Round-Trip Transaction

Three meanings, the first a transaction that is illusory, where Company A sells something to Company B, but quietly returns the purchase price to Company B in a separate transaction – i.e., the money takes a ’round trip.’ Such a transaction is usually engaged in for cosmetic purposes, to flatter a company’s balance sheet. When engaged in by a public company a round-trip transaction if not properly disclosed violates Revenue Recognition Rules and may constitute securities fraud and in that context is also referred to as a ‘reciprocal transaction.’

A classic prosecuted example of a round trip transaction involved a software company called Veritas (now part of Symantec) and America Online. AOL wanted to buy Veritas software products, with some training and service for a proposed $30 million deal; however the transaction value was raised to $50 million deal after AOL proposed that it pay $20 million to Veritas, if in exchange Veritas bought $20 million of online advertising. Another class of Round-Trip transaction is the Dark Swap.

Yet another form of Round Trip transaction was/is known as ‘Bed & Breakfasting,’ and was engaged in most notoriously by Anglo-Irish Bank and Irish Nationwide Building Society (INBS), and involved large loans (totalling €87 million) to the Chairman and former CEO of Anglo-Irish Bank, Sean Fitzpatrick which were concealed during audits by being paid off with funds loaned by INBS (run by a friend of Fitzpatrick, Michael Fingleton), to be reinstated immediately after the audit. When both Anglo-Irish Bank and INBS collapsed, it cost the Irish state a gross €60bn plus and a net amount of circa €47bn – or 21% of GDP or 34% of GNI.

The second usage refers to all the costs associated with completing a transaction, including taxes, commissions and other expenses (an alternative expression is ’round turn transaction costs.’)

The third meaning refers to a type of abuse by securities traders and broker who earn commission on transactions for their clients.  This type of transaction is a quick sale and repurchase of the same securities for the client, so that the trader or broker earns a commission on the transaction, while the assets held by the client remain essentially unchanged.

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