If Joe Hirko Were CFO of Enron Corporation

When Portland General was acquired by Enron Corporation, Joe Hirko was CFO. As CFO, he had a reputation for being honest, scrupulous, and conservative. I wonder if Jeff Skilling had fired Fastow and put Hirko in the CFO chair at Enron Corporation, what would the trajectory look like? When I think of a few pivotal moments that could have changed things, none paint so dramatic a picture as this hypothetical.

Joe Hirko had the trust of Wall Street. When things started getting sketchy after 9/11 and commercial paper was hard to roll (for anyone), I think Hirko could have bolstered confidence. He was known for his good judgement where Fastow was known for his risk-taking. In that post-9/11 environment, the good judgement would have been invaluable. Paper would have rolled; the decline in stock price might have abated somewhat, and Hirko’s assurances would have gone far to soothe nervous counter-parties.

Joe Hirko would not have stolen money – ever, under any circumstances. There would have been no highly publicized firing of the CFO from the company, which would drive prices down even farther. Instead, Hirko would have provided consistent, steady leadership.

With Joe Hirko as CFO, the LJM and Raptors probably would have still existed. There was nothing wrong with them – legally or accounting-wise. But some of the transactions were risky. I am thinking specifically of Osprey – which would trigger the financial collapse. I don’t think Hirko would insure one asset with the price of Enron stock over the long term; that just doesn’t sound like his style. So when the stock price did decline, it would be felt as a pinch, not as a wall of bricks crumbling upon the company.

LJM would have been better managed.

Ben Glisan probably would never have acquired the Treasurer position. That might have kept him out of the Southampton deal.

Sherron Watkins may have never written that memo to Dr. Lay in August 2001. If she had, she would not have been moved from Global Finance to Human Resources to protect her from Andy Fastow. I’m not sure what impact her remaining in Global Finance might have had but I am sure there would have been some effect.

In Enron Broadband Services, Ken Rice would have been full CEO instead of sharing the role with Joe Hirko. I decline to speculate on what might have become of EBS with just Ken Rice at the helm.

In any case, the Enron story would have been completely different. Today, instead of a man condemned to prison for sixteen months, Mr. Hirko might very well be CEO of Enron Corporation. Implying, of course, Enron Corporation would still be here.

Skilling Tells Enron Jury He’s Innocent (April 10, 2006)

[I posted this on April 10, 2006. I'm feeling nostalgic, I suppose.]

Former Enron Corp. Chief Executive Jeffrey Skilling told jurors in his fraud and conspiracy trial Monday that he abruptly resigned from the energy trading company a few months before it collapsed because he was worn out and troubled by its falling share price — not because he knew disaster loomed.

“I am absolutely innocent,” Skilling said right after he swore to tell the truth while testifying in his own defense Monday.

Then he let jurors know what’s at stake for him:

“I guess in some ways my life is on the line, so I’m a little nervous.”

As he testified, he became more relaxed and conversational, with no hint of the swaggering bravado for which he was known when he ran what was once the nation’s seventh-largest company. Known for his plainspoken manner as he led Enron’s transformation from a staid pipeline company into an energy giant, Skilling addressed jurors directly, his eyebrows raised slightly, looking earnest and alert.

At times he appeared self-deprecating, even telling jurors that he was admitted to Harvard Business School “by some huge mistake.” [Note, he used that same joke at the 2000 Analyst Conference. He was referring to Rex Shelby at time.]

He repeated what he said twice before congressional panels in 2002, that Enron was “in very good condition in the middle of August when I left.”

His lawyer, Daniel Petrocelli, asked if he had any clue that Enron would flame out in scandal less than four months later.

“Not in my wildest dreams, no. It’s almost inconceivable now what happened,” the ex-CEO said.

“Would you have left if you thought the company was going to experience the events that later transpired?” Petrocelli asked.

“No,” Skilling replied matter-of-factly.

The 52-year-old ex-CEO’s testimony kicked off the 11th week of the federal trial. His co-defendant, Enron founder Kenneth Lay, aims to testify later this month.

