Almost three and a half years after Enron collapsed into bankruptcy, the first criminal trial involving exclusively former Enron executives will crank up in front of U.S. District Judge Vanessa Gilmore in Houston federal court on Monday. Here is the Mary Flood’s article from last week and from the Sunday edition of the Chronicle on the case, which is know in Enron legal circles as the “Enron Broadband case.”
Despite widespread public acceptance that the name “Enron” means “business corruption,” the Enron Task Force has not actually done much in court to prove that proposition. Of the 23 people on which the Task Force has obtained indictments so far in connection with the Enron scandal, six have pled guilty and five — but only one former Enron executive — have been convicted in the Nigerian Barge case. Moreover, in that trial, one of the two former Enron defendants (former Enron accountant, Sheila Kahanek) was acquitted. Accordingly, 11 of the 23 people who have been indicted in Enron-related cases still await trial.
The trial of the Enron Broadband case will take care of five of those remaining 11 defendants. Those five former Enron employees of the Enron Broadband Services (“EBS”) subsidiary face charges of making false and misleading public statements about the financial viability of EBS. Adding intrigue is that those charges are closely related to charges against Enron’s big three defendants — former chairman and CEO Ken Lay, former CEO and COO Jeff Skilling and former chief accountant, Richard Causey — that are pending and will go to trial in January, 2006. Thus, the outcome of the Broadband trial will likely set the stage for that big Enron trial and possibly for future Enron-related prosecutions.
EBS was a part of the Enron’s emergence from a large but unexciting gas pipeline company to a high-techn global trading market-maker. In acquiring EBS, Enron planned to build a high-speed network that could not only deliver telecommunications services, but also create a trading market for the network, much as the company had created big trading markets in natural gas and electricity. Thus, EBS helped give Enron the glow of a trendy Internet stock when investor interest was creating the bubble in such stocks during the late 1990s.
The latest indictment in the Broadband case alleges that the five former EBS executives from April 1999 through May 14, 2001 engaged in a scheme and made false and misleading statements that were designed to deceive investors and others about EBS’ technological capabilities, value, revenues and business performance. Essentially, the indictment contends that the EBS defendants had Enron issue false and misleading press releases to equity analysts and other investors, used fraudulent structured finance transactions to generate bogus revenue so EBS would appear to reach publicly announced financial targets, and failed to disclose materially adverse information about EBS’ poor business performance.
However, perhaps most troubling for three of the defendants — Joseph Hirko, Scott Yeager and Rex Shelby — is the government’s insider trading charges. Those three former EBS executives made a boatload of money on sales of Enron stock during the period in which the government contends that they made false and misleading statements regarding EBS. According to the indictment, Mr. Hirko sold stock valued at about $70 million, Mr. Yeager about $55 million and Shelby about $35 million, which are numbers that will perk up any jury. Messrs. Hirko, Yeager, and Shelby — along with former EBS executives Kevin Howard and Michael Krautz — face conspiracy to commit wire and securities fraud charges, while the indictment’s insider trading and money laundering charges are focused solely on Messrs. Hirko, Yeager and Shelby.
Other potential problems for the defendants are the plea bargains that two former EBS executives have struck with the Task Force prosecutors. Ken Rice, a former high-level Enron executive who was once EBS’ CEO, and Kevin Hannon, EBS’ former chief operating officer, were originally indicted in the Broadband case, but both entered into plea deals with the prosecution in which they agreed to testify during the upcoming trial. Under cooperation agreements with the government, Messrs. Rice and Hannon admit to some of the indictment’s allegations, including that Enron and EBS made false statements about the products, services and business performance of EBS. Mr. Rice pled guilty to one count of securities fraud and faces up to 10 years in prison and a $1 million fine, while Mr. Hannon pled guilty to one conspiracy to commit securities and wire fraud count and faces up to five years in prison and a $250,000 fine.
