NEW YORK (CNN/Money) - Two Enron executives were arrested Wednesday and charged with securities and wire fraud, the Justice Department said.
Officials arrested Kevin Howard and Michael Krautz on charges stemming from the misstatement of $111 million in earnings related to Enron's contract with Blockbuster Inc., the retail video store chain, in 2000 and 2001, the department said in a statement.
The charges also allege that the men concealed information on the operation from the company's auditor, Arthur Andersen.
| New charges against Enron executives
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The misstatements were based on a 20-year contract Enron's broadband unit entered into with Blockbuster to provide a service by which customers could download media on demand. Enron's plan was to begin testing the service in December of 2000, but it was not expected to turn a profit until several years later.
The charges allege Howard and Krautz created an arrangement, known internally as "Braveheart," that allowed Enron to book anticipated future profits from the broadband agreement.
Through Braveheart, Enron recorded revenue of $53 million in the fourth quarter of 2000 and $58 million in the first quarter of 2001, but in fact, the charges allege, the Blockbuster agreement generated no actual revenue and was shut down March 9, 2001.
The DOJ said the pair surrendered to the FBI Wednesday in Houston and are scheduled to appearance in court later in the day. If convicted of the charges, Howard and Krautz face a maximum sentence of 10 years in prison and a fine of $250,000 for the securities fraud, and also five years and a $250,000 fine for each violation of wire fraud, conspiracy, and false statements laws.
The Securities and Exchange Commission said it is looking for restitution of illegally received funds, civil fines, and a permanent bar from acting as a director of a publicly held company.
Separately, the Commodities Futures Trading Commission charged Enron and a former company vice president, Hunter Shively, with manipulating natural gas prices.
The CFTC also accused Enron of operating EnronOnline as "an illegal futures exchange" from September 2001 to December 2001 because it traded commodity futures contract swaps, which required CFTC registration.
Enron filed for bankruptcy in December 2001, hurt by hidden debts and questionable accounting practices.
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