Enron Defendants and Double Jeopardy

Sheesh, what a lousy article!

First, the article is written as if the SEC’s accusations against Enron Broadband defendant, Kevin Howard, are factual. But Kevin did not agree that any of the accusations were true in his settlement with the SEC. This is a classic SEC agreement in which the defendant agrees to remain silent on the accusations, but certainly does not agree with them. The SEC seldom goes to trial — it simply extorts what money it can from a defendant and then moves on to the next victim, like a blood-sucking mosquito.

Second, Kevin Howard had already been cleared of exactly the same charges by the DOJ in his criminal case after two trials and the threat of a third one. The plea deal Kevin eventually agreed to in the criminal case was a bookkeeping irregularity unrelated to the accusations the author mentions in her article.

All the primary Enron defendants faced exactly the same charges from both the DOJ and the SEC. This is clearly double jeopardy as the definition was actually intended. The DOJ and the SEC are clearly part of the same organization — the federal government — they even bragged about working together on the Enron prosecutions. The fact that one brings a criminal indictment and the other brings a civil complaint does not cure the abuse of the intent of the double jeopardy protections when the accuser is the same entity. Just about every thinking attorney admits that this is a double jeopardy situation, but nobody is able to stand up to the Feds to get it corrected.

Look, the U.S. Federal Government should be considered one party. The DOJ and the SEC routinely share information on cases and work together. Indeed, the two agencies routinely use the multiple exposures of the defendant as leverage in plea deal negotiations — this is precisely what they did to Kevin Howard and other Enron defendants. The fact that prosecutors get multiple conviction attempts against a defendant is particularly unsavory given the massive advantage in resources which the government wields.

I wish we could get some journalists to cover that injustice instead of quoting SEC talking points!

How The DOJ Got Luitgard Fischer

One of the most sympathetic prosecution witnesses is Luitgard Fischer, a German citizen who was a finance director in EBS. John Kroger had his sites on her, but before he could make his move and indict, she got spooked with the threat of deportation and came forward. Kroger discusses this in his autobiography:

There is just so much evil packed into these paragraphs, it is difficult to believe that he had the audacity to publish it. I’m curious why the ETF was not interested in prosecuting low-level executives/employees. Surely if they were guilty, they should go to prison, right? But it isn’t true anyway. Look at Lea Fastow, William Fuhs, Chris Calger, Sheila Kahanek, and Michael Krautz. None of them were hugely powerful inside Enron (or Merrill Lynch, respectively.)

Furthermore, I find it amusing in an ironic way that Kroger would be shocked that people who might be under his microscope would do some research of their own. He calls it “creepy.” I wonder if he thought it was creepy when FBI agents took photographs of Joe Hirko’s house without a search warrant. Does he think it is creepy at all to publish a book in which he says he chose to come aboard the Enron Task Force because he was craving power after his girlfriend left him for another man. In fact, he even says that he was stalking her toward the end of their relationship; was that creepy at all? I think Luitgard’s googling of the “Professor” (hahahah) is completely and totally rational.

Luitgard Fischer testified that Project Braveheart – the project with Blockbuster – was fraudulent because Enron guaranteed a partner, nCube, a profit with no risk.Had such a promise been offered, it would have violated accounting rules (incidentally, it would have been a duplicate of the Nigerian Barge Deal – but with video on demand instead of electricity barges.)

“This transaction was based on accounting rules that I feel we violated,” said Fischer. She blamed Michael Krautz and her boss, Kevin Howard, for issuing promises to nCube. The jury disagreed; Michael Krautz was acquitted and Kevin Howard went to trial two times. Finally he accepted a plea deal to make it go away.

It was certainly not quite the slam dunk that Kroger had hoped.

What Does The Future Hold For Upcoming Enron Trials?

As James A. Brown prepares for his second trial on September 20 under an indictment which fails to state an offense, I have to wonder about the sanity of our government. For instance, I wonder how much taxpayer money has been spent prosecuting this man, and jailing him for a year on a perjury charge which stemmed from his testimony about a phone call he was not even a party to. How many millions? Is it more millions than seven? Because if it is, I think we can call this even.

Money doesn’t matter to the government because they have infinite resources. The defendants like Jim Brown and Rex Shelby, who have been litigating since 2004, are mere mortals; they can’t afford to spend money forever on their defenses. Of course the agents of our government know this; it is part of their strategy. It is a significant form of leverage in forcing defendants to accept plea bargains.

I also wonder at a system which ignores corruption, punishes honesty, and would cast innocent men aside in a mad stampede for the glories of history and a cushy private sector job. The fresh Brady documents that were kept from James Brown prove beyond any measure that the government KNEW that the Nigerian Barge transaction was legitimate, that all the people involved believed it was legitimate and acted ethically, and that the government deliberately and with great malice kept exculpatory evidence from James Brown. If the defense had access to this material this before trial it would have changed the entire defense—and the government certainly knew it. It is the only reason they could have possibly had to withhold it.

So why wasn’t Judge Werlein outraged? The prosecutors were lying to him! But he, like Judge Gilmore and Judge Lake, seemed to have a soft-focus lens when it came to the prosecutors. They could get away with more, their objections were more often sustained, they would allow the prosecution to immunize their own witnesses but not the witnesses of the defense, and their jury instructions were used more often than the defense’s.

