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Thanks, Brad. I totally accept those criticisms. I perhaps should have originally said something more like, Malcolm's way of presenting this reminds me of T.O. in 2005 etc. because that's where the similarity was strongest. I didn't mean to present it as a totally solid analogy at all, but I was immediately bumrushed, which seemed a bit unfair to me and put me in a position where I had to wheedle out as much analogous meaning as I could. That wasn't the original intent.

Now the dead horse really has been beaten. Let's all get on with our lives.

Professor Yvan Allaire

Mr. Gladwell,

Your New Yorker piece does raise a fair question about proof of guilt and just punishment.
One SPE transaction, Chewco, in 1997 was clearly fraudulent, had to be reversed in October 2001 and started the runaway demise of Enron.Did Skilling know about the last-minutes arrangement with Barclays Bank that invalidated the off-balance sheet treatment? Probably, but was it proven, other than based on (save-my-own-skin) Fastow's assertion?
But, of all the damning evidence presented at Skilling's trial, I think his attendance as a guest speaker to the October 26th 2000 meeting of the LJM partnership is a clincher. There in a bold-faced Power Point presentation,Fastow explains the purpose of LJM as well as the transactions closed in the past year; it states thus:
"LJM Rationale: Why does Enron need private equity?
.Energy and communications assets typically do not generate earnings and cash flow within the first 1-3 years
-Investments are dilutive to Enron's current EPS
-Investments are dilutive to credit rating ratios
-Enron must deconsolidate assets
-Enron must create structures which accelerate projected earnings and cash flows..."

COO Skilling, by his active presence at this meeting, was giving his and Enron's support to a set of measures designed solely to mislead investors. The problem however is with the other attendees: auditors of Price Waterhouse Coopers, limited partners: GE Capital, J.P. Morgan, Merrill Lynch, CSFB,Morgan Stanley, etc.!!All of them were presented the above rationale for LJM, as well as a slide about "Multiple exit routes" which include a cryptic (but question- begging) ."Effective" put.
Skilling was guilty on that count certainly; does he deserve the sentence he got? I think not, particularly when compared to a conventional criminal like Fastow ( but he cooperated...). There's also the bizarrely gentle treatment that was dispensed on the executives of Global Crossing (which also caused massive losses of investments -$50 billion in market value at its peak- and 401K as well as 14,000 jobs, $250 million in retirement benefits, etc)...The founder cashed in $700 million of Global Crossing shares before the bankruptcy, including $127 million in April 2001! (But, in a shrewd PR move, testifying before Congress, he pledged $25 million for the 401K of employees!)
Skilling- guilty, yes but fairly sentenced no.

Yvan Allaire


An interesting, thought-provoking piece. But to suggest that Skilling did nothing wrong (legally) is to miss the point. His deceptions caused investors to overlook Enron's flaws and eventually lose lots of money. This is why he's in jail.

There are some points in your article that warrant comment.

Mark to market (MTM) that produces unrealized results is not wrong - it reflects what could be realized if a balance sheet item were disposed now. Using artificial rates to value illiquid or unmarketable items is wrong. Companies have the option of using MTM when it suits them - use of MTM should be mandatory not optional.

Taxable vs. actual income is not unusual or wrong. Personally, we reduce our actual income by, say, mortgage interest paid, to reduce our tax liability.

Lastly, the use of SPE's. Why? Seems like its sole purpose is to mask financial reality from scrutiny. They should be disallowed entirely. In any event, Enron violated the liberal rules required for SPE's and were not called to task by Arthur Andersen.

Which brings me to an interesting idea you might with to explore: Are accounting firms truly independent of the firms they audit? Who pays their fees? Invariably, they bend over backwards to accomodate their clients, helping them to shelter taxes, put the best face forward, all of which does nothing for transparency and openness.

Yes - more information is not necessarily the answer (but I don't need a debatable and convoluted distinction between puzzle and mystery for that!) The world of accounting and investor analysts should be carefully reviewed and improved - those where the mousetraps and warning signals that failed to warn.

