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June 9, 2009

The thin line of business criminality

Kevin howard In this earlier post regarding former Enron Broadband CFO Kevin Howard's recent plea deal, I predicted that the factual basis for the plea deal would barely describe wrongdoing, much less criminality.

Turns out I was right. Check out paragraph 14 of the plea agreement at the bottom of page 6, which sets forth the factual basis of the deal.

That paragraph describes that Enron had told the market that its Broadband unit had great potential, but that it expected to lose at least $60 million for the year. Inasmuch as Enron's prediction was turning out to be correct, Howard helped arrange a joint venture transaction that monetized a portion of Broadband's lucrative deal with Blockbuster. Nothing unusual about that.

So, what's the problem, you ask? Essentially, the factual basis provides that Howard did not disclose to Enron's auditor (Arthur Andersen) that Enron's joint venture partner was not expecting to be a long-term partner in the joint venture, even though the partner verified by signing the joint venture agreement that it was not relying on any such expectation in connection with entering into the venture. Nevertheless, if Andersen had known that the partner was really not expecting to be in the venture for the long haul despite the terms of the written agreement, suggests the factual statement, then the auditor may not have allowed Enron to account for the deal in a way that reduced the Broadband unit's losses to the $60 million level that the company had projected and ultimately reported.

That's the basis for a crime?

Frankly, U.S. District Judge Vanessa Gilmore should have the same reaction to Howard's proposed plea deal that U.S. District Judge Lynn Hughes had to the equally vacuous deal that Enron Task Force prosecutors crammed down the throat of former Enron mid-level executive Chris Calger back in 2005. At least the DOJ ultimately threw in the towel on the stinky Calger plea deal.

Based on the foregoing, any business executive who engages in a transaction for the purpose of helping his company achieve earning projections is at risk of being indicted and convicted of a crime, and sentenced to a long prison sentence.

And by a long prison sentence, I don't mean the 4-12 months of home confinement to which Howard agreed in his deal.

Remember, the foregoing transaction is one for which Jeff Skilling is currently serving 24 years in prison.

We live in truly perilous times.

Posted by Tom at June 9, 2009 12:01 AM |


So creating paperwork on a long-term deal that is really a short-term commitment, and giving it to the auditors to allow for funny-money accounting, this is not a fraud?

Time for auditors to crank up the skepticism part of the brain.

Posted by: Rusty Author Profile Page at June 9, 2009 1:41 PM

But the only evidence of a short-term commitment is the testimony of the JV partner reps given under threat of indictment by the government. The written agreement says nothing about such a short-term commitment.

Moreover, during Howard's second trial, evidence was introduced that the JV partner's CEO explicitly stated in an email well into 2001 that the partner "had no plans to exit the JV." Likewise, the JV partner's own audited financials for 2000 (also done by Andersen) recorded the investment as a long term equity investment.

Finally, my sense is that the intentions of the JV partner were probably irrelevant to Enron's accounting treatment of the investment; only the intent of EBS would seem to be relevant, and EBS's intent was clearly long term.

So, the government ignored all of the foregoing and proceeded to prosecute (persecute?) Howard through the dubious testimony of a compromised JV partner rep.

Who is defrauding whom?

Posted by: Tom K. Author Profile Page at June 9, 2009 7:18 PM

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