If it wasn’t quite enough to have the prosecutors and judge in the tank for the prosecutors, all Enron defendants had to handle the onslaught of negative media attention. When was Daniel Bayly’s sterling reputation ever mentioned? When did anyone talk about the fact that James Brown had a reputation as a straight-shooter and nobody who knew him would believe that he had acted in bad faith? Sean Berkowitz and Bethany McLean’s romance was heating up in the Skilling / Lay trial, the media would later fawn over the new lovers’ amusing story of how they met. But who talked about the wives of the Merrill Lynch executives, or the Enron executives, who cried and struggled and tried to hold it together as their husbands desperately tried to save themselves? Who cared about the children of these men, the families and friends who loved them? They became fodder for a ruthless news cycle which cared more about sensationalizing the story than actually reportage.

In these circumstances, it is hard to believe any of the defendants came out okay. And yet they did. And some, like Kevin Howard, Rex Shelby and James Brown not only survived, they endured – or will endure – a second trial.

I hope it is different this time. We are all five years older now. A child born on the day the Broadband verdicts were rendered will enter Kindergarten this September: a lot can – and has – changed.

To most people, the word “Enron” is ancient history. It died ten bloody years ago. The passion for a witch hunt has somewhat abated – at least for these particular witches. I predict jury fatigue. I can imagine sitting as a juror on Brown’s case and wondering why in the world I should care about a $7 million deal that was done eleven years ago, and not really seeing where the big controversy is. Even if he was guilty (and he is NOT), I can’t imagine thinking that eleven years later, we should punish him.

And the Broadband Trial is going to be a snooze-a-thon. Rex Shelby was a technology guy. For most people, his testimony will be as interesting as listening to someone read aloud engineering specifications for a washing machine – except more boring because we can all visualize washing machines; it’s much harder to visualize a “concept” like the EIN. (I, however, am going to laugh and laugh and laugh as I watch the prosecutors try to monkey through the EBS technology.) So if I were a juror on that case, I’d constantly be wondering what time is lunch. Or pass the judge a note to ask the defendant to remove his shirt. Just to liven things up.

In addition to a bored jury listening to testimony that is completely irrelevant in 2010, I predict the media has been so shamed in its coverage that will be a little more benign. One former defendant tells me the story of meeting a Houston Chronicle journalist while he was out and about, and she greeted him with a hug. As if she’d never said those horrible things about him!

The Enron Task Force has failed to deliver in its lavish promises of “massive fraud” at Enron. There was no fraud. These men are innocent. They were years ago, and they are today. I worry that the prosecutors play dirty, but I pray that everyone is a little less tolerant of their shenanigans. Is it too much to hope for in America?

The Broadband Verdict

Five years ago today, the jury delivered its verdict on the initial Enron Broadband trial: some acquittals, some hung counts, and *zero* convictions. This was a disastrous outcome for the government’s Enron Task Force which had charged five defendants (Kevin Howard, Michael Krautz, Joe Hirko, Scott Yeager, and Rex Shelby) with nearly 200 counts among them. The trial lasted more than three months and took place during the height of the press and public anti-Enron witch hunt frenzy. The Houston jury pool was strongly biased against anything or anybody associated with Enron. The Enron Task Force was confident of an easy victory and assumed that the expected convictions would build momentum for the upcoming trial of Ken Lay and Jeff Skilling. The Task Force used every dirty trick in the book, all the same abuses which they also used in the Lay/Skilling case. The judge at the trial heavily favored the government in all pre-trial and trial rulings.

So, with all those massive advantages, why did the Enron Task Force lose the trial?

Pundits have given various explanations. One popular theory is that the “mistakes” of the Enron Task Force prosecutors cost them the trial. Perhaps the most mentioned mistake is when the prosecutors coached one of their witnesses into saying a video was played at the January 2000 Enron Analyst Conference which, in fact, was not shown there. Such a mistake undoubtedly did not help the prosecutors, but I just don’t buy the mistake theory as an explanation for the trial’s outcome. Sure, mistakes at trial always hurt the people who make them. But, from my reading, both sides made mistakes during the trial in about equal measure. And the video mistake occurred so early in the long three-month trial that there was plenty of time for the prosecutors to recover if they had actually had a case.

Based on my reading of the trial transcript and exhibits, the reason the Enron Task Force got zero convictions at the Enron Broadband trial is because it had no case, pure and simple. It is genuinely impossible to decipher a coherent story from the prosecutors’ meanderings during the trial. The tales of the prosecution witnesses were vague and often unrelated to the charges. And the prosecution witnesses performed horribly on cross-examination by the defense attorneys because they could not keep their lies straight. Basically, the government and its witnesses zig-zaged on their story more often than a squirrel crossing a busy highway.

In contrast, the defense witnesses were generally much more compelling and consistent. From my reading, the best witnesses were the defense team’s technology guys, the engineers who had worked with Rex Shelby at Enron Broadband. Those guys gave awesome testimony which made logical sense and which held across both direct and cross examination. In addition, each of the five defendants also took the witness stand in his own defense and did a good job. In other words, the defendants beat the prosecutors because the prosecutors had no case and were unable to manufacture one during trial which would convince even an initially biased jury. It is pretty much as simple as that.

In any case except an Enron one, the prosecutors would have dismissed the hung counts after the trial. Instead, the government continued to hound all the defendants. The government forced Howard and Krautz through a second trial and then threatened Howard with a third trial! The government is currently threatening Shelby with a second trial in spite of the fact that his co-defendant, Scott Yeager, just won a Supreme Court appeal on the very grounds that Shelby also has for dismissal of his remaining counts!

