In late 2001, a company filed for bankruptcy. This would not have been unusual, had this company not been one of the top ten fastest growing companies in America. How could such a successful company go down so quickly? The answer is simple: they cheated. Now, the responsibility falls to the government and the SEC to clean up the mess left behind. This is their fable.
Enron was formed in 1985 when Kenneth Lay became CEO of the Internorth Corporation. Lay shifted the headquarters of the company to Houston, Texas from Omaha, Nebraska. He quickly changed the name to from Internorth to Enteron, then quickly changed it again when he realized that “enteron” means intestine. Enron won Fortune Magazine’s award of “America’s Most Innovative Company” 6 years in a row, from 1996 to 2001. In 2000 is made Fortune’s list of the “100 Best Companies To Work For In America.” It continued to be one of America’s best and brightest companies until December of 2001, when it filed for bankruptcy amid accusations of insider trading and fraudulent accounting practices. It would later reach to light that most or all of Enron’s massive success was based on fraud. This is the story of a safe company that lost its way.
Before the Enron scandal came to light, it enjoyed a very good financial and political site. They not only enjoyed huge profits and financial successes, but also had many allies in the Bush administration due to the huge campaign contributions they made to him. Vice President Dick Cheney drafted an energy belief in early 2002 that relied heavily on advice from Enron CEO Kenneth Lay. Many beget this energy plan was an attempt by the Bush administration to reward Enron for its massive campaign contributions.
The beginning of Enron’s shady practices dates back to 1988, when it was discovered that millions of dollars had been moved from the company into the personal accounts of two employees. These two employees were later found to be participating in insider trading and stealing from the company. Insider trading is the act of making security-trading decisions though the use of non-public information. It is outlawed by the SEC. When these issues were brought to light, top Enron officials told investigators to drop their investigation. The two guilty employees had brought millions to the company; millions that Enron did not want to lose regardless of the moral standards of these employees.
Enron’s success continued through the 1990’s. When Enron stock hit its peak of $90 in August of 2000, investors were told to buy, buy, occupy! At the same time, top Enron executives were unloading their Enron stock. Investors were told that the sky was the limit for Enron stock, but top executives who knew the truth were selling their shares as fast as they could. While the Enron stock dropped as a result of this massive unloading, investors were reassured that it would soon skyrocket yet again. By the middle of August, that stock had sunk to $40.
Enron’s stock continued to slip. By the end of October, it had hit $15. Enron continued to reassure investors, and dump stock, until November 28, 2001. The stock value finally fell to less than a dollar when Enron finally came public with information indicating that the company was actually worth 1.2 billion dollars less than it had previously reported. This admission prompted the SEC to inaugurate a full scale investigation into the Enron Corporation that is still in progress. Enron filed for bankruptcy in December of that year.
But how were Enron executives able to hide their company’s huge losses from the public? Through the use of partnerships with other companies, groundless book keeping, and questionable loans, Enron was able to conceal the fact that it was losing money hand over fist and note itself to the public as profitable. Here are a few partnerships that Enron used to do this, courtesy of securitiesfraudfyi.com.
ە RADR- a group of entities secretly funded by Enron that purchased electricity-generating windmills from Enron, then later sold them back with some of the profits going to key Enron officials and their families.
ەChewco – a company formed by executives of Enron in order to buy out the shares of California Public Employees’ Retirement System (CalPERS) in a joint venture investment partnership known as JEDI. Chewco bought out CalPERS interest in order to retain JEDI’s off-balance-sheet status. However, Chewco did not meet the requirements for accounting rules and claimed profits that it was not entitled to. In addition, when Enron bought out Chewco’s interest, Chewco’s note was driven up, reaping huge benefits for the novel investors (Enron execs).
ە Southampton- Enron bought the shares of National Westminster Bank (NatWest) in a runt partnership with Credit Suisse First Boston. Enron paid $20 million, but only $1 million went to NatWest. The remainder of the money went to several executives and their families, as well as to three NatWest employees who were in on the deal.