Sean Carman

I think the discussion Malcolm has prompted is valuable, but I also think there is a different phenomenon at work here than the one Malcolm has identified.

As anyone who works on complex matters can tell you, it's difficult to give a common-sense explanation, to a journalist or any other layman, of something complex that you have come to know as a specialist. The problem is that you become accustomed to understand the phenomenon without having to explain it, and so you lose the ability to give a common-sense, intelligible explanation.

Thus, when you work on something complex, in which you happen to be a specialist, and you talk to a journalist about it, and try to explain what you are working on, you don't give the best explanation, and the journalist, inevitably, gets some part of it wrong. Usually a small detail that any other non-specialist, in reading the piece, wouldn't recognize -- a mistake, in other words, that any intelligent non-specialist might make -- but a mistake nonetheless. (This can be as much the explainer's fault as the journalists. My point is simply that this happens ALL THE TIME, and so isn't a particularly noteworthy thing about the world.)

Indeed, one could argue that our world is more a mass of confusion and misunderstanding than it is of lucidity and comprehension, that in fact lucidity and comprehension and not the governing rule, but the rare and precious exceptions to it.

Here, it seems that Malcolm has let the complexity of the Enron affair keep him from seeing clearly how Skilling and Fastow harmed Enron's investors, or why their crimes should be regarded as serious. What's interesting is that, rather than learn where the crime lay, and how to understand it, Malcolm chose to write, instead, about his own confusion, as if it were its own subject of interest.

The fundamental question is: Is it interesting, or does it tell us anything new about the world, to realize that there are complex matters that are difficult to render in lucid prose, and that can be obfuscated by misunderstanding or ignorance?

I don't think so. Things in the world are complex. It's sometimes difficult to explain them clearly. But the fact that some people cannot explain some complex things in clear fashion does not mean those things are difficult to understand, or are in some deep sense "mysteries." It only means they are complex, and difficult to explain.

An even better question is whether there might be, in all of this, a perverse and insidious (and, I assume, innocent) ideology at work. Encouraging people to see complex matters that are difficult to explain as "mysteries" runs counter to the notion of encouraging vigilance against sophisticated or complex injustices or wrongdoing. It runs contrary to a view of the journalist's role as one of understanding complex issues and explaining them to the public for the purpose of exposing otherwise hidden social wrongs or injustices.

Thus the emotional reaction to Malcolm's piece. People understand that the next step in the argument is to tell them not to worry about skillful criminals seeking to defraud them, or slick politicians abusing their power. After all: It's all a mystery, right?

The next article in the series, for example, could be about the shell organizations Tom Delay used (illegally) to funnel special interest money to right-wing politicians. Another complex subject that cries out for indignation and retribution, but that can also be portrayed as an ineffable mystery.

There's also, of course, the dark possibility that Malcolm is, in some sense, deliberately failing to see the wrong committed for the sake of keeping his story aloft. Can it be that a brilliant journalist and writer, after talking to the experts and reviewing the documents, couldn't understand the wrong committed by Skilling and Fastow? That he doesn't see why what they did was wrong? Can we really accept this? Should we?

I know Malcolm is stepping back from the precipice, and claiming that he's only interested in the inscrutable aspects of public policy, but it's also fair to point out the arguably pernicious idealogical underpinning of his chosen point of view.

Sean Carman

I think I should amend my post, to point out that what is really going on, it seems, is that Jonathan Macey is representing to Mr. Gladwell that the Enron case is murky, and that Enron's violations of the law represent "gray areas."

To some extent it's a matter of perspective. Macey isn't so much concerned that investors get an accurate picture of their investments; rather, his concern appears to be making sure market value reflects the true value of the company.

Also, Macey tends to make the classic law and economics mistake of thinking that information is freely available in the marketplace, and can be understood equally well by everyone.

If, however, you focus on the investors who were misled by statements in the annual reports and representations by Ken Lay and others, and consider that they generally lack the expertise to comb the proper documents to discover the real numbers, then it becomes harder to say the violations are gray areas, and a mystery.

