Almost ignored amidst the media’s unprecedented focus on the Lay-Skilling trial, the first re-trial in the Enron Broadband case will go to the jury today after the prosecution and defense attorneys complete their closing arguments, which are expected to last most of the day. The trial is taking place in the courtroom of U.S. District Judge Vanessa Gilmore in Houston’s federal courthouse just down the hall from where the Lay-Skilling jurors resume deliberations this morning.
As noted earlier, the defendants in this first re-trial are Kevin Howard, the former Enron Broadband (“EBS”) CFO, and Michael Krautz, the former EBS senior accounting director, who are being tried together on four counts alleging that they conspired to commit wire fraud and falsify books and records in connection with a sale of video-on-demand profits. The charges 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 Howard and Krautz understood the accounting rules relating to the 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. Howard and Krautz assert that the sale was an entirely legal and creative structured finance transaction that allowed EBS to generate earnings in an industry that was undergoing a deep shakeout amidst intense competition and fast-changing technology.
As noted earlier here, the Enron Broadband case is a part of a troubling trend in the post-Enron era in which individuals involved in legitimate structured finance transactions are targeted for indictment and prosecution, resulting in yet another disincentive for those individuals and their companies to engage in innovative risk-taking that generates wealth and jobs.