Enron not only former these companies to hide its losses, but also to line the pockets of top executives.
Enron also created “dummy” companies outside the US to conceal its debt in. Technically called “offshore entities,” allowed Enron to shift its depts. around, and off of Enron itself, tax free. However, as Enron continued to use these offshore entities, it became more and more difficult for them to hide the huge debts that the company had incurred, until finally the company spiraled out of control and was forced to bring its losses public.
The SEC investigation revealed many conspirators in the Enron scandal. Many of these conspirators have been charged with “wire fraud, money laundering, securities fraud, mail fraud, and conspiracy (securitiesfraudfyi.com).” A short list, again courtesy of securitiesfraudfyi.com, is below:
ە Kenneth Lay – old CEO and Chairman of Enron.
ە Andrew Fastow – aged CFO of Enron. Fastow was indicted on 78 counts of securities fraud, money laundering, wire and mail fraud, as well as conspiracy to inflate Enron’s profit.
ە Michael Kopper – former director in the global finance unit.
ە Kopper pleaded guilty to financial wrongdoing in August 2002.
Jeffrey Skilling – former CEO of Enron.
ە J. Clifford Baxter – former Vice Chairman of Enron. Accused of securities fraud, Baxter died in an apparent suicide in January 2002.
ە Arthur Anderson – the accounting firm that was responsible for auditing Enron. Arthur Anderson was found guilty of obstruction of justice for shredding documents related to the Enron scandal.
ە Timothy Belden – former head of trading at Enron’s Portland, OR office. Belden pleaded guilty to one count of conspiracy to commit wire fraud related to Enron’s activities during the California power crisis.
ە Gary Steven Emigre, Gilles Robert Hugh Darby, David John Birmingham – three former employees of NatWest (National Westminster Bank). These men have been charged with wire fraud that defrauded their employer but benefited themselves and executives at Enron.
To this date, the Enron Corporation is still under SEC investigation. Ken Lay is still in trial, and is pleading not guilty to all charges. He claims that he was manipulated by those around him and was unaware that he was doing anything wrong. Lay’s demeanor at trials and his ability to make people like him have served him well, though there have been times when his amiability has broken down, In July of 2004, “he raised his philosophize, scowled and snarled repeatedly at the prosecutor who secured an indictment against him (Hays).”
Enron Corporation is in the process of liquidating its remaining assets to pay its creditors.
As you can eye, the Enron scandal was one perpetrated by dishonest, dishonorable men. These men, however, were quite possibly economic and business geniuses. They’re ability to hide billion dollar losses and illegal securities trading practices from the SEC and the public for so long is amazing. While what they did was certainly ghastly, one cannot dispute the economical genius behind their actions.
Works Cited
“Behind the Enron Scandal – Multiple Articles.” TIME 2002. 27 Apr. 2006 .
“BBC NEWS | Business | Enron Scandal At-a-Glance.” BBC News. 22 Aug. 2002. The BBC. 27 Apr. 2006 .
“Enron Scandal – Information on Enron.” Securities Fraud Fyi. 2003. 27 Apr. 2006 .
Hays, Kristin. “Prosecutor Questions Lay At Enron Trial.” Business Week 27 Apr. 2006. 27 Apr. 2006
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Filed under Sole Proprietorship Bankruptcy by on Dec 19th, 2011. Comment. 
Petitioners filing for bankruptcy have to indicate under which chapter of the bankruptcy law they’re filing. It’s usually under either Chapter 7, Chapter 11, or Chapter 13.
Before considering the differences between the three, let’s take a minute to review the reasons why an individual, a partnership, or a corporation would find itself having to file for bankruptcy. In all cases, it’s usually a situation where cash outflows are larger than cash inflows. No matter how simple or sophisticated the financial dealings of the petitioner, boiled down to the essentials of the case, it’s usually an instance where the petitioner has assumed financial obligations which far outweigh the income available to cover those obligations.
