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Business Law Term Paper Assignment


Andrew Fastow, the erstwhile chief financial officer of Enron Corporation, was a person of perverted intelligence and misplaced ambition. These dubious qualities ensured that Fastow departed from doing the right things and committed the worst ever corporate fraud. He knew what he was doing when he was wrecking Enron and indirectly plotting his own fall. His belated penitence and detestation of his crimes were the glaring examples of his understanding of the mammoth damage he had caused to Enron and Enron’s investors. Rules are not a panacea for all kinds of ill-conceived human contrivance. Rules are for guidance based on ordinary prudence, but they can be cunningly surpassed by awkward individuals, who know how to structure around them. However, beyond the rules lie the all important virtues of value and principles. Fastow realized this all important truth too late.

How Fastow found ways around the rules? He knew about Enron’s business plans and its governance failure. The board and its advisers of Enron lacked oversight, and Fastow could take advantage of it. There were inherent risks in the use of Special Purpose Entities (SPE), or corporate vehicles and its related structured finance. According to the US Generally Accepted Accounting Principles (US GAAP), the assets and liabilities of an SPE may not appear on the balance sheet of the Vendor company that has set it up on the following conditions: (a) the outside investor must induct 3% of the working capital of the SPE and (b) must be able to control the disposition of the transferred asset/assets to the SPE. This 3% of the working capital was indicative but changeable depending upon situations. Enron took advantage of this rule and set up a number of Special Purpose Entities to manage its assets off balance sheet. These Special Purpose Entities or equity affiliates, as they are called, helped Enron to replace investments that had potential drain on the company as long as these Special Purpose Entities made good on the debts met by Enron through initial asset transfer.


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There were no accounting problems as long as this practice was within the framework of the US GAAP. But problems started when Enron could not find genuine outside investors. In certain cases, sham outside investments were arranged in the form of bank loans guaranteed by Enron itself. Furthermore, some Special Purpose Entities, which were used to engage in highly volatile investments, such as dotcom companies, were capitalized through Enron’s common stock. But this practice ran into rough weathers when some Special Purpose Entities had de-faulted their obligations to Enron. To make things worse, there had not been any hedging on these deals. The reason cited was that these investments were substantially large in volume and were illiquid. As the news of the irregularities surfaced, Enron started winding up most of these Special Purpose Entities. The company was blamed for indulging in incompatible accounting principles. Enron’s auditors swung into action by restating concealed and unstated liabilities in Enron’s balance sheet. The consolidation of accounts and revaluation of assets and liabilities ran into an overall loss of billions of dollars. News of this reduction in Enron’s value shook market confidence. Leading credit rating agencies and investor services began downgrading Enron’s long term debt and credit status. When the scale of the company’s debts emerged clear, every attempt to save it failed, and finally, it was declared bankrupt. The shares of Enron, once traded at $90, plummeted to the level of $1each.

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Fastow, many officers, and senior employees of the finance section of Enron were involved in setting up and running many of these sham Special Purpose Entities. Although Fastow’s involvement in certain deals was brought to the notice of the board, it was watered down on the plea that he was a senior employee and one who owed fiduciary duty of loyalty to the company. Later, it came to light that the board was either not properly informed or misled on Fastow’s case. The board was also in the dark as to the huge sums that Fastow and others earned through the Special Purpose Entities. Fastow alone earned up to $30 million for his part in the SPEs. When the board finally learnt about this, it suspended him from his services in Enron. Enron had a typical style of promotions and demotions of its employees. Those who played to the tune of the superiors were rewarded with ‘performance’ based increments and stock options. This was an added reason why Andrew Fastow could succeed in his clandestine activities. The staff engaged by him in setting up his Special Purpose Entities kept silent. They neither complained nor protested against Fastow and his activities, which represented huge risks to the company’s well being. It is not surprising to note that those employees who were serving under Fastow were also well taken care of for their cooperation in relevant transactions (Deakin).

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When Fastow says, “The more complex the rules, the more opportunity,” according to the Post, we have every reason to believe that he authored “the complex web of off-balance sheet” to exercise that opportunity at a later date. Fastow has got ample reasons to be remorseful for the rest of his life. As he himself expressed, “The question I should have asked is not what the rule, but what is the principle,” explains his agony of foregoing values and principles of life for furthering his greed for money. While the board of Enron failed to read the inherent risks in their company’s business plan, Andrew Fastow succeeded in reading opportunities in it (Meglio).

