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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Regarding Fraud, Insider Trading Charges Relating to Enron's Broadband Subsidiary

Remarks by:

Linda Chatman Thomsen

Deputy Director, Division of Enforcement
U.S. Securities and Exchange Commission

Prepared for Delivery at U.S. Department of Justice Press Conference
May 1, 2003

Good morning.

Today, the Securities and Exchange Commission amended its March 12th Complaint to add charges against five former executives of Enron's broadband subsidiary. In its Amended Complaint, the Commission charges these five individuals with orchestrating a fraudulent scheme to inflate the price of Enron's stock through, among other things, a series of false and misleading public statements. The Commission also alleges that each defendant personally traded in Enron securities while in possession of material nonpublic information concerning the true nature of this business. The Commission is seeking disgorgement of ill-gotten gains, civil penalties, injunctive relief, and an order permanently barring each of them from serving as an officer or director of a publicly traded company. Pursuant to the Sarbanes-Oxley Act, the Commission is seeking an order providing that any civil penalties will be added to other monies recovered, which will then be distributed to the victims of the alleged violations.

These defendants, each of them, served as senior executives and played a critical role in the purported Enron success story: Enron Broadband Services or "EBS." Defendants Ken Rice and Joe Hirko at various times both served as Chief Executive Officer. Defendant Kevin Hannon served as Chief Operating Officer, and defendants Rex Shelby and Scott Yeager were both Vice Presidents. At a point when Enron's touted ground breaking broadband technology was little more than a concept -- and its business model was not commercially viable -- these defendants played important roles in perpetuating the fairytale that Enron was capable of spinning straw -- or more appropriately, fiber -- into gold. These defendants made, or caused to be made, various public statements in which:

  • They described technological achievements by Enron's broadband network that did not exist;

  • they distinguished Enron's network as far superior to its competitors' when it was not;

  • they touted the value and financial performance of EBS when they knew it had little -- if any -- chance of success; and
  • they did this all for the purpose of inflating the value of Enron's stock, and -- in turn -- the value of their own bank accounts.

To be clear, the ill-gotten gains reaped by these defendants as a result of trading in Enron securities were substantial -- in excess of $150 million dollars total:

  • Defendants Hirko and Rice each sold over one million shares of Enron stock for profits of approximately $53 million and $40 million dollars, respectively;

  • Defendant Yeager sold over 800,000 shares of Enron stock for profits of approximately $35 million dollars;

  • Defendant Shelby sold over 500,000 shares of Enron stock for profits of approximately $17 million dollars; and

  • Defendant Hannon sold over 100,000 shares of Enron stock for profits of approximately $9 million dollars.

This action amends the Complaint filed by the Commission on March 12, 2003 against Kevin Howard and Michael Krautz, two other former EBS executives. In its original Complaint, the Commission alleged that defendants Howard and Krautz engaged in a sham transaction, known as "Project Braveheart," which caused Enron to overstate its reported net income by approximately $111 million. The Commission's Amended Complaint makes clear that the fictitious net income generated through Project Braveheart was an integral part of a broader fraudulent scheme to deceive the public about EBS: Project Braveheart filled an earnings hole created by the unfounded expectations resulting from the false statements charged in today's action.

The defendants charged in today's Amended Complaint bear substantial responsibility for the Enron debacle and for the ensuing damage to investors.

This action is yet another step in unraveling the various strands of fraudulent conduct that perpetuated the Enron myth. Any number of people and entities contributed to Enron's ultimate collapse and as today's action as well as our previous actions makes clear -- we are determined to pursue them, and hold them accountable under law.

Thank you.


Modified: 05/01/2003