Two Enron Corp. executives arrested Thursday face a long list of federal
charges in connection with an alleged scam to create $111 million in bogus
earnings from the energy company's failed Internet video-on-demand service.
Kevin Howard, former chief financial officer of Enron's now-defunct Broadband
Services subsidiary, and Michael Krautz, the unit's former senior director of
accounting, face charges of securities fraud, wire fraud, conspiracy and making
false statements to FBI agents.
Both still worked for Enron up to this week, but they are reportedly no
longer with the company.
The charges, filed in federal court in Houston, accused Howard and Krautz of
recording the $111 million in revenue based on a 20-year contract signed with
Blockbuster Inc. to create an Internet VOD-distribution service.
According to the federal affidavit, in the fall of 2000, the two men created
a structured financial transaction, code-named "Braveheart," that would allow
the company to immediately recognize future earnings from the deal.
They created a joint venture to implement the Blockbuster contract and landed
investment commitments from VOD-systems provider nCUBE and Thunderbird, an
investment fund controlled by Enron, Howard, Krautz and others.
They then sold part of the joint venture -- along with its projected future
revenue stream -- to Canadian Imperial Bank of Commerce. They recorded $53
million in profit from that transaction in the fourth quarter of 2000 and $58
million in the first quarter of 2001, according to the complaint.
In fact, the Blockbuster contract never generated any revenue, and it was
terminated in March 2001.
But according to the federal complaint, Howard, Krautz and other Enron
executives secretly guaranteed nCUBE, Thunderbird and CIBC that they would
profit from the deal regardless of its success, and these assurances were
deliberately omitted from the transaction documents provided to company
accounting firm Arthur Andersen LLP.
Furthermore, the affidavit claimed, when the company's accounting scandal hit
in early 2002, Howard and Krautz lied to FBI investigators about the
Both men surrendered to FBI agents in Houston and were set to appear in court
If convvicted, they face a maiximum of 10 years' prison time and $250,000
fine for each securities-fraud violation and five years and $250,000 for each