69 U. Chi. L. Rev. 1233 (2002)
What Enron Means for the Management and Control of the Modern Business Corporation: Some Initial Reflections

handle is hein.journals/uclr69 and id is 1245 raw text is: What Enron Means for the Management and Control
of the Modern Business Corporation:
Some Initial Reflections
By Jeffrey N. Gordont
On October 16,2001, Enron Corporation, a Houston-based energy
trading and distribution company famous for its advocacy of energy de-
regulation, announced a $1.01 billion nonrecurring charge related to
losses associated with certain investments ... and early termination dur-
ing the third quarter of certain structured finance arrangements with a
previously disclosed entity.' Chairman and CEO Ken Lay reassured in-
vestors about the strength of the company's core businesses, said he was
very confident in [Enron's] strong earnings outlook and reaffirmed
that the company was on track to continue strong earnings growth.
Nevertheless, the write-offs produced a third-quarter loss of more than
$600 million and surprised Wall Street. Moreover, The Wall Street Journal
reported that $35 million of the losses derived from business dealings
with partnerships managed by the company's CFO, Andrew S. Fastow.'
The bad news, the reported conflict of interest, an ensuing SEC in-
vestigation, and the fall in Enron's stock price from the mid-$30s to the
low $20s, triggered a crisis of confidence in the company. Enron's energy
trading business, its crown jewel, depended crucially on solid finances,
since parties dealing with Enron were loath to assume significant coun-
terparty credit risk: a serious chance that Enron could not perform on a
contract to buy or sell energy meant that parties no longer would trade
with the firm. In desperation, Enron turned to a merger with its cross-
town rival, Dynergy, to save the day. Then, on November 8, Enron re-
leased a bombshell. The quarterly earnings statement restated (that is,
t  Alfred W. Bressler Professor of Law, Columbia Law School. I appreciate discussion and
comments from Jack Coffee, Ron Gilson, Victor Fleischer, Vic Khanna, Ed Iacobucci, Jon Macey,
David Schizer, some Columbia alums who wish to remain anonymous, and participants at the Uni-
versity of Chicago Law Review Symposium.This Article bears a date of February 15,2002.
I Enron Corporation, press release, Enron Reports Recurring Third Quarter Earnings of $0.43
per Diluted Share; Reports Non-Recurring Charges of $1.01 Billion After- Tax; Reaffirms Recurring
Earnings Estimates of $1.80 for 2001 and $2.15 for 2002 and Expands Financial Reporting (Oct 16,
2001)  available  online  at  <http'J/ww.enron.com/corp/pressroom/releases/2001/enel
68-3QearingsLtr.html> (visited Feb 19,2002). For a contemporary history of Enron's collapse, see
Kurt Eichenwad with Diana B. Henriques, Enron's Many Strands: The Company Unravels; Enron
Buffed Image to a Shine Even as It Rotted from Within, NY Times Al (Feb 10, 2002).
2  John R. Emshwiller and Rebecca Smith, Enron Jolt: Investment; Assets Generate Big Loss,
wall St J Cl (Oct 17,2001).
1233

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