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Fortune’s Bethany McLean Pulls the First Thread on Enron’s Frauds

Although Enron had been “cooking the books” for quite some time, it wasn’t until a columnist for Fortune magazine, Bethany McLean, wrote an article in the March 5, 2001 issue of Fortune entitled, “Is Enron Overpriced?” that people began to ask questions.  The article questioned how Enron could maintain its high stock value, which, at the time, was trading at 55 times its earnings and a stock price of approximately $90 per share.  In her article, McLean pointed out how analysts and investors did not know exactly how Enron was earning its income and therefore were incapable of accurately pricing its stock value.  

McLean was first drawn to the company’s situation after an analyst suggested she view the company’s 10-K report, where she found “strange transactions”, “erratic cash flow”, and “huge debt” on the books for this supposedly superstar stock.  Prior to publishing the article, Mclean called Skilling to discuss these findings but was immediately met with a harsher-than-expected response.  Instead of simply explaining these seemingly anomalous elements, Skilling chastised her and accused her of being an “unethical” journalist for not properly researching the company.  In a hasty attempt to apparently correct Skilling’s tongue-lashing, Enron CFO Andy Fastow cited to Fortune reporters that Enron could not reveal earnings details as the company had over 1,200 trading books for assorted commodities and did “… not want anyone to know what’s on those books. We don’t want to tell anyone where we’re making money.”

Troubled by Skilling’s surprising response to her seemingly innocuous questions, and not convinced by Fastow’s attempt at financial “three-card-monte”, Mclean could not comprehend how Enron was generating profits.  Ultimately Mclean and Fortune decided to publish the article anyway.  Once the article became public many analysts and investors started to question Enron’s valuation and, thereafter, the company’s ratings began to tumble.  It was not long after the article’s publication that Lay, Skilling, and Fastow began to discard their shares of Enron, while conversely persuading their employees to buy stocks of the energy giant.

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