EnronEnronThe Classic Shell GameThe Classic Shell Game

Intro VideoIntro Video

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Cow ExplainationCow Explaination

Here are some analogies to help explain what Here are some analogies to help explain what happened. In each of these next slides, remember happened. In each of these next slides, remember that all we have is two cows.that all we have is two cows.

Feudalism Feudalism

You have two cows. You have two cows. Your lord takes some of the milk. Your lord takes some of the milk.

Fascism Fascism

You have two cows. You have two cows. The government takes both, hires you to take care The government takes both, hires you to take care of them and sells you the milk. of them and sells you the milk.

CommunismCommunism

You have two cows. You have two cows. You must take care of them, but the government You must take care of them, but the government takes all the milk. takes all the milk.

CapitalismCapitalism

You have two cows. You have two cows. You sell one and buy a bull. You sell one and buy a bull. Your herd multiplies, and the economy grows. Your herd multiplies, and the economy grows. You sell them and retire on the income. You sell them and retire on the income.

EnronEnron You have two cows. You have two cows.

You borrow 80% of the forward value of the two cows from your You borrow 80% of the forward value of the two cows from your bank, then buy another cow with 5% down and the rest financed bank, then buy another cow with 5% down and the rest financed by the seller on a note callable if your market cap goes below by the seller on a note callable if your market cap goes below $20B at a rate 2 times prime. $20B at a rate 2 times prime.

You now sell three cows to your publicly listed company, using You now sell three cows to your publicly listed company, using letters of credit opened by your brother-in-law at a 2nd bank, then letters of credit opened by your brother-in-law at a 2nd bank, then execute a debt/equity swap with an associated general offer so execute a debt/equity swap with an associated general offer so that you get four cows back, with a tax exemption for five cows. that you get four cows back, with a tax exemption for five cows.

The milk rights of six cows are transferred via an intermediary to The milk rights of six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority a Cayman Island company secretly owned by the majority shareholder who sells the rights to seven cows back to your listed shareholder who sells the rights to seven cows back to your listed company. company.

The annual report says the company owns eight cows, with an The annual report says the company owns eight cows, with an option on one more and this transaction process is upheld by option on one more and this transaction process is upheld by your independent auditor and no Balance Sheet is provided with your independent auditor and no Balance Sheet is provided with the press release that announces that Enron as a major owner of the press release that announces that Enron as a major owner of cows will begin trading cows via the Internet site COW (cows on cows will begin trading cows via the Internet site COW (cows on web). web).

PlayersPlayers

Kenneth Lay, CEO EnronKenneth Lay, CEO Enron Jeffrey Skilling, Former Enron CEOJeffrey Skilling, Former Enron CEO Andrew Fastow, Former Enron CEOAndrew Fastow, Former Enron CEO David Duncan, Chief Auditor, Arthur AndersenDavid Duncan, Chief Auditor, Arthur Andersen

Ordered the Enron documents shreddedOrdered the Enron documents shredded Nancy Temple, Auditor, Arthur AndersenNancy Temple, Auditor, Arthur Andersen

Sent an email to staff *reminding* them about the Sent an email to staff *reminding* them about the “Document Retention Policy”“Document Retention Policy”

Thomas White, Secr. Of ArmyThomas White, Secr. Of Army Former Vice Chairman of Enron Energy ServicesFormer Vice Chairman of Enron Energy Services Pushed through energy privatization legislationPushed through energy privatization legislation

The “Shady” AccountingThe “Shady” Accounting

Mark to MarketMark to Market Special practice for securities and commodities Special practice for securities and commodities

traders, as long as the market is LIQUIDtraders, as long as the market is LIQUID Allows capital gains/losses to be just regular Allows capital gains/losses to be just regular

incomeincome AccrualAccrual

Buying/selling securities is subject to capital Buying/selling securities is subject to capital gains taxes because this is an extraordinary gains taxes because this is an extraordinary itemitem

Enron was allowed to use Mark to Market, Enron was allowed to use Mark to Market, even though the market they were trading even though the market they were trading in was NOT liquid enough.in was NOT liquid enough.

Enron FactsEnron Facts

15 550 Employees15 550 Employees #7 in Fortune500 (Feb2001)#7 in Fortune500 (Feb2001) 2800 subsidiaries (874) offshore2800 subsidiaries (874) offshore 2M$ to Bush-Cheney Campaign2M$ to Bush-Cheney Campaign

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