Financial History 142 Summer 2022 | Page 19

admitted it had inflated its profits by $ 586 million starting in 1997 . By December , the company was bankrupt .
Some of Enron ’ s key executives — including the CEO and the finance chief — were convicted of fraud and received prison sentences . At the same time , shareholders sued the company for $ 40 billion and Enron ’ s auditor , Arthur Andersen ( AA ), bit the dust as its clients fled to other service providers . AA was also convicted of obstructing justice .
It turns out that Enron wasn ’ t the only company shrouded in controversy around that time . Tyco International , WorldCom and others became bywords for corporate scandals . “ That conspired for us to lose faith in the markets ,” one veteran Wall Street strategist recently told The Wall Street Journal . Indeed , the idea that investors couldn ’ t rely on the numbers presented in financial statements was a shock and held the very real possibility of undermining the integrity of the deep US capital markets . That position as a legitimate and ,
hence , highly attractive venue for raising capital was not something the United States wanted to forgo .
Now was the time for the political class to act . And they did so with uncommon speed and cohesion . In July 2002 , the Sarbanes-Oxley Act ( Sarbox ) overwhelmingly passed the House by 423 in favor and three against . The Senate result was even more one-sided , with 99 approving the bill and none opposing it . The Wall Street Journal reported that then-President George W . Bush said it was “ a good piece of legislation .” He ’ d also pledged to sign the bill into law even before the Senate had ratified the act . Or , put another way , this legislation saw little resistance , which is probably why it sailed through with speed . It was only the previous December that Enron had failed , and yet eight months later the new laws were in place . They would have a lasting impact , although not necessarily in fighting securities fraud .
The new-fangled legislation gave investors more time to file suits for alleged fraud . Pre-Sarbox plaintiffs would have one year to file suit from when they discovered the alleged malfeasance . That would jump to 24 months under the new legislation . Suits could now also be filed within five years of the date the fraudulent event happened , instead of the previous three . At the time it was believed that such filing extensions would increase the number of suits filed . First , the time alone would mean more slow-moving investors would still get a bite at the cherry . In addition , the longer period would allow more time for discovery and identification of fraud at corporations .
Perhaps the starkest change was that corporate leaders would now need to personally guarantee that the published financial statements reflected the real financial strengths and weaknesses of the corporation . Executives who failed to do so could face criminal penalties . On top of the personal burdens placed on executive leadership , corporations also faced huge record-keeping and filing obligations .
Collection of the Museum of American Finance
Enron Corporation stock certificate , dated July 24 , 2002 . The energy giant ’ s $ 63.4 billion collapse was at the time the largest US bankruptcy in history . It was one of several financial scandals that led Congress to pass the Sarbanes-Oxley Act in 2002 .
www . MoAF . org | Summer 2022 | FINANCIAL HISTORY 17