- The Washington Times - Thursday, March 13, 2003

Two Enron Corp. officers were arrested and charged with fraud in Houston yesterday in the fabrication of revenues from a failed Internet video-on-demand venture to pump up the company's stock price.
The failed deal with Blockbuster, like other Enron broadband ventures, was a pet project of former Enron Chief Executive Jeffrey Skilling, who boasted to investors about profitability even as the ventures crumbled behind the scenes.
Enron's once-dominant energy-trading business under Mr. Skilling's tenure also came under renewed fire yesterday from federal enforcement agencies, which charged that the company manipulated natural gas prices and illegally traded futures contracts for natural gas and lumber during 2000 and 2001.
The robust profits reported from Enron's energy-trading business and budding broadband ventures sent the company's stock price soaring to a high of $90 in early 2001, enriching Mr. Skilling and other executives, who were paid mostly with stock options.
A Justice Department criminal complaint yesterday charged that, to ensure Enron met its profit targets, two finance officers in Enron Broadband Services manufactured $111 million in fake revenue from the Blockbuster deal before it fell through in March 2001, using a scheme dubbed "Project Braveheart."
Kevin Howard and Michael Krautz created the appearance of profitability by selling projected future revenue from the Blockbuster deal to the Canadian Imperial Bank of Commerce and an Oregon video firm in sham transactions, the complaint said.
Last night, Enron spokeswoman Karen Denne said the men no longer work at the company. She declined to say if they had quit or were fired.
Mr. Howard and Mr. Krautz engaged in illegal verbal side deals with the bank and repeatedly lied about the Braveheart arrangements in a concerted effort to deceive Enron's auditor, Arthur Andersen, and enable the company to book the revenue, the complaint said.
One unidentified bank official was so wary of his part in the deal, dubbed "Hawaii 125-0," that he predicted that Enron's chief financial officer, Andrew Fastow, would be "led away in handcuffs" one day, the complaint said.
Mr. Fastow was the first Enron officer to be indicted last year and is awaiting trial on separate conspiracy and securities-fraud charges.
Prosecutors also charged Mr. Howard and Mr. Krautz yesterday with perjury for lying about the deals in interviews with the FBI last summer. The executives, who were released on $500,000 bond apiece, face up to 20 years in prison.
"A significant fraud against Enron's investors was compounded by lies," said Deputy Attorney General Larry Thompson, who vowed to continue pursuing wrongdoers at Enron.
The Securities and Exchange Commission filed parallel securities-fraud charges against the two Enron officers yesterday.
Mr. Howard's lawyer said the defendants are innocent and will fight the charges. The executives "had Enron's best interests at heart," attorney Jim Levine told the U.S. District Court in Houston.
Though the Blockbuster deal never generated a dime before it was terminated in March 2001, the revenue fabricated through Braveheart represented the vast majority of earnings generated by Enron's broadband division in the last quarter of 2000 and the first quarter of 2001, the complaint said.
Mr. Skilling and other Enron executives promoted the future of the broadband business at a meeting they hosted for stock analysts on Jan. 20, 2000.
Enron's stock price jumped 30 percent that day and continued to soar until the broadband business folded a year later.
Though the business never turned a profit or lived up to its hype, and in fact created a financial drain that helped cause the company's bankruptcy in December 2001, Mr. Skilling and other executives touted it until the end. Mr. Skilling at one point told investors the broadband business alone was worth $40 per share.
Yesterday's arrests may give prosecutors a window to raise securities-fraud charges against Mr. Skilling, if they can prove he knew the Braveheart revenues were a sham or that the Blockbuster deal would go bust even as he touted its profitability to investors, analysts said.
At issue is whether executives misled investors about the financial well-being of the company and its future prospects, said Jacob Frankel, a former SEC lawyer.
Federal investigators probably are looking at the "quality of the disclosure made by executives" as well as "whether they disseminated false or misleading financial information or failed to provide information to investors," he said.
In a separate move yesterday, the Commodity Futures Trading Commission took its first enforcement action against Enron, charging it with manipulating the natural gas market to drive up prices in 2001, when gas prices were near record levels.
The complaint said Hunter S. Shively, the manager of Enron's central energy-trading desk, ordered extraordinarily large purchases of natural gas on the spot market on July 19, 2001, in a way that caused prices to spike artificially both in the spot market and in the futures market on the New York Mercantile Exchange.
Enron also operated an illegal futures exchange from September through December 2001, the agency said, by allowing clients to post bids and offers on its Enron Online Web site without having registered with the commission, as the law requires.
The company also offered its online clients an illegal way of trading in lumber futures, the agency said.
"This is the first step in addressing Enron's violative conduct," said Gregory G. Mocek, director of the commission's enforcement division. "We will continue to pursue all other allegations against the company and its employees."

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