The name Enron keeps popping up in front of me lately, and yes, it’s very easy to draw comparisons between that fraud and many companies awkwardly showing similar stock price behaviours today (latest one in the post below).
What I am going to do today is present you with all the 🚩 about Enron managers, and I invite everyone to think deeply about them and how there are so many (awkward) similarities with many prominent business people today, starting from the ones I explicitly mentioned in the title.
PERSONAL BENEFICIARY OF SPVs DIRECTLY DEALING WITH THE COMPANY THEY MANAGE
Enron’s structure was literally a puzzle of SPVs, shell companies, and subsidiaries where often its management had a personal stake in and was directly profiting from transacting with Enron. LJM was the most famous one, and its General Partner was Andrew Fastow, who at the same time, was Enron’s CFO. What was LJM’s business? To perform “hedging transactions” on behalf of Enron, its sole counterpart.
Beware of a company’s management that can reap personal gains by dealing with its own company from the outside.
VAGUE ANSWERS
Enron’s advertising slogan, paradoxically, was “Ask Why” (video below), but that was a question Enron’s management didn’t like to answer at all. To the point that in one famous conference call, the CEO Jeffrey Skilling called an investor “A-hole” because he dared to ask why the company didn’t report a Cash Flow statement.
Beware of management that provides vague or no answers to questions they should be familiar with.
LOVE FOR “STRUCTURED” AND “CREATIVE” FINANCE
Enron’s management loved “structured finance”, and not surprisingly, Wall Street bankers were all over them to win a piece of that fat fees business. The “structuring” envelope was pushed so much here that after the collapse, a Merrill Lynch banker even ended up in jail. In the deal that banker orchestrated, Enron officially “REPOed” to his bank 3 Nigerian Power Generating barges for 5 months vs. cash, while in reality, Merrill Lynch was outright lending cash to Enron. Why did Enron love dealing in complex transactions with? Because the ultimate goal was to take debts out of their books and cover earnings holes before quarterly reporting, then get them back in the books after the reporting window.
Beware, when you see a company’s management too adamant with engaging in complex business transactions, M&A with obscure companies, and so on, 9 times out of 10, it’s all a game of smoke and mirrors to hide something in their books.
“GREAT IDEAS” THAT CAN CHANGE THE WORLD
Enron’s management was literally a factory of ideas that every time could “change the world” (and of course, make them a ton of money in the process). Of course, Wall Street Research cheerleaders, oops, I meant to say analysts, loved them like a child loves fantasy bedtime stories. Why were they doing that? Because their (complicit) auditor allowed them to record as revenues today what the company’s management subjectively expected as the potential amount of revenues from their new great idea (that was still in a PowerPoint slide) could make in the future. It sounds insane, right? It sounds even more insane they were calling it “Mark to Market” accounting.
Beware of management that one way or another, reports in their company’s books today revenues for goods or services that haven’t been sold yet.
Conclusion
In less than 1 year, Enron’s share price went from an all-time high of 90.75$ to zero. The company at that time was the 7th largest corporation in the US. Plenty of other similar cases came after it, all with the same management red flags (think about Wirecard, WeWork, or Nikola, to name a few). Rest assured, many more companies will share the same fate in the future, and I hope that now that you know the red flags to pay attention to, you can dodge the bullet.