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The really big Enron Corp. show starts next January when the criminal trial of former high-ranking executives Ken Lay, Jeff Skilling and Richard Causey kicks off in federal court in Houston. But before that event, the Enron Task Force gets another shot at trying to convict lower level employees of criminal conduct linked to the spectacular and tragic demise of the former Houston energy giant. Today, five former employees of the one-time highly touted Enron Broadband Services subsidiary face trial in U.S. District Judge Vanessa Gilmore’s court on charges of making false and misleading public statements about the financial viability of EBS. With five individuals at the defense table — the largest group of former employees of the Houston energy company to go to trial to date — there may be as much at stake for the Enron Task Force as for each defendant. “It’s the most important Enron trial to date,” says Dan Cogdell, a criminal defense attorney in Houston who won an acquittal for Sheila Kahanek and represents Kenneth Rice, a former chief executive officer of EBS who agreed to a plea deal in the Broadband case. “Whatever happens here is likely to be a harbinger of what’s going to happen in the Lay, Causey, Skilling trial.” “This is really the first Enron case, but it’s not the corporate executive-level Enron case, so there is a great deal of pressure on both sides,” says Jack Zimmermann, a Houston lawyer who represents defendant Kevin Howard. “There’s pressure on defense lawyers when you have clients that you believe are innocent. There’s pressure on this out-of-town, out-of-state team of prosecutors as well, because the other cases have sort of been considered not exactly Enron cases.” The Enron Task Force has largely been successful in winning convictions. In 2002, a federal jury in Houston found former Enron accounting firm Arthur Andersen guilty of obstruction of justice for destroying Enron documents. And in 2004, another federal jury in Houston returned a guilty verdict against five former Merrill Lynch employees and one former Enron employee in a trial known as the Nigerian barge trial. But the jury acquitted one former Enron employee, Kahanek, in that trial, a result that gives hope to other Enron defendants. The so-called Broadband trial is the first Enron-only trial. And the allegations in the indictment are closely related to allegations against the top tier of executives who are defendants in United States v. Richard A. Causey, et al., the big trial that begins next year. That, presumably, puts more pressure on the Enron Task Force to post a big win in the Broadband trial before it goes after Lay, Enron’s former chairman, former chief executive officer Skilling, and former chief accounting officer Causey. “More so than in other [previous] cases, prosecutors will seek to create for the jury the deceptive, duplicitous, high-pressure atmosphere which characterized Enron’s operations,” says Houston solo practitioner Christopher Bebel, a former federal prosecutor who closely followed the Andersen and Nigerian barge trials. “And they will try to show the jurors that Enron executives were receiving information of one sort and broadcasting to the investing public an entirely different set of circumstances.” The Fifth Superseding Indictment in United States v. Joseph Hirko, et al., alleges the five former EBS employees, from April 1999 through May 14, 2001, engaged in conduct and made false and misleading statements designed to deceive investors and others about the technological capabilities, value, revenues and business performance of EBS. The government alleges the defendants accomplished it by causing Enron to issue materially false and misleading press releases, by making and causing others to make materially false and misleading statements to equity analysts and others, by using fraudulent means to generate revenue so EBS and Enron could appear to reach publicly announced financial targets, and by failing to disclose material adverse information about EBS’s poor business performance. The indictment also accuses defendants Joseph Hirko, Scott Yeager and Rex Shelby of selling large amounts of Enron stock during that two-year period and making millions from it. It alleges Hirko sold stock valued at about $70 million, Yeager sold about $54 million and Shelby sold about $35 million. Hirko, of Portland, Ore., was president and CEO of EBS from July 1998 to July 1999, then he shared responsibilities for the job with Rice for another year and later served as a consultant. Yeager, of Sugar Land, Texas, was senior vice president of strategic development at EBS from October 1998 until around Aug. 1, 2001. Shelby, of Houston, was senior vice president of engineering operations at EBS from December 1998 until about Nov. 15, 2001. The indictment brings conspiracy to commit wire and securities fraud, wire fraud and securities fraud charges against Hirko, Yeager, Shelby, Howard and Michael Krautz. It also brings insider trading and money laundering charges against Hirko, Yeager and Shelby. Krautz, of Houston, was senior director of transactional accounting at EBS from August 1999 to October 2001, and Howard, also of Houston, was vice president of finance from August 1999 to September 2001. All the defendants have pleaded not guilty to the charges. Rice, once the chief executive officer of EBS, and Kevin Hannon, the former chief operating officer, were indicted in Hirko, but each pleaded guilty to a single criminal charge and is expected to testify during the trial. Rice pleaded guilty to securities fraud and faces up to 10 years in prison and a $1 million fine, while Hannon pleaded guilty to conspiracy to commit securities and wire fraud and faces up to five years in prison and a $250,000 fine. Andrew Weissmann, director of the Enron Task Force, says he cannot say if Hannon and Rice will testify, but both signed