I get the sense (and I hope this is true) that people are finally starting to look at the Enron cases without the blinders of witch hunt bias. Most of the Enron cases have been shameful exercises in federal government abuse and over-reach. The Enron Broadband case has been a particularly shameful and sickening medicine show by the prosecutors, especially the Enron Task Force. For anyone out there who has not been paying attention to the government’s Enron fiasco, now is a good time to start!

Project Braveheart Primer

Purpose of Project Braveheart

Project Braveheart was a joint venture between Enron Broadband Services and Blockbuster. The goal was to use Blockbuster’s vast entertainment library to run over the Enron network – in other words, video on demand.

The Project Braveheart Players

Kevin Howard, CFO of Enron Broadband Services, and a young accountant named Michael Krautz were indicted for a mix of crimes along with the EBS technology defendants, Rex Shelby, Joe Hirko, and Scott Yeager, Ken Rice and Kevin Hannon. Kevin Howard and Michael Krautz were the only two indicted for crimes involving Braveheart.

The Alleged Criminality of Project Braveheart

Anyone familiar with the corporate prosecutions at Enron will recognize the allegation here: prosecutors allege that Project Braveheart was a conspiracy to manipulate accounting rules so that earnings targets could be met.

The allegations of wrong-doing center on an attempt to monetize future earnings from EBS’s deal with Blockbuster. EBS created partnerships with a Portland vendor, nCube. nCube and Enron created a project called Thunderbird, which was partially funded with Enron-controlled investment, Whitewing. Each of these entities contributed the required 3% of outside equity to the partnership, the minimum to count it as a separate entity for accounting purposes.

They sold the venture to another investment partnership called Hawaii 125-0, which EBS had created with the Canadian Imperial Bank of Commerce and then booked the $111 million as revenue.

Prosecutors allege that the sale was phony because the outside equity was not adequate and it was not a “true sale,” evoking a shade of the Nigerian Barges with their “what is a sale” questions and the allegation that EBS only partnered with nCube for the purpose of meeting its earnings target for the year 2000. Prosecutors also used that old chestnut, the “secret side deal” that made Andy Fastow in Corporate so famous. According to Kevin Howard’s plea agreement, through discussions with Howard and others at EBS, nCube understood that it would not suffer financially in any way from participating in Project Braveheart and that EBS was going to arrange for the company to be bought out of the joint venture by a third party the next quarter.

It must be noted that Kevin Howard’s plea agreement is garbage. He did nothing wrong at all; he eventually accepted a plea agreement, like so many others, because he was tired of the emotional cost to himself and his family. There is nobody at EBS who believes that Kevin Howard was a liar or in fact dishonest in any way. I only use the plea agreement to point out the prosecution’s allegations, not the facts in evidence.

What Does The Indictment Say?

Vis a vis Braveheart:

Defendants HOWARD, KRAUTZ and others also intentionally deceived Arthur Andersen accountants working on the transaction by failing to disclose, among other things, that the Braveheart transaction deliberately had been structured in a way that violated applicable accounting requirements. As HOWARD and KRAUTZ knew, had all of the facts about the transaction been disclosed, Enron would not have been able to report any of the $111 million as revenue.

Impact of the Braveheart Transaction

28. In the fourth quarter of 2000, $53 million of EBS’s reported $63 million in revenue came from Braveheart, while in the first quarter of 2001, $58 million of EBS’s $85 million in reported revenue was from the transaction. On January 22, 2001, Enron’s Chief Operating Officer announced to equity analysts on a conference call that EBS had met its $60 million loss target. Absent the fraudulent Braveheart revenues, EBS would have missed its publicly stated target for the year 2000 by more than $50 million. Similarly, in the first quarter of 2001, EBS would have missed its quarterly target but for the revenues from the fraudulent Braveheart transaction. Enron reported the revenues from the Braveheart transaction on its publicly filed SEC form 10-K for 2000 and SEC form 10-Q for the first quarter of 2001.

29. The January 25, 2001 Analyst Conference 29. Between approximately October 2000 and January 22, 2001, defendants RICE and HANNON were repeatedly informed that: EBS was performing very poorly; EBS had made little commercial progress during 2000; EBS’s network operations should be shut down or sold; and EBS had an unsupportable cost structure. This information was provided by senior executives, independent business consultants, and in weekly management summaries setting forth EBS’s projected losses. On January 22, 2001, RICE and HANNON were informed that every business unit at EBS was losing money and that EBS currently estimated that it would lose more than $149 million in the first quarter of 2001.

30. In December 2000, defendants RICE and HANNON also became aware that Blockbuster was threatening to terminate the EBS-Blockbuster VOD agreement because, among other things, EBS had failed to meet its contractual commitment to sign distribution agreements with each regional Bell operating company by December 2000. In order to prevent termination, which would threaten the Braveheart transaction, EBS negotiated an extension with Blockbuster in which both parties agreed not to terminate the agreement before March 2001. The agreement was subsequently terminated in March 2001.

31. In January 2000, defendants RICE and HANNON held a series of meetings to plan the EBS presentation for Enron’s upcoming annual equity analyst conference, scheduled for January 25, 2001. During these meetings, RICE and HANNON, among other things, reviewed estimates of EBS’s value. During one meeting, RICE and HANNON reviewed a model showing the value of EBS’s content distribution business as $8 billion, a sharp decline from the $18 billion estimate presented at the 2000 analyst conference. After RICE stated that he would not allow EBS to present a number lower than the prior year, the number was inflated to $21 billion.

