Securities and Exchange Commission
Litigation Release No. 18030 / March 12, 2003
Accounting and Auditing Enforcement
Release No. 1738 / March 12, 2003
SEC Charges Two Enron Executives With Fraud
Relating to Enron's Broadband Subsidiary
Kevin A. Howard, former chief financial officer, and
Michael W. Krautz, former senior director of accounting,
charged with violating federal securities laws.
Securities and Exchange Commission v. Kevin A. Howard and Michael W. Krautz, Civil Action No. H-03-0905 (Harmon) (SDTX) (March 12, 2003)
The Securities and Exchange Commission ("Commission") today charged Kevin A. Howard, the former chief financial officer, and Michael W. Krautz, a former senior director of accounting, of Enron Broadband Services, Inc. ("EBS"), a wholly-owned subsidiary of Enron Corp., with violating the antifraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws.
The Complaint, which was filed in the United States District Court for the Southern District of Texas, alleges that defendants Howard and Krautz engaged in a scheme to overstate the reported earnings of Enron, and its EBS subsidiary, by $111 million during the fourth quarter of 2000 and the first quarter of 2001. The scheme, known as "Project Braveheart," involved a sham sale of certain assets to accelerate recognition of income from a long-term agreement to develop and provide video-on-demand services. Conceptually, defendants sought to sell an interest in the future revenues associated with this agreement for purposes of immediate income recognition. As alleged in the Complaint, Project Braveheart was a sham from its inception: the transaction had no economic substance and was created solely for the purpose of generating income.
The Commission's Complaint alleges that defendants Howard and Krautz carried out the scheme by forming a purported joint venture, assigning the agreement to the joint venture, and selling an interest in the joint venture to a third party financial institution. The entity enlisted by defendants Howard and Krautz to form the joint venture was a partner in name only and was never intended to participate in the joint venture. The equity stake of this joint venture partner was not at risk because Enron guaranteed the entity a short-term take-out at a specified rate of return. The financial institution to which Enron sold a portion of its interest in the joint venture also did not have equity at risk as required, having been guaranteed against loss by Enron. As a result of Project Braveheart, Enron overstated its reported net income for the year 2000 by $53 million and for first quarter 2001 by $58 million.
In its Complaint, the Commission charges Howard and Krautz with: violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; falsifying Enron's book and records, Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1; aiding and abetting Enron's filing of false and misleading quarterly reports, Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; and aiding and abetting Enron's books and records and internal accounting control violations, Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The Commission is seeking disgorgement of ill-gotten gains, civil money penalties, a permanent bar from acting as a director or officer of a publicly held company, and an injunction against future violations of the federal securities laws.
The Commission brought this action in coordination with the Justice Department's Enron Task Force, which today filed related criminal charges against Howard and Krautz.
The Commission's investigation is continuing. For additional information see
SEC Complaint in this matter