Caught between the proverbial rock and a hard station, most petitioners turn to the Bankruptcy Court (a federal court) as a last resort. The U.S. legal system allows for petitioners to seek relief from the claims of their creditors through bankruptcy. Every entity–individual or business–has the factual to do so once every seven years. While some would never even consider filing for bankruptcy, others have regularly found themselves headed for the court over and over again in order to put their financial houses in order.
As mentioned earlier, petitioners have to indicate the type of bankruptcy relief they’re seeking. That’s why bankruptcy Chapter 7, Chapter 11, or Chapter 13 are used to distinguish among filings. Each allows for a certain type of relief for the petitioner.
A Chapter 7 bankruptcy filing indicates the petitioner (usually an individual) is asking for liquidation. Place another away, it means that whatever assets the petitioner possesses will be sold and the proceeds used to pay off creditors (sometimes for pennies on the dollar). It’s important to ticket that in a Chapter 7 filing, individuals are able to keep some of their possessions. Each state has identified certain exemptions which a petitioner can use to hold on to certain possessions. They include, for example, tools used to work in a trade, homes, household furnishings, etc.). Therefore, depending upon the state where petitioners reside, they’ll be allowed to spare certain of their assets from being sold off.
A Chapter 11 bankruptcy filing usually occurs when a business, especially a corporation, is filing for bankruptcy. Once again, the petitioning business or corporation has to list all of its assets. Those assets will be sold and the proceeds used to pay off the creditors of the business. Since in most cases the assets available for sale do not amount to enough to cover outstanding indebtedness 100%, creditors have to state themselves with receiving only a partial repayment of all the money owed them.
To handle the sale of assets, as well as to monitor the financial condition of a petitioner, the Bankruptcy Court appoints a trustee to oversee each case. Usually an attorney, the trustee’s responsibility is to keep the court informed of the particulars of a case, accomplish sure that petitioners identify fully and completely not only all of the indebtedness they have, but also all of the assets which can be used to pay off that debt.
Unlike bankruptcy filings under Chapter 7 and Chapter 11, Chapter 13 bankruptcy filings ask the court essentially to have creditors back off and give the petitioner time to develop a view to pay off outstanding debts. In other words, petitioners mediate (in most cases) that they can continue to operate on a sound financial basis, but due to an unexpected development, they find themselves temporarily short of funds to meet their obligations. Thus, with a Chapter 13 bankruptcy filing, the court can say to creditors (1) cease asking for payment for the time being, and (2) you’ll get your money once the petitioner has a chance to carry out a new financial plan approved by the court.
Recently, a number of big corporations in the United States, especially airlines, have resorted to bankruptcy in order to retain themselves afloat. While they are perfectly within their rights to do so, what some have found objectionable is a tendency on the part of some companies to expend bankruptcy to jettison long-term outstanding obligations, such as pension plan payments.
While arguments can be made on both side of that issue, the fact remains that bankruptcy is an integral part of the U.S. legal system. And entities–either individual or corporate–which find themselves in financial difficulties are able to obtain relief–either temporary or permanent–from their financial woes.
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Filed under Sole Proprietorship Bankruptcy by on Nov 16th, 2011. Comment.
Chapter 11 bankruptcy is a reorganization of debt. Unlike Chapter 13, there is not a limit on the amount of debt which can be filed. For large businesses trying to restructure their debt, Chapter 11 is generally the choice of bankruptcy options. When a business files a Chapter 11, the debtor usually continues to remain in possession of their assets and their business operates under the supervision of the court, specifically for the benefit of the creditor. If the management of the debtor is less than unprejudiced or ineffective, a trustee may be appointed by the courts (Moran Law Group, 2007).
