1. Fort Hays State University
MGT301 - Management Principles
Authors:
Bobby Martinez, Aubrey Hodges & Ashley Heimbouch
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2.  Slide 3 & 4 – Understanding a Ponzi Scheme
 Slide 5 – How Steven Covey Would Prevent The Bernie Madoff Ponzi
Scheme
 Slide 6 – The Madoff Affair (Video)
 Slide 7 & 8 – Enron Scandal Timeline
 Slide 9 – How Steven Covey Would Prevent The Enron Scandal
 Slide 10 – The Smartest Guys in the Room (Video)
 Slide 11 & 12– Facebook Lawsuit
 Slide 13 – How Steven Covey Would Prevent The Facebook Lawsuit
 Slide 14 – The Social Network movie trailer (Video)
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3. Pyramid Scheme Ponzi Scheme
 Typical “hook”  Typical “hook”
◦ Earn high profits by making one payment ◦ Earn high investment returns with
and finding a set number of other little or no risk by simply handing
distributors of a product. The scheme over your money; the investment
typically does not involve a genuine typically does not exist.
product. The purported product may not
exist or it may only be “sold” within the
pyramid scheme.
 Payments/profits  Payments/profits
◦ Must recruit new distributors to ◦ No recruiting necessary to receive
receive payments payments.
 Interaction with original
 Interaction with original promoter
promoter ◦ Promoter generally acts directly with
◦ Sometimes none. New participants may all participants.
enter scheme at a different level.
 Source of payments  Source of payments
◦ From new participants-always ◦ From new participants-never
disclosed. disclosed.
 Collapse  Collapse
◦ May be relatively slow if existing
◦ Fast. An exponential increase in the
participants reinvest money.
number of participants is required at
each level.
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4.  High investment returns with little or no risk.
Be highly suspicious of any “guaranteed” investment opportunity.
 Overly consistent returns.
Be suspect of an investment that continues to generate regular, positive returns regardless
of overall market conditions.
 Unregistered investments.
Registration is important because it provides investors with access to key information
about the company‟s management products, services, and finances.
 Unlicensed sellers.
Most Ponzi schemes involve unlicensed individuals or unregistered firms.
 Secretive and/or complex strategies.
Avoiding investments you don‟t understand or for which you can‟t get complete
information is a good rule of thumb.
 Issues with paperwork.
Ignore excuses regarding why you can‟t review information about an investment in
writing, and always read an investment‟s prospectus or disclosure statement carefully
before you invest. Also, account statement errors may be a sign that funds are not being
invested as promised.
 Difficulty receiving payments.
Be suspicious if you don‟t receive a payment or have difficulty cashing out your investment.
Keep in mind that Ponzi scheme promoter sometimes encourage participants to “roll
over” promised payments by offering even higher investment returns.
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5. How Would
Steven Covey
HABIT 1: Be Prevent The HABIT 4:
Think
Proactive
Bernie Madoff Win/Win
What are going to
Ponzi Scheme? Is this a win/win
situations for all involved?
be the effects of
this investing?
HABIT 2: Begin with If not, then it is perfectly
the End in Mind acceptable to walk away
Be proactive by from it.
gathering all the
information you can
on the
„investment‟.
Can this
investment Does this investment
continue on sound too good to be
long-term? true?
Mostly likely
not.
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6. 1985
Ken Lay is appointed CEO of ENRON, a company that was created as a result of mergers of gas and pipeline companies in the US
Southeast. His performance is weak and his business principles questionable.
1987
Lou Borget of Enron Oil Trading is convicted of money laundering and fraud costing Enron shareholders about sixty-four million
dollars.
1990
Jeff Skilling joins Enron Corp after leaving the failed bank, First City Bank of Houston which was seized for insolvency.
1993
Enron launches investments in South America and India. An agreement was reached to build the massive Dabhol power plant in
India which never operates when Enron is still in business.
1994
Enron starts trading electricity
1996
CFO Andrew Fastow constructs off-book entities in which Enron would make deals with these companies and then Enron would
transfer its debt into those companies while at the same time, Fastow and other Senior execs, with their respective companies, would
also be taking money out of those companies from the Enron transactions.
1997
Andrew Fastow creates Chewco (managed by Enron’s Michael Kopper) in an effort to hide debt and inflate profits, but Chewco
doesn’t meet requirements to keep it off Enron’s balance sheet.
