enron white collar crime

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enron white collar crime

Enron Corporation

Enron Corporation Scandal





Enron Corporation Scandal

White collar offenses are crimes committed by someone who uses their position at a certain profession to disguise their criminal behavior. In the past couple of decades white collar crime has been on the rise and the scandal surrounding these crimes have gotten more and more shocking. One of the most infamous white collar crimes involves the scandal involving the Enron Corporation. Enron is one of the most infamous cases of fraud by company executives that embezzled millions from the company while providing a false financial record to the board of directors and investors. As a result many of these executive went to jail and Enron was bankrupted.

History of the Enron Scandal

Enron was established in 1985 when Omaha-based InterNorth and Houston Natural gas merged into one company. Kenneth Lay was appointed CEO and the company saw immediate success. In 1993 the company made its first mistake when they created a number of limited liability special purpose entities that allowed Enron to hide its liabilities while growing its stock price (Folger, 2011). This was criticized by financial analysts who found the company was hiding large amounts of debt. From 1993 to 2001 the company was considered innovative and a leader in energy technologies. Despite the debt the company continues to purchase pipelines and bought into other industries, such as water and paper.

Enron was an energy trader and supplier that took advantage of the deregulation of the energy market to become successful in the energy industry. A year after Enron was formed Lay became Chairman of the Board and by 1999 the company embraced new technology and launched its broadband services and then established a website for trading commodities known as Enron online. Investors flocked to the company y eager to invest. Many ended up losing thousands if not more.

Enron Online was an immediate and huge success with about 90 per cent of the company’s income came from trades (George, 2006). By 2000 the company was making profits well into the billions and in the same year was the sixth largest company in the world. The company's stock price peaked at $90 US (George, 2006). Even though Enron appeared to be thriving financially it was not being properly managed but because of political influence from political powerhouses, such as President Bush and Vice President Dick Cheney, the company appeared to be legitimate and thriving financially.

In fact Ken Lay had access to Vice President Dick Cheney, who earlier in 2001 drafted a new national energy plan that seemed to lean heavily on the suggestions of Mr. Lay (Lashinski, 2011). It was believed Cheney supported the National Energy Plan for the purpose of supporting the goals of Ken Lay. Jeffery Skilling took over the position of President from Ken Lay and later become Chief Financial Officer until he resigned in 2000. Skilling is an important player in the Enron scandal because similar to Lay he was deeply involved in the criminal activities occurring in the company.

Under Shillings leadership the broadband branch of the company seemed to flourish and the stock continued to rise but when he retired in 2000 Lay returned to the position of CEO and Andrew Fastow became the CFO. Due to false reports given to the public investors flocked to the company but these reports were false. Fastow quickly figured out the true financial state of the company and resigned. Shortly after his resignation an investigation was launched by U.S. Securities and Exchange commission.


Enron formed after the government lifted the regulations placed on the energy industry. In the 1980’s and the 1990’s Kenneth Lay lobbied for the deregulation of the energy industry using his political power to persuade Federal Energy Regulatory Commission (FERC) to deregulate natural gas (). Lay was a huge contributor for the Bush campaign which gave him a lot of influence in Washington. As a result he was later successful in having electricity deregulated allowing it to become a commodity that was bought and sold. Through the support of the Bush Administration state after state was deregulated.

Lay and Enron was successful in pushing through electric power deregulation in 24 state legislatures, which made it possible for them to create the "markets" they needed to rip off consumers (DeRosa, 2002). Kenneth Lay was successful in making these drastic changes to the energy industry because he would contribute to the political campaigns of over 700 politicians to ensure whatever he proposed became law. The political campaigns Lay contributed to included utilities commissioners, councilman, majors, governors, and even presidents. This way Lay would receive support of his goal to deregulate the energy industry.

The massive political and lobbying power of these energy companies over powered the voices of reason coming from environmental and consumer groups concerned about the potential risks that would occur as the result of the deregulation (DeRosa, 2002). The deregulation of the energy industry allowed for corrupt business men like Lay to take advantage of this deregulation to steal billions of dollars from investors. Lays ultimate goal for deregulation was to get away with his fraudulent behavior. When Lay was successful at deregulating the energy company it gave Enron free reign to engage in corrupt behaviors.

The White Collar Crimes and the Cover-up

Prior to filing bankruptcy in 2001 the SEC began an investigation into the company. The company was suspected of committing crimes against their investors but due to the complexities of the financial accounts it took five years to reveal all of the crime that were committed. White collar crime refers to criminal actions committed by someone in a professional position in society. White collar offenders will disguise their criminal activity behind a mask of professionalism. Enron’s executives created the illusion of a successful and thriving company when in fact it was a house or cards.

