Enron’s Lies vs Everybody Else’s Lies

Enron was accused of lying many times, but perhaps most vividly about its capabilities at Enron Broadband Services. Joe Hirko was accused of lying in a press release about Enron’s acquisition of WarpSpeed. A press release which was demonstrably factual and accurate and which was incidentally seen by perhaps five journalists in the entire world. Rex Shelby, Ken Rice, Kevin Hannon, Scott Yeager, and others were accused of lying at the 2000 Analyst Conference about the capabilities of the Broadband Operating System and EIN. None of their so-called lies were actually proved to be lies — and certainly not by the standard of the super-hyped tech sector of the late 1990s and early 2000s.

So when I came across this Apple report from 2004, I was goggle-eyed. Steve Jobs said at an analyst conference that there was no video iPod in the works.

Mr. Jobs addressed the issue of video on iPods when asked by Mike Wendland of the Detroit Free Press whether or not Apple was looking to add features to the iPod. “We want it to make toast,” replied Mr. Jobs. “We’re toying with refrigeration, too.” While intended to get a laugh, which it did, Mr. Jobs also offered a more substantive answer as to why Apple had heretofore not added too many features to the iPod. “One of the things we say around Apple, and I paraphrase Bill Clinton from the 1992 presidential race, is ‘It’s about the music, stupid.’” Mr. Jobs says that there is a big difference between the way people listen to music and other activities like watching videos. Specifically, he said, you can listen to music in the background, while movies require that you actually watch them. “You can’t watch a video and drive a car,” he said. “We’re focused on music.”

A year later, the video iPod debuted, complete with videos and movies available to buy on iTunes.

I don’t understand why Apple – indeed why many companies – are held to such a radically different standard than Enron.

2000 Analyst Conference Back Online

After a short delay, the 2000 Analyst Conference is back online. (Some of the tapes are still uploading so if it doesn’t work right away, try again in a few minutes). I will also have transcripts up in the next day or so.
[Update: I'm having internet connectivity problems; some of these videos are only seconds long when they should be hours. It will just take some time to get them up as I fight with my internet connection.]

EBS Part 1

EBS Part 2

EBS Part 2, Retail Part 1

EBS Edited Tape 4

EBS Clips

Rex Shelby

John Bloomer

Shawna Meyer Part One

Shawna Meyer, Part Two

An Interesting Sequence In The 2000 Analyst Conference

Ironically, Rex Shelby was not planning on attending the 2000 analyst conference, but did so in order to host Jonathan Schwartz and Scott McNealy of Sun. Shelby met them outside, escorted them into the conference room, and sat with them in the back of the room. During the Q&A, Jonathan Schwartz, who would become CEO of Sun, was asked a question. He answered part of it and then handed the microphone to Rex for a more complete answer.

I hadn’t noticed these shots of Ken Lay in the frames before. It sort of made me sad.

Jonathan Schwartz hands off the microphone to Rex Shelby:

Ken Lay walks in front of camera:

Rex Shelby, Schwartz and Ken Lay:

Rex Shelby answering with Ken Lay in the frame:

Rex and Jonathan Schwartz laughing over some nerd joke:

2000 Analyst Conference

EBS Part 1

EBS Part 2

EBS Part 2, Retail Part 1

EBS Edited Tape 4

EBS Clips

Rex Shelby

John Bloomer

Shawna Meyer Part One

Shawna Meyer, Part Two

The 2000 Analyst Conference – The Raw Video

I’ve done it! I’ve found a way to chop up all the 2000 Analyst Conference video into 5 minute increments – the allotted time that YouTube will allow. So I’m going to start the rather Herculean task of posting five minute bits of the 2000 Analyst conference on my blog via YouTube. I am excited about this because no matter how much I talk about the conference, it won’t be as immediate as actually viewing it yourselves. It’s going to be a very long project. A year or more. I have all the video, meaning the retail, the broadband, and everything in between. So it’s a long project, but I think it’s worth it to get the video in the open so you can see for yourselves that nothing nefarious happened at that conference.

Furthermore, this means I can also add the Shawna Meyer, John Bloomer, and other videos that have been burning a hole in my hard drive.

But first, the 2000 Conference! Tonight I will have the first segment up and ready. Watch this space.

