Enron Bankruptcy, December 2, 2001: How the Energy Giant Fell

Enron filed for Chapter 11 bankruptcy on December 2, 2001, listing $63.4 billion in assets, the largest corporate bankruptcy in American history up to that point. Only a year earlier the Houston company had claimed about $101 billion in annual revenue and a stock price near $90. The Enron bankruptcy wiped out shareholders, cost about 4,000 people their jobs and became the starting point for criminal trials and a rewrite of corporate accounting rules.

From Pipeline Company to Energy Trader

Enron was formed in July 1985 through the merger of Houston Natural Gas and InterNorth, a natural gas company based in Omaha. Kenneth Lay, who had led Houston Natural Gas, became chairman and chief executive, and the company soon settled its headquarters in Houston.

During the 1990s Enron moved from operating pipelines to trading energy. It bought and sold natural gas and electricity contracts and kept adding new markets. In November 1999 it launched EnronOnline, a website for trading energy contracts. Fortune magazine named Enron “America’s Most Innovative Company” six years in a row, from 1996 through 2001, and by 2000 the company reported about 20,600 employees.

How Enron Hid Its Problems

Two practices made Enron look healthier than it was.

The first was mark-to-market accounting. When Enron signed a long-term contract, it could book the estimated present value of all the future profits right away, before any cash arrived. Jeffrey Skilling, the executive who built the trading business, championed the method. The catch was that reported earnings depended heavily on Enron’s own forecasts of prices and demand years into the future.

The second was the use of special purpose entities. Chief financial officer Andrew Fastow formed and ran partnerships known as LJM1 and LJM2 in 1999, which required Enron’s board to waive its own ethics code. These partnerships and related entities, including a group called the Raptors, took poorly performing assets and stock positions off Enron’s books. The Raptors were funded largely with Enron’s own stock, so the protection they offered weakened as the share price fell.

Six Weeks from Warning to Bankruptcy

The collapse came quickly once the problems became public. You can count the gap with the days-between-dates calculator: from the first major disclosure on October 16 to the bankruptcy filing on December 2 was 47 days.

Date	Event
August 14, 2001	Skilling resigns as CEO after about six months in the job
August 15, 2001	Enron executive Sherron Watkins sends Lay an anonymous letter warning of accounting problems
October 16, 2001	Enron discloses losses and a $1.2 billion reduction in shareholders’ equity tied to the partnerships
October 22, 2001	The Securities and Exchange Commission says it is looking into Enron’s deals
Early November 2001	Enron restates its results for 1997 through 2000; rival Dynegy agrees to buy the company
November 28, 2001	Dynegy abandons the deal; Enron stock closes at 61 cents
December 2, 2001	Enron files for Chapter 11 protection in New York

The 2001 calendar shows how compressed this was: the company went from a confident trading house to a bankrupt shell in the space of one autumn, while the country was still absorbing the September attacks. The full 2001 calendar puts those weeks in context.

Who Lost the Most

Employees were hit twice. About 4,000 lost their jobs, and many had their retirement savings tied to the company. Roughly 62 percent of the assets in Enron’s employee savings plan, which covered about 15,000 workers, were in Enron stock, much of it bought at around $83 a share in early 2001. By January 2002 the stock traded for about 12 cents.

Outside investors lost billions. The Justice Department later described the scheme as an effort, running from at least 1999 to 2001, to hide Enron’s true performance from investors and regulators, and said the collapse cost thousands of workers their jobs.

Trials, Convictions and Arthur Andersen

The scandal also brought down Enron’s auditor. Arthur Andersen, one of the largest accounting firms in the country, was convicted of obstruction of justice on June 15, 2002, for destroying Enron-related documents. The Supreme Court overturned the conviction in 2005 because of flawed jury instructions, but by then the firm had collapsed and about 85,000 people had lost their jobs.

Fastow pleaded guilty to two conspiracy charges and agreed to testify against his former bosses. On May 25, 2006, a federal jury in Houston convicted Skilling on 19 counts, including securities fraud, insider trading and lying to auditors, and convicted Lay on six counts; a judge found Lay guilty on four more in a separate trial. Skilling was sentenced on October 23, 2006, to 24 years and four months and ordered to forfeit about $45 million, a term later reduced by about ten years. Lay died of heart disease on July 5, 2006, before he could be sentenced, and his conviction was vacated under a legal rule that applies when a defendant dies during an appeal.

What Changed After Enron

Enron, followed in 2002 by the even larger WorldCom bankruptcy, pushed Congress to act. The Sarbanes-Oxley Act, signed in July 2002, created an oversight board for auditors, barred accounting firms from selling most consulting services to the companies they audit and required chief executives and finance chiefs to certify their financial reports personally.

Sherron Watkins, whose August letter warned Lay of trouble, was one of three whistleblowers named Time’s Person of the Year for 2002. Enron itself emerged from bankruptcy in November 2004 under a court-approved plan whose main purpose was to sell what remained, from pipelines to office art and logo signs, and repay creditors owed nearly $67 billion.