Road to judgment: Orgy of greed that ended in shame

Enron. Just say the word now to conjure up an orgy of corporate greed and executive malfeasance. Yet, little more than five years ago, the energy company's name evoked quite a different response. The company was a stock market superstar, the seventh largest firm in America, routinely voted the most innovative, and the source of great wealth for its loyal army of investors.

Its bosses were fêted as the smartest and the most influential in corporate America. Kenneth Lay was the grandfatherly figurehead of the company, golfing partner to George Bush Snr, informal adviser to George W., and talked of as a potential energy secretary. Lay's right hand man, Harvard alumnus Jeffrey Skilling, had transformed the sleepy Texan oil pipeline company into a $70bn (£37bn) giant that kept on inventing new and complex ways to make money.

As Lay and Skilling proselytised the deregulation of energy markets, Enron and its top traders made themselves filthy rich from buying and selling electricity supply contracts as if they were stocks and shares.

And as the company's profits went up and up, so did Enron's share price. Its employees - a majority still doing unglamorous work in power stations, or inside gas, water and electricity suppliers - were seduced by the thrill of working for one of the most successful companies in America.

It was also the era of the dot.com boom, when people who had never before dabbled in shares were playing the stock market like pros. Encouraged by the bullish predictions of Lay and Skilling, Enron's employees and followers were happy - proud, even - to shovel their spare cash and their pensions into the company's shares.

But Enron was a con trick.

Hidden within the company was a mountain of debt that would eventually engulf it. To the outside world, the company looked so powerful that it was accused of holding electricity markets to ransom and triggering blackouts in California. Inside, a vast network of unpublicised side deals had been used to push $30bn of liabilities beyond the view of the company's formal accounts.

Failing businesses and assets that might not generate real cash for decades were shunted into off-balance sheet vehicles with Star Wars-related names like Jedi and Chewco. It allowed Enron to maintain the illusion of ever-rising profit even as the foundations were crumbling.

This network of side deals was so labyrinthine that the man in charge of it, Enron's chief financial officer, Andrew Fastow, was able to illegally cream off $45m without the board knowing.

With regulators closing in, Fastow's deceit was made public and he was fired, triggering a collapse of confidence in the company.

No one would trade with it, partners called in the liabilities, and Enron - together with the livelihoods of 21,000 employees - was doomed to be wiped out.

A con trick, there's no doubt about it. But a fraud that stretched right to the two men at the very top? The jury decided yes.

Sherron Watkins, whose memo to Lay proved he had been made aware of concerns over Enron's accounting practices, said: "It was a very exciting, vibrant, alive place. New businesses could be started in a very short period of time. But the dark side of innovation is fraud, if you push your employees and don't have the right risk management procedures. Any trip up in ethics at the top is magnified in the trenches."

Those at the top became addicted to the perks and the power; the switch from Wall Street darling to public enemy was too hard for some to bear. Clifford Baxter, one of Skilling's closest confidantes and an Enron vice-president, committed suicide within weeks of its bankruptcy, telling his wife: "I have always tried to do the right thing, but where there was once great pride now it's gone."

The government has wrung 19 guilty pleas from employees further down the ladder, and from bankers involved in the side deals with Enron. Only one, the former treasurer Ben Glisan, is serving time. Most are yet to be sentenced, and three British bankers are still fighting extradition.

Other reputations have been destroyed. Arthur Andersen, the auditing firm, was wiped out entirely by the scandal, accused of colluding in the creation of misleading accounts and then shredding documents as regulators closed in. Its conviction for obstructing justice was later overturned, but it had already been broken up. The UK's Lord Wakeham, a former Tory energy minister, was among the Enron non-executives who failed to spot the fraud. He stood aside from his post as chairman of the Press Complaints Commission in the aftermath.

A question remains as to how much individual investors might recover. Earlier this week, three more of the big banks agreed to settle a class action lawsuit over their part in organising or investing in Fastow's side deals. That netted $6.6bn and took the total compensation wrung from Wall Street so far to $7.2bn. That will be parcelled out next year, but pales next to the $40bn that the shareholders claim they lost.

The collapse of Enron was dazzlingly swift. When the company was declared bankrupt three weeks before Christmas in 2001, it sent a shockwave through the global financial system whose effects are still being felt today.

No longer would company results be taken on trust. Now, directors have to sign up to their accuracy, on pain of prosecution. And a host of new accounting rules, have added millions of dollars to the cost of operating a public company in the US. The Sarbanes-Oxley legislation, rushed through in the wake of Enron, is now facing a growing backlash from investors who claim it is driving companies away from Wall Street and on to other markets such as London.

Worst of all, Enron cast a cloud of public cynicism over corporate America and came to symbolise an era of executive criminality. Bernie Ebbers (of WorldCom, whose collapse stole Enron's crown as the biggest bankruptcy in US history), Dennis Kozlowski of Tyco, and Martha Stewart have all been sentenced to prison terms for their misdemeanours, but Enron came first and it dominates the public consciousness. The convictions of Lay and Skilling are the most important step in the fight to lift the cloud of public cynicism.