Federal prosecutors charged two Enron Corp. executives on Wednesday with a scheme to generate false earnings through an Internet movie-on-demand service that flopped.
In a separate action Wednesday, the Commodity Futures Trading Commission charged Enron and a former vice president with manipulating natural gas and agricultural commodity prices.
Arrest warrants brought in Houston charge Kevin Howard and Michael Krautz with securities fraud, wire fraud, conspiracy and making false statements to FBI agents. Both are executives with Enron Broadband Services.
In a related federal court filing, the Securities and Exchange Commission charged the pair with violating a number of federal securities laws, including falsifying Enron records and quarterly reports, for a transaction the SEC said was “a sham from its inception.”
The two men, who still work for Enron, surrendered Wednesday morning to FBI agents and were scheduled to make initial court appearances later in the day.
The charges stem from an attempt by Enron, in partnership with the Blockbuster Inc. video outlet chain, to set up an Internet video-on-demand business using broadband technology. Like many other Enron transactions, this one carried a fanciful code name: “Braveheart.”
An affidavit filed with the arrest warrants in federal court says that Enron claimed $111 million in profits from the venture in 2000 and 2001, when in fact no revenue was generated.
The crux of the indictment is that Enron secretly promised profits from the deal to outside investors, including a software firm in Beaverton, Ore., called nCube. These promises were left off of transaction documents and hidden from Enron’s accountant, now-defunct Arthur Andersen.
The venture fell apart in March 2001 when Blockbuster pulled out.
The Commodity Futures Trading Commission charged in a complaint, also filed in Houston federal court, that Enron and former vice president Hunter S. Shively operated the Enron Online subsidiary as “an illegal futures exchange” and cited several instances of attempts to manipulate the natural gas market.
The complaint also says Enron tried to offer an illegal agricultural futures contract involving a lumber deal. The CFTC complaint seeks unspecified monetary penalties and a court order barring such activity in the future.
The charges were the latest brought by the Justice Department in the 2001 collapse of Enron, the first of several corporate scandals that jolted the business world and rocked the stock market. The biggest indictment in the Enron case, last year, was brought against the bankrupt company’s former chief financial officer, Andrew Fastow. He was indicted on 78 charges alleging he masterminded a scheme to artificially inflate the energy trading giant’s profits.
Fastow has pleaded innocent and is awaiting trial. The Justice Department is also expected to bring a superseding indictment against him that could add even more charges.
The Justice Department’s Corporate Fraud Task Force, formed in the wake of the scandals, has brought charges against 160 other people, including several other Enron executives, in a bid to target company wrongdoers.