| May 2, 2003
U.S. Indicts 11 Former Enron Executives
By KURT EICHENWALD
OUSTON, May 1 Federal prosecutors unsealed indictments today against 11 former Enron executives, including charges that the once-vaunted success of the company's high-speed Internet business was largely an illusion.
In addition, the government charged three new defendants with participating in illegal deals with Enron's former chief financial officer, Andrew S. Fastow, using those deals both to enrich themselves and improperly manipulate the company's financial performance. Among those defendants was Mr. Fastow's wife, Lea, who was charged in a separate indictment with committing fraud by aiding her husband in certain schemes.
The unusual single-day disclosure of three distinct indictments in a related case was intended to give federal prosecutors the ability to signal significant success in their more than yearlong investigation of Enron's collapse, government officials said. All told, 18 people have been charged with crimes related to Enron; of that number, 8 were indicted for the first time today.
The charges paint a portrait of deception on a grand scale. As described in the indictments, Enron executives engaged in a series of schemes, including pumping up company profits with bogus sales of assets, lying about the state of the company's technology, enriching themselves by defrauding the company, and selling millions of dollars in Enron shares as the market celebrated positive corporate news that was false.
There were many people at Enron and other institutions "who were responsible for reducing the seventh-largest corporation in America to rubble," said Andrew Weissmann, a federal prosecutor on the Justice Department's Enron task force. "The task force is continuing to sift diligently through the rubble that was Enron piece by piece, scheme by scheme and lie by lie."
Two of the indictments unsealed today built on previous cases brought against Mr. Fastow and against two former executives with Enron's broadband division, Kevin Howard and Michael Krautz. In each of those indictments, new defendants were added to the case.
The indictment related to Mr. Fastow which also named Ben F. Glisan Jr., a former Enron treasurer, and Dan Boyle, a former executive in the finance division involved allegations that were featured in the original charges last fall against Mr. Fastow; mainly that he used the complex web of partnerships in his control to enrich himself and manipulated Enron's financial performance.
Lea Fastow was charged separately with fraud, money laundering and tax violations in the third indictment.
All of the defendants pleaded not guilty today in hearings at the Federal District Court here and were released on bail that totaled millions of dollars.
At the courthouse, lawyers for Mrs. Fastow attacked the charges as a "transparent effort" by the government to put pressure on her husband to plead guilty. "Lea Fastow is innocent," said Nanci Clarence, a San Francisco lawyer representing her. "Mrs. Fastow has done nothing wrong, and she had nothing to do with the fall of Enron. These charges are utterly meritless."
The charges against the bulk of the executives all of them from the broadband division are a significant shift in the direction of the investigation. Until now, the criminal charges brought against Enron executives related to off-balance-sheet partnerships that executives used to exaggerate the company's financial situation and enrich themselves.
But the broadband indictment naming the division's entire senior management, including Kenneth Rice and Joe Hirko, both former chief executives portrays a more traditional fraud, accusing Enron of having celebrated its creation of technology that had not yet been born, driving the company's stock price up as executives sold millions of dollars worth of shares.
In essence, the broadband case signals that the Enron inquiry has shifted from examinations of complex accounting machinations to what, at first glance, would seem to be more easily understood concepts about truth and lies. None of these activities played a role in bringing Enron down; rather, they helped drive up the stock price, placing it on the lofty perch from which it fell.
The Securities and Exchange Commission also brought an action against the seven broadband executives the others were Kevin Hannon, Kevin Howard, Scott Yeager, Rex Shelby and Michael Krautz portraying the division as being built on advances that did not exist.
The government faces certain complexities in the broadband case, particularly in describing the technologies involved. Enron maintained that it had established a software-driven "intelligent" network, with software that offered advanced features like billing based on use and a function known as "user-defined quality of service." The network did exist, but the government contends that the special features that would differentiate it from rivals did not.
In public statements, Enron executives represented that the system was up and running; if it was not, the defense in the case would face an enormous challenge. People who have spoken with the defendants said that they intended to argue that those features did indeed work.
In the indictment, the government said that Enron changed the name of its network software to Broadband Operating System, or BOS. The government charges that Enron executives referred to the BOS as a system that was in use, when in fact it was in development.
But internal documents including a transcript from an analysts' conference in January 2000 that is central to the government's case suggest that different executives meant different things when they discussed the BOS. The result is that some executives including Jeffrey Skilling, the former chief executive refer to the BOS as a product in development; at the same meeting, other executives, including Mr. Hirko, referred to it as a system that was up and running.
"As I have learned the facts in this case, it is clear to me that there were many different understandings internally of what was meant by the BOS," said Lee Hamel, a lawyer representing Mr. Yeager.
In the end, this means that at least some of any trial will bog down on what people meant when they referred to particular systems.
But as the financial position of the broadband unit deteriorated throughout 2000, the indictment said, Enron executives went to enormous lengths to hide the troubles. For example, the executives structured what the government contends was a bogus sale of an interest in a failing joint venture with Blockbuster to provide video-on-demand. That deal, known as Braveheart, resulted in $111 million in revenue being generated in 2001, allowing the division to meet its projected earnings.
The indictment describes further deceptions. Ultimately, the complaint says, the Enron executives portrayed the division, known as Enron Broadband Services, as a smashing success at the January 2001 annual meeting, when in fact it was performing dismally.
In the complaint against Mr. Fastow, Mr. Glisan, the former company treasurer, was portrayed as a central participant in the wrongdoing involving the partnerships. Mr. Glisan was a recipient of more than $1 million from a $5,000 partnership investment provided to him by Mr. Fastow; as described in the charges, those profits came at the expense of Enron and one of its banks. Mr. Boyle, a former finance executive, is described as taking part in a fake sale of Nigerian barges to Merrill Lynch.