A Short Basic Story of Enron Corporation and its Failure

Apart from operating one of the largest gas transmission networks, Enron Corporation was the largest marketer of electricity and natural gas in the United States. The company pioneered in introducing novel trading products and also managed the world’s largest natural gas risk management contracts. While at its peak, Enron became Fortune’s “Most Innovative” company ranked #7th on the Fortune 500 list in the year 2000. Bankruptcy of a giant company like Enron was the largest of its kind in the history of the United States.

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The merger of Houston Natural Gas (HNG) with InterNorth in 1984 marked the beginning of Enron. At the time of merger HNG was basically concentrating on gas exploration and production, and InterNorth was running premier pipeline networks. In 1986, the merged entity was christened as Enron. In 1989, Enron developed a new system called the ‘Gas Bank’ to market natural gas. By 2000, Enron slowly turned to trading. It also diversified its business into marketing of electric power, coal, steel, water, optic broadband fiber, paper, and pulp. Business was as usual in Enron, until it met with a series of setbacks in its operations. In California, it was accused of manipulating power supplies, and its traders were indicted for criminal fraud. Failure of economies of scale in its water business Wessex Water of Great Britain led Enron to liquidate this business after two years of operation. Its Broad Band Services, Enron Online failed to take off on expected lines.

Setbacks in these ventures dealt heavy blows on Enron’s finances. Billions of dollars were lost in business, but Enron recorded profits of millions of dollars using its accounting mechanisms on a deal with Blockbuster. In reality, there was no revenue. As Enron turned into trading, it brought about the market-to-market accounting procedure. This is an accepted accounting practice. Although Enron was losing money in business, this accounting practice saw its stock rise about 56 percent in 1999 and yet another 87 percent in 2000. Enron continued to sign billions of dollars worth prepaid agreements as it tried to raise funds. During 1990s, Enron also used Special Purpose Entities (SPEs), a kind of independent equity investors, to manage risky projects and assets. Initially, these SPEs functioned correctly, but later on, these SPEs were used unfairly to hide losses of underperforming assets. Enron also utilized its management staff and capitalized its own stock hedging assets with itself.

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By 2001, Enron’s financial reporting was in doldrums. Reported cash flows and revenues were not actually there. Enron’s stocks fell below $47 per share. Credit rating agencies were not happy with Enron’s financial position. Its business plan and assertions generated skepticism among analysts. This further affected Enron’s stock price. The situation was rapidly deteriorating. There were changes at the top. This led to more suspicion among analysts, and they began close observation of Enron’s finances. Liquidity crisis ensued. Enron relieved Andrew Fastow, the Chief Financial Officer. It was forced to draw billions of dollars in credit lines and tried using whatever was deemed worthy of collateral. Stocks continued to fall, and all attempts of revival of Enron failed, leading the board of management to file protection under the United States bankruptcy laws. For their roles in Enron’s collapse, twenty-two executives were convicted of criminal charges. Among others, Andrew Fastow, the former CFO, got lengthy prison term (Frontain)

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A Short, Basic Story of What Andrew Fastow Did, and WhatHappened to Him in the Legal System

 Enron disguised its losses by keeping the borrowings taken to finance those losses off the books. This operation was carried out by their Chief Financial officer Andrew Fastow. The US Generally Accepted Accounting Principles (US GAAP) allow leaving borrowings off the books if the outside investor contributes a minimum of 3% of the working capital of the Special Purpose Entity (SPE) formed for this purpose. Since this 3% is a relatively small figure, Andrew Fastow found it easy to organize the lending packages. Several SPEs were, thus, formed, which helped Enron to compensate for the potential liabilities. These operations continued uninterrupted, as they did not contravene the accounting principles until the late 1990s. In the late 1990s, the company made a series of transactions, wherein there were no genuine external investors. An SPE named Chewco made an investment for which Enron itself was the guarantor. 

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Some other entities, namely LJM and Raptor, were formed and were capitalized by bank loans and Enron’s own stocks. Raptor was used to shield Enron’s income statement. Raptor was employed as a strategy of using Enron’s stock to offset its own loss. This ran counter to the basic principles of accounting. However, this was what exactly Andrew Fastow, the Chief Financial Officer of Enron, was doing. It was known only towards the end of 2001 that Andrew Fastow was behind the two SPEs, LJM and Raptor. Chewco, another SPE, was run by Michael Kopper, a senior employee in the finance section of Enron. It was also found that Andrew Fastow was majorly involved in many more sham SPEs. A number of junior employees in the accounting and finance positions also were found to be running several SPEs, all under the very nose of or with the knowledge of Andrew Fastow. Although Fastow’s involvement was brought to the knowledge of the board in 1999, the board approved his involvement as recommended by the then CEO and Chairman Ken Lay. Fastow’s participation in LJM and Raptor had been a clear case of breach of Enron’s code of ethics, if Lay had not recommended his case. However, later on, it was found that in this case, the board was simply misinformed or misled. Fastow was receiving $30 million for his role in Raptor and LJM. In October 2001, he was suspended from his employment with Enron. Fastow was imprisoned for a lengthy term for his misdeeds. He also lost all what he earned through these dubious means (Watkins).

