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

a huge loss by selling an asset whose value had plummeted on the open market. "Qwest said we will
overpay for the assets, and you will overpay me on the contract," one former Enron executive said.
A financial analyst looking at the deal's details stated: "This is clearly a swap for accounting
purposes." Executives at Enron and Qwest held discussions into the final days of the 3rdQ,
discussing how to account for the deal so that each would gain accounting benefits and improve their
quarterly earnings results. On 9/30/01, a Sunday and the final day of the 3rdQ, Qwest signed a deal
to buy from Enron "dark fiber" along a route from Salt Lake City to New Orleans. Enron agreed to
buy "lit wavelength," or active fiber optic cable services, from Qwest over a 25-year period, and each
company exchanged checks for about $112 million around the close of the deal. The deal enabled
Enron to book a sale and avoid recording a loss on the dark fiber assets, whose value in the open
market had dropped far below the price on Enron's books. Enron had recorded a high value on its
dark fiber assets after selling some dark fiber to LJM2.
J. Hidden/Disguised Loans
44. Another tactic utilized by Enron to falsify its financial condition and hide the true
extent of its debt and liquidity involved transactions with certain of its banks – JP Morgan,
CitiGroup and CS First Boston. In the case of JP Morgan, these manipulations used an entity
controlled by JP Morgan, known as "Mahonia," which was located in the Channel Islands off
England. JP Morgan and Enron utilized a scheme which JP Morgan had originally utilized before
with a commodities trader from Sumitomo, by which large bank loans are disguised to be commodity
trades. In fact, offsetting trades were arranged with the ultimate cost differential being in favor of
the bank, representing the interest rate on the disguised loan. Enron, Mahonia and JP Morgan got
Vinson & Elkins to give a false legal opinion that these transactions were in fact legitimate
commodities trades. Thus, by utilizing this manipulative device, JP Morgan and Enron falsified
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