Update
Nevermind. YouTube doesn’t like the format so it’s going to be a while before I can post it. How annoying!

Ken Rice Testimony Speaks Volumes About EBS

I’m still all over Project Braveheart and while perusing the record, I found an intriguing commentary by Michael Krautz’s attorney, Barry Pollack, about Ken Rice’s testimony vis a vis Braveheart. This was said outside the presence of a jury; they were arguing over jury instructions.

I have three points to bring up about this.

The first is Pollack’s statement that there were no investors in EBS. That’s actually brilliant; I hadn’t looked at it like that before but it’s true. You couldn’t buy EBS stock on the NYSE. I’ll have to noodle that a bit more.

The second is that Ken Rice vindicated Michael Krautz and Kevin Howard totally when he said that EBS didn’t need Project Braveheart to make its earnings. If the jury was going to believe him when he said he lied, and they were going to believe him when he testified about Joe Hirko, and later, Jeff Skilling and wholesale reserve counts and third quarter 2001 earnings, etc., then logically it follows that had to believe him on this point too. And if they believe him on that point, you acquiesce that Project Braveheart wasn’t a fraud at all because there was no reason to commit fraud. And if that’s possible, you have to ask yourself about the Nigerian Barge deal, and the other accusations of massive fraud.

Actually, it is probably best you don’t think of those things, because when you remember what happened to the men involved in those deals, it will break your heart.

Ken Rice also said the valuation for EBS was from 2008 onward. Intriguing since Jeff Skilling said the exact same thing. At the analyst conference, Jeff mentions 2008 sixteen times in his introduction to EBS. He also says, directly:

But the cash flow model assumes 2008 revenues of $11 billion to $12 billion.

So Ken said the 2000-2001 valuation of EBS was “whether or not they had credibility on the technology”. That would make any financial tricks irrelevant, superfluous and short-sighted in the near term.

The Street undoubtedly believed that EBS had the technology cred to pull this off. Another way to think of it is like this: Jeff Skilling told the analysts at the conference that it would take seven years to get where they wanted to be. And the analysts loved it. They didn’t care that it took that long. The only way they would have that confidence is if they believed that Enron had the resources to sustain the baby start-up in the basement for that long, if it had the right people and the right partners. Undoubtedly, they did believe that.

It boggles the mind to think that there was financial shenanigans going on in EBS. They were a start up. Nobody expected them to make money.

Iron Man and Enron

As I was watching Glee the other night (I am both a Gleek and a geek!), a trailer for the upcoming Iron Man 2 movie was shown. It stars Robert Downey, Jr. — yummy! The movie trailer was sponsored by Oracle/Sun Microsystems. For the other geeks out there, you know that Sun was recently acquired by Oracle. After the Iron Man 2 trailer, the Oracle/Sun logos stamped onto the screen, and the words “Applications — Middleware — Database” appeared in layers next to the words “Software — Hardware” which also appeared in layers!

Interesting, Cara, but what does this have to do with Enron, you ask. Well, for those of you who have been following my Enron Broadband posts, you know that this screams EBS! It was the appearance of Scott McNealy, then CEO of Sun, during EBS’ presentation at the January 2000 Enron Analyst Conference that made a huge impression on the financial analysts in attendance. Everybody I have ever talked to who attended that conference tells me that it was the endorsement of Sun that most impacted the analysts’ confidence in EBS’ direction. In spite of the ridiculous government indictments which tried to paint an innocuous Broadband presentation as lies, it really was nothing EBS presenters said about technology that influenced the analysts. It was what McNealy said that left the analysts with a positive impression of the potential of EBS.

But there is something even more exciting about the Sun/Oracle television commercial. Those words which appeared in layers can be seen in identical fashion in lots of EBS materials from the period of the conference. And notice the word “Middleware”! There are a number of varieties of middleware, but basically it is the software which sits between apps and infrastructure and which, hidden to us end users, makes app creation easier and faster for developers. Middleware has been around forever, but now it has finally made it to television!

So what’s your point, Cara, you ask! Well, the last man standing in the inane EBS indictments is Rex Shelby. Shelby was the head of a software company called Modulus, a pioneering middleware company. Modulus helped establish some of the industry standards in middleware, working closely with Sun’s Java efforts. Sun even licensed the Modulus middleware and rolled it into numerous Sun products, including it’s Solaris operating system. Sun then rolled the middleware onto Linux platforms and even Windows computers. So the Modulus technology is now spread all over the world, even though nobody knows this.

