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2 Enron officials charged in $111 million broadband fraud
The two allegedly created $111 million in bogus earnings from a ballyhooed video-on-demand venture failed from the very start.
Federal authorities arrested and charged two Enron Corp executives on Wednesday with fraud for allegedly creating $111 million in bogus earnings from a ballyhooed Internet video-on-demand venture that was a failure from its inception.
Separately, the Commodities Futures Trading Commission charged Enron and a former employee for allegedly trying to manipulate prices for natural gas. It also charged the Houston company with operating an illegal commodity exchange.
The US Justice Department accused Kevin Howard, the former chief financial officer of Enron Broadband Services Inc, and Michael Krautz, the unit's former senior director of accounting, of fraudulently helping Enron record earnings in 2000 and 2001 from a deal with Blockbuster Inc to provide video-on-demand.
The two men worked at the company until this week, although an Enron spokeswoman declined to say in what capacity. Howard and Krautz were charged with securities and wire fraud, conspiracy and making false statements to federal authorities, for which they face up to 25 years in prison if convicted.
"It's basically an accounting fraud scheme that produced earnings of over $110 million," Enron task force prosecutor John Kroger said.
The criminal complaint says the two executives spoke to investigators on the condition their statements could not be used against them. But prosecutors said the deal was broken when the men allegedly lied to them.
The Securities and Exchange Commission also filed civil charges against the two men, seeking disgorgement of ill-gotten gains and to bar them from holding office at a publicly traded company.
Enron spokeswoman Karen Denne said the men were no longer employed at Enron. They had been working there as of Tuesday morning.
Bogus earnings
Howard and Krautz appeared before US Magistrate Judge Marcia Crone in Houston and were released on $500,000 bond each. Neither Krautz nor his lawyer commented on the charges.
"Kevin is innocent of the charges, he is going to fight these with every breath that he has," Howard attorney Jim Lavine said after the hearing. "All the work he did at Enron was focused on Enron and had Enron's best interest at heart."
Enron and Blockbuster signed a 20-year deal in April 2000 to stream video films to customers' homes by December of that year. The deal, coupled with Enron's wild projections about broadband's future profitability, pumped the stock price up sharply. But the catch was that Enron was having a hard time making the reality match the hype.
The solution Howard, Krautz and other unidentified employees allegedly designed was a joint venture called "Project Braveheart" that created projected future earnings from the Blockbuster deal that could be booked immediately.
Following a now-familiar Enron pattern, the men allegedly created a partnership with 3 percent owned by outside parties that Enron secretly controlled. The arrangement allowed Enron to keep its liabilities to the partnership off its books while recording earnings from the deal.
The complaint alleges that Howard and Krautz knew that admitting the true nature of the deal would "blow the accounting treatment," and thus conspired to hide it from its accountants, Andersen.
They then sold a portion of Braveheart and its future revenues to an shell company created and funded by the Canadian Imperial Bank of Commerce. In what the bankers called a "trust-me" type of transaction, Enron orally promised the bank it would not lose money on the deal, the complaint says.
No revenue received
This arrangement allowed Enron to record $53 million in revenue in the fourth quarter of 2000 and $58 million in the first quarter of 2001, the Justice Department said. But Enron never received any revenue from the deal and the contract was terminated on March 9, 2001.
Hinting at what may come next in the investigation, the complaint says the chief operating officer at EBS ordered Howard to increase the size of the Braveheart deal from its initial $20 million so it could help EBS make its earnings targets. It did not say who that was at the time.
The CFTC, which oversees US futures markets, leveled a series of charges against the now-bankrupt energy company and Hunter Shively, a former Enron desk manager, for attempting to manipulate futures markets.
The CFTC said Enron's giant EnronOnline trading platform on July 19, 2001, bought "an extraordinarily large amount" of natural gas from the Henry Hub spot market, which affected the correlating futures contract prices on the New York Mercantile Exchange.
The CFTC also accused Enron of operating EnronOnline as "an illegal futures exchange" because it traded commodity futures contract swaps, which required CFTC registration, and because it allowed a US financial lumber swap.
The CFTC said it will seek permanent injunctions against the parties, and a fine of $120,000 per violation.
(Additional reporting by Jeremy Pelofsky and Chris Baltimore)