The prosecution’s theory of the case revolves around the allegation that Messrs. Hirko, Yeager and Shelby orchestrated false press releases in April 1999 when touting the Enron Intelligent Network, which was a software driven telecommunications network. Although other EBS employees allegedly told the three defendants that “the Enron network was not intelligent,” the prosecution contends that the three continued issuing misleading press releases and marketing materials promoting EBS. In particular, the indictment refers to early drafts of a PowerPoint presentation that disclose that EBS’ network control software was under development. According to the prosecution, later versions of that PowerPoint presentation that were actually used in analyst meetings in December 1999 and January 2000 did not include that key disclosure. After one supposedly misleading presentation that was “received favorably by analysts and investors,” the prosecution contends that Enron’s stock price spiked from $54 on the day of the presentation to more than $72 the following day.
Meanwhile, the charges against Messrs. Howard and Krautz relate to a April 2000 structured finance transaction known as Project Braveheart that was designed to allow EBS to monetize a 20-year agreement with Blockbuster Inc. EBS’ agreement with Blockbuster provided that Blockbuster would obtain digital rights to films that EBS would encode and stream over its network to customers’ homes. The government contends that Messrs. Howard and Krautz understood the accounting rules relating to such a structured finance transaction, but that they intentionally violated those rules and withheld key information from Enron’s auditors so that the Braveheart transaction could be booked and allow Enron to post about $110 million in revenue in 2000-01.
The trial will feature at least two prominent members of Houston’s fine criminal defense bar. Jack Zimmermann — one of many proteges’ of legendary Houston criminal defense lawyer, Richard “Racehorse” Haynes — will represent Mr. Howard, while Lee Hamel, an experienced defender of white collar criminal cases in the Houston area, will defend Mr. Yeager.
Jury selection begins on Monday when 100 prospective jurors will report to Judge Gilmore’s courtroom for voir dire. Judge Gilmore told lawyers at a pretrial hearing earlier in the month that she will bring in another group of about 90 potential jurors on Tuesday if the lawyers do not pick a jury from the first group. Each side says they will need about four weeks for trial, so I’m guessing that the case will go to the jury sometime in early to mid-June.

The Chronicle’s Mary Flood reports today on recent developments in the Enron-related Nigerian Barge case, in which four former Merrill Lynch executives and one former Enron executive are awaiting sentencing after being convicted last year of wire fraud and conspiracy charges in regard to a relatively small transaction in which Enron allegedly disguised a loan from Merrill as a sale of an interest in some barges off the coast of Nigeria. Two of the defendants are scheduled to be sentenced by U.S. District Judge Ewing Werlein this coming Thursday and the other three will be sentenced on May 12.
Ms. Flood and the Chronicle have gotten involved in the case by filing a motion to unseal pleadings after the Task Force and the defendants attempted to keep the Task Force’s recommendations relating to their sentences under seal (i.e., not available for public scrutiny). But one of the Merrill defendants — James Brown — earlier this week filed his objection to the Task Force’s sentencing recommendation in regard to him, and that pleading contains shocking information regarding the length of sentences that the Task Force is proposing. The Task Force Court is proposing sentences ranging from seven years for William Fuhs, the former low-level Merrill executive who had little control over the transaction, to an effective life sentence in prison for Dan Boyle, the former Enron executive who was in charge of closing the deal.
The basis of the Task Force’s draconian sentencing recommendations is the alleged loss to Enron resulting from the Nigerian Barge transaction. However, as noted in earlier posts here and in regard to the U.S. Chamber of Commerce amicus curie brief noted here, the Task Force’s position on the damages to Enron investors resulting from the relatively small barge deal is highly dubious and simply is not a credible basis for tossing business executives with no prior criminal record into prison for long periods of time.
Thus, even after the injustice of the sad case of Jamie Olis, the Justice Department continues its unfortunate policy of seeking maximum sentences against easy targets, such as relatively wealthy business executives. Given the utter lack of any perspective within the Justice Department regarding such matters, it’s going to take strong-willed judges to step in and impose sentences that relate fairly to the nature of the offenses. Let’s hope that Judge Werlein does just that on Thursday.