Article: Broadband Strategy Got Enron in Trouble
Bid to Create Market for Fiber-Optic Space Included Aggressive Accounting
By Peter Behr
Washington Post Staff Writer
Tuesday, January 1, 2002; Page E01
Enron Corp. was already a formidable company in January 2000, after a decade-long transformation from a stodgy gas-pipeline company into the nation's largest energy trader.
Then it spoke the B-word -- broadband. Chairman Kenneth L. Lay and chief executive Jeffrey K. Skilling told stock market analysts that month that Enron was about to create a market for trading space on the high-speed fiber-optic networks that form the backbone for Internet traffic.
Asking few questions, investors sped to buy the stock, as they did with most things Internet-related at the time. Enron shares shot up from $40 in January more than $70 in less than two months and went as high as $90 that summer.
The stock price gains helped created a windfall for Enron executives and directors, who sold $924 million of company stock in 2000 and 2001. Kenneth D. Rice, who ran Enron Broadband Services, sold more than 1 million Enron shares for a total of $70 million in 2000 and the first half of 2001, according to regulatory and court filings. He left the company in August.
Enron's broadband foray collapsed this year. A business that Skilling had said would eventually add $40 billion to Enron's stock value produced just $16 million in revenue in this year's second quarter, before it was closed down.
Enron's recent financial disclosures show that its claims of success in broadband last year included large gains from trades with private partnerships it had set up itself. And using aggressive accounting practices, it assigned exaggerated values to the broadband contracts it traded with others in the industry, greatly inflating its actual revenue and profit, Enron insiders and analysts now say.
"From a common-sense standpoint, we knew it was smoke and mirrors," said Rudy Sutherland Jr., a former Enron broadband trader.
"The [profit] margins were whatever they decided," said a former Enron vice president familiar with the broadband trading, who spoke on the condition of anonymity. In many instances "they were trading with themselves," he said.
As prices for fiber-optic circuits plummeted last year, Enron tried and failed to lure telecommunications giants that used broadband -- such as MCI WorldCom Inc. and Verizon Communications Inc. -- to trade with it and create a true market.
Carol Coale, an analyst at Prudential Securities who heard Enron's repeated claims that its trading operations were growing rapidly, said: "These guys were great spin doctors. They had the answers. The answers were lies."
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