Online Extra: Lay And Skilling Story Hour
With the convictions of former Enron executives Kenneth Lay and Jeffrey Skilling on May 25, the government closed the books on one of the biggest financial scandals in U.S. history. Enron's fraudulent schemes were so convoluted that it's a challenge to describe them in simple language a child could understand. How would you explain Lay's and Skilling's crimes to your child? A commentator and two BusinessWeek writers try:
Ben Stein: (Writer/actor/former game show host)
(Writer/actor/former game show host)
About 15 years ago a group of men and women started a company called Enron. It had several traditional businesses like generating electricity and transporting natural gas. It also had several new, untested kinds of business like making trades in electricity. It would make its owners and managers very, very rich, rich beyond what you can readily imagine, if it made a large and growing profit.
For a few years, Enron did legally make growing profits. Then its profits slowed, and the people who ran it resorted to trickery to make it seem as if the company were still growing rapidly. They even told these tricky lies to their own employees and wanted them to invest their retirement savings in Enron at the same time they knew Enron was not doing well.
They used many different kinds of extremely complex schemes to keep up the fiction that Enron was doing well. The worst part was that even as these rich men were telling innocent employees to put their money into Enron, they knew that Enron was in trouble and were selling their own interests in Enron.
When they were on the verge of being discovered, they told even more lies. They were eventually caught, and after an unusually long trial they were convicted of telling many lies forbidden by federal laws along with cheating in other ways. They face long prison terms.
Believe it or not, kids, sometimes grownups willfully do the kinds of things that most teenagers would immediately and plainly recognize as wrong.
That was the case with Enron. Though it was an energy company, think of it as one of those kitchen-knife companies that enlists seventh graders like you as salesmen. The owner of this knife company pays you a nice salary, plus a bonus that keeps growing as you sell more and more knives. So friendly is the boss, and so much faith does he have in you, that he lets you report your orders to him on your honor every three months. In fact, he'll even ship you the knives before you ever send in the money, as he realizes you'll need to spend that money to get the word out, buy props, vegetables, etc.
Still, you figure that it would be too boring just to collect salary and the occasional commission. A lightbulb goes off: You can make much, much more by making up orders. So you start filling out dozens of bogus sales slips -- for your brother, your cousin, your aunt, even your favorite baseball team's third baseman. Your brother, in particular, agrees to keep buying 10 knife sets every quarter as long as you promise to keep giving him a cut of your growing bonus. It's like printing money (as long as the bonus money keeps coming in).
This scheme works so well that you and your brother make up another account named after your brother's favorite Star Wars character, Chewbacca, so that he can collect a second set of bonus kickbacks and keep making you look better to your boss, who keeps paying you bigger bonuses. After about nine months, you and your brother invent five more such accounts. Then you get some of your friends in on the kickback scheme: They buy knife sets with your up-front bonus money and collect a cut. More sales and more bonuses make everyone happy.
Plus, it isn't as if all of your sales are bogus. In fact, some folks in California really need the caliber of knives you are offering. So you sell a handful of sets to them at 10 times the real, fair price and pocket the difference.
With your bonus money pouring in, you and your brother lavish yourselves with Xboxes, new bikes, and DVDs. Your older sister, a meticulous straight-A student, wonders how you're buying all these new things when she has only seen you make a handful of deliveries. Plus, she wonders, why does your younger brother suddenly have so much money when he doesn't even have the faintest idea what the knife sets look like? You tell her she's naive -- that even with her amazing grades she couldn't hope to understand the genius of your sales model. You even exhort your parents to ground her.
After all, has she been living under a rock? The local newspaper just crowned you Young Entrepreneur of the Year, your parents' bank wants you to open up a Junior VIP checking account, and your bonus keeps shooting up every quarter. No one has anything bad to say about you.
Everything goes according to plan until your boss suddenly makes a revelation: Turns out that times are actually tough at his company, and there is not as much available to pay up front in bonuses. He now wants to see the money before he pays you. In fact, according to his records, you owe him $10,000.
You stop returning his calls. He calls the police and county detectives, who descend on your house with hundreds of questions. You insist you did nothing wrong -- they just don't understand the business. But as soon as they leave, you race to destroy all the phony invoices you've been hiding under your bed.
FAME AND INFAMY.
The phone is ringing off the hook with people who want their money back, and those folks you ripped off in California now want to take you to court. But now that your prepaid bonus is gone, you can't possibly refund them -- much less pay back the money you stole from your boss.
Word quickly gets around that you haven't sold much of anything. The principal calls you in to expel you, but that's the least of your worries. Your brother confessed to the police that he helped you construct the phony accounts. Your boss, meanwhile, lost his life savings. The local newspaper has you on its cover again, but for a different reason this time: You're going to jail.
Say your school has a bully, let's call him Andrew (as in Fastow), who terrifies you and everyone else. He's so manipulative that he is able to direct the other kids at school to do exactly what he wants. Andrew decides who gets to play kickball or basketball at recess and who is on which team. You're too afraid to tattle on him because he can make your life miserable at school.
Andrew asks you and some of your friends to join some secret clubs (off-balance-sheet partnerships) he created. Sure, you say, better to be part of the group than be excluded. Andrew then directs one of the clubs, which owns a bat, baseball, and half a dozen mitts, to give its sports equipment to your club for 30 days.
In return, your club gives the other club $50 for the month. That club can do whatever it wants with the $50, but at the end of the 30 days, they have to repay the entire $50 to get their sports equipment back. A month goes by and your group returns the baseball stuff. But instead of getting your club's $50 back, you only get $40. Andrew keeps $10 because he figures he should get paid for directing the trade.
You've had enough of Andrew's bossing you and your friends around and decide it's time to take a stand. You mention the secret clubs and the $10 loss to the playground monitors. Unfortunately, the grownups don't seem to think there is anything wrong with Andrew's actions. Surely the assistant principal, let's call him Mr. Skilling, will put a stop to all this bullying.
Instead, Mr. Skilling actually admires Andrew's leadership and negotiating skills, and he actually helps Andrew to promote the secret clubs. You alert the principal, Mr. Lay, to the shenanigans going on in the schoolyard. But rather than call Andrew into his office, request the return of the $10, and put a stop to the secret clubs, Mr. Lay says he knows nothing about the situation and tells you he's sure Mr. Skilling is taking care of it.
By now, you're getting beaten up daily at recess. Still, you're determined to do what's right. Finally, someone at the Board of Education listens to you and takes action. Andrew is expelled from school and your friends play with you again. But your club is still out the $10.
By Ben Stein, Robin Farzad, and Toddi Gutner