ConspiracyBook3 - Conspiracy of Fools Part III The...

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Conspiracy of Fools Part III “The Probability of Ruin” Page Fraudulent Activities, Groups Errors, and Agency Conflicts CHAPTER 14 368 Fraudulent Activity: Enron’s finance group created a third Raptor, designed to hedge investments in New Power Company, without approval from the board. It was financed with New Power stock itself, which doesn’t make any economic sense. 371 Fraudulent Activity: Fastow drafted a written agreement of Enron assets now owned by LJM2, along with the repurchase price and predetermined profit that LJM2 would make. This was proof that these were only disguised loans that he expected Enron to repurchase. 372 Group Error: Mark Haedicke chastised Stuart Zisan for the harsh tone of his memo, which exposed the book manipulations behind Raptor I, but completely brushed off the actual warnings put forth about its legal perils (confirmation bias). 376 Agency Conflict: David Duncan, on Andersen’s behalf, wrote a letter objecting to the SEC’s proposed rule on separating auditing and consulting services. 378 Fraudulent Activity: Skilling tried to persuade California Governor Gray Davis to enter into long-term power contracts that locked in prices for years. Enron could then use its deceptive mark-to-market accounting to record huge profits from the contracts on the outset. 380 Fraudulent Activity: By submitting schedules ending in fractions (megawatts were rounded down at delivery but rounded up at payment time), Enron traders scammed about $15,000. The company was paid for MW that it never delivered. 382 Group Error: Enron’s board approved Fastow’s latest proposal, LJM3, without bothering to even ask for reviews of the LJM deals. This shows a continued pattern of groupthink, overconfidence, illusion of effectiveness, and polarization. 385 Agency Conflict: Fastow and Causey created a “costless collar,” forcing Enron to pay Raptor I for any losses it suffered if Enron shares fell below a certain value. Enron was hedging with itself. Management’s incompetency would hurt shareholders of Enron. 388 Agency Conflict: Jordan Mintz came to the realization that LJM2 deals were “blindly rubber stamped.” Those in charge of assessing such transactions approached their duties casually, giving everything just the once-over. There was essentially very little internal control. 392 Group Error: Enron’s general counsel was informed that large lawsuits would be filed against Enron as a result of the California trading schemes, and he kept the information from Lay and Skilling. This is an instance of poor information sharing.
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393 Agency Conflict: On LJM2 and LJM3 offering documents, Fastow told investors they would profit from his access to proprietary deal-flow data from Enron. This is a blatant display of conflict of interest because the CFO had a fiduciary duty to Enron’s shareholders. 395
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This note was uploaded on 04/02/2009 for the course AEM 4230 taught by Professor Bogan,v. during the Fall '08 term at Cornell University (Engineering School).

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ConspiracyBook3 - Conspiracy of Fools Part III The...

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