Two former Enron Corporation executives have been charged with fraud for using accounting tricks to generate $111-million in fake earnings from the bankrupt energy trader’s failed attempt to start an Internet movie-on-demand service.
Kevin Howard (40) and Michael Krautz (34) were still Enron employees when they surrendered to the FBI and were taken to the courthouse in handcuffs on Wednesday morning. They were later freed on $500 000 bond, and by the end of the day were ”no longer with the company,” Enron representative Karen Denne said.
She declined to say whether the pair quit or had been fired. Both men were charged with securities fraud, wire fraud, conspiracy and lying to the FBI. The Securities and Exchange Commission also charged them with falsifying records and quarterly reports for a transaction that was ”a sham from its inception.”
”The victims in the fraud are primarily investors who made investments in Enron Corp. relying on the financial statements of the company, which turned out to have a large volume of earnings that were achieved through fraud,” federal prosecutor John Kroger said on Wednesday.
Krautz and his attorney left the courthouse without comment. Howard stood by silently while his lawyer, Jim Lavine, said his client had done nothing wrong and would fight the charges ”with every breath that he’s got.”
The charges stem from an attempt by Enron and the video chain Blockbuster Inc. to set up the video-on-demand business using broadband technology in a transaction dubbed ”Braveheart.” At the time, Howard and Krautz worked for the now-defunct Enron Broadband Services unit.
Prosecutors say Enron secretly promised profits from the deal to outside investors. Those pledges were omitted from transaction documents and hidden from Enron’s accountant, Arthur Andersen LLP.
The deal was announced in April 2000 and fell apart 11 months later when Blockbuster pulled out. But prosecutors say Enron claimed $111-million in profits from the venture in 2000 and 2001 when no revenue was generated. The SEC complaint described a computerised skit presented at an Enron Broadband holiday party in December 2000 that joked about fraudulent aspects of the video business. The skit noted how TV boxes used to deliver movies to a customer had caught fire during tests and depicted Andersen as ”The Grinch” for trying to stop the
transaction.
The complaint said Broadband’s general counsel ordered all copies of the presentation destroyed ”because the powerpoint contained incriminating material.”
In a recent review, Enron bankruptcy examiner Neal Batson ridiculed the Blockbuster deal. He noted that it had been approved by Andersen, which was convicted of obstruction of justice last year for its Enron dealings.
”Andersen appraised the value of this contractual agreement at between $120 million and $150-million, even though the anticipated business did not have the technology to deliver its product or any rights to the product (movies) it proposed to deliver,” Batson wrote.
In a separate move on Wednesday, the Commodity Futures Trading Commission accused Enron and former vice president Hunter Shively of operating the Enron Online subsidiary as ”an illegal futures exchange” and cited several instances of attempts to manipulate the natural gas market.
Sen. Dianne Feinstein called the CFTC’s action ”too little, too late” after California’s energy crisis in 2000 and 2001. The CFTC complaint also says Enron tried to offer an illegal agricultural futures contract involving a lumber deal. It seeks unspecified penalties and a court order barring such activity in the future, though Enron halted trading operations more than a year ago. The company is still closing out existing trading contracts.
The criminal charges are the latest brought by the Justice Department in the 2001 collapse of Enron, the first of several corporate scandals that jolted the business world and rocked the stock market. – Sapa-AP