Infamous Corporate Bankruptcies

The September 15, 2008 bankruptcy filing by Lehman Brothers is the biggest in corporate history in terms of assets held.

Lehman’s slow collapse began as the mortgage market crisis unfolded in the summer of 2007, when its stock began a steady fall from a peak of $82 a share. Crushed by debt and losses tied to mortgage-backed securities, the 158-year-old investment bank entered into bankruptcy after Bank of America Corp. and Barclays plc., which were considered potential suitors for Lehman, walked out of the deal.

One day after the filing, Barclays said it would buy Lehman’s United States capital markets division for $1.75 billion, a bargain price. Nomura Holdings of Japan agreed to buy many of Lehman’s foreign assets. Lehman also said it would sell much of its money management business to Bain Capital and Hellman & Friedman for $2.15 billion.

Driven by mark-to-market adjustments stemming from write-downs on commercial and residential mortgage and real estate assets, Lehman had forecast a net loss of about $3.9 billion or $5.92 per share for the third quarter ended August 31, 2008, compared to a net loss of $2.8 billion for the second quarter of fiscal 2008 and net income of $887 million or $1.54 per share for the third quarter of fiscal 2007.

But while Lehman’s collapse may have been the biggest to date, it’s not the first company to file for bankruptcy protection after making unwise–or illegal–investments. Here’s a look at some earlier collapses.

WorldCom Inc.
Telecommunications giant WorldCom Inc. filed for bankruptcy protection in July 2002, about a month after disclosing it had inflated profits by nearly $4 billion through deceptive accounting.

At the time of the Chapter 11 filing, WorldCom had $103.9 billion in assets and over $41 billion in liabilities. As part of reorganization, WorldCom changed its name to MCI Inc. in 2003. The debt load of the newly reorganized company was reduced to $5.7 billion, while its cash totaled $6 billion. The following year, on April 20, WorldCom exited bankruptcy protection under the name of MCI Inc.

In February of 2005, MCI agreed to be acquired by Verizon Communications Inc. for about $6.6 billion but a bidding war between Qwest Communications and Verizon, made Verizon to raise its offer price for MCI to $8.6 billion; the transaction was finalized in January 2006.

WorldCom CEO Bernard Ebbers was sentenced to 25 years in prison for his role in the accounting scandal.

Enron
Enron is best known for abusing Special Purpose Entities, a form of off-balance sheet financing that helped the company raise debt while hiding debt exposure. When the extent of the accounting abuses became public, Enron shares dropped from over $90 to 61 cents a share.

The company’s auditor, Arthur Anderson, went down with it. One of the world’s top accounting firms, Arthur Anderson was eventually found guilty of obstruction of justice in 2002 for destroying documents related to the Enron audit and was forced to stop auditing public companies. Although the conviction was thrown out by the Supreme Court in 2005, the damage to the company was fatal.

With assets of $65.5 billion, Enron’s December 2001 Chapter 11 filing is the third-largest bankruptcy in history. As part of a reorganization plan, Enron changed its name to Enron Creditors Recovery Corp., to reflect its mission of obtaining the highest value from the remaining assets and distribute the proceeds to its creditors. The company will cease to exit once it has completed all outstanding litigation, monetized all assets and made a final distribution to creditors.

The day Enron filed for bankruptcy, employees were told to pack up their belongings and were given 30 minutes to vacate the building. In May 2006, the company’s former CEOs Kenneth Lay and Jeffrey Skilling were convicted on charges including securities fraud, making false statements, and conspiracy that brought about the downfall of Enron.

Texaco
Texaco filed for bankruptcy protection on April 12, 1987, following an unfavorable court ruling awarded in a suit filed brought by Pennzoil in 1984.

Pennzoil was trying to buy Getty Oil when Texaco outbid the company and walked away with the prize. Pennzoil then filed suit, arguing that Texaco had illegally interfered with a completed deal.
In 1985, a Texas jury ruled in favor of Pennzoil, granting $10.53 billion, plus interest in damages. The following year, a Texas Appeals court reduced the verdict to $1 billion. But the Supreme Court on April 6, 1987, invalidated the Texas Appeals ruling. When it couldn’t make the payout, Texaco collapsed into bankruptcy. The company had $34.9 billion in assets at the time.

After the court ruling, Texaco executives found themselves facing multiple suits from shareholders for botching the Getty deal. Eventually, Texaco and Pennzoil later agreed to a $3 billion settlement and a bankruptcy judge voided the shareholder suits. On April 8, 1988, Texaco emerged from bankruptcy. Texaco was acquired by Chevron for $39 billion in 2000 and the combined company was named Chevron Texaco. In May 2005, Chevron Texaco renamed itself Chevron Corp. photo credit: Mykl Roventine

Refco
Refco filed for bankruptcy in October 2005, just days after it announced that its chief executive officer and chairman, Phillip R. Bennett had hidden $430 million in bad debts from the company’s auditors and investors. The company had been under the scrutiny of the SEC for accounting irregularities.

The commodities and financial-markets broker’s assets were valued at $33.3 billion and the amount owed to creditors totaled $16.8 billion.

In November 2005, Refco’s futures subsidiary, Refco LLC was acquired by UK-based hedge fund manager Man Group. In June 2006, Austria’s BAWAG bank, which owned a 10 percent stake in the company from 1999 to 2004, admitted to playing a role in the company’s shady deals and agreed to pay $675 million in settlement to creditors and shareholders.

Bennett was indicted on several counts of securities fraud; he was sentenced to 16 years in prison on July 3, 2008.

Global Crossing
Hurt by a sluggish demand and declining prices for bandwidth capacity, and burdened by a heavy debt load, the telecom company filed for Chapter 11 bankruptcy in January 2002 claiming $30 billion in assets and $12 billion in debts.

Singapore Technologies Telemedia acquired a 61.5 percent equity stake in Global Crossing for $250 million in December 2003, a deal that allowed the telecom company to exit Chapter 11. In addition, Singapore Technologies Telemedia agreed to purchase $200 million in senior secured notes that were meant to be distributed to former creditors. Global Crossing used the $200 million cash to pay off its creditors.

United Airlines
The airline’s 2002 bankruptcy filing bit the carrier in the behind once again in September of this year when a six-year-old news story covering that event was recycled and published as current. The error drove stock prices down 75 percent.

The original bankruptcy was far worse. Hurt by a slumping economy and the 9/11 attacks, United Airlines filed for Chapter 11 bankruptcy protection on December 9, 2002 when it was unable to make a debt repayment of $920 million.

The airline was reeling under a loss since 9/11. Among the four planes that were involved in September 11 attacks, two were United Airlines’ planes. One crashed in Shanksville, Pennsylvania and the other hit the World Trade Center. That year, the company lost $2.14 billion and rose to $3.21 billion in 2002.

After spending more than three years under bankruptcy protection, United Airlines exited Chapter 11 in February 2006. As part of the reorganization plan, United Airlines reduced its workforce from 83,000 to 58,000. The company also terminated employee pensions, reduced its debt to $17 billion from $30 billion and lowered its average annual costs by $7 billion.

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This entry was posted on Tuesday, November 18th, 2008 at 4:42 am and is filed under Economy & Business News. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.