Also, as many people have pointed out, it simply isn't true to say that the Enron case was murky, or the violations a mystery. The violations can be succinctly, and powerfully, explained.

So it's not quite a case of something being difficult to explain. Rather, Macey seems to be making the case ambiguous by treating information available to experts as it it was common knowledge, and focusing only on market valuation, to the exclusion of concerns about so-called "ordinary" investors.

Mr. Gladwell seems to take from Macey's article the nifty idea that the Enron case was so complicated that it's violations could at once be out in the open and still invisible, and therefore could not have been uncovered by any latter day Woodward or Bernstein.

But if you shift your perspective -- from Macey's law-and-economics perspective about market valuation and freely available information that is universally understood -- to a more humane concern about investor fraud and transparency, the thesis doesn't seem to hold up.

Anyway, thanks for entertaining these posts, Malcolm, and keep up the good work.


I don't think a parsimonious explanation is sufficient because I don't think that Enron's malfeasance falls into a simple type or category. There are two fundamental reasons for this:

1) The improprieties of Enron seemingly occured at all levels, from energy traders to executives

2) Assigning accountability to each of these improprieties is difficult, with so many intertwined mistakes and people.

I would characterize Enron as a massive, convoluted puzzle: if you interviewed every single employee and each one of them told the truth, you would eventually solve the puzzle, and find out the full chain of culpability. But doing so is not as easy as having a singular "Deep Throat" source providing info...

mark cuban

malcom. love the blog. Love the comments. A blog with 99 pct real comments. I love it.

to answer your question.

He lied. You cant say a pig is a cow and then sign a piece of paper saying you own a cow.

They represented assets as other than they were and then certified that they were as represented. Thats a do not pass Go, go straight to jail lie .

DIsclosure, i exec produced Enron:The smartest guys in the room and Im a big believer that the stockmarket is closer to a ponzi scheme than an efficient market

Paul Lightfoot

agree with cuban. lying about something while disclosing is by it's nature not disclosing.


Succintly summarizing all the various crimes in three sentences would require a lot of semicolons. See http://fl1.findlaw.com/news.findlaw.com/cnn/docs/enron/usskllng21804sind.pdf

The one-sentence answer is that they knowingly used a wide variety of fraudulent schemes to misrepresent the value of the company.


The Enron fraud can be summed up in one word: Emphasis. Enron essentially hid their ENTIRE business (or lack of it) in a footnote, which itself failed to emphasize the material importance of the information it contained. This made their entire financial reporting misleading.

The Enron fraud is remarkably similar to the Bush Administration's fraudulent case for the Iraq war. It is true that "everyone thought Iraq had WMD," but it is true because nobody communicated the substantial, material caveats to that conclusion "hidden" in the footnotes of intelligence reports. It other words, it never was "true," it was a matter of emphasis.

The Enron folks stressed what they thought was helpful, so did the Bush Administration. Neither was concerned with the "footnotes" because the information in them didn't suit their public purposes, even if the footnotes told the whole story. That's fraud, plain and simple.


When you cut to the chase isn't what Skilling et al did basically just a sophisticated version of a good old fashioned pump and dump stock scam?

BT Hathaway

Dear Malcolm,

Enron's leaders made promises to Wall Street types such that Wall Street lost money and that's not a particularly good thing. BUT, they also had a deep fiduciary duty to the poor and near poor of this country to deliver power at the fairest possible price. From a perceptual point of view Enron robbed from the poor to give to the rich. Inexcusable, but dramatically compounded by the fact that they cheated Wall Street as well [not to mention the embarrassment of government leaders]. This double (triple) whammy left them with no where to hide.

Utilities have always been held to a special standard, a quasi-governmental standard. THAT's why the press got involved and broke the story. If you look at the purely technical aspects of whether the partnerships stayed within "bounds", you miss the entire point. Serve the public and you have to ACT like a servant of the public, particularly toward those of limited means. NEVER lose track of that.


Paul Lightfoot

Everyone saw this morning's NYT?

Nocera on page 1 of biz section joins the gang in ganging up on the article.

Still a super useful discussion.


