Attention All Potential Victims
United States v. Rex Shelby and Joseph Hirko
Court Docket Numbers: 3-093-4 and 3-093-7
(Appeal-5th Cir. 06-20691 and 06-20593)
Before the Honorable Vanessa D. Gilmore, Courtroom 9A, United States District Court for the Southern District of Texas, 515 Rusk Street, Houston, Texas 77002.
On March 28, 2011, defendant Rex Shelby, the former senior vice president of engineering operations at Enron Broadband Services (EBS), was sentenced to 2 years probation, including 3 months of community confinement and 3 months of home confinement, on his November 22, 2010 guilty plea to one count of insider trading (Count 7: 15 U.S.C. §§78j(b) and 78ff) charged in a November 2005 seventh superseding indictment. In addition, Shelby was ordered to forfeit $2,568,750 in criminal proceeds (to be applied to the SEC’s Enron Fair Fund). In pleading, Shelby agreed to not accept remuneration or compensation of any sort, directly or indirectly, for the dissemination through books, articles, speeches, interviews, or any other means, of information regarding his work at Enron or the investigation and prosecution of any civil or criminal cases against him. Co-defendant Joseph Hirko, former EBS co-chief executive officer, pleaded guilty in October 2008 to one count of wire fraud charged in the November 2005 superseding indictment and was sentenced in September 2009 to 16 months in prison, followed by 2 years of supervised release, and was ordered to forfeit $7 million (applied to a restitution fund).
In November 2004, Hirko along with six other EBS employees – Kenneth Rice, Kevin Hannon, Kevin Howard, Scott Yeager, Rex Shelby, and Michael Krautz – were indicted on various counts of conspiracy to commit securities and wire fraud, securities fraud, wire fraud, insider trading, and money laundering. Co-defendants Kenneth Rice, a former EBS chief executive officer (CEO), and Kevin Hannon, a former EBS chief operating officer, pleaded guilty in 2004. In July 2005, following a fourteen-week trial and four days of jury deliberations, a jury was unable to reach a verdict as to counts against Hirko, Shelby, Howard, Krautz and Yeager. Following the court’s declaration of a mistrial, three separate superseding indictments were returned in November 2005 charging Hirko and Shelby, Howard and Krautz, and Yeager, respectively, with various counts of conspiracy, securities and wire fraud, insider trading, and money laundering. In May 2006, Howard was convicted and Krautz was acquitted at trial; however, Howard’s conviction was overturned by the court in 2007. In June 2009, Howard pleaded guilty to one count of falsifying Enron’s books and records charged in the sixth superseding indictment and was sentenced in November 2009. Yeager was acquitted by the court in October 2009.
As described in the superseding indictment and the plea agreement, while in possession of material non-public information regarding the technological capabilities, value, revenue, and business performance of Enron and EBS, Shelby sold shares of Enron stock and generated total proceeds of $17,558,595. In January 2000, Shelby participated at Enron’s annual analyst conference in Houston, Texas, at which Enron former CEO Jeffery Skilling introduced EBS as one of Enron’s “core” units. Skilling also announced the development of a Broadband Operating System or “BOS,” which was meant to be an “intelligent” operating system that would, among other things, automatically find the optimal path to deliver data on Enron’s network, a process Enron dubbed as “dynamic routing,” link Enron’s network to other networks and provide guaranteed levels of quality of service. At the conference, Shelby and others associated with Shelby affirmed the existence of EBS’s “intelligent network.” Shelby and others within EBS knew, however, that the BOS was not complete, and parts of the BOS remained in the development stage throughout Shelby’s employment at Enron. Shelby, co-defendant Hirko and others also omitted material facts and neglected to disclose material information about the serious difficulties that EBS had encountered and the significant risks that it faced in releasing its products, generating recurring revenues, meeting its earnings and revenue targets, and completing its network and control software development. Together, these misrepresentations and omissions made it appear that EBS was much further along in its development than was actually the case and that there was little to no risk involved in the venture. These misrepresentations and omissions were designed to attract investors and increase Enron’s stock price. At the conference, Shelby gave a videotaped presentation regarding Enron’s network control software, during which he made numerous false statements about Enron’s network control software.