Chapter 11 bankruptcy laws indicate that an individual may not file bankruptcy under Chapter 11, or any other chapter for that matter, if they have had a previous bankruptcy dismissed within the preceding 180 days as the individuals intentional failure to appear before or comply with orders of the court, or if their dismissal was voluntarily occurred after creditors had sought relief to recover property. The United States bankruptcy laws also state that no individual can be a debtor under Chapter 11 (or any other bankruptcy code) unless they have received credit counseling from an approved credit counseling agency within 180 days prior to filing. When debt management plans are developed during required credit counseling, the plans must be filed with the court (US Courts, 2007).
Chapter 11 bankruptcy can be filed by an individual or by an involuntary petition, which is filed by creditors that meet certain requirements. If filing is voluntary, the individual must file with the court a schedule of assets and liabilities, recent income and expenses, unexpired leases and executory contracts, and a statement of financial affairs. Individuals must file a certificate of credit counseling along with any debt repayment plans which were developed through credit counseling, proof that they receive payment from employer(s) which has been received sixty days prior to filing, monthly net income statements and any expected increases or decreases in income or expenses after filing bankruptcy, and lastly, a record of any interest the debtor has in state or federal tuition or qualified education accounts (US Courts, 2007).
As our company is not incorporated, it still may file Chapter 11 bankruptcy. If the company is a sole proprietorship, the individual’s personal and business assets are viewed. In the case of a partnership, only in some cases are the individuals personal assets used to pay creditors. To avoid this in a partnership, each partner may be forced to individually file bankruptcy (US Courts, 2007). The US Trustees appoint a creditor committee from the 20 largest unsecured creditors who are not insiders. This committee represents all of the creditors to provide negotiations and plans of reorganization. The creditors are formed into groups based the characteristics of their claims. Their vote’s function of the amount of claim against a debtor, and a Chapter 11 opinion is only confirmed by the distinct votes of the creditors. If a plan cannot be agreed upon by the creditors and the debtor, the debtor can attempt to get the plan “crammed down”, or forced into agreement, with creditors so that the plan is confirmed by the debtor meeting specific statutory requirements (Moran Law Group, n.d.).
Chapter 11 is the most flexible of the chapters, and that flexibility makes it difficult to generalize. Chapter 11 is also the most expensive type of bankruptcy to file and it has the lowest reorganization rate, often times estimated at 10% or less (Moran Law Group, n.d.).
Several large companies have filed Chapter 11 bankruptcy; however the largest Chapter 11 bankruptcy filed was Worldcom in 2002. MCI/Worldcom had filed Chapter 11 in 2002, elected a new chairman and CEO in 2003 who led them out of bankruptcy, then MCI was purchased by Verizon, with the sale completed in January, 2006. Worldcom had filed for bankruptcy due to a $41 billion debt load one week after announcing that $3.8 billion in expenses were booked improperly. Worldcom had listed assets totaling $107 billion. When problems at Worldcom came into public knowledge, banks that had previously dealt with Worldcom refused to provide any more money to the company unless the loans were secured with assets owned by Worldcom. There were over 1,000 creditors listed in the bankruptcy filing for Worldcom. Worldcom had started out as a success fable in the 1990’s, purchasing MCI in 1998. Worldcom started receiving a lot of attention from auditors when it was discovered that their former CEO had been taking personal loans from the company totaling $366 million (CNN Money, 2002).
It is indispensable to remember that a diminutive business debtor can only file Chapter 11 bankruptcy if their secured and unsecured debt is under $2 million. Small business are put on a faster course of action than other Chapter 11 filings and hearings may be combined to expedite the discharge of the bankruptcy for businesses choosing to file as a small business. Under 11U.S.C. §362(b), an automatic stay allows a period of time when foreclosures, collection efforts, repossessions, and judgments must cease. This automatically goes into effect when the bankruptcy petition is filed and any debt incurred prior to the filing must cease collection efforts or honest action. A United States State Trustee supervises the administration of Chapter 11 bankruptcy cases. The trustee is a federal employee who appoints the committee of creditors. The committee of creditors has the right to consult with the debtor, investigate the operation of the business as well as investigate the conduct of the debtor, and they may also participate in the plan of reorganization (Chapter 11 Bankruptcy, n.d.). I would recommend Chapter 11 as our company would be able to keep our assets and continue to function and potential grow as a company once we recover from the bankruptcy repayments.