32. On January 25, 2001, defendants RICE and HANNON made a presentation about EBS at Enron’s annual equity analyst conference. In the EBS presentation, RICE stated, among other things, that EBS’s strategy was right on target; EBS’s content delivery business had an outstanding year; Blockbuster was EBS’s “anchor tenant” with a 20-year deal; EBS had a commercially viable and scalable broadband delivery platform; the BOS network control software was up and running and controlling Enron’s network; EBS was ahead of where it expected to be in January 2000; and EBS, which Enron claimed was worth an estimated $30 billion in January 2000, was now, after deducting costs, worth $36 billion, with $21 billion of that figure derived from content services. These statements and others were false and misleading. RICE and HANNON did not disclose that EBS was performing worse than expected, that every business unit at EBS but one was losing more money than expected, that EBS did not have a cost effective or scalable broadband delivery platform, that the BOS network control software was still under development, that the Blockbuster deal was in danger of cancellation and had been extended only through March 2001, or that, even though EBS had yet to receive any recurring revenue from the Blockbuster deal, it already had sold the majority of the future revenue from the Blockbuster contract through the Braveheart transaction. RICE also stated that EBS would lose $65 million in 2001, even though he had been provided three days earlier with EBS’s own internal estimate of far greater losses.

Sorting Out The Financials

The indictment mentions a 2001 conference, but I’d like to look at an excerpt from the transcript of the 2000 conference. This is from the end of the regular presentation and before the BOS presentation.

Jeff Skilling says EBS will burn three million dollars and the metrics have nothing to do with movies at all.
But the cash flow model assumes 2008 revenues of $11 billion to $12 billion

Note that this is eight years in the future – clearly a long term business plan.

There is a burn rate associated with this business. It’s similar to the burn rate that we had in the retail business. Discount that back and that’s about a $3 billion deduct from us, so….

Skilling is saying clearly that the retail business took years to develop and Enron lost a lot of money getting it going. He is comparing EBS to the Retail business, so this is another example of it taking time and money to get to EBS to become a money making business. The government kept saying the business never made money like that is a crime. It was stated it would not make money for a while and it would take time and money. Skilling said the burn rate is 3 billion– not just the $60 million loss in 2000 that is predicted but $3 billion. This is a lot of money and the market was told this in the financial section of the presentation. How can the entire false earning allegation of the Blockbuster/Braveheart part of the case matter at all?

As stated previously, Enron Broadband Services was a tiny technology start-up inside a vast intermediation company. Practically speaking, EBS did not matter to Enron’s bottom line. Enron wasn’t biting its nails praying that tiny little EBS would turn a profit or meet its goal of burning $60 million.

I think the government picking this out is like looking at a graph of a stock that goes up over a very long period of time, but inside that period of time you have day to day fluctuations. The government is saying that this loss is somehow akin to Broadband being worthless. It doesn’t compute.

Furthermore, don’t take my word for it. Take Ken Rice’s! On the stand, Rice said something to the effect that whatever happened with Braveheart was utterly insignificant to Enron and Enron’s financials. It was below the level of notice in the overall scheme of things.

Michael Krautz testified that it was not a catastrophe if the targets were not met:

Michael Krautz: EBS’s earnings targets were — were significant from the standpoint of letting the people at corporate know how they were doing in accordance to the Enron overall target and specifically letting them know if they needed to adjust targets with different divisions to meet the overall earnings targets, so, to keep corporate abreast of how it was going.

Barry Pollack: What was your experience throughout your time at Enron about what would happen, if anything, if a subsidiary didn’t meet that subsidiary’s earnings targets?

Michael Krautz: It was — I’d say it happened several times. And there was a reallocation procedure, which I believe was called “Overview,” where corporate would find out from the different divisions how different divisions were performing, compare that to the overall target, and, if one subsidiary wasn’t meeting its target, they would adjust the allocations of subsidiaries that were doing better so that the overall corporate number could be met.

So, no big whoop. Furthermore, in a sidebar with Judge Gilmore, Pollack points out that Andy Fastow pressured Krautz to change his accounting to better suit Enron Corporation and Krautz was principled enough to refuse:

THE COURT: When did this transaction start? [The Judge is referring to another transaction, not Braveheart.]

MR. POLLACK: This is the transaction June 30th, 2000, during the middle of the conspiracy. It is a transaction the Government has said was the sole reason that EBS made its earnings targets for the second quarter. What is significant about Mr. Krautz’ testimony is that Mr. Fastow asked him to change his view of the accounting to allow this transaction to go through and specifically told him that if he didn’t agree to do so EBS would not make its earnings targets and Mr. Krautz refused to change his view of the accounting.

Two Good Reasons The Allegation Makes No Sense

1. nCube was owned by Larry Ellison, the CEO of Oracle. There has never been a whisper of controversy about Ellison’s ethical makeup. For him to involve himself in a scheme to assist a tiny Enron subsidiary to make its earning targets is to strain credibility.

2. There was no reason to lie to make earnings targets. As Michael Krautz and others testified, it was not a big deal to miss earnings targets. And Krautz had no reason to lie at all – he had no stock. He made a tiny bonus compared to other people (a five figure bonus, not seven!) He literally could not benefit in any way by lying to Arthur Andersen, Enron Corporation, or Enron stakeholders.

