MW, was the largest Natural Gas Co-Gen plant in the world. Its on-time and under-budget completion put Enron Power on the map as an international developer, owner and operator. Bahia Las Minas (Panama)largest thermal power plant in Central America, 355 MW Puerto Quetzal Power Project (Guatemala)110 MW PQP LLC (Guatemala)holding company for 124 MW Power Barge named "Esperanza"

Empresa Energetica Corinto (Nicaragua)holding company for "Margarita II" 70.5 MW power barge, Enron held 35% share EcoElectrica (Puerto Rico, USA)507 MW natural gas cogeneration plant, with adjacent LNG import terminal- supplied 20% of island's electricity Puerto Plata Power Project (Dominican Republic)185 MW power barge named "Puerto Plata" Modesto Maranzana Power Plant (Argentina)70 MW Cuiaba Integrated Project (Brazil)480 MW combined cycle power plant Nowa Sarzyna Power Plant (Poland)116 MW, first privately developed post-Communist electricity project in Poland Sarlux Power Project (Italy)551 MW combined cycle power plant, converted residue from Italy's largest oil refinery into synthetic gas for fuel Trakya Power Project (Turkey)478 MW Chengdu Cogen Project (China)284 MW, joint venture with Sichuan Electric Company Northern Marianas Power Project (Guam, USA)80 MW slow speed diesel oil plant Batangas Power Project (Philippines)110 MW Subic Bay Power Project (Philippines)116 MW Dabhol Power Project (India)2,184 MW combined cycle plant, generally considered one of Enron's most controversial and least successful projects Storm Lake Wind Generation Project (Iowa, USA)193 MW wind farm Lake Benton II Wind Generation Facility (Minnesota, USA)104 MW wind farm Lake Benton I Wind Generation Facility (Minnesota, USA)107 MW wind farm Cabazon Wind Generation Facility (California, USA)40 MW wind farm Green Power I Wind Generation Facility (California, USA)16.5 MW wind farm

Indian Mesa I Wind Generation Facility (Texas, USA)25.5 MW wind farm Clear Sky Wind Power Generation Facility (Texas, USA)135 MW wind farm Mill Run Wind Wind Power Generation Facility (Pennsylvania, USA)15 MW wind farm Trent Mesa Wind Generation Facility (Texas, USA)150 MW wind farm Montfort Wind Generation Facility (Wisconsin, USA)30 MW wind farm 8 hydroelectric plants in Oregon with a combined capacity of 509 MW, owned through Portland General Electric 4 additional thermal plants in Oregon and Montana with a combined capacity of 1,464 MW, owned through Portland General Electric

CASES REGARDING ENRON CASE ONE

ACCOUNTING CONTAGION: THE CASE OF ENRON By Martin, Anna D Publication: Journal of Economics and Finance Date: Friday, July 1 2005
The Enron scandal offers the opportunity to assess the degree to which misleading accounting can affect connected firms and industry rivals. While the market was inept at detecting the inaccuracy of Enron's financial statements, it swiftly punished many connected firms once Enron's faulty accounting was publicized. A cross-sectional analysis documents that the market punished connected firms that had greater exposure to Enron's business, whose financial statements were viewed as more complex, and that had greater financial leverage. Most of the negative news indicating concern with Enron's accounting corresponded with a significant decline in the stock prices affirms in the energy and natural gas (ENG) industry, regardless of an explicit connection to Enron. Furthermore, rival firms with direct exposure to Enron and more aggressive earnings-reporting methods also experienced more detrimental effects. (JEL G39, G14) Introduction The ability of financial markets to revalue stocks based on financial statements and other related information has received much attention in the financial literature. Because firms commonly possess asymmetric information, investors may rely on information about one firm as indirect signals for the valuation of others. While the sluggish market recognition of Enron's problems because of misleading financial statements is well documented,

less is known about how these problems triggered accounting concerns about the industry and other firms that had relationships with Enron. The damage caused by Enron's misleading accounting statements is not limited to the shareholders and employees of Enron but can affect firms with linkages to Enron. The losses may extend to adverse effects on connected firms that have business relationships with Enron and also on rival firms in the same industry whose financial condition may have been overstated if they had used similar methods as Enron to report financial information. Since Enron's collapse is attributed to its accounting irregularities, the adverse effects of Enron's collapse on firms with linkages to Enron can be viewed as a form of accounting contagion. To the extent that misleading financial statements cause erroneous valuations of a reporting firm, they can cause erroneous valuations of firms with linkages to that firm. Our goal is to measure the extent and breadth of corrected valuations following news of Enron's misleading financial statements.2 We document negative valuation effects for connected firms that have a high degree of relative exposure to Enron and for all firms in the energy and natural gas (ENG) industry, regardless of an explicit connection to Enron. These results verify the existence of accounting contagion resulting from the recognition of Enron's problems. Furthermore, we identify potential sources of these significant valuation effects using cross-sectional analyses. For the connected firms, those variables that help explain the cross-sectional variation in the valuation effects are relative exposure to Enron, number of footnote disclosures, membership in the ENG industry, financial leverage, and firm size. For the firms in the ENG industry, the significant explanatory factors are direct exposure to Enron, degree of earnings aggressiveness, financial leverage, prior stock price

performance, and correlation in returns. These cross-sectional results substantiate that analysts are considering how firms they monitor are indirectly subjected to a related firm's misleading financial statements. Chronology of Events Leading to Enron's Demise Eleven months before going bankrupt. Enron's slock price was $80 per share. Two months before going bankrupt, its stock price was $30 per share. The chronology of important events that indicate concern over Enron's accounting information is summarized in Table 1.3 The stock price chart of Enron is shown in Figure 1. with points indicating these critical events identified in the chronology.