agreements calling for them to cooperate fully with the U.S. Department of Justice’s investigation and to testify truthfully at any grand jury, court or other proceeding. DETAILS ABOUT DOCUMENTS As alleged in the indictment, Hirko, Yeager and Shelby, along with Rice, issued and caused to be issued the “first of many” false and misleading press releases in April 1999 when touting the Enron Intelligent Network, a software-driven telecommunications network. The false and misleading press releases continued through 1999 and into 2000, as alleged in the indictment, even though numerous EBS executives and employees told the three defendants and Rice “the Enron network was not intelligent” and the press releases and marketing materials were false and misleading. Also, as alleged in the indictment, Hirko, Yeager, Shelby, Howard and Rice participated in meetings preparing for a PowerPoint and video presentation about EBS for an analyst conference held in January 2000. The indictment alleges early drafts of the PowerPoint presentation clearly state the Broadband Operating System (the network control software) was under development only, but during December 1999 and January 2000, those statements were deleted from the presentation. The indictment alleges Hirko, Shelby, Rice and others knowingly made numerous false and misleading statements about EBS’ fiber network, proprietary software and technical capabilities at the presentation to analysts. It alleges the presentation was “received favorably by analysts and investors” and Enron stock increased from $54 on the day of the presentation to more than $72 the next day. The indictment further alleges that after the conference, and through July 2000, Hirko, Yeager, Shelby, along with Rice, Hannon and others, continued to cause the issuance of materially false and misleading press releases. Meanwhile, charges against Howard and Krautz relate to a structured finance transaction known as Project Braveheart designed to allow EBS to monetize a 20-year video-on-demand agreement with Blockbuster Inc. That agreement, signed in April 2000, called for Blockbuster to obtain digital rights to films and for EBS to encode the movies and stream them over its network to customers’ homes. The indictment alleges Howard and Krautz understood the accounting rules relating to structured finance transactions, but they and others intentionally violated accounting requirements to complete the Braveheart transaction and to post $111 million in revenue for Enron in 2000 and 2001. The indictment also alleges Rice and Hannon were “repeatedly informed” between October 2000 and January 2001 that EBS was performing poorly and that Blockbuster was threatening to terminate the video-on-demand agreement. But, the indictment alleges, Rice and Hannon made a presentation in January 2001 to analysts that included numerous false and misleading statements about EBS’s financial prospects, including the fact the Blockbuster deal was in danger of cancellation and that even though EBS had yet to receive any recurring revenue from the Blockbuster contract, it had already sold the majority of future revenue through Braveheart. In sworn statements attached to their cooperation agreements, Rice and Hannon admit to some of the overt acts alleged in the indictment. Rice says in the statement he and other employees of Enron and EBS made false statements about the products, services and business performance of EBS. “Our purpose was to mislead investors and others about the success of EBS, including the extent to which the company had developed various products and services and the company’s financial performance, in order to artificially inflate the price of Enron stock,” Rice wrote in the statement. “I also engaged in schemes to enrich myself and others at the expense of Enron shareholders.” Hannon says in his statement that he helped draft the content of the EBS portion of the analyst conference in 2001, made misleading statements during the presentation and failed to correct misleading statements made by others. He said the presentation falsely portrayed EBS as a commercial and financial success. Cogdell, Rice’s attorney, declines to discuss any testimony his client may give at trial, and an attorney for Hannon, Reid Figel, a partner in Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington, D.C., did not return a telephone message seeking comment before press time on Thursday. While prosecutors allege a conspiracy among the defendants, they are actually split into two groups — the former EBS executives who allegedly made false and misleading statements and those who worked on Braveheart. Zimmermann, a partner in Zimmermann & Lavine, says that while “there are clearly two camps,” the defendants are working together where they can. “Where there’s a unity of interest, there’s a unity of effort. Hirko, Shelby and Yeager, the technology defendants, they have similar defensive issues and they are charged with the same thing. Howard and Krautz are working close together and are basically charged with the same thing,” he says. Lee Hamel, a partner in Houston’s Hamel Bowers & Clark who is an attorney for Yeager, says, “We have a common interest in seeing the government fail in its conspiracy and fraud scheme charges.” Jury selection begins today, when 100 prospective jurors will report to Gilmore’s courtroom for voir dire. Jury questionnaires were sent to a panel of about 400 potential jurors, but lawyers on both sides who reviewed the questionnaires notified Gilmore in March they agreed to dismiss about 100 of the jurors for cause. Gilmore told lawyers at a pretrial hearing on April 11 that she will bring in another group of about 90 potential jurors on Tuesday if the lawyers don’t pick a jury from the first group. Each side says they will need four weeks for trial, meaning a verdict isn’t likely until late June.

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