Federal prosecutors charged two Enron Corp. executives with fraud Wednesday for allegedly participating in a scam that generated $111-million in phantom earnings from an Internet movie-on-demand service that later fell apart.
"It was basically an accounting fraud scheme," prosecutor John Kroger said.
Kevin Howard, 40, and Michael Krautz, 34, surrendered to the FBI and were taken to the courthouse in handcuffs. They were freed on $500,000 bond.
Krautz and his attorney left without comment while Howard's lawyer, Jim Lavine, said his client had done nothing wrong.
Both men were charged with securities fraud, wire fraud, conspiracy and lying to the FBI. The Securities and Exchange Commission also charged them with falsifying records and quarterly reports for a transaction that was "a sham from its inception."
Late Wednesday, Enron spokeswoman Karen Denne said the men no longer work at the company. She declined to say if they had quit or were fired.
The charges stem from an attempt by Enron and the video chain Blockbuster Inc. to set up the video-on-demand business using broadband technology in a transaction dubbed "Braveheart." At the time, Howard and Krautz both worked for the now-defunct Enron Broadband Services unit.
Prosecutors say Enron secretly promised profits from the deal to outside investors, promises that were left off transaction documents and hidden from Enron's accountant, Arthur Andersen LLP.
The SEC complaint described a computerized skit presented at aholiday party in December 2000 that joked about fraudulent aspects of the video business. The skit noted how TV boxes used to deliver movies to a customer had caught fire during tests and depicted Andersen as "The Grinch" for trying to stop the transaction.
The complaint said Broadband's general counsel ordered all copies of the presentation destroyed "because the powerpoint contained incriminating material."
The venture fell apart in March 2001 when Blockbuster pulled out. But prosecutors say Enron still claimed $111-million in profits from the venture in 2000 and 2001 when no revenue was generated.
In a recent review, Enron bankruptcy examiner Neal Batson ridiculed the Blockbuster deal. He noted that it had been approved by Andersen, which was convicted of obstruction of justice last year for its Enron dealings.
"Andersen appraised the value of this contractual agreement at between $120-million and $150-million, even though the anticipated business did not have the technology to deliver its product or any rights to the product (movies) it proposed to deliver," Batson wrote.
In a separate move Wednesday, the Commodity Futures Trading Commission accused Enron and former vice president Hunter Shively of operating the Enron Online subsidiary as "an illegal futures exchange" and cited several instances of attempts to manipulate the natural gas market.
The complaint also says Enron tried to offer an illegal agricultural futures contract involving a lumber deal. The CFTC complaint seeks unspecified penalties and a court order barring such activity in the future, though Enron halted trading operations more than a year ago. The company is still closing out existing trading contracts.
Sen. Dianne Feinstein, D-Calif., called the CFTC's action "too little, too late" after California's energy crisis in 2000 and 2001.
"The "manipulative scheme' that CFTC is charging Enron with occurred on July 19, 2001. Yet, this is the first time that CFTC has filed charges in the Western energy crisis," she said.
The criminal charges against Howard and Krautz are the latest brought by the Justice Department in the 2001 collapse of Enron.