The MD&A in Enron's reports did not comply with SEC rules and was false and misleading. The article is interesting in showing that more disclosure may be confusing but the material details of the SPE deals taken as a whole and the attendant risks were not disclosed to investors. They were intentionally hidden and/or mischaracteriazed by members of management that knew or should reasonably have known of the false and misleading nature of the chosen disclosures.

Ian Fernandes

When companies like Enron commit illegal acts, it is disturbing, but it's a drop in the ocean relative to the legalized fraud that goes on every day, that steels from the poor and gives to the rich. Since declaring bankruptcy, enron has still been raking in billions in cash from its operations, and not a cent has gone to all the employees left with valueless 401K's. Instead, billions have poured into the coffers of law firms, accountants, and executives - and it's all legal. And let's not get started on soaring executive compensation while jobs are outsourced, usurious interest and complex fees structures on the poorest lenders, private equity firms buying firms for their pension funds, etc. etc. etc. The illegal fraud at Enron distracts from the legal fraud that exceeds it by many orders of mangitude.


So the comments here seem to fall into a number of categories:

- Those that attempt to answer the question simply

- Those that point out that the simplifications are really over-simplifications and leave out the critical parts

- Those that bicker about the above.

- Those that are written by shameless cowards who are jealous of Malcolm's success and must criticize every new article as part of a steady decline. (Though these seem to crop up in every entry, and are hopefully ignored by everyone.)

The actual point that Malcolm makes is a good one, and can be over-simplified as: modern life is complicated and hard to explain. And while that's a simple statement, and you lot can scream about how it's just a fact of life, it doesn't get recognized enough.

I used to have a book of Very Short Science Fiction Short Stories. One was about a team of scientists who find a way to pull a person from the future into the present for a short period of time and then return him to the future. They do so, and begin asking questions: "Do you have flying cars?" "Oh sure!" "How do they fly?" "Well, there's a lever to control altitude..." Take my word for it, it makes the point pretty well.

The reason that it's am important point, and I don't know whether or not Malcolm sees this, is that much of our daily lives is controlled by sound-bites and thee-sentence evaluations. Sure you can explain a Higgs boson in 3 sentences, but not 3 sentences that would convince a voter to fund a particle accelerator to go looking for it.

In the same way, the Republicans have (until they ran everything into the ground at which point there was no excusing their malfeasance) done a much better job than Democrats at distilling their message in a way that encourages voters to take action. "Cut and run," "flip-flop," and "support the troops" are all stupid over-simplifications. But they all worked much better than, "phased withdrawal," "I voted for the bill before I voted against it," or "[any statement about the war that doesn't contain 'support the troops']."

Recognizing this and looking for ways to help people make decisions about things that you can't adequately explain to them is important. Because some positions that can't be boiled down to a phrase or a paragraph are the right ones. And since things are going to be more complicated in the future than they are now, it's important to figure out how to work around our increasing complexity before it's too late.


Edith Orenstein

I read your article "Open Secrets" with great interest and cited it in our Financial Executives Internatational (FEI) Sarbanes-Oxley Section 404 blog here: http://www2.fei.org/blog/permanent.cfm?post_id=201
The blog is also carried on Securities Mosaic's (SM) daily blogwatch here: http://www.securitiesmosaic.com


As far as complying with GAAP at the time one could easily argue they did not break any laws.

Having read the article I would just like to add that the reason for the decision from the judge (I do agree with the outcome) is unfortunate. As you point in the article, a precedent that this incident was a "puzzle" and that management was hiding information has now been set. I believe it is an unfortunate precedent because it virtually leaves the "institutional investment community" (and others as you pointed out later) out of the public scrutiny.

One could argue that all the time and money it takes to comply with Sars-Ox could have had more effective results if similar compliance (with obviously different rules) were designed for the "critiquers" and not the "providers".

David M. Nieporent

My reaction to the article was the same as Steve Sailer's: I said to my wife, "Isn't he using these terms backwards?"

