The former chief executive of Enron Corp.'s Internet broadband unit pleaded guilty yesterday to securities fraud and agreed to cooperate with prosecutors investigating his superiors at the onetime Houston energy giant.
Kenneth D. Rice, 45, could be sentenced to as long as 10 years in prison on the single charge, but he is likely to receive a shorter sentence from U.S. District Judge Vanessa Gilmore in exchange for helping the government with its ongoing investigation of who was responsible for Enron's collapse into bankruptcy in late 2001. According to the plea agreement, Rice may be particularly helpful in prosecutors' efforts to shore up their fraud and false statements case against former Enron chief executive Jeffrey K. Skilling.
Rice handed over $13.7 million worth of cash, jewelry, sports cars and real estate to the Justice Department's Enron Task Force and gave the Securities and Exchange Commission an additional $1 million as part of the settlement. He sold $53 million worth of Enron stock from February 2000 to June 2001, according to his indictment.
Federal prosecutors declined to comment yesterday, as did Rice's lawyer, William D. Dolan III.
Former employees said Rice and Skilling had a close working relationship. Rice led Enron Broadband Services (EBS), one of the company's most highly touted units, from July 1999 to July 2001. EBS leaders used accounting tricks to generate revenue, repeatedly lied to investors about its financial health, and sold millions of dollars in company stock at improperly inflated prices, according to court papers.
The broadband unit was a favorite of Skilling and Enron Chairman Kenneth L. Lay, who poured more than $1 billion into its development. Its reputation soared along with Enron's stock after company officials appeared at a conference with the chief executive of Sun Microsystems Inc. in January 2000, at the height of the Internet boom. Skilling told analysts the same day that broadband was so valuable that it should add $37 dollars per share to Enron's stock price. Enron's stock price rose steadily for months after that conference.
But Rice said yesterday that as of January 2000 "it was known throughout the company" that some of Enron's broadband technology had not advanced beyond the initial stages. He said he and others lied that the business was "thriving" to drive up the stock, according to a written attachment to his plea agreement.
Rice added that in late 2000 and early 2001, he and other Enron officials repeatedly hyped the broadband technology and the overall health of the business to the outside world even though it lacked customers and losses mounted. Within the broadband unit, the accounting gimmicks were treated as a joke at the December 2000 Christmas party.
Skilling's upbeat statements to analysts and investors about the finances of the broadband unit in late 2000 and early 2001 -- when Rice said that he and other executives knew EBS losses were spiraling out of control -- are referenced in both Skilling's indictment and in Rice's court papers.
Skilling has publicly defended himself by arguing that expectations for Internet businesses were too optimistic across the board and that his statements were no different from those of many other executives during that heady time.
Rice had been scheduled to go to trial in October with six lower-level Enron broadband officials. His guilty plea could complicate the defense of Rice's onetime underlings, particularly those who were familiar with how EBS met earnings targets and booked revenue, according to lawyers involved in the case.
"His testimony is going to be critical because of the level he was at," said Philip H. Hilder, a Houston lawyer who represents several witnesses in the Enron investigation. "He can explain what went on behind closed doors and put meat on what happened in documents. . . . It's quite significant because he can go both up and down the ladder."
Daniel M. Petrocelli, lead trial counsel for Skilling, could not be reached for comment yesterday. Mark J. Hulkower, a lawyer for former Enron accounting chief Richard A. Causey, who was charged with taking part in accounting manipulations related to the broadband unit, and a spokeswoman for Lay, who was indicted this month, declined to comment.
Skilling, Lay and Causey have pleaded not guilty.