Conclusion

Project Braveheart was one of many good ideas to come from Enron. Imagine today what it would have been like in 2000 to have movies on your computer, on your phone. EBS was trying to make it happen, and it is a shame that the company collapsed before they could succeed.

Enron Milestones of 2009

We are within Frisbee distance of 2010. As I look backward at 2009, I feel a great deal of satisfaction that some progress has been made, but mostly a great weariness that the Enron prosecutions continue.

At the very top of the list, Scott Yeager won at the Supreme Court and was later completely exonerated by the Fifth Circuit.

Ken Rice completed his prison sentence and rejoined the world. Michael Kopper also finished his sentence. (Fun fact: Ken Rice and Michael Kopper were roommates at the halfway house.)
Kevin Hannon finished his sentence.

The Supreme Court has decided to hear Jeff Skilling’s case.

The NatWest Three are now out of prison and back at home in England.

In the minus column, Joe Hirko took a plea deal and entered prison. Kevin Howard also took a plea deal, and got twelve months of home confinement.

The Nigerian Barge defendants will be heading back to trial in 2010 after the Fifth Circuit rejected their claim of collateral estoppel and double jeopardy – amazingly, since Scott Yeager just clarified collateral estoppel.

Rex Shelby, the last of the Broadband Three, remains enmeshed as he will not accept a plea deal.

2010 promises to be a pivotal year. Jeff Skilling, the Nigerian Barge defendants, and Rex Shelby will ultimately be resolved. For better or worse, it will all be over this year.

Today In Enron History

December 22, 1961, Andrew Stuart Fastow was born in Washington DC.

I’ve written extensively about my attempts to unravel the mystery that is Andy Fastow, and I’ve been deservedly chastised for attempting to see complexity where there is only deception and theft. I’m still trying to understand him.

What I do know is Andy was loved by his coworkers when he was at Enron. He was a clown. He had a desk full of candy and toys. Children of his coworkers, visiting the office, would run directly to him, knowing he would indulge them like nobody else.

When the 9/11 attacks happened, he immediately hung a giant American flag outside his house.

He liked rock music.

He was generous with his money, paying for a vacation for a friend who couldn’t afford to come along to a gathering.

Also:

He was short-tempered. He was petty. He started arguments for no reason.

One person tells me the story of the time he was at the PRC, in a completely division from Andy, Andy attacked his guys for no reason at all; he didn’t have to do that – he did it for fun. Meanwhile, my friend was just trying to get his guys compensated.

Another guy told me that he never met Fastow, but his friend did, and his friend said he was a jerk.

Another told me that while at a party for the underlings, she was introduced to Andy and he looked at her, said nothing, and walked away.

There is a picture of him and Jeff Skilling at some party. Jeff is looking at the photographer; he looks healthy and handsome and tanned. Andy is looking at Jeff. He has a silly, possibly tipsy smile on his face. It is the only picture I’ve ever seen of him smiling, and you would not believe how happy and normal he looks. But also, if you have a brain like mine that is constantly searching for answers about him, you might detect an unguarded moment of adoration.

This, I understand.

Happy birthday, Andy.

Also today in Enron history, in 2000, Project Braveheart closed. Enron Broadband Services CFO, Kevin Howard, was accused of falsifying books to inflate Enron’s stock valuation. Though he was not guilty, he pleaded guilty rather than be tried for the third time by a jury. The plea agreement says:

[Howard's] participation in the “Braveheart” transaction, which closed on December 22, 2000, knowingly and willfully directly or indirectly caused Enron’s Form 10K for the year-ending 2000 to be falsified, in that the 10K did not accurately and fairly reflect, in reasonable detail, the transactions and dispositions of the assets of Enron, in violation of [federal securities law].

Blah blah blah. It was a perfectly fine transaction. And Kevin Howard is a brilliant, moral man who hates to lie, but he did lie when he said Braveheart was a fraud.

Kevin Howard – Misfiled

Did anyone else notice that the Chron’s coverage of Kevin Howard is under the heading “Enron Barge Trial”?

If they’re this careless with something so basic, one must ask what else they’re getting wrong.

Kevin Howard Sentenced

Kevin Howard was sentenced today to one year of probation — nine months of that under home confinement — in a plea deal in which prosecutors stipulated he did not personally benefit from his crime.

Via Chron:

Rather than go to trial for the third time, Kevin Howard agreed to a deal that required no prison time. He pleaded guilty to one count of falsifying books and records. Howard stood in court Monday with a group of family and friends in the audience, including his former codefendant Michael Krautz, who wrote a glowing letter to the court about Howard.

U.S. District Judge Vanessa Gilmore sentenced Howard to also pay a $25,000 fine and said for the first nine months of his probation he can only go to work, church, medical appointments and educational classes. Gilmore said that while Howard’s actions did not cause the ultimate downfall of Enron, which collapsed in 2001, and while he got no personal benefit from his action, he still must be held accountable.

Whoa. Wait. Why must he be held accountable if he did not benefit from his actions, and his actions did not play into the collapse of Enron? Oh, right, I remember, this is an Enron case, therefore everyone must pay regardless of innocence.

“You will be restricted. It’s jail, but jail at home,” she said. She said he can’t coach sports or go to dinners or parties or shows and if he violates the order he will go to prison.

Kevin Howard is innocent. I’m disappointed he got nine months instead of four (or none!) But as far as Enron sentences go, it’s not terrible. I hope that he has found some peace.