Both are accused of repeatedly lying to investors and employees about Enron’s financial health when they allegedly knew fraudulent accounting propped up a facade of success. Enron careened into bankruptcy proceedings in December 2001, six weeks after announcing unprecedented losses and a massive equity writedown that generated intense scrutiny from once-adoring Wall Street and regulators.

The two men say there was no fraud at Enron other than that committed by former Chief Financial Officer Andrew Fastow and a few others, who skimmed millions from secret schemes, and that bad publicity coupled with lost market confidence sank the company.

In staccato fashion, Petrocelli asked Skilling if he ever destroyed documents or computers, set up offshore accounts to hide money, or did anything to hide past behavior or dealings. Each time, Skilling said, “No,” sometimes accentuating his answer by leaning forward.

“Did you leave town?” Petrocelli asked.

“I went to Fredericksburg,” Skilling replied, eliciting courtroom laughter at his referral to a small town a few hours’ drive away.

Skilling is charged with 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.

If convicted of all counts, Skilling faces a maximum of 275 years in prison and tens of millions of dollars in fines — though an actual prison term would likely exceed two decades. Lay faces a maximum of 45 years in prison if convicted of the six counts against him.

Jurors took copious notes and listened intently as Skilling spoke. His first wife, Susan Skilling, and their daughter and two sons, aged 22, 19 and 15 — watched his testimony, flanked by Skilling’s second wife, former Enron corporate secretary Rebecca Carter.

The ex-CEO described how Enron consumed his life and how, as it grew into a successful company, he decided to move on because he’d neglected his family and his “head wasn’t in it anymore.”

“I guess you could say I was obsessed with Enron,” he said. “Every day was intense, and I had not spent the time I should have spent with my family.”

But he also said he told Lay on “that fateful day, Friday, the 13th of July,” that he wanted to resign after 11 years with the company because he was bothered by Enron’s falling stock.

Skilling told investors on the day his resignation became public that he quit strictly for personal reasons. Several prosecution witnesses said they didn’t know the falling stock helped prompt his resignation until they read his comments about it in a newspaper.

Skilling said he thought Enron’s businesses were in good hands. He took a rafting trip with his youngest son, considered a teaching job, and founded a private investment company.

Yet his attention focused on Enron again when the company announced massive third-quarter losses and a $1.2 billion writedown of shareholder equity in mid-October 2001. A storm of media and regulatory scrutiny followed, particularly regarding partnerships Fastow created and ran to conduct deals with Enron.

Fastow testified that he used the partnerships to help Enron manufacture earnings by pretending to buy its poor assets and investments with Skilling’s knowledge.

Skilling said he didn’t believe there was a bad motive or intent attached to Fastow’s partnerships. He said he called Lay and offered to come back to help right the ship.

“I thought it would show support to the marketplace. Most people know I understand the business. By coming back, I would send a strong signal to the marketplace that I didn’t think anything was wrong,” Skilling said, contradicting his earlier statement that his credibility with Wall Street had waned.

Lay and other managers rejected his offer.

He said he tried to galvanize other ex-top executives to put up a combined $200 million to help reignite investor confidence in Enron, but aborted the effort when one of the chief would-be contributors — former Enron Vice Chairman Cliff Baxter — backed out.

“I was devastated because there’s nothing harder. This had been my life. I was very proud of what we had built, so it was devastating to be so powerless, to not be able to do anything,” he said.

He referred to congressional hearings into Enron’s collapse as “witch hunts,” and said he ignored advice from attorneys to invoke his Fifth Amendment right not to testify. His two defiant appearances set him apart from many other ex-executives who invoked that right, including Lay.

“Someone had to get out and start explaining what had happened before someone else stepped into this vacuum and explained it incorrectly,” he said.

But he clammed up when he learned from SEC investigators that he was a target in the Justice Department’s investigation. He was indicted in February 2004, and said he “never … not once” considered making a deal with prosecutors the way more than a dozen other Enron executives did.

“I will fight those charges until the day I die,” Skilling said.

Enron Primer: Hedging & The Origin of LJM1

[This is a re-post from 2004.]

In this section we’re going to clarify exactly what hedging is and how Enron used hedging in its financial strategy. But first, let’s clarify the very basic terms of securities.

Security positions are referred to as long, short, or flat.

