Federal investigators hit Enron Corp. from two directions yesterday, charging that executives at the Houston company had engineered $111 million in fraudulent profits from an Internet movie deal two years ago, while an energy-trading executive was accused of manipulating natural gas prices.
The Justice Department yesterday arrested Kevin A. Howard and Michael W. Krautz, both former senior executives of Enron's highly touted broadband business. A criminal complaint filed in Houston alleges that they committed securities fraud by arranging a financial transaction, code-named Project Braveheart, that fraudulently overstated Enron's earnings from the online movie venture in late 2000 and early 2001, a time when the project was failing.
The complaint also charged that Howard and Krautz lied to investigators when asked if the deals that created the profits had violated accounting rules.
In a separate complaint, the Securities and Exchange Commission said the transaction was "a sham from its inception . . . created solely for the purpose of generating earnings."
Howard, financial vice president for the broadband movie venture, and Krautz, its senior accountant, intend to plead not guilty and fight the government's charges, their attorneys said. A preliminary hearing is scheduled for April 1. Howard "is disappointed that he is being singled out and charged with offenses he categorically denies," said his attorney, James Lavine.
In the trading case, the Commodity Futures Trading Commission filed civil charges yesterday against Enron and former trading executive Hunter S. Shively. The agency alleged that Shively and colleagues made huge purchases of natural gas on July 19, 2001, artificially driving up prices on commodity markets.
CFTC Enforcement Director Gregory G. Mocek called the complaint the agency's "first step" in addressing trading violations at Enron. "We will continue to pursue other allegations against the company and its employees," he said.
Shively's attorney, Susan Brune, said her client would fight the charges. "It's not manipulation to buy a large quantity of gas, regardless of what effect that has on markets," she said.
Two other Enron traders have pleaded guilty to manipulating electricity prices during California's energy crisis, in a separate Justice investigation.
The charges in the broadband case, anticipated by defense attorneys for weeks, move beyond the government's initial Enron indictment, which accused former Enron chief financial officer Andrew S. Fastow of conspiring to cheat Enron by diverting business profits to himself.
The broadband allegations center on one of the company's most important new business ventures -- a partnership with Blockbuster Inc. -- which Enron used as a critical source of reported profits needed to meet Wall Street's earnings targets in 2000, the government said. Several of Enron's top executives were directly involved in launching the broadband effort.
Enron's former chief executive, Jeffrey K. Skilling, had assured Wall Street analysts in January 2001 that the broadband venture was on track, and later testified to Congress that it failed abruptly in mid-2001 as the telecom investment boom collapsed.
The complaint against Howard and Krautz said that officials in the broadband unit knew by December that the Blockbuster partnership was failing, but got Blockbuster to extend it for three months so Enron could count the profits. The venture was shut down in March.
Attorneys following the Enron investigation believe that in charging Howard and Krautz, the government is hoping to pressure Enron executives into implicating others higher up at the company. The Justice Department said the allegations are supported by 15 confidential witnesses, most of them from Enron.
"The big question is who if anyone is next," said Houston lawyer and former federal prosecutor Dan Hedges. "It seems doubtful they would stop with these two."
The Justice complaint alleges that senior broadband executives were briefed by Howard about accounting violations that threatened the venture, including the project's chief executive, an apparent reference to Kenneth D. Rice, a close ally of Skilling's.
Prosecutors said the risks to the Blockbuster deal were not disclosed to Enron's accountants or the outside investors in Braveheart at the time. According to witnesses, Enron officials joked about the project's plight at a Christmas party, producing a takeoff on a Dr. Seuss rhyme that read, with a reference to generally accepted accounting principles: "You cannot do it without GAAP. You cannot do it because it's crap."