We here at Cara Ellison Corp keep a good thought for him.

Kevin Howard Sentencing Today

Kevin Howard is scheduled to be sentenced today. I’ll update as soon as possible. Meanwhile, my fingers are crossed that the judge gives him the absolute minimum (four months home confinement.)

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.

Innocence In A Time of Guilt

Enron filed for bankruptcy just after midnight on Sunday, December 2, 2001. 7 years, 5 months, and 30 days ago.

In that time, the following companies have collapsed or experienced short term liquidity crises: Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, Wachovia, Citigroup, General Motors, Chrysler. Not one of these companies has experienced the absolute hell that Enron and its employees and executives have endured. Enron’s financial condition and rapid descent into bankruptcy was no more a result of fraud than any of these companies, yet Enron is today – 2738 days later -still paying the price for having the audacity to fail. If Enron were around today, would we even bat our eyelashes at their problems? Jeff Skilling did not take an enormous bonus when he left the company – yet valid bonuses issued at AIG incite medieval torch and pitchfork mobs. Ken Lay said Enron was in good financial shape and was eviscerated for it, while John Thain of Merrill Lynch spent bailout money on a new executive washroom.

The actions of Enron Corporation would be utterly routine if they had happened today.

During the Tech Bubble, there was a lot of commentary about how ordinary people were getting into the stock market. The phenomenon is even mentioned in The Smartest Guys In The Room. If the masses at the time were unsophisticated investors, then we can also expect them to have an unsophisticated (ie, irrationally angry) response to losing money. I believe this is where much of the outrage comes from – the lies, myths, and misunderstandings of Enron that still permeate our culture today. When the masses start screaming, the government listens (usually). When stockholders were told of AIG bonuses, every Democrat politician found a camera and decried the “greed” of these executives. One should never underestimate the power of a group of average people screaming.

So Enron lost money and people didn’t like it and the politicians were concerned about being re-elected so they agreed with the people who lost money, and Enron was prosecuted.

Great system, except it has nothing to do with justice.

The men we read about in the paper, like Kevin Howard today, are innocent. It is a tough sell. For so long we’ve been told that Enron was corrupt. But look around you. Is AIG being prosecuted? Merrill Lynch? Bear Stearns? Are there Presidential Task Forces at work? Are there conspiracy theories spouting up about these companies? No. And Enron was much better behaved than those companies.

Enron was innocent in 2001. It is innocent today. Kevin Howard was innocent in 2001. He is innocent today. He pleaded guilty because he was tired. He did not want to take his chances on a third trial (a third trial!). That doesn’t make him guilty, it makes him human.

The men who plead guilty in the Enron case will get no static from me. I completely understand. This justice system makes you do criminal things – like lie in court so you can be free. But since that is the game, I support the men who play.

Innocence is so hard to prove. Maybe Enron will never be vindicated and recognized for the excellent company it was. But as time goes by, maybe it will be seen as simply better than anything we have now.

Former Broadband CFO Pleads Guilty

Via Houston Chronicle:

The former finance chief for Enron’s broadband division has pleaded guilty to one charge of falsifying books and records, rather than gamble on a jury for the third time.

As part of a plea agreement, Howard will serve four to 12 months of probation or home confinement, or a combination of both. U.S. District Judge Vanessa Gilmore accepted the deal and will formally sentence Howard this fall.

Kevin Howard had been slated to go to trial today on fraud and conspiracy charges similar to those he faced when first indicted in early 2003.

He’s been there twice before. His first trial ended with jurors hung on counts against him, and the second ended with convictions later thrown out.

This time, he cut a deal rather than take another chance.

Howard first went to trial alongside four other ex-broadband executives in 2005 in a three-month case that ended with a handful of acquittals, no convictions and jurors hung on dozens of other counts — including all pending against him.

Two other broadband executives — former co-CEO Kenneth Rice and former chief operating officer Kevin Hannon — each pleaded guilty to crimes in 2004. Both finished prison terms earlier this year.

Most of the 2005 trial involved tedious, technology jargon-filled testimony regarding three defendants accused of overstating the division’s capabilities so they could pocket millions from selling company stock inflated by the hype.

The case against Howard and former in-house accountant Michael Krautz involved allegations that they manufactured earnings by selling future revenues in a video-on-demand venture that failed.

Unable to win convictions in the first trial, prosecutors split the defendants among three separate, pared-down cases. In their second round before a jury in 2006, Krautz was acquitted while Howard was convicted of conspiracy, wire fraud and falsifying books and records.

Gilmore tossed out Howard’s convictions in 2007, ruling that prosecutors prevailed by flawed means.

Gilmore based her ruling on a 5th U.S. Circuit Court of Appeals decision that wiped out most convictions in another Enron case because prosecutors wrongly presented a theory of guilt that was also used in Howard’s case.

That theory held that the defendants robbed Enron of their “honest services” by helping cook Enron’s books. However, the 5th Circuit ruled that the theory didn’t apply because the defendants didn’t steal, take a bribe or otherwise rob Enron of money or property.

In Howard’s case, the government conceded that four of his five convictions would be tossed out on appeal, but Gilmore threw out all five. The 5th Circuit upheld her decision, so prosecutors moved to try Howard a third time. As part of today’s deal, prosecutors stipulated Howard did not personally benefit from any fraud at Enron.

The honest services issue is central to former Enron CEO Jeff Skilling’s appeal as well.