Resources
Chapter 11 Bankruptcy. (n.d.). Retrieved on June 19, 2007 from:
http://www.file4bankruptcy.com/Chapter11.htm
CNN Money. (2002). Worldcom Files Largest Bankruptcy Ever. Retrieved on June 19,
2007 from: http://money.cnn.com/2002/07/19/news/worldcom_bankruptcy/
Moran Lay Group. (n.d.). Bankruptcy in Brief, Chapter 11. Retrieved on June 18, 2007
From: http://www.moranlaw.net/chapter11.htmieved
US Courts. (2007). The Federal Judiciary. Bankruptcy Basics. Retrieved on June 18,
2007 from : http://www.uscourts.gov/about.html
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Filed under Partnership Bankruptcy by on Feb 13th, 2011. Comment.
Many businesses are facing difficult times. Loans have become great harder to score. Your customer base may have slowed down dramatically. Financial cut backs have been done as much as possible. As a business owner you may have face the reality that income is not meeting expenses and there is not a possibility of future improvement.. Bankruptcy may be the only way to restructured or save your credit. There are two options available, Chapter 11 bankruptcy, Chapter 7, or Chapter 13 bankruptcy proceeding.
Chapter 11 Bankruptcy is filed for those businesses that would like to remain viable but want to force creditors to reorganize their debt. In this type of bankruptcy the debtor, or business filing, Once the filing is done, creditors will be notified and committee will be formed to picture the interest of the creditors. The plan must be approved by the court. This filing can be complicated so a attorney is recommended. After 120 days, creditors can enter a proposed understanding, if one is not implemented. Just like with other bankruptcy cases, a motion of pause is ordered. This ceases any collection efforts by creditors. The trustee will review the bankruptcy to make sure the right filing has been done. If the trustee discovers that the bankruptcy qualifies as a Chapter 7 or 13, it can be converted. If the Chapter 11 filing is just, you business can be allowed to continue to function as it restructures. A Chapter 11 does not require the companies assets to be liquidated, instead the company’s financial health is overseen by the trustee. A Chapter 11 filing does require the votes of the creditors.
Chapter 7 Bankruptcy is suitable for companies who are so far in debt that reorganization is not possible. This bankruptcy allows for the liquidation of assets to payoff credits. The assets are sold off to pay the creditors. Those creditors that have secured debt, will have the asset returned to them, while those with unsecured debt would have to file a claim and hope there are funds left over to received some repayment. When a business files for Chapter 7, the company will cease operations.
It is important to realize that not all debt can be discharged in a business bankruptcy. Debts such as taxes owed to local space, federal or government agencies, debt that was not listed, debts acquired after bankruptcy and more. It is necessary to consult with your attorney to make sure that all the paperwork filed is lawful. Do not mislead or attempt to hide information from the bankruptcy court. The penalties are severe, could include fines and possible jail time.
Filing bankruptcy will affect your business. First, all your creditors who are listed in the bankruptcy filing will be contacted. They will be notified depending on your type of bankruptcy filing, whether they will receive payments, assets returned or a settlement offer. Accountants and your attorneys, will receive administrative claims, which means they will have priority on being paid first.
Making the decision to file bankruptcy is not a easy one. But in today’s economy, it is not unexpected that more and more businesses will have to access this option. Depending on the filing you do, bankruptcy can support to obtain your business. A Chapter 11 gives you the opportunity to work with your creditors to remain operational and to rehabilitate your business. There are two other options but they are limited. Chapter 13 can be traditional for sole proprietorships and partnerships if the amount of secured debt is less than $1,010,650 or unsecured debt is less than $336,900 according to www.moranlaw.net . If you are a family farm business you can file under Chapter 12. Again, consult with your legal counsel to see which bankruptcy meets your needs and what actions can be taken after the filing.
