Enron's crash now is being tracked back to deceptive accounting and unbridled deal-making that were part of the company's culture for years. Had anyone paid more attention, they could have seen it foreshadowed in the demise of a lesser-known corner of its business, a water unit called Azurix. 

While federal investigators, bankruptcy lawyers and the public gape at years of stashed losses and the last-minute dash to shred documents, former Azurix executives call the tale of their company 'Act I' in the wreckage of Enron. 

According to these executives, the venture failed because of unrealistic expectations, hubris and deal-making that ran amok — characteristics they contend mirrored the way Enron was run in general. Analysts said they grew wary of Enron's finances after what they saw at Azurix. 

Enron started to publicly unravel in October, when Moody's Investors Service warned it might downgrade the company's debt rating after Enron announced its assets had declined in value by $1 billion. Of that, Azurix was devalued more than any other entity. 

Coupled with disclosures about a decline in shareholder equity, hidden debt and unreported losses, Enron's credit rating plunged in late November. That triggered billions of dollars in debt payments the company could not afford — including more than $900 million connected to Azurix — as its stock price plummeted and longtime business partners closed their doors to Enron. Within days, Enron filed for bankruptcy. 

Enron had a lofty goal when it launched Azurix in 1998: to take on the world's biggest water companies, French giants Suez Lyonnaise des Eaux SA and Vivendi SA's Generale des Eaux. The intent was to transform the $300 billion global water industry in roughly the same way it revolutionized natural gas markets, by riding a wave of deregulation that would allow the company to squeeze inefficiencies out of utilities formerly managed by governments. 

But things didn't work out as planned. Water industry deregulation moved at a crawl. Efforts to commoditize water failed. And profits did not grow at Enron-like speed. 

Former Azurix executives say there was a cockiness to the venture that brought it down, and that the same problems ultimately did in other Enron subsidiaries, most notably the high-speed Internet and energy services units. 

"The incentive was to make deals happen, not make deals work," J. Paul Oxer, a former vice president of international development at Azurix, said in an interview. "We kept flitting from thing to thing to find the next big deal, instead of focusing on operating the company." 

Former Azurix executives said what compounded the problem were grandiose profit predictions from the company's chief executive, Rebecca Mark-Jusbasche, who said Azurix had the potential to double the industry's average of a 10 percent return on capital. Such bold statements may have convinced Enron executives to back large capital investments, but Azurix insiders said these projections were nearly impossible to live up to and led to disappointment on Wall Street. 

"Fundamentally, these businesses didn't have the capacity to earn these stellar returns," said Chris Wasden, a former managing director at Azurix. 

Enron wasn't generally interested in deals that earned less than 15 percent on its investment and Mark-Jusbasche pushed her employees to come up with ways to meet these targets. 

"She was consumed with competing with (Jeffrey) Skillling," said Debra Coy, a water analyst at Charles Schwab & Co., referring to Mark-Jusbasche's biggest rival inside Enron. Skilling, who is credited with creating Enron's once-prized energy trading operation, was chief operating officer at the time. 

Mark-Jusbache, a leader within Enron's international operations before taking the helm at Azurix, lost out to Skilling in a battle to succeed Kenneth Lay as Enron's top executive. 

Coy believes the simmering bitterness between the two Harvard Business School graduates may have manifested itself in Mark-Jusbasche's overly ambitious outlook on Azurix and Skilling's willingness to allow this unproven company to go public and partly distance itself from Enron. 

Mark-Jusbasche did not return phone calls seeking comment, a lawyer for Skilling said he would not comment and the current chief financial officer at Azurix declined to discuss decisions made by previous senior managers. 

Perhaps the single greatest blunder by Azurix, according to interviews with a half-dozen former executives there, was the $439 million purchase of a 30-year contract to run the water and wastewater systems in Buenos Aires, Argentina. 

Aside from Enron's $2.2 billion purchase of Britain's Wessex Water PLC — which was the cornerstone of Azurix — the Buenos Aires deal was by far the water company's biggest. This major acquisition, roughly one month before the initial public offering of Azurix in June 1999, helped the nascent company portray itself as a deal-maker on the rise. 

But several former Azurix executives, who spoke on condition of anonymity, said the company overpaid. It bid at least $120 million more than Azurix's own analysts said the concession was worth just so the company could point to a recent success ahead of the IPO, people familiar with the process said. The shares debuted at $19, but roughly one year later they were trading below $4. 

Another misstep at Azurix was the attempt to create an online marketplace to trade water. The complexity of laws surrounding the transport of water and the lack of infrastructure to move this heavy liquid from one region to another made the venture, called Water2Water.com, untenable. 

Azurix rapidly burned through the $654 million raised during its IPO and had to raise an additional $600 million from Wall Street in February 2000 by selling junk bonds. 

With Enron's top brass frustrated by the lackluster performance at Azurix, Mark-Jusbasche resigned in August (one year before Skilling resigned as Enron's CEO). In December, Enron bought back the one-third of Azurix shares that were publicly held, thereby taking the company private for about $330 million. 

Former Azurix executives said its downfall was not unlike the failure of Enron's energy services and high-speed Internet units, which also proved to be victims of their own hype. 

One key difference with Azurix was that, as a separate publicly-traded company, its problems couldn't be hidden within Enron's byzantine accounting. A practice known as mark-to-market accounting allowed Enron to book estimated future profits from long-term energy contracts immediately. With massive gains recorded this way, other struggling parts of the business were less obvious to investors. 

"Things wilt faster in exceedingly bright daylight," said Oxer, the former Azurix vice president. "That's why a little sunshine on those partnerships earlier on would have been a wonderful thing." 

Enron kept billions of dollars in debt off its balance sheet through partnerships whose dealings did not have to be disclosed in financial statements. 

When Moody's downgraded Enron's debt rating to junk status on Nov. 28, Enron was obliged to immediately pay $915 million owed by Marlin Water Trust, a partnership Enron established to finance Azurix. One week later, Enron made the largest bankruptcy filing in U.S. history.