And Shelby, and the brilliant Modulus engineers, came to EBS via the acquisition of Modulus by Enron. The Modulus middleware became a component of EBS’ Broadband Operating System (BOS), a component that essentially would have provided a doorway to the BOS where ever it resides. And it now resides on computers and servers and networks all over the world! So, this software which the government prosecutors claimed didn’t exist is now all over the place. There is something downright poetic about this!

Hmm, I wonder if Rex Shelby is secretly Iron Man!

Ken Rice at the 2000 Analyst Conference

According to this document in the Official Record of the Broadband Trial, Ken Rice had fifteen meetings with the FBI:

It is not difficult to see how during the course of fifteen meetings with various federal agents, one can start to “get one’s mind right”. That is, start to agree with the FBI – sort of Stockholm Syndrome for the accused. One of the things I am absolutely certain of is that there were no lies uttered at the 2000 Analyst Conference (or anywhere else) but during the course of those interviews, FBI agents counted forty-five things that were material statements of fact over two hours. Of those statements, four or five could be construed as false or misleading or ‘over-representing’. Of course those were standard puffery. I doubt that you could find any successful company that didn’t do similar puffery at their analyst conference. Incidentally, courts have found that puffery does not constitute fraud.

It was a crazy day for all the executives at the Conference. Scott McNealy tried to bail at the last minute because he was sick. Skilling and Joe Hirko convinced him to come. He said he would speak for only a couple minutes and it turned out to be quite awhile.

The Enron executives had to rearrange the whole schedule to fit him, and the government claimed that they had re-arranged the schedule for the market impact.

That’s the thing about the prosecution… they don’t have to get their witnesses to lie. They convict with a version of the truth. By distorting and twisting the context and by inflaming the jury pool you can get a jury to believe almost anything is criminal.

Was it even puffery, what Ken Rice said? I don’t know. I’ve watched the tapes and read the transcripts until my eyes bleed, but I am unable to find any statement at all – from Rice or anyone else – that was demonstrably untrue.

January 20 2000 Stock Prices By Hour

The Book

This is “the book”, the final version of the hand-out that went to analysts at the 2000 conference. [PDF]

Bill Collins’ Regret

I’ve described Bill Collins before, and indeed even described this letter. This is part of a letter that Bill Collins sent to Ken Rice. Collins had sold stock right before the analyst conference, and when he saw how the stock had increased, he had second thoughts. So he thought he’d just jot a note to Rice and Rice would happily write a check for $18 million. It didn’t happen that way. I’ve cut out the first four pages of this letter because it’s a bunch of EBS political stuff, and centered on the request for $18 million because it is one of the very few funny things that happened because of the 2000 Analyst Conference.

UPDATE
Updated to add Kristina Mordaunt’s reply to this letter to Ken Rice. I’ve blotted out Collins’ personal information.

The Shelby Videos

As best I can tell from the vague indictment, Rex Shelby was pulled into the EBS case because of two brief videos about EBS technology which he pre-recorded before the analyst conference. One of the videos was shown at the conference, and one was not shown.

Ken Rice testified that both were shown, and Canales did a great gotcha and proved that no, only one had been shown.

This caused great consternation among both the defense and prosecution. Tom Kirkendall gave a pretty good blow-by-blow of the event. But I think even Kirkendall’s great coverage missed two important points:

1. Shelby wanted both videos shown at the conference.
2. Shelby himself mistakenly told the SEC that both videos had been played.

In fact, it was Jeff Skilling’s team who alerted the EBS defense that the second video was not played at the conference. So to the Shelby team, it didn’t really matter if both or one or neither were played.

So when Ken Rice testified that both had been played, it was great legal theatre but it was ultimately insignificant.

What was in those videos?

Not much.

From reading the trial transcript, it was never made really clear exactly what the government thinks was wrong with the videos. In fact, the prosecutor hardly asked Rex Shelby any questions at all about the videos.

So why, exactly, was he indicted, and why is he still fighting for his freedom ten years later?