1998
Enron enters into several capital intensive ventures that turn into financial disasters including a water distribution scheme and
power plants in Brazil.
1999
Enron board of directors waive conflict of interest rules in order to allow Andrew Fastow to run private companies that do business
with Enron. He creates LJM that buys poorly performing Enron assets. In reality, LJM is used to hide debt and inflate profits for Enron
in order to prop up its stock price. It is believed that this is the beginning of the complex and questionable accounting practices that
lead to Enron’s demise.
Enron withdraws from oil and gas productions and announces the launch of EnronOnline, its internet-based commodity trading site.
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7. 2000
Enron launches EnronCredit.com which buys and sells credit risk to help companies manages the risk in trading.
Enron and Blockbuster announce a 20 year deal to provide video-on-demand service over high-speed internet. Eight months later
the deal was terminated.
Ken Lay files fraudulent financial documents
Jeff Skilling signs fraudulent financial reports to Arthur Andersen
Enron publishes a comprehensive ethics codes
2001
Enron causes rolling blackouts in California
Jeff Skilling commits securities fraud by omitting bad news and lying to investors. He makes a false presentation to investors.
Enron executives receive million dollar bonuses
Enron is named “most innovative company in America” for the sixth consecutive year by Fortune Magazine
Skilling is named CEO
Arthur Andersen tells the Enron board of directors audit committee that they have no concerns.
Enron announces a first quarter profit of $536 million
Lay and other Enron officials meet with the energy task force of Vice President Dick Cheney
The energy task force issues its report, which endorses some of Enron’s proposals.
Enron announces a quarter profit of $536 million.
Fortune Magazine issues a story titled “Is Enron overpriced?”
Enron’s stock price closes below $59.78, a critical point for one of the partnerships
Executives start selling Enron stocks.
Enron’s stock price closes below $47, a critical point for the Raptor partnerships.
Citing “personal reasons, “Skilling resigns as CEO. Lay replaces him, stating “Absolutely no accounting, no trading issue, no
reserve issue, no previously unknown problem issues” are involved
Vice president for corporate development Sharron Watkins puts a one-page letter in Lay’s suggestion box, questioning Enron’s
accounting practices.
Lay tells employees that Enron’s accounting practices are “legal and totally appropriate”
Arthur Andersen start document shredding
Enron announces a third quarter loss of $618 million.
Enron’s assets (shareholder equity) are reduced by $1.01 billion.
The Enron 401 (k) retirement plan is frozen for administrative changes.
Andrew Fastow (CFO) is forced to leave ENRON
The SEC starts investigation Enron and Arthur Andersen
Enron declares bankruptcy and Ken Lays is forced to lay off 21,000 employees
Information from http://www.washingtonpost.com/wp-dyn/articles/A25624-2002Jan10.html 7

8. Think of how breaking the
Realize that law and defauding the
Integrity and free market would
Equality are jeopardize your company
more important & cost many people their
than profit HABIT 2: Begin jobs
with the End in
Mind
HABIT 3:
Put First
Things How Would
HABIT 4:
First
Steven Covey Think
Win/Win
Prevent The
HABIT 1: Be
Proactive Enron Scandal?
Understand that your
company can generate
HABIT 5: Seek First to revenue without breaking
the law
Be proactive by Understand
seeking to
understand the
ethical approach to
running a business
decisions
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9. Mark Zuckerberg  Founder of Facebook
 Sued by fellow Harvard
classmates, Tyler and
Cameron Winklevoss
and also Zuckerbergs
best friend Eduardo
Saverin
 Both cases settled
outside of court
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10. Winklevoss case Saverin case
 Claimed they came up  First to invest money in
with the Facebook Facebook, $15,000.
 Cofounder and business
idea.
manager for Facebook.
 Said that Zuckerberg  His share was diluted
lied about making their from 34% to 0.03%
ConnectU site. because it was said his
 Settled for $65 million involvement decreased.
in 2008.  Settled out of court for
an undisclosed amount.
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11. Habit 6:
Synergize
Great things can
happen when
working as one
cohesive unit
rather than
independently
How Would
Habit 5:
Steven Covey Think First to
Understand
Rather than to seek the glory
for yourself, create a
Prevent The
Facebook
partnership which fosters new
ideas for the final product
Lawsuit? By understanding the
goals and perspectives of
your stakeholders prevent
conflict later on
Habit 4: Think
Win/Win
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