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The Writing on the Wall: Early Enron Scandals

Financial scandals ensued almost immediately at the newly dubbed Enron Corp.  In 1987, two oil traders at the subsidiary Enron Oil Corp. were found to be diverting company profits to a Channel Islands account for personal gain.  Further, it became apparent that these traders had manufactured false records of a nonexistent board of directors meeting in an attempt to cover their tracks.   While such dubious behavior would normally be met with civil, criminal or internal discipline, Chairman Ken Lay keenly recognized that Enron Oil Corp. was Enron’s most profitable entity at the time – bringing in almost one third of company reported earnings.  With Enron’s profits collapsing under the natural gas price-drop of 1987, Lay opted to keep the two rogue traders in place to secure Enron Oil Corp’s much-needed gains.  Unfortunately for Lay, the profits reported from these “superstar” futures traders were also found to be fabricated.  Instead of raking in profits of $30 million as reported, the traders had exposed Enron to over a billion dollars in potential losses from bad futures bets.  Although crafty contract management miraculously reduced Enron’s overall exposure to a mere $142 million, Ken Lay was in desperate need of a new way to raise Enron’s stymied profits.

Enter Jeffrey Skilling (born November 25, 1953).   Though once tied to the federally-seized First City Bank of Houston, this eager HBS alum became a superstar in his own right as one of the youngest partners in the history of famed business consulting firm McKinsey and Co.  Having worked with Enron in his role at McKinsey in 1987, Skilling was hired as the Chairman and CEO of Enron Finance Corp. and helped develop Enron’s uber-profitable forward market for natural gas.   Under the care of Skilling and his new hires – such as Andrew Fastow – Enron met the peak of its corporate potential.

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