* If you own stock are you are said to be in a “long” position. A long position is positive.
* If you owe stock, you are “short” the stock. A short position is negative.
* If you neither own nor owe the stock, you are said to be “flat”. A flat position is neutral.

A person or company can hedge a trade by taking a small position on the opposite end of the transaction. An example: an airline. You believe the airline industry is going to do well (*snort*, sorry, that cracks me up) so you go long on airline stocks. At the same time, you can go long on fuel stocks or commodities, because if the airlines do well you make money but at the same time, a factor that could cause a depreciation of the value of stock prices (rising fuel costs), could also cause an increase in the other stock (the fuel stocks). As long as you’re long on the fuel, you make money.

This is a rudimentary hedge position. The hedges can become much more complex when you add short stocks. One way to hedge is to use an option.

* Call options give their owners the right to buy stock at a set price.
* Put options give their owners the right to sell stock.

A call option can be bought as a form of insurance that can protect a short term position against a catastrophic loss or protect an already-established profit on a short position. On a short sale, there is, theoretically, no limit to how much an investor can lose: he has borrowed the stock to deliver against his short sale and some day must buy back shares to cover the transaction so that he can return the borrowed shares. There is no way in telling how much what price he will have to pay because, at least in theory, there is no telling how high a price will go. The short seller is facing a huge potential loss. He can protect himself with a call.

Enron had bought a small Portland internet company, Rhythms, for $10 million dollars. A year later it went public and shot past $400 million. With mark-to-market accounting, every one of those dollars would be counted as profit, even though, as standard with IPOs, the stock could not be sold by executives for at least six months. Jeffrey Skilling, CEO of Enron, wanted to find a way to protect these enormous gains with “hedges” – related investments that would go up in value (fuel stocks, so to speak) if Enron’s holdings went down (the airline stocks, so to speak.) If the stock collapsed while Enron was required to hold the shares, the incredible gains in the first quarter would be a huge, unexpected loss in the third.

Enron’s idea was to pay a third party to assume the risk that Rhythms’ price would fall. If Enron could find an investment firm to sell it a put option, then its profits would be locked in. Unfortunately, that was impossible. No investment bank would sell a put option on a volatile, new, thinly traded stock like Rhythms. And more worrisome, such a put option would violate Enron’s agreement with Rhythms.

Andrew Fastow, the CFO of Enron, thought and thought and thought about the problem. And then he solved it.

LJM (named by Fastow after his wife, Lea and his two sons, Jeffrey and Matthew) would act as an off-balance-sheet fund (in other words, completely separate from Enron; it would be a partner to Enron, not an asset of Enron). Enron would contribute its own stock (about $250 million) to some outside fund, which would then sell a put option on Rhythms stock to Enron.

That outside fund, of course, was LJM.

Joe Hirko’s Sentencing

Joe Hirko looked exhausted at his hearing this morning. Still good looking, of course, but tired, like he’d been up all night.

I felt like I was still asleep. I just kept thinking… it’s a dream. It isn’t happening.

But it was.

Sixteen months. For approving a press release.

Even now, it seems unreal.

It makes me question not just our justice system but the meta issue of the role of business in society. It seems that Joe Hirko was caught up in the mounting anti-business hysteria that was started, I am ashamed to say, by President Bush and has gained real traction under President Obama. Even if he was guilty – and he’s not, but let’s pretend he is guilty of telling lies in press releases, so what?

What impact could that possibly have in the world? Who the fuck cares?

This is not a crime. Raping a 13 year old child and running away to France is a crime. Giving tax advice to a sex-slave ring is a crime. Failing to pay your taxes is a crime. Dealing drugs and stealing things are crimes.

Lying in a press release is not a crime.

And Joe Hirko is not a criminal. Joe Hirko is the kind of guy you want on your team. He is honest and kind. He has created wealth and opportunity in America. I am thinking of Obama’s bullshit statement that he “created or saved 600,000 jobs” in the last ten minutes or whatever. I think: how many jobs has Joe Hirko created? How much good has he done?

For seven years, he’s not created any jobs because he’s been ensnared in this nightmare. And he won’t create any jobs for 16 more months. And he won’t be productive and he won’t be paying taxes and we all lose. We all lose when Joe Hirko goes to prison.

