But it was a world of make-believe. On Sunday, Dec. 2, 2001, Enron filed what was at the time the largest bankruptcy in U.S. history after it became apparent that its gangbuster growth was based on accounting gimmicks and a web of lies. Enron’s 20,000 employees lost their jobs and $1.2 billion in retirement funds tied up in company stock; its retirees saw $2 billion of their pension funds evaporate.

Nancy Rapoport, who served as the dean of the University of Houston Law Center at the time of Enron’s collapse and wrote several books on the Enron scandal, recalled the company’s swift and stunning fall from grace.

“Before it blew up, we thought Enron was this amazing company and donor to the city of Houston, the arts and higher education,” said Rapoport, now a law school professor at the University of Nevada Las Vegas. “So it was a shock to all of us when we realized that Enron was so different from what we thought.”

Twenty years later, the shock of Enron’s downfall has long faded, but it remains a cautionary tale of corporate hubris and fraud. Its lessons still carry weight, especially as Theranos founder and CEO Elizabeth Holmes stands trial, accused of defrauding investors and patients about the viability and accuracy of its medical testing technology.

Enron’s Chairman Kenneth Lay and CEO Jeff Skilling convinced the company’s board, Wall Street analysts and investment banks of the energy company’s supposed success. Similarly, Holmes was able to sway investors and Theranos’ esteemed board including former Secretaries of State Henry Kissinger and George Shultz and Gen. James Mattis that the company could conduct hundreds of medical tests from a single drop of blood.

Rapoport said the lessons of Enron bear repeating. Corporate boards must ward against groupthink and company executives should heed Enron’s advertising tag: Ask why.

“If I had to pick a single lesson from Enron, it would be about being wary of charismatic leaders because they can charm and bully their boards into agreeing to things that in the light of day these sophisticated board members would never agree to,” Rapoport said. “Look at the board of Theranos. Like the board of Enron, you had super famous, super intelligent, super well-educated people, but they were captivated by charismatic leaders who broke down their defenses in terms of common sense.”

Simple beginning

Enron was founded in 1985 after Lay’s pipeline company, Houston Natural Gas, merged with Omaha-based energy holding company InterNorth. Lay, the son of a Baptist preacher, recruited Skilling, an executive with big business ideas, from consulting giant McKinsey in 1990.

Under their leadership, Enron became an energy giant and a household name in Houston. The company operated pipelines and power plants, but also revolutionized commodities trading. Enron traded everything from natural gas and electricity to internet bandwidth and weather futures, becoming the engine of a new digital economy. Fortune magazine named Enron its most innovative company for six-straight years.

Enron also became a champion for deregulation as it increasingly made profits from trading oil, natural gas and power. Lay was one of the biggest backers behind the deregulation of Texas’ power grid in 1995. After California deregulated its power grid a few years later, Enron traders allegedly manipulated the West Coast state’s wholesale market, taking advantage of skyrocketing electricity prices during rolling blackouts in summer 2000.

Several Enron ventures, however, were major duds. The company invested billions of dollars to build a power plant in India, where ratepayers could not afford Enron’s electricity prices. A deal with video rental company Blockbuster to stream online video was doomed, a decade before Netflix popularized the concept.

THE MONEY MAN: Enron's former CFO Andrew Fastow once saw himself as 'a hero'

Enron executives, paid largely in company stock, used an accounting maneuver known as “mark-to-market accounting” to cover losses and prop up the share price. Mark-to-market accounting allowed the company to record projected future profits from deals and projects on its books, instead of recording actual profits — allowing Enron to manipulate profit margins to its advantage. For example, even though Enron’s Dabhol power plant in India lost $1 billion, the company reported a profit and paid out multibillion dollar bonuses.

As actual losses kept mounting, Enron stashed $30 billion of debt in special companies managed by Chief Financial Officer Andy Fastow and private investors. This move, called structured finance, allowed Enron to conceal its massive debt on its balance sheet and report higher imaginary profits every quarter.

Enron’s deceitful schemes began to unravel in March 2001, when Fortune reporter Bethany McLean penned an article titled, “Is Enron Overpriced?” It raised questions about how the company made money and its opaque accounting practices. A subsequent investigation by the Wall Street Journal and other media outlets revealed gross financial irregularities, which prompted federal investigations. Several books and an Oscar-nominated documentary, “Enron: The Smartest Guys in the Room,” would later dissect Enron’s fraud.

