Film Summary

‘Enron: The Smartest Guys in the Room’ is a 2005 documentary film detailing the biggest corporate scandal and collapse in American history. Enron is the story of insatiable greed made possible by the perpetrators’ ingenious ability to invent highly questionable methods to portray the company as a successful company and win the trust and admiration of a gullible public with devastating outcomes. The outcomes include: suicides by corporate executives, jail sentences, the dismissal of more than 20,000 employees and the loss of life savings by thousands more while the company’s top executive walk away with more than $1 billion. The company gave itself an appearance of profitability by inflating its profits and concealing its losses through corrupt bookkeeping practices, with the acquiescence of its highly paid firm of accountants, Arthur Anderson.

Within two years of its founding in 1985 by Kenneth Lay, the company becomes embroiled in a scandal after two of its traders begin betting on the oil market resulting in consistent profits. But betting and the publication of consistent profits, which very few questioned, would be the hallmark of the company right up to its collapse. 

Enron’s ambition was to reinvent the energy industry as a market place where gas and electricity could be traded like shares and bonds. Put simply, Enron gambled in the energy market and manipulated it and other commodities and even considered ‘trading weather’ at some point. 

Its executive officers were involved in the company’s unethical and often criminal activities. These include: 
• its founder Kenneth Lay who gambled away all of the company’s assets and reserves and encouraged the company’s president to gambled more in trading and also claimed that the company was the ‘best energy company in the world’ when he should have known that the company was bankrupt and had been worthless for years; 
• its president Louise Bourget who diverted the company’s profits into his personal bank account, destroyed the company’s record and gambled the company’s money; 
• its new CEO, Jeffrey Skilling who used an accounting tactic, mark-to-market, to record the company’s projected future profits as its current income as soon as a contract was signed regardless of the actual profit that the contract would generate;
• Lou Pai, the elusive CEO of Enron Energy Services who had an obsession of gambling and visiting strip clubs using shareholder money and who left suddenly with a $250 million pay-out when his department was $1 billion in debt.
• Andrew Fastow the Chief Financial Officer who breached his duty to Enron and its shareholders and made more than $45 million through the creation of a number of front companies designed to hide Enron’s losses.

By maintaining an appearance of profitability, the company’s executives were able to consistently reward themselves with huge bonuses.

Assume that Mr Kenneth Lay, the founder of Enron had provided a loan of £1 million to the company and that following the collapse of the company Mr Lay attempted to recover his money from the company but the liquidator resisted his claim on the ground that there was no difference between Mr Lay and the company since he had overall control over the company and that instead of trying to claim money from the company he should be made liable for its debts. 

In the film, Mr Louis Bourget the president of Enron diverted the company’s profit into his personal account, destroyed the company’s records, and gambled the company’s money. Mr Andrew Fastow, the company’s Chief Financial Officer created a number of front companies which he uses to defraud Enron of tens of millions of dollars. 

Required:

a) Advise on the merits of the liquidator’s arguments, in British company law, indicating whether or not Mr Lay should be personally liable for Enron’s debts. 
b) Advise as to whether any of the senior officers of Enron breached their duties as directors of the company, explaining which duty, if any, they breached under the Companies Act 2006.

You must support you answer with relevant legal authorities using the IRAC system.

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