They’re taking a good man and making it impossible for him to do good. And bad people, bad-intentioned, bad-minded, small, stingy, outright evil, walk around unburdened by the DOJ.

It’s just wrong. And I’ve tried very hard to explain why it is wrong. I’ve angered some people (for that I am truly sorry). I’ve messed up once or twice. But I swear, I swear on everything I hold dear, I swear my intentions have only ever been to show that Joe Hirko and indeed most of Enron, was good. Good for society, good for business and just objectively good.

That’s all I meant to do.

If I have failed, I’ve failed myself more than anyone else.

I am incredibly sad that Mr. Hirko is going to prison. I’m sad that we live in a world where it is even possible.

Joe Hirko Gets 16 Months In Prison

Joe Hirko, CEO of Enron Broadband Services, was sentenced to sixteen months in prison.

I did not want to write this and I have nothing else to say about it right now. Later, when the grey dull sickness passes, maybe I will be angry and maybe I will be better able to articulate why this is such a terrible injustice. But for now, I’m just sick inside.

Today In Enron History

Today in 2006, Andy Fastow, the former CFO of Enron Corp., was sentenced to six years in prison. Fastow pleaded guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud, and forfeited $23.8 million in cash and property. The government dropped 96 other criminal charges in exchange for Fastow’s cooperation and he testified against Dr. Lay and Jeff Skilling.

Originally Mr. Fastow agreed to serve 10 years but in light of his “extraordinary cooperation”, prosecutors asked for, and received, six years.

The Enron Play

Credit where credit is due…. this actually looks pretty good.

There is something “Jeff-like” about that actor – at least in the first scene. The scene where he says, “They’re standing around celebrating their ignorance,” no, that’s not Jeff-like at all. He didn’t talk through gritted teeth like he was holding himself back by pure mandible strength, as this actor portrays. And he wasn’t greasy like this actor.

And what is up with that woman’s accent? Who is she supposed to be? Rebecca? No clue. But wow, they positively saturated here with a fake Texas accent.

Strange.

The Ken Lay dude is completely wrong. Completely. Ken Lay was warm and engaging and kind. This guy looks like a predatory advertising executive.

But overall… it does make me nostalgic.

Another Insider Trader The EFT Wasn’t Interested In Prosecuting

Oh lookie, this evening I found more confessions of insider trading. I guess if it’s not going to be prosecuted anymore, we can all do it, right?

I have written about David Reece before so I guess this is a follow-up. He met with the Task Force and FBI many times, as all prosecution witnesses did, but it seems to have never come up that he traded on inside information. Intriguing.

A. There’s a very simple explanation for this.

Q. Yes?

A. It is that the only participation we had, as I indicated, by a staff analyst in the documentation. I did not
participate, nor did any of our other people participate in preparation for the January conference.

Q. But Mr. Shelby addressed this e-mail to you, didn’t he?

A. He did so in error if he was trying to thank me for my contribution, because I made none.

Q. All right. Now, did you talk to the F.B.I. before testifying today?

A. Talked to them on numerous occasions, yes.

Q. How many times?

A. Oh, three or four perhaps.

Q. How many hours?

A. 10, 15, something like that.

Q. Does that include time that you spent with counsel from the task force?

A. No. It would be greater than that, I would say.

Q. How much time would it be altogether, the time you spent with counsel for the task force and the F.B.I. taken together?

A. I would imagine four or five days total, something like that. I don’t recall exactly.

Q. During any of those meetings, did you ever talk with the F.B.I. or the task force about the fact that you had had this purchase and sell of stock?

A. Yes, I did.

Q. During any of those conversations, did anyone from the F.B.I. or the task force ever suggest that there was a potential that you could be prosecuted for insider trading as a result of that?

A. No.

Q. Did it ever occur to you, in your own mind, that you could potentially be prosecuted for insider trading as a result of your sale?

A. Absolutely not.

Q. Never occurred to you at all?

A. No.

Q. So, it never occurred to you that if you were cooperative with the F.B.I. or the task force, that would help reduce the chance that you could be prosecuted?

