Enron founder and former Chairman and CEO Kenneth Lay was indicted in July 2004

Question

Enron founder and former Chairman and CEO Kenneth Lay was indicted in July 2004 for his role in the Enron scandals. The SEC's complaint against Lay, ironically, seemed to corroborate Lay's protests that he had nothing to do with the manipulation of Enron's books. The complaint, however, did heavily accuse Lay, in concert with Jeff Skilling and Richard Causey, of disclosure fraud. Review the SEC's complaint at www.sec.gov/litigation/complaints/comp18776.pdf, beginning with paragraph 59 and concluding with paragraph 95.  Required: (1) The SEC complaint accuses the defendants of disseminating false and misleading statements through which seven forums? See paragraph 59. (2) How many separate incidents does the SEC complaint identify with Causey, Skilling, and Lay making false and misleading statements? See paragraphs 60 through 94. (3) How many false or misleading reports does the SEC accuse the defendants of causing to be filed with the SEC? See paragraph 95. (4) What is your reaction to the Enron scandal?

Explanation / Answer

(1) The SEC complaint accuses the defendants of disseminating false and misleading statements through which seven forums? See paragraph 59. These statements were disseminated to the investing public in conferences, employee meetings, conference calls, press releases, interviews, SEC filings, and statements to members of the media. (2) How many separate incidents does the SEC complaint identify with Causey, Skilling, and Lay making false and misleading statements? There were 14 Separate incidents in which SEC complaint identify, the summary of which is as under When Para Desc Who S. No. First Quarter 2000 Analyst Conference Call 60 Skilling omitted to disclose that approximately $85 million of the $220 million in earnings were unrelated to the operating performance of Enron’s energy business. Skilling 1 Fourth Quarter 2000 Analyst Conference Call 61, 62 California utilities issues Causey, Skilling 2 January 25, 2001 Analyst Conference 63,64 Performance of EBS Skilling 3 March 23, 2001 Analyst Conference Call 65,66 EBS Failure Skilling 4 First Quarter 2001 Analyst Conference Call 67 to 70 EES energy contract portfolio and success in EBS Skilling 5 Second Quarter 2001 Analyst Conference Call 71,72 EES performance Skilling 6 August 14, 2001: Skilling Leaves Enron 73,74 On departure of Skilling Lay 7 August 16, 2001 Employee Meeting 75 EES growth and performance Lay 8 August 20, 2001 Interview 76 “There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues,” Lay 9 Lay Learns Of Additional Problems, August-September 2001 77 to 80 overvaluation of Enron’s assets and business units by billions of dollars. Lay 10 September 26, 2001 Employee Forum 81,82 False outlook for 3rd quarter and false statement about enron stock purchase by him Lay 11 October 12, 2001 Call To Credit Rating Agency 83 false and misleading statements to a representative of a prominent credit rating agency Lay 12 Third Quarter 2001 Earnings Release – October 16, 2001 84 to 89 Lay again falsely described the hundreds of millions of dollars in losses as “nonrecurring.” Lay also falsely stated that “in connection with the early termination, shareholders’ equity will be reduced by approximately $1.2 billion.” Lay and Causey did not disclose that the vehicles unwound (as part of the $1 billion charge) were the Raptors nor disclose that the $1.2 billion equity reduction was principally due to a significant accounting error. In the same call, Lay made false and misleading tatements regarding the valuation of Enron’s international assets. In response to questions regarding the value of Elektro, a Brazilian power plant, which Enron carried on its books in excess of $2 billion, Lay stated that “[w]e may well have that asset and operate that asset for quite some time. It’s not a bad asset Lay 13 October 23, 2001 Analyst Call 90 About disclosure Lay and Causey 14 (3) How many false or misleading reports does the SEC accuse the defendants of causing to be filed with the SEC? See paragraph 95.   Total 14 Misleading reports filed to SEC, out of which 8 was annual and quarterly reports, 5 registration statements and 1 From 8k Annual and Quarterly Reports Form 10-Q for the Third Quarter 1999 (filed on or about November 15, 1999); 1 Form 10-K for the Fiscal Year 1999 (filed on or about March 30, 2000); 2 Form 10-Q for the First Quarter 2000 (filed on or about May 15, 2000); 3 Form 10-Q for the Second Quarter 2000 (filed on or about August 14, 2000); 4 Form 10-Q for the Third Quarter 2000 (filed on or about November 14, 2000); 5 Form 10-K for Fiscal Year 2000 (filed on or about April 2, 2001); 6 Form 10-Q for the First Quarter 2001 (filed on or about May 15, 2001); 7 Form 10-Q for the Second Quarter 2001 (filed on or about August 14, 2001) 8 Registration Statements Form S-3 filed on or about April 4, 2000; 1 Form S-3 filed on or about June 15, 2000; 2 Form S-3 filed on or about July 19, 2000; 3 Form S-3 filed on or about January 26, 2001; and 4 Form S-3 filed on or about June 1, 2001 and Amendment dated July 13, 2001 5 Other Form 8-K dated November 9, 2001 1 (4) What is your reaction to the Enron scandal? Endorn Scandal was one of the biggest corporate scandal in the history of US, which has shattered every one in the country, from investor to banker to govt, this has lead to formation of greater internal control processes, greater transparency and governance norms. a new set of accounting regulation comes in to the picture and this scandal has changed the corporate behaviour for forever.

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