April 27, 2005
Catching up on the Enron broadband trial

Former Enron Broadband Services CEO Ken Rice, who has already pled guilty to a charge of fraud for his role in the EBS flimflammery, has been testifying busily for the past couple of days in the trial of five other ex-EBS execs. This is from his early testimony:


"I lied about the status of Enron Broadband Services," said Rice, who appeared nervous at the start of his one-hour testimony near the end of proceedings on Friday.

"Did you do this alone?" asked U.S. Attorney Ben Campbell.

"No," Rice replied.

He then named [Jeff] Skilling, who is not being tried in this proceeding, and four of the five former EBS executives who are currently on trial as accomplices in making analysts, investors and the public believe that Enron's Internet business had more capabilities and in turn more value than were true.

[...]

Prosecutors showed jurors video clips of a Jan. 20, 2000, analyst meeting in Houston and had Rice respond to statements made by some of the executives.

In one clip, [Joe Hirko, the former co-chief executive of EBS and the highest-ranking executive now on trial], standing beside Rice, touts the capabilities of EBS's software capabilities, which Rice then told the court did not work at the time. He said it was a lie designed to bolster Enron's stock value.

At another point in the video, a smiling Hirko motions to Rice and asks him in the style of a showman if the capabilities of the broadband network were "a pipe dream" or even years away from being developed.

"No," answered Rice "This is something that exists today."

Prosecutors turned off the video and asked Rice if that was a true statement.

He replied the statement was also a lie.

Prosecutors also showed a clip of [Rex Shelby, the former senior vice president of engineering and operations for EBS] touting the software that Rice again testified was untrue.

Prosecutors said they would be showing the jury more clips of the analyst meeting as well as the video in its entirety.

Rice testified that the lies were to puff up Enron's profit.

"The purpose in telling the lies was to make Enron Broadband Services look better than it was," Rice said, adding that in turn, Enron's stock would rise.

The Jan. 20, 2000, meeting is widely seen as the catalyst for a huge increase in Enron's stock price in the following year.

Enron's stock climbed 25 percent that day and began its gallop up to a record high of $90.56 that August.


Earlier testimony from techie types was about how the software Enron purportedly had to manage excess broadband capacity was "pixie dust" and how a demo for NBC executives was faked. A lot of this was covered in the Smartest Guys In The Room movie. Maybe it's easier now to see what a dumb idea this was, but it's still amazing how thoroughly the stock analysts got duped on this one.

I kind of hope that the trial examines the ill-fated deal EBS had with Blockbuster to deliver video on demand, because I never really understood how that was supposed to work. Was the idea really to pipe movies to people's computers? I have a much nicer computer now than I did in 1999, with a much nicer monitor, but I'd still never choose to watch a movie on my PC instead of my television. Did they believe enough people would do so? If that wasn't the idea, didn't they also need to have deals in place with cable companies so that there'd be a channel on which the movies could be viewed and controlled? Was anyone asking these questions at the time, or was it all just hype?

And it wouldn't be an Enron trial without a sideshow diversion, in this case Jeff Skilling being asked to leave the courtroom because he's a potential witness in the case. Tom thinks he got a bum ruling, however.

Posted by Charles Kuffner on April 27, 2005 to Enronarama | TrackBack
Comments

I remember saying EBS' plans would never work when they let out their prospective deal with Blockbuster. You may remember that Michael and I were very early DSL adopters in Houston (#3), and I knew then that movies-on-demand couldn't compete with cable because of my own experiences.

My feeling is that the analysts had been cowed and nobody was asking questions, much less smart questions.

Posted by: Ginger Stampley on April 27, 2005 7:53 AM

On a related note, Starz and RealNetworks have combined to form a movies on demand system for PC. You need a minimum 600k connection and costs $12.95 a month.

While I did watch major league baseball on PC for the last two years, there is a world of difference between watching something on digital cable and watching it on a broadband connection. Even watching a movie on a DVD-ROM requires a subwoofer.

I consider this technology to be a work in progress in 2005. What were the analysts thinking then?

Posted by: William Hughes on April 27, 2005 10:21 AM