Like Howard and the defendants in the other Enron case, Skilling didn’t take money or property. But the 5th Circuit ruled earlier this year that as a CEO, he set the fraudulent agenda rather than carry out orders from above, and upheld all 19 of his convictions. Skilling is seeking a review by the U.S. Supreme Court.

Of the other three broadband defendants, former co-CEO Joseph Hirko pleaded guilty to wire fraud last year and faces a 16-month prison term after he is sentenced in September.

The other two — former top strategist Scott Yeager and software executive Rex Shelby — are still fighting and have yet to be tried a second time.

The Supreme Court heard Yeager’s appeal earlier this year that the government should drop insider trading and money laundering charges against him because the 2005 jury acquitted him of underlying fraud and conspiracy charges. Shelby’s retrial is on hold pending the outcome of Yeager’s appeal.

My heart hurts. I am so sorry for Kevin Howard. I am glad that he will not have to endure prison, but that is such a small comfort for an innocent man.

Kevin Howard, and the other Broadband defendants, are innocent. The fact that some are pleading guilty is not indicative of guilt. It is indicative of the exhaustion these brave men have endured for nine years. They are tired and they want it to end. Joe Hirko and Kevin Howard are good men who have been worn down by the system. More importantly, they are innocent men who have been worn down by the system.

Rex Shelby and Scott Yeager are the last men standing at Enron. I do not believe that Scott Yeager will plead, even if the Supreme Court comes back with a negative answer on his appeal. But just as Ken Rice, Rick Causey, Kevin Howard and others discovered, everyone has their breaking point.

I strongly believe that Rex Shelby will not plead under any circumstances.

But I hope and pray the question is moot. I continue to believe Yeager’s appeal will be granted, and collateral estopell will prevail, meaning that the government can not try him again. If this is the case, then the government will be forced to drop Shelby’s case.

As I write this, I am bewildered at the course of events that have led here. These men are engineers and business guys. They’re not criminals. They are forced to act like it, such as with Kevin Howard pleading guilty though he knows he’s not and we know he’s not. What kind of justice is this?

It’s not justice.

Whatever else it is, it’s not justice.

Today In Enron History

Today in Enron history, in 2005, the Enron Broadband Trial began. On trial were Rex Shelby, Joe Hirko, Scott Yeager, Michael Krautz, and Kevin Howard. Michael Krautz and Kevin Howard were accused of manipulating the accounting with a transaction called Braveheart (more about that transaction can be found here.) Rex Shelby, Joe Hirko, and Scott Yeager were accused of lying to analysts about the status and ability of the software – called Broadband Operating System or BOS.

The trial ended in disaster for the prosecution. One defendant was acquitted, one was convicted but his conviction was overturned, and Shelby, Hirko, and Yeager all ended in mistrial. Presently Scott Yeager’s case is before the Supreme Court. Joe Hirko has taken a plea deal and will be sentenced on April 27. Rex Shelby’s retrial has been suspended pending the outcome of Scott Yeager’s SCOTUS appeal.

Also in Enron history, the Raptors were approved on this day but notably not by Jeff Skilling.

[Doh! I already did a TIEH for this day. It can be found here.]

The Grand Unifying Theory Of The Prosecution of Enron

September 11 Changed Everything

The prosecution of Enron, for our purposes today, begins on September 11, 2001. On September 11, 2001, those of us on the East Coast who witnessed firsthand the terror attacks were horrified beyond anything we had ever experienced in our lifetimes. The impact was felt all across the United States and indeed the world, but seeing the devastation up close was a truly soul-shattering experience.

The Passion of the FBI

For law enforcement personnel, it was felt on two levels (or more.) Certainly as an institution, the FBI felt they had failed; they did not admit it publicly but several FBI agents that I know admitted as much to me. There was a sense of defeat, of embarrassment, and of course, plain old horror at what had happened. Additionally, several federal law enforcement agents were killed in the attacks, and as we all know, they do tend to protect their own.

Who Was Minding The Country?

From September 11, 2001 to December 2, 2001, our entire national conscience was on September 11. Fighting the war in Afghanistan, learning about al Qaeda, setting up the TSA, learning about GITMO, watching news reports night after night about Kabul and the Northern Alliance and what Real Muslims were. Though Enron had been experiencing difficulty for several weeks by December 2, very little attention was paid to it. At that time, most stocks were down. Most companies were struggling in the aftermath of the terror attacks. It would have been difficult for the average person who was not necessarily focused on Enron to determine that anything was wrong at all.

Enron Who?

On December 2, 2001, Enron declared bankruptcy. Immediately a firestorm of activity broke out in Houston, Washington, DC and New York City. I recall very specifically being in my friend’s condo and looking up and seeing Ken Lay on the news. I remember thinking, “Oh… Houston….” And then I saw what the report was about. It’s true that I loved Enron even back then. I loved the people who worked there, loved the leadership, loved the company and the products and the services. Yet when I saw it on the news, it barely made an impression because my mind was occupied by other things. So unless you were invested in the company, or had some other compelling reason to care, you just didn’t. There were too many other things happening.

Task Force Formed

George W. Bush, for reasons that will remain his own until he writes a memoir, made the executive decision to form a task force to investigate the collapse of a single company. This was unprecedented.