Enron’s stock fell from more than $80 a share at the start of 2001 to pennies by the time it filed for bankruptcy at the end of the year. Before Enron’s market value disappeared, top executives cashed in $116 million in stock and paid themselves $55 million in bonuses. The company tried to extend lines of credit and strike a deal to be acquired — but those attempts failed. Enron filed for bankruptcy in the early morning of Dec. 2, 2001.

Consequences

The fallout from Enron’s fraud was widespread.

Some 20,000 Enron employees were let go in November with an average $4,500 severance.

Neville Ravji, who was manager of capital markets at Enron from 1997 to 2001, invested about $20,000 in Enron stock, which disappeared when the company filed for bankruptcy. Similar jobs outside the company were nearly impossible to find with so many ex-Enron employees applying.

“It hurt a lot,” said Ravji, 56, who is married with a son. “It was pretty much all our savings.”

A couple of months after the bankruptcy filing, Cliff Baxter, Enron’s former vice chairman and chief dealmaker, was found dead inside his black Mercedes-Benz S500 sedan on the side of Palm Royale Boulevard in Sugar Land with a gunshot wound to his temple. He left a suicide note for his wife at their home.

After a 2006 trial, Lay, Skilling and Fastow were found guilty of fraud, conspiracy and insider trading. Fastow also was found guilty of money laundering.

Skilling was sentenced to 24 years in prison, but his sentence was reduced by 10 years. He was released from federal custody in Feb. 2019 after serving half of his original sentence. Fastow was sentenced to six years.

Lay died of a heart attack while on vacation in Aspen, Colo., six weeks after his guilty verdict. He was never sentenced.

Arthur Andersen, Enron’s auditor that shredded thousands of internal documents related to the company’s finances, went out of business. Vinson & Elkins, Enron’s law firm, settled with the company for $30 million.

The Enron scandal ignited public condemnation of corporate greed, and spurred congressional legislation aimed at deterring financial fraud and abuse. The Sarbanes-Oxley Act of 2002 mandated strict financial reporting and greater accountability from corporate board members. Other countries around the world passed similar legislation.

NEXT ACT: Ex-Enron CEO Jeffrey Skilling is out of prison, fascinating as ever

Enron’s demise and the subsequent regulations, however, didn’t mark the end of corporate fraud and accounting scandals.

Lehman Brothers used accounting gimmicks to conceal billions of dollars in subprime mortgage investments that kicked off the Great Recession in 2008. New York stock broker Bernie Madoff ran the largest Ponzi scheme in history, defrauding investors of nearly $65 billion. South African retail conglomerate Steinhoff International overstated profits in a $7.4 billion accounting scandal, which in large part forced its Houston-based subsidiary Mattress Firm to file for Chapter 11 bankruptcy in 2018. At about the same time, Theranos dissolved after it was revealed that its revolutionary medical testing technology was a sham.

In the case of Theranos, the Sarbanes-Oxley Act’s disclosure mandates wouldn’t have applied since it was a private company, said Michol Ecklund, the general counsel for Callon Petroleum Co., who spoke at a recent Texas State University business school forum on Enron.

For example, a medical professional on Theranos’ board resigned because he didn’t have confidence in the company’s medical test. If Theranos were a publicly traded company, that resignation would have been required to be publicly disclosed with some reasoning, perhaps tipping off investors earlier to the fraud.

“There’s so much sunlight that is being shined on publicly traded companies,” Ecklund said. “For those that are involved in private companies, it’s that personal curiosity and courage to ask all of the questions that is so very important.”

15

Remnants

Parts of Enron still live on in Houston and across the country.

EOG Resources, the former Enron Oil and Gas, separated from Enron in 1999 and was one of the pioneering shale producers that helped make the U.S. the world’s top oil producer. Kinder Morgan, which was built on Enron assets purchased by founder Rich Kinder after he stepped down as Enron’s president in 1996, is one of the nation’s biggest pipeline companies. Switch, a Las Vegas data and telecommunications company, was founded in 2000 from a former Enron Broadband facility in Nevada.

The Houston Astros paid $2.1 million to Enron creditors to rename its ballpark Minute Maid Park from Enron Field. Chevron in 2011 bought Enron’s downtown tower for $340 million.

Ultimately, Houston became more resilient for having survived Enron’s collapse, according to Rapoport, the former University of Houston law dean. After the oil busts of the 1980s and the harsh spotlight of Enron, the city has diversified beyond energy, building out a world-class medical center, universities, restaurants and museums.

“If you ignore the traffic and the weather, the other things that make Houston great far exceed what happened 20 years ago,” Rapoport said. “We’re not the Enron city. We’re just Houston.”

Marcy de Luna contributed. Includes previous reporting by James Osborne

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