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

(i) Enron entered into dark-fiber swaps to book a profit on the gain from
the sale. The EBS dark-fiber deals used an overvalued price for the swaps. Even though Enron
agreed to pay a higher price – above true value – for the fiber it was getting, Enron also paid an
equivalent higher price for what it was selling. One deal that Enron did with LJM illuminates this.
Top executives asserted pressure on EBS personnel to make needed revenue numbers for the 3rdQ
00, which resulted in booking a dark-fiber deal with LJM worth over $300 million. The sole reason
for this deal was to enable Enron to make the required quarterly revenue number;
(ii) Enron boasted about its high and increasing volume of broadband
trades, but these purported trades were not profitable. In essence, Enron and its trading partners
exchanged fiber-optic capacity with one another in transactions that were nearly similar in the buying
and selling prices. So while cash was exchanged in these transactions, they did not result in actual
profits for Enron or its trading partners because the Company's cash outlay for purchasing access to
the other party's fiber-optic lines was nearly the same as the money paid for access to Enron's
network;
(iii) The situation in EBS was so desperate by Spring 01 that there was a
coup attempt by several managers who reported to CEO Rice and COO Hannon and wanted them
moved out of EBS. The managing directors met with Skilling and informed him that EBS was in
extremely dire straits – there was "no way to win," EBS "had no income," and the "cash-burn rate
was too high." They showed Skilling actual EBS performance numbers. Rejecting their request,
Skilling neither replaced Rice and Hannon nor did he make any changes, other than having the
managing director also now report to him directly to keep him updated on the disaster in EBS; and
(iv) Despite concrete evidence of EBS's failed operations, EBS CEO Rice
publicly stated that broadband's assets had an estimated value of $36 billion. A high-ranking former
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