Kevin Howard, former chief financial officer and vice president of finance for Enron Broadband Services (EBS), Enron’s failed telecommunications business, pleaded guilty today to falsifying books and records.
Kevin Howard, 46, of Houston, entered the guilty plea today before Judge Vanessa Gilmore at U.S. District Court in Houston. Howard pleaded guilty to one count of falsifying books and records. According to the terms of the plea agreement, Howard faces a maximum sentence of up to 12 months of home confinement at his sentencing, which will be scheduled at a later date.
According to the superseding indictment and the plea agreement, Howard knowingly and willfully directly or indirectly caused Enron’s Form 10K for the year-ending 2000 to be falsified because it did not accurately and fairly reflect, in reasonable detail, the transactions and dispositions of Enron’s assets.
In January 2000, Enron officially unveiled EBS to the public as Enron’s newest "core" business group and announced that EBS would report a loss of $60 million for the year 2000. According to court documents, by the fourth quarter of 2000, EBS had failed to generate any significant revenue. Howard admitted that he and others at EBS and Enron knew that absent a large revenue-generating transaction, EBS would miss the announced target by a wide margin. According to court documents, while EBS had little revenue, it had entered into an agreement with Blockbuster to provide video on demand services. This agreement had anticipated future revenue in the hundreds of millions of dollars.
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In an attempt to generate earnings sufficient to meet the earnings target, Howard admitted that he and others at EBS structured a transaction known as "Project Braveheart" designed to "monetize" or book a portion of the anticipated hundreds of millions of dollars of future earnings from EBS’s agreement with Blockbuster in the fourth quarter of 2000.
Howard admitted that, in November 2000, he and others at EBS approached a small video on demand (VOD) technology company and asked if the company would be willing to be EBS’s joint venture partner so that EBS could meet its earnings target for the year 2000. According to the plea agreement, through discussions with Howard and others at EBS, the VOD technology company understood that it would not suffer financially in any way from participating in Project Braveheart and that EBS was going to arrange for the company to be bought out of the joint venture by a third party the next quarter. Howard admitted he explained to the company that its participation in the joint venture was simply a "bridge mechanism" to get EBS into the next quarter. Based on these conversations, the company agreed to be the joint venture partner.
Prior to the close of Project Braveheart, Howard admitted he learned that Enron’s auditors, Arthur Andersen, would probably not have agreed with EBS’s recognition of earnings from Project Braveheart if it had known that the VOD technology company intended to exit the joint venture in the first quarter of 2001. Howard admitted that he knowingly and willfully failed to inform Andersen or cause Andersen to be informed of the VOD technology company’s intentions. Similarly, Howard admitted that he knowingly and willfully failed to inform the VOD technology company prior to the close of the transaction that he had learned that the company could not be bought out in the first quarter as originally discussed.
According to the plea agreement, Project Braveheart closed on Dec. 22, 2000, and EBS subsequently sold a portion of its interest in the joint venture and booked $53 million in earnings from this transaction in the fourth quarter of 2000. Project Braveheart enabled EBS to falsely record these earnings as revenue in order to meet the $60 million loss goal and this false loss amount was reported in Enron’s 10K for the year 2000.
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In November 2005, Howard was charged in a superseding indictment with conspiracy to commit wire fraud and falsify books and records; wire fraud, including honest services wire fraud; and falsifying books and records. In May 2006, Howard was found guilty of the charges against him, but the conviction was vacated prior to sentencing due to the Fifth Circuit Court of Appeals’ decision in United States v. Brown relating to honest services wire fraud. Subsequently, the government removed the honest services wire fraud charges from the superseding indictment and the case was set for re-trial, with trial scheduled to begin today.
Charges against a number of EBS employees, including Howard, were initially brought in March 2003 by the Enron Task Force, a team of federal prosecutors and agents formed to investigate matters related to the collapse of Enron Corp. All remaining Enron Task Force cases are now being handled by the Criminal Division’s Fraud Section, with investigatory assistance from the FBI.