The Commodity Futures Trading Commission (CFTC) last week charged Enron Corp. and Hunter S. Shively, manager of Enron’s central futures trading desk, with using EnronOnline (EOL) to manipulate the natural gas market, causing a spike in prices at the Henry Hub and affecting the futures price on the New York Mercantile Exchange (Nymex). The CFTC also said Enron operated EnronOnline as an illegal futures exchange.

Other parts of the complaint filed by the CFTC in federal district court in Houston charge the now-bankrupt Enron with offering illegal lumber futures contracts through EnronOnline, its Internet trading platform. The CFTC complaint was filed on the same day the federal government’s Enron Task Force, led by the Justice Department, arrested two Enron executives accused of inflating earnings with another special purpose entities (SPE) scheme.

The complaint charges that on July 19, 2001, Shively, through EOL, caused Enron to purchase an extraordinarily large amount of Henry Hub spot natural gas within a short period of time, causing artificial prices at the Hub and impacting the correlated Nymex natural gas futures price.

Shively’s attorney, Susan Brune, said the CFTC had no grounds for action against her client, according to the Houston Chronicle. “What the complaint says is that Mr. Shively and others bought and sold a large quantity of natural gas within a short period of time. There’s nothing illegal about that. The only reason the CFTC is going after Mr. Shively is he had the misfortune of working at Enron.”

The complaint also charges Enron with operating EOL as an illegal futures exchange from September through December 2001 by modifying EOL to effectively allow outside users to post bids and offers. Enron listed at least three swaps on EOL that were commodity futures contracts. The CFTC said that with this modification, Enron was required to register or designate EOL with the CFTC, or notify the CFTC that EOL was exempt from registration. Enron failed to do either of these things, and the complaint charges that, because of this failure, EOL became an illegal futures exchange.

Finally, the complaint charges the company with offering an illegal agricultural futures contract on EOL. According to the complaint, between at least December 2000 and December 2001, Enron offered a product on EOL it called the US Financial Lumber Swap. Since it was not traded on a designated exchange or otherwise exempt, it therefore was an illegal agricultural futures contract.

The CFTC is seeking against each defendant a permanent injunction, civil monetary penalties and other remedial and ancillary relief.

In the Justice Department investigation, two Enron executives, Kevin Howard and Michael Krautz, were arrested last Wednesday on charges of securities fraud, wire fraud, conspiracy and lying to FBI agents about a fraudulent scheme, labeled “Braveheart,” involving a video on-demand contract between Enron and Blockbuster, the retail video store chain.

The arrest warrants on criminal charges were filed by the Justice Department, acting for the federal court in Houston. At the same time the Securities and Exchange Commission (SEC) filed a civil suit relating to the same scheme.

According to the Justice Department affidavit accompanying the arrest warrants filed in federal court in Houston, Howard and Krautz deliberately violated accounting rules to allow Enron to fraudulently record $111 million in earnings in 2000 and 2001. The affidavit also alleges that Howard and Krautz intentionally concealed aspects of the transaction from Arthur Andersen accountants and allegedly lied to agents of the Federal Bureau of Investigation.

At the time of the fraud, Howard and Krautz, both residents of Houston, were executives at Enron’s telecommunications division, Enron Broadband Services (EBS). Both are still employed at Enron.

The transaction in the complaint was based on a 20-year exclusive contract signed by EBS and Blockbuster, Inc., in April 2000 to stream video films directly to customers’ homes. EBS’s plan was to begin testing the VOD service by Dec. 15, 2000, but the service was not expected to produce any profits until many years later. The scheme allowed Enron to book the expected profits immediately.

The deal with Blockbuster eventually collapsed in 2001. The financial scheme centered on the contract with Blockbuster appeared to be similar to earlier revelations of special purpose entities (SPE), or off-the-books partnerships, such as JEDI, Chewco and Raptor, that were used to enhance the corporate balance sheet. A bankruptcy examiner had said Enron had at least 50 of these entities (see Daily GPI, Sept. 24, 2002).

The two Enron executives surrendered to the FBI in Houston Wednesday morning. If convicted, they face a maximum penalty of 10 years in prison and a $250,000 fine for each securities fraud violation, and five years imprisonment and a $250,000 fine for each violation of wire fraud, conspiracy and false statements laws.

The SEC civil suit charges Howard and Krautz under the antifraud provisions of the federal securities laws with falsifying Enron’s book and records, aiding and abetting Enron’s filing of false and misleading quarterly reports and violating internal accounting controls. The SEC 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.

Both the SEC and the Justice Department’s Enron Task Force are continuing their investigations.

Wednesday’s charges are the latest in a long line of accusations following on the implosion of Enron and the bankruptcy filing on Sunday, Dec. 2, 2001 (see NGI, Dec. 10, 2001). In June 2002, Enron auditor Arthur Andersen was convicted of obstruction of justice. Former Enron Chief Financial Officer Andrew S. Fastow was indicted by a federal grand jury in Houston on Oct. 31, 2002 on 78 counts of wire fraud, money laundering and conspiracy.

In August 2002, former Enron finance executive Michael J. Kopper pleaded guilty to conspiracy to commit wire fraud and money laundering. Former Enron energy traders Timothy N. Belden and Jeffrey Richter pleaded guilty to conspiracy to commit fraud by manipulating energy prices in the California market, and are cooperating with the government’s ongoing investigation.

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