White collar crime theories provide an explanation for why criminals commit crimes. Many criminal theories that would make sense for the street criminal may not make sense for the white collar criminal. For example the strain theory may not fit the white collar criminal that came from a privileged background but the rationale choice theory might provide a better explanation. According to the rational choice theory, criminals will first weigh the benefits against the consequences of committing a crime (Regina, 2000). In the case of Enron, the executives got away with their crimes for almost a decade without detection.

The term white collar criminal was coined by Edwin Sutherland in the 1930’s in response to businessmen engaging in corruptive or illegal behaviors (Meier, 2001). When the Enron scandal was revealed the complexity of the crime was astounding. Street crimes are usually less complex but the two categories of crimes have many similar characteristics. The difference s Enron executives used their upstanding position in society to pull the wool over the eyes of all the stakeholders.

Street criminal use other deceptive practices to conceal their crime but unlike the white collar criminal will not pretend to be a productive member of society (Poortinga, 2006). White collar criminals get away with their crimes by finding or in the case on Enron creating ways to disguise their criminal behavior behind a mask of legitimacy. The criminal case at Enron was so complex it took 45 financial experts from across the country to untangle the web of deceit that had been created.

The white collar crimes began when Lay used his influence to deregulate the energy industry allowing him the opportunity to give an inflated picture of the profitability of the company. Enron ripped of electric company’s by selling the electricity at inflated prices resulting later in an energy crisis in the state of California. The company overvalued its international assets and would take money from investors and never invest it back into the company. The company appeared to be thriving when in fact the only people getting rich where the top executives.

The known crime begins in 1997 when Enron purchased at company called Chewco and used it to cover-up their illegal behavior. Enron hide their deceptive financial practices behind a series of transactions designed to hide the true financial picture of the company. Enron would take money from investors and then send out false reports making the financial picture of Enron more attractive than it actually was. It was basically a big ponzi scheme with many other fraudulent behaviors thrown in. The false financial picture allowed the company to draw thousands of unsuspecting investors who funded the life styles of the Enron executives.

In 2000 the first hint of scandal surrounding the company emerged surrounding their natural gas division. At this time there was not complete panic and employees were blocked from selling their stock even though top executives sold their stock before the company began its plummet. While the investors of Enron were crime victims so were the employees of Enron. Many employees were paid with stocks and had 401k retirement funds through the company. When Enron collapsed employees were left without any financial future. Their retirement money was stolen and the stocks were useless.

The first crime committed by the Enron executives was embezzlement. Embezzlement is criminal activity involving the unlawful and unethical attainment of monies and funding by employees; typically, funds that are embezzled are intended for company use in lieu of personal use (Meir, 2000). The executives would take money given by investors and line their pockets or cover their debt in one are in order to juggle their financial deceit. Eventually the stolen money caught up to the company and they were forced to file bankruptcy which helped to reveal their criminal behavior.

Opportunity Perspective for Fraud

According to the opportunity perspective crimes that have particular opportunity structures or conditions make a white collar crime possible or attractive to a potential offender (Benson & Simpson, 2009). In the case of Kenneth Lay he used his influence in Washington to commit crimes that made him billions. Other executives working for the company y took advantage of the opportunity provided by Lay and instead of reporting the criminal behavior also took advantage of the opportunity to commit frauds in the billions against unsuspecting investors and employees.

The opportunity perspective of fraud finds criminal will take advantage of loopholes in the law, failures in corporate ethics, or a lack of proper controls n order to commit frauds. Corporate fraud is just fraud committed by people who are in position of authority within an organization. At Enron only top executives knew about the fraud. The rest of the employees and investors were in the dark about the true financial position of the company.

The opportunity structure of Enron allowed Lay ad other executives to disguise risky behavior stock holders and investors (Benson & Simpson, 2009). When a criminal is given an opportunity and the risk to being caught is limited, a motivated offender will take advantage of this opportunity. Lay was a motivated offender that went to great length to deregulate the energy industry so that he would profit financially. In other cases where the opportunity was not available for Lay and his criminal defendants he made his own opportunity. Lay was a powerful player in Washington with powerful friends that quickly distanced themselves from the criminal when his crimes where uncovered.

The Trial

The SEC investigation and the bankruptcy of Enron revealed the true financial state of the company. In order to discover who was at fault for the fraudulent behavior a criminal investigation uncovered the criminal behavior of the top executives including Kenneth Lay and Jeffrey Skilling. Lay and Skilling’s defense for the crimes was they had committed no crime and the failure of Enron was in fact the fault of some unscrupulous employees that had engaged in fraudulent behavior. The jury rejected this defense and found Lay and Skilling were at fault for the embezzlement of millions of dollars.

On May 25, 2006 Lay and Skilling were found guilty of fraud and conspiracy. The jury of four men and eight women found Skilling guilt of six counts of fraud and conspiracy and one count of insider trading. Kenneth Lay was found guilty of six counts of fraud and conspiracy as well as dour counts of bank fraud. Both men will spend the rest of their lives in jail if they do not win their appeals.

