Law

Former Enron Executive Sentenced to 16 Months In Prison For Wire Fraud

enronJoseph Hirko, the former co-chief executive officer of Enron Broadband Services (EBS), the high-flying energy giant’s failed telecommunications unit, was sentenced Monday to 16 months in prison after pleading guilty to charges of wire fraud, said Assistant Attorney General Lanny A. Breuer of the Criminal Division in a statement.

Enron imploded in a wave of accounting scandals in 2001.

In addition to the prison term, U.S. District Court Judge Vanessa Gilmore ordered Hirko, 53, of Portland, Oregon, to pay about $7 million in restitution to victims through the U.S. Securities and Exchange Commission’s Enron Fair Fund, in accordance with the terms of the plea agreement. Hirko pleaded guilty on Oct. 14, 2008, in U.S. District Court in Houston to one count of wire fraud charged in a superseding indictment.

“I reviewed and approved press releases that contained, among other things, statements that the BOS was complete and I knew it was in development,” Hirko told Gilmore when he entered his guilty plea.

In July 2005, Hirko and four other EBS executives were tried on various charges of conspiracy to commit securities and wire fraud, securities fraud, wire fraud, insider trading and money laundering relating to their employment at Enron. The trial resulted in a mistrial, and Hirko was subsequently charged in a superseding indictment with wire fraud, securities fraud and insider trading.

According to the superseding indictment and the plea agreement, Hirko participated in Enron’s annual analyst conference in Houston at which Enron introduced EBS as one of its “core” units. Enron also announced the development of a broadband operating system or “BOS.” According to the plea agreement, the BOS was purported to be an “intelligent” operating system and was described as, among other things, a standard protocol for accessing real-time bandwidth.

As alleged in the superseding indictment, Enron issued a press release on May 15, 2000, announcing the acquisition of Warpspeed Communications. According to Hirko’s guilty plea, the Warpspeed release falsely represented the status of the BOS and implied that it was already embedded and functioning as a part of Enron’s network.

Specifically, the Warpspeed release stated that the BOS “allows application developers to dynamically provision bandwidth on demand for the end-to-end quality of service necessary to deliver broadband content.” According to the plea agreement, Hirko reviewed and approved this language even though the Warpspeed release contained material inaccurate representations regarding the BOS’s status.

In doing so, Hirko admitted that he acted with reckless indifference to the true facts, including: that the BOS was under development throughout his employment at Enron; that it was never embedded on Enron’s network; and that it could not dynamically provide bandwidth on demand or provide for the end-to-end quality of service necessary to deliver broadband content.

According to the plea agreement, Hirko’s approval of the Warpspeed release, as well as other press releases, assisted in maintaining Enron’s overall stock price, thereby improperly maintaining the value of Hirko’s holdings of Enron stock.

The Houston Chronicle reported last October that Hirko, who joined Enron in 1997, worked closely with former Enron chief executive Jeffrey Skilling and co-CEO Kenneth Rice to make EBS appear profitable when it was actually a money-losing venture.

Former Enron CEO Jeff Skilling embraced the division as a major profit center amid the dot-com boom. However, the unit fizzled despite big plans for video streaming, bandwidth-on-demand and bandwidth trading as the telecom industry cratered in 2000 and 2001.

Hirko, Rice and Skilling talked up the division at Enron’s January 2000 analyst conference, and the company’s stock rose $13 a share that day.

Rice pleaded guilty to securities fraud in July 2004. A few weeks later, Kevin Hannon, the former chief operating officer of EBS, pleaded guilty to conspiracy.

Charges against the EBS employees were initially brought in March 2003 by the Enron Task Force, a team of federal prosecutors and agents formed to investigate matters related to the collapse of Enron. All remaining Enron Task Force cases are now being handled by the Criminal Division’s Fraud Section, with the investigatory assistance of the FBI.

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