FOR IMMEDIATE RELEASE|
WEDNESDAY, MARCH 12, 2003
TDD (202) 514-1888
TWO ENRON EXECUTIVES CHARGED WITH FRAUD, CONSPIRACY
AND FALSE STATEMENTS
WASHINGTON, D.C. – Two Enron executives, Kevin Howard and Michael Krautz, were arrested today on warrants filed in federal court in Houston, Texas, charging them with securities fraud, wire fraud, conspiracy and making false statements to FBI agents. The charges stem from the defendants' involvement in the generation of $111 million in fraudulent earnings relating to Enron's contract with Blockbuster, Inc., the retail video store chain.
According to the affidavit accompanying the arrest warrants, Howard and Krautz deliberately violated applicable accounting rules to allow Enron to fraudulently record $111 million in earnings in 2000 and 2001. The affidavit also alleges that Howard and Krautz intentionally concealed aspects of the transaction from Arthur Andersen accountants as part of the fraudulent scheme. When interviewed by F.B.I. agents investigating Enron's collapse in 2002, Howard and Krautz allegedly lied about their conduct.
"Today's complaint charges these defendants with a significant fraud against Enron's investors compounded by lies they told to our investigators," said Deputy Attorney General Larry Thompson, the head of President Bush's Corporate Fraud Task Force. "These charges demonstrate our perseverance in ensuring that all wrongdoers involved in the collapse of Enron are brought to justice."
At the time of the fraud, Howard and Krautz, both residents of Houston, were executives at Enron's telecommunications division, Enron Broadband Services, or "EBS." Howard was Vice President of Finance at EBS from approximately Aug. 1, 1999 to September 2001, while Krautz was Senior Director of Transactional Accounting at EBS from approximately Aug. 16, 1999 to Oct. 3, 2001. Both are still employed at Enron.
The transaction at issue was based on a 20-year exclusive contract signed by EBS and Blockbuster, Inc., in April 2000 to stream video films directly to customers' homes. This service was known as "video on demand," or "VOD," because customers were supposed to be able to access and watch movies whenever they wanted. EBS's plan was to begin testing the VOD service by Dec. 15, 2000, but the service was not expected to produce any profits until many years later.
In fall of 2000, Howard, Krautz and others created a structured finance transaction, known internally at EBS by the code-name "Braveheart," designed to allow Enron to immediately recognize anticipated future earnings from the Blockbuster deal. Howard, Krautz, and others created a joint venture to implement the Blockbuster contract with two investors: nCube, Inc., a small video technology company, and Thunderbird, an investment fund controlled by Enron. Howard, Krautz and others then sold a portion of the joint venture, along with its anticipated future revenue stream from the Blockbuster contract, to the Canadian Imperial Bank of Commerce ("CIBC"). Through this transaction, Enron was able to record revenues of $53 million in the fourth quarter of 2000 and $58 million in the first quarter of 2001. These represented the vast majority of EBS's reported revenues for both periods. In fact, the Blockbuster contract generated no revenue for EBS and was terminated on March 9, 2001.
According to the affidavit, the Braveheart transaction was fraudulent. In order to deconsolidate the joint venture off Enron's balance sheet, a prerequisite to recognizing earnings, Enron could not control the joint venture and had to attract at-risk investments from nCube, Thunderbird, and CIBC. In fact, Howard, Krautz, and other Enron executives secretly guaranteed these three companies that they would profit from the deal regardless of its success. These promises were deliberately omitted from transaction documents and were not reported to Arthur Andersen. Howard, Krautz, and others hid additional material facts about the transaction from Arthur Andersen, including EBS's control of the joint venture and the fact that Enron faced imminent cancellation of the Blockbuster contract in December 2000.
Howard and Krautz surrendered to the FBI in Houston this morning and are scheduled to make their initial appearance on the charges contained in the complaint later today. If convicted, Howard and Krautz face a maximum penalty of 10 years in prison and a $250,000 fine for each securities fraud violation, and five years imprisonment and a $250,000 fine for each violation of wire fraud, conspiracy and false statements laws.
The Enron Task Force, formed in January 2002 to investigate matters related to the collapse of Enron Corp, leads the investigation under the supervision of the Corporate Fraud Task Force. The Enron Task Force consists of a team of federal prosecutors supervised by the Department's Criminal Division and agents from the Federal Bureau of Investigation and the Internal Revenue Service's Criminal Investigations Division.
Several criminal charges have been filed in connection with Enron's collapse. In June 2002, Enron auditor Arthur Andersen was convicted of obstruction of justice. Former Enron Chief Financial Officer Andrew S. Fastow was indicted by a federal grand jury in Houston on Oct. 31, 2002 on 78 counts of wire fraud, money laundering and conspiracy. In August 2002, former Enron finance executive Michael J. Kopper pleaded guilty to conspiracy to commit wire fraud and money laundering. Former Enron energy traders Timothy N. Belden and Jeffrey Richter pleaded guilty to conspiracy to commit fraud by manipulating energy prices in the California market, and are cooperating with the government's ongoing investigation. In September 2002, a federal grand jury in Houston returned an indictment charging three former British bankers with wire fraud in a scheme involving the Southampton special purpose entity. In addition, in November 2002 former Enron finance executive Larry Lawyer pleaded guilty to making and subscribing a false tax return and is also cooperating in the government's ongoing investigation.
The Task Force investigation is active and ongoing.