A Short Statement of the Effects of Enron's Failure on People and Laws inthe USA

The Enron’s debacle was a human tragedy. Apart from taken its toll on Corporate America, it resulted in several divorces and suicides of those who lost everything. Total lack of communication between the board and the organization down the line led to loss of the company’s assets and the earnings of innocent investors. Thousands of unguarded investors became real victims of a handful of individuals, who conspired and contrived the downfall of an iconic organization. Employees did not loss their public sector pension funds, but those who had invested all their pension funds in company’s stocks also lost everything. Rules that prevented employees from moving their pension plans to alternate investments also dealt blows on many. Those who had no possibility to exit their hard earned life-time investments were the hapless ones and suffered mercilessly.

Enron became synonymous with corruption and corporate greed. Its death was worth $70billion in retirement benefits and capitalization. Although legal help could manage small portions of the employee-invested funds, they could not help much in terms of major portions as these funds were tied to the price of Enron stocks. The economic securities of the employees descended to worthless status in line with the falling stocks of the company. In order to help the public with whatever remained of the once prestigious Enron, the authorities changed its name to Enron Creditors Recovery Corporation. The aim was that the company would no longer remain upon completion of the final disbursal to creditors.

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Congress passed Sarbanes-Oxley Act in response to this debacle requiring more transparency in dealings between executives and corporations. The legislation provided for rigorous penalties for fraud, and corporate officers were personally made responsible and liable for the accuracy of financial reporting. Internal financial control procedures were made more accessible to investors, and added independence of auditing firms was now provided under the legislation (Yahanpath).


