Enron: the Nigerian Barge Deal
April 4, 2006
0
1 Introduction: The Nigerian Barge Deal
Enron Corporation was an energy company based in Texas and created when InterNorth acquired Houston Natural Gas Company in 1985. Enron's growth was fast, it was named
\America's Most Innovative Company" for six consecutive years and it soon became the seventh largest company in the United States, until its bankruptcy was declared in 2001.
Accounting fraud, money laundering and conspiracy are some of the charges which Enron stood accused of in a series of scandals that nally came to a head in the largest bankruptcy in history.
One of these scandals was named the Nigerian Barges case ([Fleischer1, 2005]). Enron tried to sell an interest in three power-generating barges in the coast of Nigeria unsuccessfully.
When Enron failed to sell it by December of 1999, Merrill Lynch, one of the world's leading nancial management and advisory companies, agreed to buy that interest. That transaction was closed at the end of December 1999, and therefore Enron could book about twelve million dollars in earnings that year and meet earning targets.
But the transaction was a fraud ([Kirkendall, 2005]). The main problem with this deal was that Merrill Lynch acted only as a temporal buyer to help Enron look more pro table than it really was. Enron's Chief Financial Ocer Andrew Fastow promised verbally to Merrill
Lynch that Enron would buy back the barges at a determined pro t within six months, or
Enron would nd a third company to do so. This fact turned the transaction to be a simple loan, and not a true sale, as Enron claimed. Enron's objective with this transaction was not other than making its nancial statements look better so that it could improve the income statement and then, for instance, borrow money from banks and the public at a lower interest rate, or simply pay the executives in Enron unwarranted bonuses.
Six months later, Enron could not nd a purchaser to buy the interest that Merrill Lynch had acquired. Thus,
0
1 Introduction: The Nigerian Barge Deal
Enron Corporation was an energy company based in Texas and created when InterNorth acquired Houston Natural Gas Company in 1985. Enron's growth was fast, it was named
\America's Most Innovative Company" for six consecutive years and it soon became the seventh largest company in the United States, until its bankruptcy was declared in 2001.
Accounting fraud, money laundering and conspiracy are some of the charges which Enron stood accused of in a series of scandals that nally came to a head in the largest bankruptcy in history.
One of these scandals was named the Nigerian Barges case ([Fleischer1, 2005]). Enron tried to sell an interest in three power-generating barges in the coast of Nigeria unsuccessfully.
When Enron failed to sell it by December of 1999, Merrill Lynch, one of the world's leading nancial management and advisory companies, agreed to buy that interest. That transaction was closed at the end of December 1999, and therefore Enron could book about twelve million dollars in earnings that year and meet earning targets.
But the transaction was a fraud ([Kirkendall, 2005]). The main problem with this deal was that Merrill Lynch acted only as a temporal buyer to help Enron look more pro table than it really was. Enron's Chief Financial Ocer Andrew Fastow promised verbally to Merrill
Lynch that Enron would buy back the barges at a determined pro t within six months, or
Enron would nd a third company to do so. This fact turned the transaction to be a simple loan, and not a true sale, as Enron claimed. Enron's objective with this transaction was not other than making its nancial statements look better so that it could improve the income statement and then, for instance, borrow money from banks and the public at a lower interest rate, or simply pay the executives in Enron unwarranted bonuses.
Six months later, Enron could not nd a purchaser to buy the interest that Merrill Lynch had acquired. Thus,
References: [Bagley, 2005] Bagley, C. E. Using Contracts to De ne and Strengthen Relationships [Capacity, 2006] Wikipedia, the free Encyclopedia. Capacity De nition http://en.wikipedia.org/wiki/Capacity (law) [Chron, 2005] Chron.com Ex-Enron, Merrill execs sentenced [Contract, 2006] Wikipedia, the free Encyclopedia. Contract De nition http://en.wikipedia.org/wiki/Contract [Cornell, 2005] Cornell Law School http://www.law.cornell.edu/wex/index.php/Contracts [Fleischer1, 2005] Fleischer, V [Fleischer2, 2005] Fleischer, V. More on Financial Engineering. Available from: http://www.theconglomerate.org/2005/08/more on financi.html [Glisan, 2003] United States District Court. Souther District of Texas, Houston Division. 6 [Kirkendall, 2005] Houston 's Clear Thinkers, Kirkendall T [Segal, 2005] Segal, Martin E. The Function of Contracts. In Preventative Law for Business Professionals [Skilling & Causey, 2004] United States District Court. Souther District of Texas, Houston Division secskllng21904cmp.pdf [Smith, 2005] Smith, Craig A http://www.west.net/ smith/offer and acceptance.htm [Statute, 1990] Statute of Frauds