A. You couldn’t be more wrong.

Q. I just asked if it ever occurred to you?

A. No, it did not.

It seems to me that everyone who was insider trading at Enron was not prosecuted for it and those who weren’t were prosecuted for it. Those who have admitted to insider trading or demonstrably were insider trading are:

Shawna Meyer
Bill Collins
John Bloomer
Ken Rice
Sherron Watkins
David Reece

I’m pretty sure this list is incomplete. So strange that the government just kept looking the other way on these admissions.

Ken & Linda Lay’s Condo For Sale

The Chron has the scoop — sort of. The article speculates about almost everything, from what the interior looks like to why Mrs. Lay is selling. And it has this weird sentence about Mrs. Lay:

She grieved when he died.

Ya think?

Enron The Movie

I’ve avoided discussing this because it annoys me. But Perez Hilton is even talking about it so I guess I need to at least mention it lest I appear to be oblivious.
Via Perez:

The sold-out show is doing so well that Sony Pictures has purchased the film rights from the playwright, Lucy Prebble, and is looking to make a movie out of the show. They are even commissioning the playwright to work on the screenplay about “most notorious scandal in modern corporate history.

Snooze! No thanks!

We’ll pass on that one. We already know how it ends.

Will U go see the flick?

See, that’s just it. You don’t know how it ends. You don’t even know how it began or what happened. I defy Perez Hilton to try and explain one aspect of the events at Enron. His choice – Raptors? Fastow? Broadband? NatWest Three? Southampton? Greyhawk? The September 16 stock sale?

People think they know.

They don’t know.

Cliff Stricklin: Whiny Little Bitch

As I peruse some of the official record of the Broadband Trial, I noticed an exchange which makes me want to karate chop Cliff Stricklin in the face. Here’s the setup: During a pre-trial conference, David Angeli, Hirko’s attorney, is speaking to the judge about an expert witness who can shed some light on the market in 2000.

The Court: So you are saying that what you need to be able to show is all the market factors and market conditions that might have had an impact on the stock price?

Angeli: That’s right –

The Court: What the attitude of the market was generally?

Angeli: That’s right.

The Court: Toward the technology, I mean?

Angeli: Exactly [expansion on his idea omitted.]

The Court: We’ve forgot all about that big dot-com bubble by now, haven’t we?

Angeli: That’s right. We are now in 2005. We need to get the jury back to 1999 and 2000. [Line omitted, not pertinent to discussion.]

The Court: That’s an important point. It seems like ancient history. That was the thing back then.

Mr. Stricklin: May I be heard, your honor? [A few lines omitted as they talk about getting copies of witness lists to Defendants.] On the issue of materiality, it seems the definition has just been broadened somewhat. But we need to show on materiality what what a reasonable person, in this case, a reasonable investor would do under the circumstances, and not… It is not what an analyst would do under the circumstances of the bubble in 1999 and 2000 would do, it is what a reasonable investor would do.

The Court: That’s what he said.

Mr. Stricklin: No, he made it more specific than that, which makes our burden harder.

First of all, he says in the previous paragraph the definition is “broadened” and here he says it’s narrowed. In other words, he doesn’t know what the hell he’s talking about.

Secondly, this feminized little fuck represents the United States Government. His burden should be very hard. This kind of statement just makes me want to scream — does he understand that it is not the job of the court or of the defense to make his life easier?

Boo hoo, Cliff Stricklin, the defense attorneys are actually making life hard for you. Both Cliff Stricklin and John Kroger come off as whiny little bitches who just think it is so unfair that opposing counsel actually argues with them.

Secondly, the average investor in 2000? Who would that be? Janus owned most of Enron’s stock with a 16% haul. So who else? Employees? Mutual funds. Portfolio managers from Citi, Goldman Sachs, Bear Stearns, Lehmans, etc. etc. There were very few country bumpkins standing at the NYSE with a crumpled twenty dollar bill asking, “Could I buy me a share of that there Enron stock?”

Fucking moron.

Enron Conpiracies: How Stupid People Like To Spend Their Time

I fucking hate Enron conspiracies. I don’t allow those Enron conspiracy nuts to post comments on my blog, I don’t answer their emails, and I ban them for life. In the entire time I’ve been blogging about Enron, I have avoided this topic because it annoys me so much. But today I have decided to bust the Enron conspiracy myths once and for all. This will be a very short because I just can not handle the lunatics this subject attracts.