  1. This was a case of selling lemon juice by a particular company, which was already a branded product of another company. Although the product was different in make and quality, the container looked alike. In this case, the learned judge affirmed the permanent injunction barring the second producer from marketing the lemon juice in lemon-shaped containers.
  2. In this case, it does not change the fact that what the people at the dealership did was fraud. It meets every aspect of the Consumer Legal Remedies Act. It does not matter how they justified it, it is the kind of act mostly crooks do. The laws in no way agree to make the action right when the dealership and manufacturers through their people seek to defraud their customers. This is the reason why society requires necessary laws to protect them.
  3.  The company employed methods declared unlawful by Section 1770 by misrepresenting the affiliation. The aggrieved party received an unsolicited fax advertising mortgages from the company. The company sent many unsolicited fax messages to the aggrieved party. The aggrieved party also sent numerous letters apprising the company that they were committing on-going violations of the act. The aggrieved party already has two judgments against the respondent company for previous unsolicited faxes, and also it had personally discussed the illegal faxes. Under these circumstances, the respondent company has used methods declared unlawful by section 1770 of the Civil Code: has passed off goods as those of another and misrepresented the source and certification of goods placing the names other than the respondent company’s. Also, they failed to specify the license under which they were providing loan brokerage services, as required by law. Under the circumstances, the aggrieved party in order to redress his grievance demanded (1) to remit them $80 in actual damages for legal tress pass, (2) to remit $9000 in statutory minimum damages specified under the Telephone Consumer Protection Act for the faxes, and (3) to cease immediately the respondent’s practices of sending illegal and misleading faxes in violation of CC 1770.
  4. In this case, the affected person by the deceptive trade practice of the offender is liable to be granted an injunction against it under the principles of equity and on terms that the court may consider reasonable. Proof of monetary damage, loss of profits, or intent to deceive is not required. For example, relief granted for the copying of an article shall be limited to the prevention of confusion or misunderstanding as to source. The court may award reasonable attorneys' fees to the complainant. The court may also award attorneys' fees if it is convinced that the defendant has willfully engaged in a deceptive trade practice.
  5. False and deceptive advertising hurts not only the consumers but also other competing companies that correctly and accurately present and advertise their services and products. Even though the laws accurately specify what types of advertising strategies are viewed as deceptive, the language of these laws allows other instances being regarded as fraudulent. In this case, Section 1780(a) provides relief to any consumer who suffers "damage" as a result of any deceptive or unfair trade practice. A consumer may sue for damages for relief. The defendant should check carefully any complaint filed in less than 30 days after a CLRA notice to know if the complaint includes any claim for restitution or damage. If it does, the complaint is liable to be considered.
  6. California has typical statute in place to protect consumers against this particular offence of representing the goods and services. This clause is applied when a party publicly negatively comments on particular business’ name. Claim for commercial disparagements is the way to respond to it.
  7. A typical example of this is “Maids to Order” company’s case. The owner of a cleaning company who registered his business under the name “Maids to Order” filed a lawsuit against a television station in Pittsburgh because it aired a news feature “Maid to Order”. This was about the scarcely and provocatively dressed women who were getting ready to clean a dwelling. Although the court admitted any business has the right to protect its brand name, the court observed that “Maid to Order” was simply a substitution and slight change of “made to order”. For this reason, it could not be interpreted with any negative meaning. Since this phrase is quite common, it was ruled that Pittsburgh TV station had no mal-intentions against the plaintiff’s company and had not meant to harm the plaintiff’s business. Therefore, this news report was not viewed as commercial disparagement. Thus, it becomes clear that a business using a common phrase as its name should also take into account the disadvantages of such usage.
  8. This clause pertains to established companies resorting to measures with ulterior motive. Instead of creating new branding, companies resort to mirroring successful brands in the market place. This can cause confusion in the market. There are chances that the existing, or potential customers may associate inferior products with the established ones, causing negative impact on brand loyalty.
  9. This chapter shall be prima facie evidence for action if such cases are brought into the notice of the court. This practice shall be declared unlawful under relevant sections. For any complaint brought by a plaintiff under this section, the court may award reasonable attorney fees in addition to relief provided under this section.
  10. Consumers suffering damage on account of unlawful methods stated in this chapter can file suit in California Superior Court for compensation under section 1770. This section provides relief to customers who are entitled to actual damages. In addition to relief, the court orders offending parties to stop prohibited “acts, methods, or practices”.
  11. This section provides clear relief to the aggrieved. The case in question is a sofa set supplied by a shop, wherein the sofa was not fitted with proper cushion. They had not advertised the price of the completed sofa set when the consumer approached them. The completion did not take place even after several months, whereby the customer suffered because of the delays in fixing the incomplete sofa set.
  12. This section protects citizens from misleading statements in regard to reasons for price reductions as advertised by marketers.
  13. If you fall prey to offences described in the section, you may be able to recover the amount in damages that the fraudulent transaction may cost you. The consumer has every right to sue for economic damages. If the defendant commits the mistake willfully, the consumer has every right to sue for damages caused to him/her. Consumers shall be awarded court costs and necessary attorney fees.
  14. In such a case, one should ask the shop for the written explanation with the estimate, final bill, and other papers. One should make sure that a mechanic returned old parts if a replacement of parts has been done. If you suspect that the repair shop has violated the law, and if you find it difficult to resolve the issue directly, get your vehicle inspected by another shop. If you are convinced that you have been cheated by the first shop, go for legal remedy. This section of the law will protect you.
  15. A consumer who pays for unsolicited services or goods should demand the supplier for refund. A written demand is sufficient enough to indicate the intention of the customer that the refund of payment has to be made for the unsolicited goods or services. When the supplier gets a demand from the consumer for refund, in cases of unsolicited goods or services, he must refund the money within 15 days.
  16. This section prohibits merchants from representing rebate or discount when they conceal or make the transaction contingent on an event to occur subsequent to the consummation of the transaction.
  17. There are claims or causes of action for a customer to bring for such misrepresentations. In California, laws allow a consumer to recover actual damages additional to punitive damages, attorney’s fees, and costs. The most common prohibitions in this section are against false, misleading, or deceptive acts or practices.
  18.  A court has a great deal of flexibility to remedy upon finding unconscionable situations. It can directly refuse to enforce the contract or refuse to enforce the offending clauses. The court can also take measures that it may deem necessary for a fair outcome. In this case, damages are not enforced.
  19. Advice constitutes a submission as to a future course of action that may be ultimately accepted or rejected. Recommendation under subsection 21 (1) of the act is a different form of advice. It is considered as, “the action of advising with insistence”.

22A. This section pertains to class actions to be brought under the specific provisions. However, this section does not deprive the consumer of any statutory or common law to redress his or her grievances.

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22B. This pertains to unsolicited prerecorded messages by telephone. It is active on this issue, but the subdivision does not apply to messages coming from a business associate, customer, or from a person who has established relationship with the person or organization who is making the call for the purposes of dealing with an existing obligation or at the request of the recipient (Government Legal Info California).



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