Enron accounting and 'a shot of crack cocaine'

Within weeks of dazzling Wall Street by lying about the capabilities of its new broadband network, Enron faced a daunting task in living up to the hype, the former head of the defunct broadband unit testified on Wednesday.

Kenneth Rice, in his third full day testifying for the prosecution, said pressure escalated further when Enron stock jumped to $72 from $54 within a day of a January 2000 analyst conference. At that conference, Rice, former Enron CEO Jeffrey Skilling and three of the five former broadband executives on trial for fraud described the network as having capabilities that competitors lacked.

Rice also testified that he called an alleged scheme to use accounting tricks to fake earnings for the money-losing broadband venture “a shot of crack cocaine” that he approved only because the unit couldn’t otherwise meet expectations.

At a videotaped February 2005 employee meeting, Joseph Hirko, one of the five defendants who then ran the broadband unit with Rice, touted a much ballyhooed software as the “magic dust” that would control Enron’s broadband network and provide services competitors couldn’t match.

“He talks about the software in the present tense,” testified Rice, who pleaded guilty to securities fraud in July last year.

“We did not have that software.”

Hirko and two former Enron vice presidents focused on software and strategy—Rex Shelby and Scott Yeager—are charged with fraud, conspiracy, insider trading and money laundering. They are accused of lying about the network to get rich from selling hype-inflated stock.

The other two defendants, former unit finance chief Kevin Howard and in-house accountant Michael Krautz, are accused of conspiracy and fraud for allegedly manufacturing earnings for the unit to minimise losses.

The indictment alleges Howard and Krautz took a 20-year video-on-demand deal Enron struck with Blockbuster in April 2000 and “monetised” it, or sold future estimated earnings so Enron could book profits in the fourth quarter of 2000. Rice testified the monetisation deal, called Project Braveheart, was critical to ensure the broadband unit posted losses no higher than the $60-million Skilling told analysts to expect.

Enron nixed the Blockbuster deal before the first quarter of 2001 ended. But Rice said Howard told him and Kevin Hannon, the broadband unit’s former chief operating officer, Enron could book more earnings from Braveheart through a couple of first-quarter transactions.

After Rice and Hannon approved Howard’s proposal, Rice said Hannon asked him what he thought of it.

“I called it one more shot of crack cocaine,” Rice testified, noting he disliked relying on such deals to meet earnings targets, but he felt he had no choice.

Under brief cross-examination by Hirko lawyer Barnes Ellis late on Wednesday, Rice acknowledged Hirko was “passionately enthusiastic” about the broadband unit in its early days. That questioning was to continue on Thursday.

Rice pleaded guilty to securities fraud in July last year and is cooperating with prosecutors. Hannon pleaded guilty to conspiracy a month later, is also cooperating, and is expected to testify later in the trial, which began last week.

Skilling is not on trial. In a separate, more wide-ranging case set to go to court in January, he is accused, among other things, of knowingly making similar false claims about the network to analysts in 2000 and 2001. - Sapa-AP

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