1. Documents related to the Enron prosecution were located in World Trade Center 7.

You’re a fucking moron. Even the most cursory examination of the facts shows this is impossible.

A. Enron was in Houston. The Enron prosecutions took place in Houston, Texas and Portland, Oregon. Why would prosecutors send documents to New York? Is there a sudden shortage of storage space in Texas, the second largest state in the Union? You’re a fucking moron.

B. Enron collapsed AFTER 9/11. The building was GONE when Enron collapsed. On September 11, Andy Fastow hadn’t even been fired yet. Use a little critical thinking here.

C. There were no “prosecution papers.” What the fuck is a prosecution paper? A 302? An indictment? You have no fucking idea what you’re talking about.

2. Enron was working with the Taliban to build an oil pipeline in Afghanistan.

You’re a fucking moron. Enron was a natural gas intermediation company. Enron did not deal with oil. They were not in the business of building pipelines. They had no business in Afghanistan. Oh, and their primary originator at that time was a woman. I can imagine her walking up to a Taliban dude and saying, “Hi, we want to build a pipeline right through here, right through this POS little skidmark, and we want to pay you big money to watch over us while we do it.” They’d have raped her, then killed her, and we’d have heard about it on the news.

Did not happen.

3. This was forwarded to me: Or was it that Enron and the White House were working closely with the Taliban — including Osama bin Laden — up to weeks before the Sept. 11 attack? Was a deal in Afghanistan part of a desperate last-ditch “end run” to bail out Enron? Here’s a tip for Congressional investigators and federal prosecutors: Start by looking at the India deal. Closely.

You’re a fucking moron. If Bush and Cheney wanted to bail out Enron, all they had to do was write a check. They did not. Osama bin Laden? What the fuck? Are you just sitting around with a hat full of random words, pulling them out and trying to stream them together to create some semblance of a plot here? What is wrong with you?

4. Ken Lay is still alive.

You sicken me. You really do. What kind of heartless, cerebrally corrupted moron are you? Dr. Lay perished of a heart attack.

5. Enron was forced into bankruptcy by Grey Davis, and that is why Enron caused the West Coast Energy Crisis of 1999

You’re really TSTL. Events must happen in sequential order. 1. The energy crisis. 2. Grey Davis was replaced with Arnold S. 3. Enron collapsed.

If Enron is already collapsed, it is very unlikely that it “get revenge” on Grey Davis by causing the energy crisis from two years previous. Also: what? Grey Davis couldn’t even keep his governorship, how the hell did he force Enron into bankruptcy?

Okay that’s enough for me. I’ve reached my stupidity tolerance level for the evening.

LA Times: Enron Knew How To Throw A Party

A blogger at the LA Times had a funny way of describing an Emmy party:

HBO’s Emmy parties have become the stuff of legend over the years and last night’s over-the-top affair was no exception. It might as well have been an Enron party just before the fall.

A huge tent was set up at the Pacific Design Center and there were rows of elevated stages above several dance floors where gregarious bands played upbeat music. An enormous red-hued chandelier hung above the room and a large moon glowed just above. Hair and makeup suites were filled with sexy women in floor-length gowns and everywhere you looked there was someone to recognize.

Those were the days…

Remember the late 1990s? Remember when everyone had money and companies were producing things every day? Remember when you heard about IPOs every week, and stock options? And Enron….?

The Kevin Howard Case Explained

The original broadband trial involved five defendants: Joe Hirko, Rex Shelby, Scott Yeager, Michael Krautz, and Kevin Howard. The “Broadband Three” are Rex Shelby, Scott Yeager, and Joe Hirko. These guys were all involved in the technology of the company. The other two, Michael Krautz and Kevin Howard, were involved in financial allegations, specifically a transaction called Braveheart. (Maybe I should call them the “Broadband Two” but somehow that just doesn’t have the same ring to it.) It was an abomination that these two very distinct issues – finance and technology – were tried together; they had nothing in common other than the fact the defendants all worked in the same place.