Normalization of Deviance Theory

The Normalization of Deviance Theory finds that when there is deviance in the organizational environment people within that environment can adapt to this deviant behavior not only did many people in the organization either assist in the fraudulent behavior or turned a naked eye to the criminal behavior, the company’s accounting firm also allowed the behavior to go on. The Normalization of Deviance Theory provides an explanation for the conspiracy amongst top executive to disguise the true financial picture of the organization in order to steal the money of unsuspecting investors.

Anderson was the company’s accounting firm. This firm worked independently of Enron who was their largest customer. Despite being an independent accounting firm Anderson was willing to cook the books for Enron and create a financial picture. Anderson made a separate copy of the books that was used to show investors and the Board of Directors and destroying key company financial records to hide the fraudulent behavior. The normalization of deviance did not just stay in the confines of the organization but trickled over to other client working with the firm.

Normalization of deviance has impacted many companies resulting in negative consequences. At Enron the willingness of many different stakeholders to ignore questionable behavior was due to role of the people leading the fraudulent behavior. Kenneth Lay was friends with the President and vice president at the time and used his influence to ensure people would turn a blind eye to his illegal actions. When the leadership in an organization sets a fraudulent example it is far easier for this type of behavior to become the norm. Lay and top executives engage in all types of criminal actions in order to be successful in their fraudulent schemes. When these schemes would have been questioned by other employees excuses would have been made and accepted instead of being questioned. When the deviant behavior of Lay and Skilling was not questioned it did not become the norm.

Impact to Energy Industry

The bad actions of Enron had a negative impact on the energy industry causing California to go into an energy crisis and causing the government to return to regulating the energy industry. When Kenneth Lay used his political influence to deregulate the energy industry it had a major impact on the state of California. After Enron illegally shut down energy pipelines in California it resulted in energy shortages that in some cases created complete shutdowns. Enron used its power to delays any opportunity for California to create new energy plants in order to force them to pay the high prices being charged by Enron.

After the discovery of the frauds committed by top executives at Enron the energy once again become more strictly regulated. Energy is an important resource in the nation that cannot be monopolized. As a result of the bad behavior of Enron the federal government established new legislation to better protect this industry. The Sarbanes Oxley act was enacted in 2002 by the Bush administration. The same administration that was persuaded by Kenneth Lay to deregulate the industry resulting in one of the largest frauds by an organization against investors in America’s history, also established the laws to put better checks and balances into place.

The Sarbanes Oxley act was established in order to establish better regulations over the practices of organizations but in the finance industry an oversight board was created including financial auditors tasked with auditing the actions of organizations. The goal of this act is to prevent organizations from disguising their true financial picture or committing frauds against investors.

Losses and Consequences

The end result of the fraudulent behavior of the executives at Enron is the company went bankrupt and thousands of investors and employees were left holding the bag. As a result investors lost over 70 billion dollars and employees lost investment and pension funds as well as savings plans and stock options. As a result of the Enron scandal the energy industry is once again strictly regulated and other industries are not far more regulated, Enron was able to paint a false picture of their financial health and provide a set of false books to convince investors that the company was flourishing when it was in fact sinking fast.

There were many people involved in the Enron scandal that could have simply made a phone call and put it all to a step any time in the decade that these crimes occurred. Instead many people either engaged in the crime or turned their back on the fraudulent behavior. White collar crime is just as prevalent and creates harm to the victims. Thousands of investors and employees were victimized by supposed to be upstanding members of society.

With proper regulation businesses, such as Enron, can no longer cheat unsuspecting investors out of their life savings. While Enron executives went to jail for their bad behavior the actions of Bush and Cheney and other political figures were ignored. If these political figures had not been persuaded by the promise of campaign fund to deregulate the energy industry these changes would never have been made and investors would not have lost billions and billions of dollars. The new regulations will ensure the behavior of companies in the energy industry will be closely monitored to prevent any further frauds against investors.


Benson, M. & Simpson, S. (2009).White Collar Crime: An Opportunity Perspective: Chapter 5,

pg. 91. Routledge, ed.

DeRosa, M. (2002). The Enron Debacle and Electric Power Deregulation. Retrieved August 26,

2014 from http://ctgreenparty.org/articles/48-the-enron-debacle-and-electric-power-dereg

Folger, J. (2011). The Enron Collapse: A Look Back. Retrieved August 25, 2014 from


George, S. (2006). The rise and fall of Enron: a brief history. Retrieved August 25, 2014 from


Lashinsky, A. (2011). The Enron Scandal. Retrieved August 25, 2014 from


Meier, R. (2001) ‘Geis, Sutherland, and White-Collar Crime in Henry N. Pontell and David

Shichor (eds) Contemporary Issues in Crime and Criminal Justice: Essays in Honor

Regina, U. (2000). Rational Choice Theory (RCT). Retrieved August 26, 2014 from


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