OUSTON, May 19 — Enron and Global Crossing used a complex deal brokered by a third company to sidestep accounting rules in a March 2001 transaction that was designed to help Global Crossing disguise a loan and allow each company to book revenue, according to executives and traders involved in the transaction.
The people involved said the deal, a swap of fiber optic network capacity and services, was brokered by Reliant Resources, one of the nation's biggest traders of energy contracts, which had expanded into the network-capacity trading market. The transaction helped disguise what was essentially an exchange of long-term services and a $17 million loan to Global Crossing by Enron, the executives said.
The details shed light on the way Enron and Global Crossing operated in the formerly frenetic market for trading high-speed communications capacity — a market that until recently, federal investigators say, was fraught with so-called round-trip transactions conducted merely to inflate the reported revenue of the parties.
The executives say the deal, which was hatched in the fall of 2000 but not completed until March 2001, was emblematic of the techniques companies like Enron and Global Crossing used to impress Wall Street and help drive up their stock prices.
A little more than a year later, Enron, an energy company that recast itself as an avatar of the Internet boom, and Global Crossing, a fiber optic network operator whose stock for a time performed as fabulously as Enron's, are now both mired in Chapter 11 bankruptcy proceedings and are the targets of federal investigations into their business practices.
Investigators from the Securities and Exchange Commission and other federal agencies are trying to determine whether a rash of similar networking swaps in the past few years by Enron, Global Crossing and other companies were sham deals that misled investors by inflating reported revenues and earnings. People close to Global Crossing said this weekend that the S.E.C. was expanding its investigation into the company's network trading activities beyond the 15 or so capacity deals that were the original focus.
Though the March 2001 deal was relatively small for the two companies, former executives said it was one of several deals aimed at helping Enron and Global Crossing massage their earnings at the end of each quarter in 2000 and 2001. Enron booked about a $5 million profit from the deal, according to a former executive at the company. It is not yet clear how Global Crossing accounted for its part of the transaction.
A spokesman at Enron declined to comment on the March 2001 deal. Officials at Global Crossing acknowledge that a transaction with Enron took place in the first quarter of 2001, but a company spokeswoman declined to comment specifically on the deal. Reliant officials acknowledge the company completed a deal with Global Crossing but declined to discuss the details.
Reliant's role indicates the extent to which energy companies, whose natural-gas pipelines are often overlaid with fiber optic communications networks, began trading network-access rights — a market that eventually collapsed under a glut of fiber optic capacity. For its middleman role Reliant expected to receive the equivalent of about $300,000, according to former Enron and Reliant executives.
Enron's payment to Reliant took the form of dozens of network-access swaps, in which Enron agreed to take losses while Reliant was assured of profits, the executives said. Besides the payoff to Reliant, the goal for both companies, they said, was to bolster the market's trading volumes. At the time, four big energy companies — Aquila, Enron, El Paso and Reliant — were largely trading network rights among themselves at a lackluster pace. "It met both companies' needs: to spread it out over time and to book more trades," said one former Enron executive.
Last week, two high-level Reliant executives resigned after the company admitted to engaging in bogus trades in the electricity market in recent years to increase its revenues and overall trading volumes.
One former Enron executive said the swap with Global Crossing was part of a broad-based Enron effort to manage Wall Street's expectations. In recent years, he said, several Enron divisions had persuaded other companies to help manage cash flow and earnings with so-called structured finance deals as well as creative accounting practices.
"We pitched to them that we could manufacture earnings," the executive said, referring to the deal with Global Crossing. "We were selling them bullets; they could use them any way they wanted."
The March 2001 Enron-Global Crossing transaction evolved from a trade originally completed in 1998, when the two companies agreed to swap fiber optic circuits and services in what was a noncash transaction. In late 2000, however, Enron and Global Crossing planned to renegotiate the deal in order to help disguise a loan and help each side book a third-quarter profit. "It was a loan," said a former Enron executive. "We could have just simply loaned them money at 18 percent."
Under the deal, Enron would prepay Global Crossing about $17 million for long-term access to a fiber optic network. Global Crossing, in turn would purchase network services from Enron for about the same value but make monthly payments over about eight years.
"Global Crossing wanted cash Ebitda," said one former Enron executive who was briefed on the deal. Ebitda, a measure of cash flow, is an acronym for earnings before interest, taxes, depreciation and amortization. "Wall Street was looking for that at the time," he said.
In order for Enron and Global Crossing to book profits on the deal, the two companies would need to alter certain facets of the old contract but also make the swap appear to be two separate deals with an independent party and not a loan.
Initially, the companies asked the El Paso Corporation, an energy company that had entered the fiber trading market, to act as a broker in the deal and help them take advantage of an accounting loophole, executives involved in the deal said.
That meant Enron would sell to El Paso, which would then sell to Global Crossing and then Global Crossing would sell back other services to El Paso and then on to Enron.
"This kind of `sleaving' is done all the time," said one executive, who said the practice of brokering deals and then paying fees through a trading operation was widespread.
The three companies raced to complete the deal by the end of the third quarter of 2000, but the agreement broke down just days before the end of the quarter. The deal was revived near the end of the fourth quarter of 2000, but again broke down. By the time the deal was completed in March 2001, Reliant had replaced El Paso as the middleman.
Norma Dunn, a spokeswoman for El Paso, said: "Enron presented the deal. It didn't meet our business criteria. So we didn't do the deal."
When the deal was completed, Enron essentially sent a high-interest $17 million loan to Global Crossing through Reliant. That loan was not expected to appear on the Global Crossing balance sheet because it had been structured as part of a fiber optic transaction.
Enron then began engaging in scores of losing broadband trades with Reliant in order to pay that company for its middleman role, according to executives and traders at the two companies.
"We were told to buy a bag of goods and to sell a bag of goods," said one trader involved in the deal. "I'm sure the end result was earnings for Global Crossing. But we didn't think anything was wrong with it. It's earnings management, but I'll argue there's nothing wrong with people selling earnings management."
A former Enron executive said the goal of the deal was obvious: both companies were trying to show profit and revenue growth. "Everyone was over-reporting their numbers back then," the executive said. "We were on the Wall Street treadmill."
