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Why did the DOJ pursue EBS Employees?

The book "Securing the Network: F. Scott Yeager and the Rise of the Commercial Internet" tells the story behind the creation of key concepts behind the media-rich commercial Internet of today.

Buy it now on Amazon

The Enron prosecution represents a stunning example of the consequences of individual ego and unbridled power enabled by a highly visible case with no oversight or accountability.

     Enron was a high-profile energy company that, in 1997, bought a utility company in Portland, Oregon. The plan was to use the existing pipeline rights-of-way the company owned to deploy fiber-optic cables and transform the utility into a communications company.  Eventually, this company became known as Enron Broadband Services, a subsidiary of Enron. Scott joined that company to develop his ideas for services we today call a CDN.
    Y2K was a challenging year for communications technology companies. First, the dot-com bubble burst in March of 2000, not long after the January 20 Analyst's Conference, where the company announced the new broadband products, sending the communications industry into a tailspin.

     Then, in April 2000, EBS announced the historic deal with Blockbuster for a Video On Demand (VOD) service to the home. They built that platform, had it up and running by EOY 2000, and demonstrated it at the 2001 Analyst's Conference.
    However, Enron hit dot-com headwinds. Although the dot-com implosion decimated the industry, Enron weathered the initial storm quite well. However, that eventually changed, and the resulting chaos provoked reorganizations and management changes, including Scott's departure. Soon after that, some questionable accounting practices came to light, the stock cratered, and a shareholder's lawsuit ensued. The case drew the attention of the DOJ and the SEC. As a result, Enron filed Chapter 11 bankruptcy on December 2, 2001.
    The prosecutors went after Ken Lay and Jeff Skilling. However, they were unable or unwilling to do the work necessary to find the presumed criminality they sought. Instead, they took the "easy" path of searching for insiders who would "flip" and testify against their actual targets. EBS had nothing to do with Enron corporation's accounting practices. Nonetheless, searching for someone they could intimidate into testifying against the Enron executives, they went after Scott and other EBS employees.

     The prosecutor indicted Scott Yeager on 122 counts, more than Ken Lay, Jeff Skilling, and Andy Fastow combined.

     Kroger admits that he decided after two weeks of research and interviewing Bill Collins and Shawna Meyer that he should indict the Broadband 7 that included Yeager. Kroger used the so-called "Lipstick email" as the smoking gun to go after these people.

    It appears that Kroger used the precise technique he bragged about in his book, soliciting false testimony and fabricating evidence to make a bogus case, rather than do the real homework required to uncover actual criminality, if any. It was a game of results by any means, whether truthful or not, threatening as many innocents as necessary to extort a false confession.

Quotes from Kroger's book:

P. 375

"Looking back, I now see … an indication that prosecutorial power had already twisted my personal character…"

P. 376

"PRIOR TO THE ENRON CASE, I had little white-collar experience."

P. 384

"Leslie, Sam, Andrew and I were used to trying mob, gang, and narcotics cases, in which the only evidence comes from the mouths of cooperating conspirators, so it felt natural for us to follow that model.
"The sheer complexity of this mess drove our investigative strategy. Most white-collar prosecutors try to build document cases, based primarily on incriminating business records. These cases may be dull, but they have one great advantage: documents don't lie. In contrast, we decided from the outset that we would try to construct a cooperator case, built primarily on the testimony of witnesses… After a few weeks of work we realized that we lacked the time and resources to conduct a comprehensive forensic analysis of Enron's financial condition."

P. 391

"OUR NEXT STEP was to find some documentary evidence that confirmed Collins and Meyer were telling the truth. … two items caught my eye.
"In December 1999, just before the 2000 conference, EBS executives had compiled a series of PowerPoint slides they intended to show to investment analysts. Someone on our team--I cannot remember who, though I suspect it was Deb (Tarasevich, a talented lawyer at the SEC) --went back and found all the early drafts of these slides and compared them with the final draft. This examination showed that initially Enron planned to describe its software as "under development." By the time the conference arrived, however, those two critical words had been [because the primary software development was complete] edited out, so that the final slides suggested that the software existed. This was clear, powerful evidence that sometime during those months the senior executives had decided to lie about their progress in order to make a more powerful splash."

P. 392
"The second piece of evidence was even more damning. In late December 1999 a group of senior EBS executives were conversing by e-mail about the impending analyst conference. One guy wrote that the Broadband Operating System, Enron's planned "intelligent software," would not be successful unless it was ubiquitous, adopted widely in the industry, like Microsoft's Windows. Bill Collins fired back [with the infamous "Lipstick" comment]:

"The BOS Dreams of Being Ubiquitous -- but as long as it's not doing anything in our network and isn't ready and doesn't work -- the analogy to other industry technologies is not quite apropos. We're not in much of a position since today BOS and EIN API has 0% market share, 0 customers, 0 installed base. I don't care what lipstick and rouge you paint that bitch up with -- she's still just dead meat lying on the sofa, just threatening to stand up and steal the show.

"This one e-mail convinced me, more than any other single item, that Collins and Meyer were telling the truth. None of the recipients sent responses like "What do you mean? The software is installed everywhere, and it is running great." Instead, they simply let Collins's comment stand."

      However, the Lipstick memo was not the smoking gun they claimed. It was, instead, about Collins not wanting to see his Microsoft deal undermined by the Sun Microsystems and 'Broadband Operating System' (BOS). BOS had not yet been announced. Thus, Collins' claim that it was not real was bogus hair-splitting by a whiny sales rep who felt threatened by the new platform. It was a new, then as yet unannounced platform, and one which Enron's best people had spent immense time and energy building. It was very real and worked in the version released on Jan 20th, as shown by the ePowered Videos of Jan 17, 18, 19 2000, before the AC. See the discussion below about Bill Collins and the Lipstick memo, and the memo itself {attached}

     Collins states in this email the following as to why he was so opposed to Sun and the BOS:
“I'd hoped Microsoft would have never heard the words "Broadband Operating System" from us or in the context of what we are doing with Sun until after we ink a deal with MFST and get past the analysts' meeting -- since you can bet they are going to have a strong reaction to having an investment and tactical deal appear to be dressed up as something they are doing to support the development of a new operating system that they don't own and control, that we position is to make up for shortcomings in Windows 2000 et al.  In my mind there is no potential bigger show stopper then us thinking we are going to tell them that they need US to support THEM in the evolution of their OPERATING SYSTEM strategy.....”
    It seems Kroger failed to perform the most basic research. It appears he did not read the total email. He willfully refused to recognize that the Analyst Conference Video showed the BOS was being announced at the AC. See the attached video of that announcement Jan 20th, 2000 as a NEW development effort with Sun and their developers. As Kroger says, he only cared about flipping witnesses to get Skilling and Lay and the end justifies the means. As he said about himself this might be “an indication that prosecutorial power had already twisted my personal character…"

The BOS announcement video clarifies that it is an announcement of a new effort with Sun. BOS was a new, then as yet unannounced platform, and one which Enron's best people had spent immense time and energy architecting. It was very real and worked in the version released on Jan 20th, as shown by the ePowered Videos of Jan 17, 18, 19 2000, prior to the AC. It was the basis of a new development effort to move the industry in a broadband-centric direction, not a mature product with established revenue.

For More information, see these additional pages.

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