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Former Enron Internet Unit's Accountant Says Deal to Fill 'Earnings Hole'

Posted on: Wednesday, 6 July 2005, 18:00 CDT

Jul. 6--Prosecutors say the sale of future video-on-demand profits was a sham, defendants say it was legitimate, but testimony Tuesday indicated that both agree the Enron Internet division did it to bolster Enron's reported earnings.

Ex-Enron Broadband Services accountant Michael Krautz testified Tuesday that the $111 million deal selling the rights for future profits was done primarily to fill an "earnings hole" -- a place where Enron would come up short of projected earnings, which could look bad to Wall Street.

Krautz and ex-EBS Chief Financial Officer Kevin Howard are accused of fraud and conspiracy. They are charged with allowing Enron to falsely appear to have sold the future movies-on-demand profits from a business it was developing with Blockbuster Video. The deal was internally dubbed "Braveheart," and prosecutors say it was nothing more than a disguised loan.

During Krautz's second day of testimony, he described how the deal to create Braveheart evolved over the last few months of 2000. He indicated that the components prosecutors claim were improper -- like full EBS control of the joint venture and an oral guarantee that outside partner nCube would get its investment back -- were not part of the final deal.

On questioning by his attorney, Barry Pollack, Krautz said he conferred often with outside auditors at Arthur Andersen to make sure the deal would pass muster when it came to shared control of the joint venture with Oregon-based nCube, a smaller company that already had a contract with Enron and was short on cash.

He said he told co-workers even after the deal was done that EBS had no obligation to buy out nCube or the Canadian bank that purchased the future profits from the nCube-EBS joint venture.

Prosecutors have presented testimony from an nCube official and others indicating nCube participated in 2000 as a favor to Enron and expected to be taken out of the deal early in 2001.

Krautz told prosecutor Lisa Monaco that he thought nCube did have "skin in the game" -- a euphemism for having risk in a venture. He told her nCube could have benefited, too.

It didn't. The EBS home video business never got off the ground. Enron ended its deal with Blockbuster in 2001, and nCube never got its money out before Enron went bankrupt in December 2001.

But Enron still booked more than $100 million in profits from the deal -- about half in 2000 and half in 2001.

Monaco asked Krautz if Enron kept its oral promises, though Krautz said he did not know of such a promise in this case. She displayed a copy of the Enron ethics code sent out by ex-Chairman Ken Lay. The jury was read the portion that said, "Agreements whether contractual or verbal will be honored."

This is the 12th week of the trial in which Krautz and Howard face charges with three EBS colleagues in U.S. District Judge Vanessa Gilmore's court.

Joe Hirko, Rex Shelby and Scott Yeager are accused of lying in press releases and at a stock analysts conference to prop up Enron stock prices and then cashing in themselves by selling millions of dollars in stock.

Krautz is scheduled to continue testifying today.

The case, which began April 18, could go to the jury as early as next week.

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Source: Houston Chronicle

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