[business week] Former Enron Broadband Services executive Rex Shelby was sentenced today on an insider trading charge linked to the investment fraud that destroyed the world’s largest energy trader 10 years ago.
Shelby, 59, pleaded guilty to one count of insider trading and was sentenced to three months in a federal halfway house and three months of house arrest. Shelby will also forfeit about $2.6 million in profits from the illicit trade.
Shelby’s lawyer Ed Tomko told a judge that Shelby has also agreed to forfeit another $1 million to resolve related Securities and Exchange Commission charges. He faced a maximum of 10 years and a fine of $1 million on the one count before reaching his plea deal. He’ll be in probation for two years, including the six months of combined confinement.
“I take full responsibility for my actions and all the decisions I made at Enron,” Shelby told the judge today. “No one forced me to do those things.”
U.S. District Judge Vanessa Gilmore sentenced Shelby to half the number of months confinement that he’d agreed to in a plea deal. “Mr. Shelby’s actions ultimately did not cause the downfall of Enron,” she said. “Only a few individuals at the pinnacle of Enron knew of the fraud.”
Gilmore said she moderated the sentence to fit Shelby’s role and the punishments given to others in the Enron fraud scheme. She said the fact Shelby has for the last eight years devoted himself exclusively to working on his defense, in “self-imposed home confinement"”, was also a consideration in her decision.
Halfway House
Shelby must report to a federal halfway house in Houston in about a week to begin his sentence, which requires him to complete 230 hours of community service during probation.
Shelby was senior vice president of engineering and operations at Enron Corp.’s internet unit in December 2001, when the energy trader plunged into bankruptcy on revelations of widespread accounting fraud.
Shelby and six other EBS executives were indicted in 2003 on charges they helped the parent company’s senior management, including Enron’s former Chairman Kenneth Lay and Chief Executive Officer Jeffrey Skilling, deceive analysts and investors about the unit’s capabilities and financial performance.
The executives were accused of misrepresenting EBS at a January 2000 analysts’ conference, where they portrayed it as one of Enron’s “core’’ units, worth about $50 billion. In reality, the division struggled to launch products and never earned a profit.
Enron’s stock soared from $54 a share the day of the analysts’ conference to $72 a share the following day. Shelby sold 150,000 shares on the price increase, reaping gross proceeds of just under $10.7 million, according to his plea.
Avoiding Trial
Shelby had long maintained he sold the shares to diversify his portfolio and not based on any inside knowledge of an alleged conspiracy to inflate Enron’s stock price. To avoid a trial on broader conspiracy and fraud charges, which had been set to begin this past January, Shelby pleaded guilty to one count of insider trading in November.
“The engineers were still working on it, but we left the impression that the technology was complete,’’ Shelby told U.S. District Judge Vanessa Gilmore when he enter his plea Nov. 22. “The next day, I exercised some stock options when I had knowledge that technology was not complete.’’
Shelby’s sentencing marks the end of the Enron Broadband case, which yielded mixed results for the government.
Guilty Pleas
Two of the seven originally indicted EBS executives -- Kenneth Rice and Kevin Hannon, who each served as president of the division at one time -- pleaded guilty before trial and testified against former colleagues.
The remaining five executives, including Shelby, were tried together in Houston federal court in 2005. That trial ended with no convictions and a smattering of acquittals, as jurors failed to reach verdicts on scores of counts.
None of the men were completely exonerated at that trial, and the government vowed to streamline its case and retry them all on narrower charges.
To avoid that retrial, former CEO Joseph Hirko pleaded guilty to a reduced charge in late 2008 and served about 16 months in prison, forfeiting $7 million.
Ex-strategy chief F. Scott Yeager appealed the government’s retrial attempts and in 2009, the U.S. Supreme Court ruled he couldn’t be retried based on his partial acquittal by the first jury.
Retrial
In 2006, prosecutors retried former EBS finance chief Kevin Howard and senior accountant Michael Krautz, resulting in Howard’s conviction and Krautz’s acquittal.
Howard’s verdicts were overturned a year later, after an appellate ruling in a related Enron case found that prosecutors used an invalid legal theory. Howard ultimately pleaded guilty to a reduced charge in June 2009 and accepted a one-year term of house arrest and a $25,000 fine in order to avoid a third trial.
Hannon, Rice and Hirko have since completed their sentences and been released from prison.
The case is U.S. v. Shelby, H-03-093, U.S. District Court, Southern District of Texas (Houston).
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