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Class Action History: Enron Securities Scandal

Formed in 1985, Enron was an energy company that was based in Houston, Texas. Founder Kenneth Lay was able to use accounting loopholes, financial mis-reporting and special purpose entities to hide billions of dollars in debt the company was floating, making Enron look significantly more profitable than it actually was.

That all came crashing down in 2001, however, with the highly publicized Enron Scandal dominating the news cycle. What followed was one of the biggest class actions in US history.

Enron Securities Scandal

The Scandal

Throughout the 1990’s, Enron posted some pretty astronomical profits over their operating costs. Of course, we now know that this was only possible because they were cooking the books and faking the numbers. However, they managed to get away with it for over a decade, tricking investors and getting their stock trading at $90.75 per share by mid-2000.

After the scandal broke, however, the share price, predictably, fell to a number that more accurately reflected Enron’s value: less than a single dollar by mid-November 2001. Investors were reasonably incensed by the ordeal, and their suit against the bankrupt Enron was forthcoming.

The Trial

Since Enron had declared bankruptcy due to the scandal, they claimed they were going to be unable to reimburse the investors who had lost money on their stock shares. However, the long-running trial resulted in quite a significant settlement once the dust settled. The final number, approved by a federal judge in 2008, was a staggering $7.2 billion settlement.

Most of the funds for the settlement were provided by a coalition of banks, including the Canadian Imperial Bank of Commerce, Citigroup and JP Morgan Chase. Around one and a half million investors received payments as a result of the trial.

Fallout

The fallout of the Enron scandal was immense. Hundreds of employees found themselves out of work as their employer imploded. Kenneth Lay and another executive named Jeffrey Skilling were both convicted of conspiracy and fraud as a result of their actions at Enron. The incident resulted in the Sarbanes-Oxley Act, an act aimed at curbing corporate deception through creating public oversight committees for audits.