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

deals was increasing. Management was well aware of how traders broke down the deals to better
the numbers. Indeed, traders were instructed many times to manipulate the numbers of trades. And
while this trade value never made sense, they were inflated since cash bonuses were paid based on
the deal's size, not its viability or earnings: "It was very simple. You just tweaked the assumptions
on different variables, which were changed to make the return higher."
(n) Enron was abusing and misusing mark-to-market accounting with respect to
its broadband intermediation activity, utilizing this accounting method – together with false
assumptions of ultimate value – to create much higher current-period revenue and bottom-line results
than were reasonable and attainable had proper accounting techniques been used. For instance:
(i) One analyst-trader was told by VPs in his group to manipulate the
assumption numbers so upper management would get bigger bonuses when the higher valued deals
were closed. And when it started to look like a deal was about to unwind – becoming a true loss
because the assumptions were never valid – Enron moved the earnings curves – "Shifting the curves
and making new deals to bury the losses from the past was constantly the strategy"; and
(ii) In fact, there were only about 20 actual broadband transactions or
intermediations – all with tiny margins. And one of these deals was derived solely from a 10-year
deal with Rice University to provide broadband services to Breiman University, a sister university
in Germany. The deal called for Rice University to pay Enron the total over 10 years, but the
Company recognized all of the revenue in the 2ndQ and 3rdQ 00. This deal would never have closed
had not Lay donated $5 million for an endowment at Rice University. Moreover, Breiman could
cancel the project and did so in early 01.
(o) Enron grossly misrepresented and overstated the nature and potential
favorable impact of the Blockbuster VOD joint venture as well as its success. First, Blockbuster did
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