CASE TWO
Some charges dropped, Enron prosecution rests Government lawyers finish up after eight weeks of testimony and 22 witnesses; defense for Lay, Skilling to start Monday. By Shaheen Pasha, CNNMoney.com staff writer March 28, 2006: 4:13 PM EST

NEW YORK (CNNMoney.com) - The judge in the Enron case dismissed three counts against former Enron CEO Jeffrey Skilling and one count against founder Kenneth Lay as the government rested its case against the two former executives Tuesday morning. Samantha Martin, spokeswoman for the Justice Department's Enron Task Force, said Judge Sim Lake granted a motion by federal prosecutors to dismiss two charges of securities fraud and one charge of lying to auditors against Skilling. Judge Lake also dismissed one charge of securities fraud against Lay. In a statement, Martin said the government asked for the charges to be dropped "for the purpose of economy," as well as other reasons. Thomas Ajamie, a securities law expert, said prosecutors ask for a dismissal of certain counts if they believe that they were unable to provide the jury with enough evidence for a conviction. If the jury were to issue a guilty verdict on a charge that government prosecutors knew they hadn't provided enough substantiating evidence on, that could mean the verdict might get overturned on appeal. Ajamie said that in the wake of the highly publicized reversal of the Arthur Andersen conviction last year by the Supreme Court, and the overturned conviction in the Frank Quattrone case last week, the government was taking extra care to make sure that it doesn't provide the defense with any cause for appeal. "It shows good lawyering," Ajamie said. "The government is obviously very confident in their case." Judge Lake denied the defense's motion for acquittal on the remaining charges. Lay and Skilling still face about three dozen

fraud and conspiracy charges accusing them of lying to investors about the company's financial state while they enriched themselves by selling millions of dollars in stock. In theory, given the number of counts on the indictment, both Lay and Skilling could face decades in jail if found guilty on each charge. But in white-collar crime cases such as this one, the defendants probably face 20 to 30 years behind bars if convicted, legal experts said. Government prosecutors rested their case after more than eight weeks of testimony. They called 22 witnesses in a bid to portray the former leaders of Enron as the puppeteers of one of the largest corporate frauds in U.S. history. Among the witnesses were former financial chief Andrew Fastow, who pleaded guilty to two counts of wire and securities fraud in 2004, and former Enron treasurer Ben Glisan, who is currently serving a five-year prison term after pleading guilty to one count of conspiracy in 2001. He is expected to be released this fall. Both high-ranking executives testified that Lay and Skilling had been aware of the company's disintegrating financial state but continued to mislead investors and Enron's own employees about the company's true financial health. The defense for Lay and Skilling requested a few days to prepare and are set to begin presenting their case Monday. The defense presented the court with a list of over 100 potential witnesses that may be called. That's about half the number previously presented, but Judge Lake -- who has assured jurors the court will try to wrap up the case by the end of April -- asked the defense to pare the number further.

Legal experts say the defense has hard work ahead after the prosecution managed to simplify the accounting issues in the case, and provided a stream of corroborating witnesses who fingered both Lay and Skilling as active participants in the corporate fraud that led to Enron's bankruptcy in December 2001. (Full story). The defense is expected to call both Lay and Skilling to testify on their own behalf -- a move, Ajamie said, that shows that the defense attorneys realize they're in trouble. "In normal criminal cases, you don't call your client unless you absolutely have to," he said. "Defense lawyers feel that the case has drawn some blood from Skilling and Lay and feel compelled to put them on the stand." And for Lay, the end of one trial will mark the start of a second criminal trial where he'll face four charges of bank fraud. Enron, once the nation's seventh largest company, declared bankruptcy in December 2001, a move that cost 4,000 employees their jobs and led to billions of dollars in losses for investors

CASE THREE

The case against Enron

More than 5,000 Enron employees lost their jobs By the BBC's Lesley Curwen The criminal investigation into the bankruptcy of Enron, the huge energy trading company, is not unexpected. A number of other investigations are already under way, and civil lawsuits have been brought against the company involving alleged insider trading. It is claimed the Enron managers were It seems likely the Justice Department will want effectively to look into a number of secretive off-shoot hiding...$1bn companies set up to shoulder Enron's huge debts. of liabilities. Enron's financial structure was certainly labyrinthine. The question is - was it rotten to the core? The criminal investigation will seek to find out. The company's collapse and bankruptcy - the biggest ever in the US - came about after confidence in the energy trader plunged, when news emerged about its huge debts. The criminal inquiry may well cover the territory of some civil lawsuits brought against Enron, which allege that some of the top managers kept $1bn of liabilities from public knowledge.

It is also claimed that some of the management sold their own shares in the company when the share price was high, even though they knew about the extra liabilities waiting in the wings. The lawyers bringing these cases say that amounts to insider trading, driven by false and misleading financial statements. Hidden losses The criminal case may centre on three so-called "partnerships" which did not appear in the company's accounts books. These, it is alleged, were set up by some of Enron's top executives to offset risk - something that would normally be done using a third-party with no connection to the company. It is claimed the Enron managers were effectively hiding the extra $1bn of liabilities, using these partnerships. There are other investigations going on - four being carried out by Congress, one by the financial regulator, the Securities and Exchange Commission and one by the Labor Department, which is examining how the company's pension fund invested more than half its money in Enron's own shares. The employees could not sell the holdings in their retirement accounts when the share price fell, and the pension fund has been badly damaged.