Sean's reply to Steve doesn't help at all. He writes: "you are missing the point. what malcolm is saying is that we know osama is somewhere, we just need to put the pieces together to find him, which is like a puzzle. there is a definite right answer once everything is in place. however, no one knew what would happen in iraq, people may have guessed, but no one knew for certain, there was no exact answer, so it was a mystery. there was no correct outcome like a puzzle. got it?"

Sure. The problem is that it's wrong. There are "exact answers" and "correct outcomes" to mysteries, in the ordinary English use of that term. When you read a mystery novel, the question is who killed Mr. Smith. The answer: the butler did it. An exact answer, a correct outcome, which one derives from putting together all the clues.

Frank Dobbs

Enron can be simply explained.

Prosecutors, acting with little if any oversight, can get anyone they want, especially if that person is unpopular.

Enron was not a "pump and dump." The top executives were deluded about their business. They did not expect it to fail. Self-delusion is not a felony.

The prosecution of Fastow and Lay (and what did Ken Lay do?) was based on a unspoken lie --that they deliberately destroyed their company for their own profit.

By considering Enron as a simple case of fraud, we are preventing ourselves from learning the salutary lessons against investing in the company one works for, against investing in companies one does not understand, in the inherent riskiness of investments, against believing the touts of the press and brokers. We have really done nothing toward making financial disclosure based on economic truth.

The latest issue of the Economist opines that US corporate investment has been depressed because CEO's have gazed on Enron and reasoned: "There but for the grace of God go I."


Can you explain in three sentences or less what *illegal* things the Nazis did that got them hanged in Nuremberg? Probably not, but nobody (except for a few Nazis and law professors) seemed to mind too much, as a greater kind of justice was trying to be served, even if laws had to be created or tweaked in order for it to happen.

The Enron case seems to be the Nuremberg trial of white collar crime. There may not have been the perfect laws in place to prosecute actions like theirs, but since it was more important to put a quick stop to "it" (whatever it was), and to prevent it from happening elsewhere, new laws and interpretations had to be created quickly, and on the fly. Again, just like with Nuremberg, most people (except for a few law professors and journalists) felt that the end did justify the means, and that, in an extraordinary situation like this, that it was permissible to follow more the *spirit* of the law, rather than its lacking *letters*...


In securing the SPE's, they used the company's stock, which in-of-itself would have been fine had the stock continued to appreciate. The only scenario which would bring the company completely to a halt, would be the depreciation of the stock price, therefore a depreciation of the assets securing the SBE's value. This coupled with the overstatement of revenue, or more specifically, the decline of the value of the company when the overstatement of revenue was revealed, crushed Enron.


there is something wonderfully elegant about the case mr. gladwell presents: from publicly available information, a newspaper writer and a group of business school students both came to the same general conclusion -- that enron's stock was overvalued. if these modestly-trained people can figure that out, why didn't hedge fund managers do the same and slam the stock price down?

in this regard, i have to agree with cuban: it must be the market is not efficient, at least in this case.

Sergeant Salami

Norbert, I think people understand well that murder
is quite wrong, and should be punished accordingly, whether
it be Nazis or OJ, regardless of legal details.
The enron case seems to boil down to:
these people lied -- which is wrong, but it's much more difficult
to explain how this particular brand of dishonesty
merits punishment tantamount to that for murder.
I'm afraid I still don't know, but I'll take smarter people's word for it that they deserved it.
However, I cannot shake the feeling that they were punished more for the
accompanying implosion of the company and loss of shareholder dollars rather than the criminal acts themselves. I can well imagine this scenario occuring at other companies, but not being punished or even prosecuted simply because they avoided the catastrophic pension/shareholder dollar loss.


They had information that indicated the company had serious financial liquidity issues but they represented to the public that they had plenty of the money and the company was doing well.

That is ILLEGAL for a public company. You have the civic duty to truthfully report to the public (ie. Your shareholders). You can put a marketing spin on your results but you can’t LIE. To make things worse….while they were lying to the public, they were exercising their options and selling their shares before the ship sunk. Stock transactions by execs are okay but if material events happen to a company, you LEGALLY must report them. These are SEC rules.

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