Enron Corp. - University of California | Office of The President

(j) To inflate the purported revenues of its EBS operations, Enron was engaging
in transactions involving so-called dark fiber – unlit broadband-transmission capability – recognizing
significant revenue on these transactions when, in fact, they were artificial contrivances known as
"dark-fiber swaps," which involved no real economic substance, but were simply a swap of Enron's
dark-fiber capacity with some counterparty for its dark-fiber capacity. A dark-fiber swap involves
two parties each purchasing fiber-optic capacity from the other at artificially high prices, which
inflated the profits that each reported on the sales side of the transaction. Some of Enron's
counterparties to these dark-fiber swaps included 360 Networks, Touch America, Qwest and Level
Three, with which Enron did a huge swap code-named "Hamachi."
(k) Enron exacerbated the manipulative and deceptive financial impact of dark-
fiber swaps by accounting for the revenue or payment it received from the counterparty that bought
dark fiber from Enron as current-period revenue while, at the same time, Enron was capitalizing
the amounts it paid to that party to buy dark fiber from it on the other side of the swap. Thus, Enron
avoided recognizing the expense of that purchase in the current period and instead, amortized it over
many, many years – a deliberate accounting manipulation where revenue and expense were mis-
matched to inflate current-period results.
(l) The prospects for future revenue and profits from Enron's EBS operation and
the purported value of that operation to Enron and to its stock price were completely false based on
arbitrary and unrealistic assertions without any basis in fact because Enron knew from current
problems in that business, as well as the current state of EBS business, that such revenue and profit
forecasts and valuations were unobtainable.
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