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Filed under Partnership Bankruptcy by on Nov 29th, 2010. Comment.
Removing your partner’s name from the business may be relatively simple or somewhat complicated depending on how diligent you were when you first applied for LLC status. Your company’s operating agreement should outline the acceptable reasons for a member to leave the organization such as retirement and personal bankruptcy.
If, however, the separation was less than amicable and the founding partner was expelled by you and the other members for unethical behavior, you may be looking at a lengthy court battle to remove her name. Depending on what your operating agreement says about an involuntary separation, a legal battle could force the dissolution and liquidation of your business.
Assuming your partner left voluntarily, she may mild have some accurate ties to the company, specifically in the areas of financial compensation and tax liability.
Before going your separate ways, did your former partner get fair value for her interest in the LLC? The operating agreement should spell out how profits are disbursed to each member; your traditional associate or her estate is entitled to a fair and equitable share of the business at the time of separation. Until she has received all the compensation she’s entitled to, you may have trouble removing her name from the company.
You also have to memoir for any contributions she made to the LLC during her time with the company, including land, equipment or specialized technical skills. If, for instance, she contributed the building in which you operate the LLC, she deserves fair value for that property.
On the flip side, your ex-partner must pay taxes on any profits she made from the LLC during her last year with the company. Like a regular business partnership, the IRS considers a corporation to be a “pass-through” tax entity. In other words, your former partner has to report earned income from the LLC on her personal income tax return.
There also is a possibility that the partner who left is still personally responsible for some of your business obligations. Though a limited liability company does, as the name indicates, limit the financial responsibility of the members involved, she may have personally guaranteed a bank loan or other credit extension.
If her name appears on any loan agreement for the LLC, you will need to remove her name from these documents, too.
You also have to deal with the possibility that her departure from the business will force the liquidation of your LLC, even if she left on fine terms. Page through your operating agreement and look once again at the paragraphs covering a member’s departure. In some cases, the agreement will say that an LLC must liquidate when one or more members leave the organization.
However, many states do allow the remaining LLC members to vote on whether to continue normal operations. In the event that you must liquidate the company, the state in which your business is incorporated may require you to file a document called an “articles of dissolution.” This document outlines how the LLC’s assets will be disbursed.
Because you are the resident agent for your LLC, all the legal documents for the corporation should be addressed to you, which should make removing her name from the business a little easier. You are the correct representative for the company in your state of incorporation, and also an active partner in the business, which should expedite any paperwork needed to remove her name completely from the LLC.
This article is intended for informational purposes only and is not a replacement for professional moral advice. Always consult an attorney prior to taking any kind of correct action.
Sources:
http://www.nolo.com/article.cfm/ObjectID/209DE475-E3E6-484E-BEBD6BA06366CE1E/catID/BAAE1B67-F54A-41B4-91943A51F56C3F79/111/182/245/ART/
http://www.nybusinessdivorce.com/2008/01/articles/llcs/expelling-an-llc-member/
http://www.nolo.com/article.cfm/ObjectID/EA88ECFE-C38F-4DF8-BA6551FCBE64DCA0/catID/BAAE1B67-F54A-41B4-91943A51F56C3F79/111/182/245/ART/
http://www.nolo.com/article.cfm/catId/BAAE1B67-F54A-41B4-91943A51F56C3F79/objectId/D7043E4E-91CB-4B29-B8DC0DDA10AD4B3B/111/182/245/ART/
http://en.wikipedia.org/wiki/Registered_Agent
http://www.llc-made-easy.com/document-to-remove-a-name.html
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Filed under Sole Proprietorship Bankruptcy by on Nov 21st, 2010. Comment.