Houston Chronicle Knight Ridder/Tribune Business News
Jun. 4--Despite the voluminous detail of their 218-count indictment against seven former Enron broadband executives, prosecutors may not find it easy to convince a jury of their guilt.
The executives are charged with lying for more than two years about the value and capabilities of the broadband business, helping to boost Enron's stock price and then making millions selling their shares.
But the court cases could degenerate into a semantic debate about technological capability, the difference between hype and fraud, and whether it was Enron Broadband Services that drove the share price up, not Enron's ceaseless drum-beating for its assorted ventures.
And it may be particularly difficult to use the broadband charges to build a case against former CEO Jeff Skilling, long considered the ultimate target of the broadband investigation.
Most of his public statements about the broadband unit were carefully hedged.
Many of the broadband charges center on claims executives made about the capabilities of the software that ran the network. The government argues the software didn't work as claimed. They will call experts, or at least former employees, in an effort to prove it.
"While the government has witnesses who will support their case and say things didn't work and false statements were made, there are also witnesses -- people who know -- who will say things did work," said an attorney involved in the broadband cases.
That was echoed by another attorney who is closely watching the case. "Bringing in the technology issues is problematic for the government. They should not have gone there and it will dilute their case," he said.
Leslie Caldwell, director of the Enron Task Force, disagrees: "I'm confident the allegations in the indictment will be more than supported by evidence at the trial."
Charged in the latest round of indictments are former EBS co-Chief Executive Officers Kenneth Rice and Joseph Hirko; former Chief Operating Officer Kevin Hannon; former senior vice presidents Scott Yeager and Rex Shelby; and former EBS executives Kevin Howard and Michael Krautz. Howard and Krautz's charges largely revolve around accounting fraud, not insider trading like the other five.
A key to the case is prosecutors' belief that the Enron Intelligent Network at the heart of the broadband business could not control and monitor the flow of data. They argue that executives lied about the business in press releases beginning in 1999 and in meetings with investment analysts that ran through 2001.
For example, investigators claim an April 19, 1999, press release that says the broadband network "a is lit and ready to deliver the first in a suite of new world network applications developed by the company," wasn't true.
The defense will likely argue that, technically, the network was "lit" because some portions of it had been tested successfully and "ready" because they were operating, even if unprepared to handle thousands of customers.
Though investigators point to comments made at analyst meetings that they say overstated the capability of the broadband network, Enron officials at those same meetings made more cautious statements the defense could say describe more realistic expectations.
For example, at a January 2000 meeting former executive Hirko claimed the network and its capabilities were "something that exists today." Skilling himself said a test run of the software had been launched just a week before the meeting.
A PowerPoint presentation for that meeting also showed details of the network, including the exact number of servers hooked up to the system and the cities where major data hubs were operating. Defense attorneys say that level of detail counters the government's claims that executives were exaggerating the network's capabilities.
But the government says that what counts is the overall impression that Enron was promoting a revolutionary product -- one that it didn't really have. Prosecutors will say the false claims buoyed the stock price and allowed the executives to profit.
The defense is likely to counter that not only was there no overall false impression, but that any increase in Enron's share price attributable to the broadband unit came not from claims of what the technology could do at the time but because of the involvement of Enron -- a company with a proven track record and ready access to capital.
Indeed, during a January 2001 analyst meeting, former broadband co-CEO Ken Rice said that rather than spending time "focusing on the technology that's going to make this work, we focus first on the commercial model. What do we need to do commercially to get a deal which will migrate that content to the digital-delivery platform."
Enron had a legitimate claim that its experience trading other commodities could apply to trading of Internet bandwidth. Therefore, citing that experience and its business model as a valuable asset was not a stretch at all.
Defense attorneys also point out that Enron's valuation of the broadband business was based in part on widely circulated studies about the future growth of the Internet and on other trends. For example, a study by Morgan Stanley Dean Witter used in a slide presentation during Enron's January 2000 analysts meeting predicted there would be 44 million U.S. broadband Internet users by 2001, 58 million by 2002 and 70 million by 2003.
The predictions may now seem unrealistic -- more recent studies put the number of U.S. broadband users at less than 20 million in 2002 -- but they were made by reputable research firms and were widely accepted, lending some credence to the idea that Enron was just using the best information available.
Using broadband as a means to build a criminal case against Skilling may be daunting. While he never publicly dismissed the business, he qualified many statements carefully when talking with reporters and analysts.
For example, in a July 24, 2000, article in the Financial Times, Skilling discussed the potential of the deal to offer movies-on-demand through a deal with Blockbuster.
"As long as we can get the technology right and deliver videos to people's screens at the touch of a button, this will be huge," Skilling is quoted as saying.
In the transcript of an Aug. 31, 2000, interview on cable news network CNNfn, Skilling makes clear that video-on-demand faced significant technological hurdles.
"Well, it's going to take a while to get enough high-capacity pipes into the home," he said. "So, as DSL spreads, as cable interfaces spread more and more people will be able to take advantage of this product."
Skilling was also candid about the bandwidth glut that was driving prices down, admitting in an October 17, 2000, CNNfn interview, "I believe they'll decline pretty significantly."
On the other hand, Skilling at least twice encouraged analysts to include the potential of Enron Broadband when pricing the stock.
He first made the pitch at the end of the meeting in January 2000, when the network was unveiled, and again in January 2001, when he said Enron stock -- then selling at $75 -- should be valued at $126, with $40 of the value coming from broadband.
The Enron Task Force continues to build on the broadband case and have brought witnesses before a grand jury as recently as Friday. Prosecutor John Kroger indicated to a judge last week that additional charges are possible.
By Tom Fowler and Mary Flood
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(c) 2003, Houston Chronicle. Distributed by Knight Ridder/Tribune Business News.
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