SEC Files Amended Complaint Charging Five Enron Executives with Fraud and Insider Trading Relating to Enron's Broadband Subsidiary

FOR IMMEDIATE RELEASE
2003-58

Kenneth D. Rice, former CEO, Joseph Hirko, former CEO, Kevin P. Hannon, former COO, Rex T. Shelby, former Vice President, and F. Scott Yeager, former Vice President, of Enron Broadband Services, Inc. charged with violating federal securities laws

Washington, D.C., May 1, 2003 - The Securities and Exchange Commission today filed an Amended Complaint charging five additional former executives of Enron Broadband Services, Inc. (EBS) - a wholly owned subsidiary of Enron Corp. - with violating the antifraud provisions of federal securities laws and personally reaping more than $150 million in unlawful profits.

Among other things, the Amended Complaint, filed in U.S. District Court in Houston, seeks disgorgement of those ill-gotten gains as well as civil money penalties from the five defendants: Kenneth D. Rice, former CEO; Joseph Hirko, former CEO; Kevin P. Hannon, former COO; Rex T. Shelby, former Vice President, and F. Scott Yeager, former Vice President. In addition, the SEC is seeking an order providing that any civil penalties will be added to other monies recovered, which will then be distributed to the victims of the alleged violations. Today's action amends the March 12 Complaint filed against former EBS executives Kevin A. Howard and Michael W. Krautz.

"The actions described in the Amended Complaint illustrate the lengths to which some at Enron would go to create the illusion of stellar financial performance," said Stephen M. Cutler, Director of the SEC's Division of Enforcement. " It is especially reprehensible that these defendants opted for their own financial well-being at the expense of Enron's shareholders."

"At a point when Enron's touted groundbreaking broadband technology was little more than a concept - and its business model was not commercially viable - these defendants played important roles in perpetuating the fairy tale that Enron was capable of spinning straw - or more appropriately, fiber - into gold," said Linda Chatman Thomsen, the SEC's Deputy Director of the Division of Enforcement.

The filing of the Amended Complaint "is yet another step in unraveling the various strands of fraudulent conduct that perpetuated the Enron myth," Thomsen said. "Any number of people and entities contributed to Enron's ultimate collapse, and as today's action as well as our previous actions makes clear - we are determined to pursue them, and hold them accountable under law."

The Amended Complaint alleges that Rice, Hirko, Hannon, Shelby and Yeager engaged in a wide-ranging fraudulent scheme to, among other things, inflate the value of Enron stock through a series of false and misleading statements and the omission of material information in such public statements about the technology, financial condition, performance and value of EBS. The false and misleading statements took the form of press releases over a two-year period as well as presentations and statements made at Enron's annual analyst conference in January 2000 and 2001. The false statements sought to distinguish the capabilities of the Enron Intelligent Network (EIN), Enron's broadband network, from other networks by claiming that it contained built-in intelligence - a software control layer called the "Broadband Operating System" (BOS) - that allowed it to perform more sophisticated applications than other networks. The BOS and its predecessor, InterAgent, however, did not work as Enron claimed and the EIN was unable to perform the applications that were represented it could perform. In addition, Rice and Hannon made false statements and material omissions concerning the value of Enron's broadband business and its commercial success at the January 2001 analyst conference.

As a result of the false statements, Enron's stock was artificially inflated. Rice, Hirko, Hannon, Shelby and Yeager then sold large amounts of Enron stock at the inflated levels, at a time when they knew that the statements were false and misleading and when they were in possession of material non-public information concerning the true status of the technology and EBS's commercial success. The unlawful profits were substantial: Hirko -- $53.0 million; Rice -- $40.3 million; Yeager -- $35.1 million; Shelby -- $17.5 million; and Hannon -- $9.0 million.

The Amended Complaint charges Rice, Hirko, Hannon, Shelby and Yeager with violating the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking disgorgement of their ill-gotten gains, civil money penalties, a permanent bar from acting as an officer or director of a publicly held company, and an injunction against future violations of the federal securities laws.

This action amends the Complaint filed against Kevin A. Howard and Michael W. Krautz, two former EBS executives, on March 12, 2003. That Complaint as well as the Amended Complaint alleges that Howard and Krautz engaged in a sham transaction, known as "Project Braveheart," which caused Enron to overstate its reported net income for the year 2000 by $53 million and for first quarter 2001 by $58 million. The Amended Complaint alleges that the fictitious net income generated through Project Braveheart was an integral part of a broader fraudulent scheme to deceive the public about EBS.

The Commission brought this action in coordination with the Justice Department's Enron Task Force, which today filed related criminal charges against Rice, Hirko, Hannon, Shelby and Yeager.

The Commission's investigation is continuing.