Just as I do not believe that Enron hired people who were latent criminals, I do not believe that the Department of Justice is staffed with jerks who are gratified by the prosecution of innocent people. I believe most of the agents who work for the DOJ are motivated to do good work and are instilled with a sense of decency and justice. But the government staffed the ETF with Mafia prosecutors who had little white collar criminal experience. They knew nothing about business, nothing about businessmen, and nothing about how to actually investigate an alleged white collar criminal offense. With a perfect storm of personalities, interests, motivations and (lack of) knowledge, the Task Force would ultimately become what they hated.

Arthur Andersen

The first indictments handed down in the Enron case were Arthur Andersen. Since the government already assumed there was malfeasance afoot, it was easy to blame the auditors for everything that had gone wrong. Arthur Andersen lost their accounting license, and thus they could not do business and quickly collapsed. Their convictions were appealed to the Supreme Court. The Supreme Court overturned the convictions by unanimous accord. But the company was already gone. It was vindicated but destroyed.

Enron Broadband Services In The Crosshairs

Enron Broadband Services was the low-hanging fruit of the Enron prosecutions so it was not surprising that they were the first inside Enron to be indicted by the government. (A primer on EBS can be found here.) EBS was not making money – but that was by design. They were a very young startup company inside a huge company and they were not scheduled to make money for years. In fact, they were scheduled to lose about $160 million in 2002. Because they were a cost-center, and not making money, it was easy to criticize them.

John Kroger, the Broadband prosecutor, wanted to be “the first on the boards”, so he rushed an indictment so he could beat the other ETF teams to the punch.

Project Braveheart

Project Braveheart was a partnership between Enron and Blockbuster. The two individuals indicted on charges related to this project were Kevin Howard and Michael Krautz. Kevin Howard was Enron Broadband Services CFO. Michael Krautz was EBS senior accounting director.

Enron set up a partnership with an Oregon company called nCube and another partnership called Thunderbird (The majority shareholder in privately held nCube was Larry Ellison, chairman and CEO of Oracle). The government alleged that Enron arranged a phony sale of the venture to another partnership called Hawaii 125-0 that Enron Broadband had created with Canadian Imperial Bank of Commerce. Enron then booked the sale of the venture – $111 million – on their books.

The government claimed it was illegal because none of the partnerships were really separate from Enron, (i.e., the equity was never really at risk) even though the partnerships contributed the necessary three percent of capital to make it a legitimate deal. The government claims that there was a Secret Side Deal – the same exact allegation against Fastow and Skilling – which is telling. (The deal with CIBC was alleged to have a secret side deal with Fastow as well.)

The indictment against Kevin Howard says that Howard promised nCube that it would receive its original investment plus $100,000 to $200,000 in return. If indeed it was uttered at all, this could have been puffery. But if it was illegal, why didn’t Larry Ellison – an experienced businessman – cry foul? Howard’s convictions were overturned.

Michael Krautz was acquitted.

The Broadband Three

The three other Broadband executives swept up in the Enron purge were Joe Hirko, Scott Yeager, and Rex Shelby – referred to here as the Broadband Three. These three were not alleged to have participated in Project Braveheart. They were alleged to have lied to analysts at a 2000 analyst conference in order to inflate the price of the stock.

Joe Hirko pleaded in October 2008. Scott Yeager’s appeal is pending before the Supreme Court. Rex Shelby’s retrial is suspended until the Supreme Court rules on Scott Yeager’s appeal.

Nigerian Barges

The next transaction under attack was the Nigerian Barge transaction. It was a tiny, insignificant deal between Enron and Merrill Lynch. The fact the government even bothered with this $12 million speck shows just how desperate they were. Yet they found it, and decided they could build something out of it. Of all the thousands of deals that were done at Enron, the best they could find was this. It boggles the mind.

Plea Deals

The government used plea deals to entice Enron executives to turn on one another. While this strategy is not uncommon, it does tend to truncate justice for the sake of expediency. When a person is offered the opportunity to save his own skin if he puts another in prison for a few years, well, that deal can look pretty tempting.

The Government used them ruthlessly in the Enron cases. Out of 34 defendants, 18 pleaded guilty.

Big Fish

I believe the government was in a terrible fix after 9/11. Unlike Osama bin Laden, Jeff Skilling and Dr. Lay were not hiding in caves in Afghanistan. They were a four-hour plane ride away, in Houston, Texas. I believe that most of the Enron convictions via plea deals were aimed at getting Jeff Skilling and Dr. Lay.

Executive’s Destiny

It pains me to say this now, but with the benefit of hindsight, I can see that Jeff Skilling was never going free. The full force of the United States government was pushing for punishment, for “scalps”, as John Kroger called them. He and Dr. Lay were scapegoats. The other Enron defendants might have had an honest chance – doubtful in Houston, but maybe – but Jeff Skilling and Dr. Lay were going to prison no matter what.

Conclusion

In 2001, the government wanted to reassure the public that, in America, a large corporation just could not go bankrupt by normal means (as companies do every day), but instead worked hard to prop up the idea that large corporations can only go bankrupt by criminal activity (a preposterous concept on the face of it). As a result, the government never tried to understand the real problems that had plagued Enron but simply decided that scalps were necessary to mollify the shareholders and public. In his book, Kroger stated that the ETF was “under pressure to get scalps quickly.”

Also, Enron was a victim of an ever more negative view of big business in America. Businessmen had become the villains in books and movies. So the government had the support of a non-skeptical public and a non-investigative press in demonizing Enron executives. It had the classic circumstances that make witch hunts possible. Lay and Skilling were the big scalps, and no amount of collateral damage and no amount of wasted money would stop the Enron Task Force.