Trawling through company balance sheets is probably not your idea of fun. But as regular MoneyWeek readers know, it pays to get your hands dirty. That’s the moral of the story of one of the biggest corporate bankruptcies in American history.
At the turn of the century, energy trader Enron was America’s seventh biggest company, reporting revenues of $111bn. But all was not as it seemed. Because hidden in the accounts lay colossal debts of $16bn.
America’s financial watchdog, the Securities and Exchange Commission, smelled a rat. Its investigations uncovered massive fraud. Enron was hiding its debts and losses in subsidiaries that made its earnings appear more impressive than they really were.
When investors got wind of this, they understandably fled for the hills. In a little over a year, the share price fell by over 99% from a high of $90 in August 2000.
That scuppered a planned takeover deal with rival firm Dynergy. Both companies pointed the finger at each other, and Enron sued for $10bn in damages.
Dynergy claimed that the investigations gave it a legitimate excuse to pull out, while Enron accused its rival of sabotaging a potential lifeline in order to get its hands on a lucrative oil pipeline that stood to be forfeited.
On 2 December 2001, Enron filed for Chapter 11 bankruptcy, which under US law grants a company protection from its creditors while it attempts to restructure itself – much like going into administration in the UK. It was the biggest corporate bankruptcy at the time (although dwarfed by the collapse of Lehman Brothers just seven years later).
Enron’s CEOs, Kenneth Lay and Jeffrey K Skilling, ended up in the dock, charged with fraud and insider trading. Skilling in particular was accused of dumping millions of dollars’ worth of shares before the company’s collapse became widely known. Thousands of employees lost their pensions in the fallout.
In last week’s issue of MoneyWeek, Phil Oakley explained how a company’s accounts can reveal its innermost secrets. Who knows? Doing a little detective work might just save you from sinking your hard-earned cash into the next Enron.