Kevin Howard was CFO of Enron Broadband Services. His legal case is nauseating from all the ups and downs. His first trial, with the other Broadband defendants, ended in a hung jury. The United States decided to try Krautz and Howard again. According to the Fifth Superseding Indictment, Michael Krautz, an accountant, and Kevin Howard were charged with one count of conspiracy to commit wire fraud and falsify books and records (count one), three counts of wire fraud (counts 2-4) and one count of falsifying books and records (count five). The wire fraud allegations (counts 1-4) all included “honest services” wire fraud.

On May 31, 2005, Michael Krautz was acquitted of all charges, while Kevin Howard was convicted on all five counts alleged in the indictment. On August 1, 2006, the Fifth Circuit Court of Appeals decided USA v. Brown which clarified the meaning of Honest Services fraud. The Fifth Circuit interpreted Honest Services to exclude fraudulent conduct by corporate employees when that conduct is approved my managers and in furtherance of the goal of increasing earnings.

Relying on Brown, Howard filed a motion to vacate his convictions and won. However, the government contended that Brown did not undermine Howard’s conviction of Count Five for falsifying Enron’s books and records. The district court disagreed with the government and vacated Howard’s conviction on Count Five on January 31, 2007.

On February 27, 2007, the United States appealed that decision to the Fifth Circuit. The Fifth Circuit affirmed the district court’s decision to vacate the convictions.

The Government then found the Fifth Superseding Indictment, scratched out the lines about “honest services” and then called it the Sixth Superseding Indictment*.

Kevin Howard, having endured two trials, was exhausted and did not want to take his chances on a third jury. Thus on June 1, 2009, Kevin Howard pleaded guilty to one count of falsifying books and records (Count Five of the indictment). His plea deal, requiring a maximum of twelve months of home detention, is by far the best for any Enron defendants, though that is probably cold comfort for a man who hates dishonesty. Kevin Howard is scheduled to be sentenced on November 2, 2009.

*To show you just what kind of crazy people Kevin Howard and Michael Krautz were dealing with, the government insisted in this document on calling Krautz a co-conspirator. Under a Pinkerton theory, they argued, this man who had been acquitted of all charges could still be called a co-conspirator.

Honor Matters

In seven years of courts, crises and trials, the Broadband Three never turned on each other. The DOJ tried mightily to get them to finger each other as the bad guy. For instance, in Joe Hirko’s 302 Notes, the FBI memorialized him basically saying that it was all Scott Yeager’s fault. Hirko never said that, but that’s what the FBI wrote down. Hirko refused to go along with that and Yeager refused to be baited.

The FBI’s methodology of having the CEOs turn on the employees worked pretty well in the case of Ken Rice, but it failed everywhere else they tried it. Skilling wouldn’t play ball, and neither did Hirko.

Rex Shelby, Joe Hirko and Scott Yeager were not friends. They did not owe each other loyalty. And each was disillusioned when he left Enron. Rex Shelby did not like that EBS had gone core and he did not like the direction the company was going, so he left in November 2000. Joe Hirko left but came back under a consulting contract, which ended up costing him money (he was taxed twice on his payout – 50% each time.) Yeager was fired by Ken Rice and Kevin Hannon because he wasn’t out closing big deals – something that had never been in his job description. It might have been easy to simply look out for oneself in this circumstance, but none of the three men took that route.

Why not?

The reason they didn’t turn against each other is because each was individually passionately committed to the truth and had the integrity to stand by that. Rex Shelby, Scott Yeager, and Joe Hirko were imperfect executives – but they were not criminals. Each knew that about themselves and the other two. Whatever their faults, they were not and are not criminals.

The government has had eight tries to get their story straight. Eight indictments. The Broadband Three had one story, one defense. They’ve stuck to it because it is the simple truth.

Joe Hirko has accepted a plea deal and will be sentenced in one week. My heart breaks for him. Like Kevin Howard’s plea deal, it only hurts himself. Hirko is still honorable, still has integrity. It’s just a shame that the first and only lie he’s ever told about Enron will be told against himself, in a court room next Monday. He never lied about Rex Shelby or Scott Yeager, even when it would have benefited him. He’s only willing to lie about himself.

If that doesn’t move you to tears at the magnitude of this man’s strength, you’re already dead inside.