Rex Shelby’s Decade

Ten years ago today, Enron presented the 2000 Analyst Conference. Rex Shelby is still being pursued for charges related to that conference. He has been through one trial which resulted in acquittals and hung counts, a trip to the Supreme Court, countless trips to the 5th Circuit, every one of his co-defendants have pleaded guilty or been acquitted, and as of today, his plight is not yet over.

Frankly, even if he’s guilty (and he is not guilty at all) at this point, what does it matter? After ten years, do the witnesses remember everything perfectly clearly? After ten years, are all the documents in perfect condition? Are all the exhibits present and accounted for, none having mysteriously vanished between the date of the conference and today? How well do you keep track of your records over the course of ten years. Oh, and there are sixty million records related to his case.

Objectively, what does it matter? If he sold on insider information, he’s spent far more on legal fees than he would have illegally earned on bad stock deals. If he lied, the technology no longer exists so nobody can be misled about it. Every analyst who covered the event has moved on. Stockholders have been compensated many times over – on average over 100% what was originally in their 401(k) plans.

Of course, Shelby neither sold stock on insider information, nor lied. After a decade, it seems the DOJ would get that through their thick skulls.

Enron is nine years dead. This conference happened a decade ago. Nobody involved with the event could possibly care a whit about it.

That ephemeral concept of justice is not served by pursuing Enron defendants, especially not Rex Shelby. Especially not ten years later.

2000 Analyst Conference: The Conspiracy Nobody Planned

During Jeff Skilling’s trial preparation, there was some conflict between prosecutors and the defense which had something to do with the Skilling team wanting more details about exactly which statements the Feds were alleging were false.

Apparently the Feds eventually stipulated before the judge that they would not be presenting evidence about EBS technology ever in Skilling’s trial, and would be focused on 2001 rather than 1999 and 2000 as it pertained to EBS. This effectively relieved the Skilling team from the burden of having to prepare a technology defense. In essence, the Feds told Skilling’s team that they did not want to get into the technology battle again after the EBS trial.

This was remarkable to the EBS defendants. The conspiracy count against the EBS defendants was all about the 2000 Analyst Conference. Ken Rice, the only government witness to testify about the conference at the EBS trial, stated that Skilling was the “mastermind” behind the EBS presentation at the conference. So here was the government re-indicting EBS defendants on conspiracy charges and alleged false statements for the 2000 conference while they simultaneously agreed not to go after the “mastermind” behind the conference.

Why? If Skilling was guilty of something, why not pursue him?

Actually, Rice was telling the truth. Skilling was the mastermind behind the 2000 Analyst Conference EBS presentation. No one disputed that at trial. However, the problem for the Feds, of course, is that no lies were told at the conference. By not going after Skilling for this at his own trial, the Feds essentially admitted they knew there were no lies at the 2000 conference.

Now, please explain how the DOJ could prosecute the Broadband defendants and not go after the “mastermind” behind the central event in their indictment!

Introduction To The 2000 Analyst Conference

Was there any more event in the history of Enron that spawned so much heart ache? So many of the counts that would be held against the executives of Enron – include Corporate and Broadband – would later be tied up with this event.

At the time, it was a mundane event, except for the fact that Enron had secretly planned to present Scott McNealy, CEO of Sun, at the conference.

Ken Rice was sick.

Rex Shelby didn’t want to make a video for the event; he suggested a co-worker do it, and somehow he got stuck with it.

Scott Yeager was involved in a tiny bit of the planning, but he did not appear at the conference, save for two brief appearances that lasted less than a minute each: once, when Jeff Skilling introduced him and told him to stand up, and once at the very end when he helped answer a question.

The analysts, frankly, did not care what Yeager or Shelby or Rice or Skilling said. They cared what Scott McNealy said.

The stock rose magnificently and several of the executives sold stock. One hapless idiot sold before the conference, and when he saw what happened, he sent Ken Rice a letter politely asking for $18 million, which is what he might have earned had he held on to the stock until the day after. Ken Rice laughed his head off. I will describe that in more detail in a separate post.

In any event, the conference was a success. Enron and Enron Broadband Services successfully conveyed to the analysts what EBS was up to with its nascent technology group. The analysts loved it – the bandwidth trading and movies on demand sounded awesome. It was truly very edgy technology and the world seemed ready for it. Enron was ready to delivery.

Things went south.