Enron Corporation (defunct)

Enron was formed in 1985 through the merger of Houston Natural Gas and InterNorth, two natural gas pipeline companies. Kenneth Lay became CEO and, with the help of consultant McKinsey & Company and a rising executive named Jeffrey Skilling, transformed Enron from a regulated utility into an energy trading company. Skilling's idea was radical: treat natural gas not as a physical commodity but as a financial instrument, and trade it like stocks and bonds. For a time, it worked brilliantly.

Fortune Magazine named Enron America's "Most Innovative Company" for six consecutive years from 1996 to 2001. Enron was celebrated as a model of the new economy — asset-light, trading-focused, staffed by brilliant people compensated with enormous bonuses. The company expanded from gas into electricity, water, broadband, and eventually weather derivatives. Enron's stock rose over 1,000% in the 1990s.

Enron used an aggressive accounting technique called "mark-to-market" that allowed it to book the estimated future profits of long-term contracts immediately, as revenue. When Enron signed a 20-year contract to supply broadband, it could book the estimated profit from all 20 years in the current quarter — regardless of whether the broadband network existed or the contract was ever fulfilled. This created the appearance of massive, growing profits while cash flows were negative.

In March 2001, Bethany McLean of Fortune Magazine published an article asking a simple question: "Is Enron Overpriced?" She noted that Enron's financial statements were incomprehensible and that the company could not explain precisely how it made money. Enron CEO Jeffrey Skilling called McLean "unethical." Within months, the financial structure McLean had questioned began to collapse. Enron's CFO Andrew Fastow had created hundreds of off-balance-sheet entities to hide over $1 billion in debt from investors and regulators.

Enron filed for bankruptcy on December 2, 2001 — the largest corporate bankruptcy in U.S. history at the time, with $63 billion in assets. Twenty thousand employees lost their jobs and their pension savings, which had been invested in Enron stock that became worthless. Kenneth Lay died of a heart attack before sentencing. Jeffrey Skilling was convicted of fraud and conspiracy and sentenced to 24 years in prison, later reduced to 14 years. The scandal led directly to the Sarbanes-Oxley Act, the most significant overhaul of corporate accounting rules in U.S. history. Arthur Andersen, one of the world's largest accounting firms, was also destroyed.