Twenty years ago this month, the Enron scandal came to light. It was one of the biggest falls from grace for a Wall Street darling in recent history. It was the largest bankruptcy at the time (2001). That is, until a year later when Worldcom filed and more recently with the financial crisis.

The fraud at Enron destroyed the accounting firm Arthur Andersen. It led to new regulations with Sarbanes-Oxley Act. A book, The Smartest Guys in the Room, was written about it (then made into a movie with the same name). But worst of all, the shareholders were wiped out.

If there is one lesson to take away from Enron’s collapse, it is the risk of having a huge chunk of your net worth tied to the existence of one company. A lot of decent shareholders, including employees, were completely oblivious to the fraud going on at the top. They were all wiped out!

Unfortunately, while bankruptcy often has a nasty ending for stockholders, it’s not the end of the story. Another world of investing exists around failing companies.

A bankrupt company still has assets, which are sold off to pay its creditors. Secured creditors, like bondholders, are paid first. Unsecured creditors, like banks, employees, and suppliers are next, if there’s any money left. The stockholders are always last and typically get nothing. Continue Reading…