Deception, or Just Disarray (about Internet Technology), at Enron?

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: "John F. McMullen" <observer () westnet com>
Date: Sun, 8 Jun 2003 11:30:44 -0400 (EDT)
To: "johnmac's living room" <johnmacsgroup () yahoogroups com>
Cc: Dave Farber <farber () cis upenn edu>, Declan McCullagh <declan () well com>
Subject: Deception, or Just Disarray (abour Internet Technology), at Enron?

> From the New York Times --
http://www.nytimes.com/2003/06/08/business/yourmoney/08ENRO.html?th

Deception, or Just Disarray, at Enron?
By KURT EICHENWALD and JOHN MARKOFF

After more than a year of investigation, the collection of millions of
pages of documents and interviews with an untold number of witnesses,
federal prosecutors last month brought their most sweeping fraud
indictment in the Enron case, charging a group of executives with
illegally pumping up the company's stock price by lying about the
existence of certain Internet technology.

But now, whether anyone charged with those crimes will ever go to jail may
rest in part in the hands of an unlikely group of people, including Drew
Carey, Shania Twain, Pete Sampras and some fans of independent short
films.

The reason is simple. The defense is expected to argue that Enron
possessed  at various levels of quality  the technical ability it claimed.
And the proof, say software specialists from Enron and other industry
executives, lies in part in the technical features that the company
offered while streaming video over the Internet for Mr. Carey's comedy
show, the 1999 Country Music Awards, the Wimbledon tennis competition and
a Web site that provided an assortment of independent short films.

Indeed, for all the seemingly black-and-white fraud allegations that have
roiled Enron, the charges involving technology deception may present far
more gray. At bottom, the technology in Enron's Internet division  Enron
Broadband Services, or E.B.S.  may have been more developed than the
indictment suggests, presenting prosecutors with some complex challenges.

That is the conclusion drawn from interviews with an array of the unit's
former customers, suppliers, consultants, employees, partners and
competitors. Many of them argue that the charges about technology reflect
not criminal activity but the disarray and disappointment that typically
accompany product development in the computer industry. In that world,
claims are made for a technology's abilities long before commercially
viable products are available  and, sometimes, results fall short of
hopes.

"If they succeed in convicting the Enron developers," said an executive at
a major computer hardware manufacturer who was never employed by Enron but
who had direct knowledge of its systems, "anyone in Silicon Valley can be
sent to jail."

Former Enron executives voice similar opinions. "I do not think the
technical capabilities were overstated," said Larry Ciscon, former vice
president for software engineering. "And comparing E.B.S. to the other
software companies I've seen in my 15 years in the software industry, I
did not see anything outside of the standard product-development process."

Prosecutors, however, say they have no doubts about their charges. "We
have full confidence that the proof at trial will bear out the allegations
in the indictment," said Leslie Caldwell, head of the Justice Department's
Enron task force.

None of this means that the Enron broadband unit was well run or that its
business prospects were not exaggerated. Executives may have boasted of
technological capabilities long before they were available, and financial
illegalities could also have taken place. Indeed, large portions of the
broadband indictment against seven former E.B.S. executives pertain to
accusations that the division manipulated its reported income through the
use of the same types of off-the-books partnerships that played a huge
role in Enron's collapse. Such dealings led to criminal charges against
several executives, including the former chief financial officer, Andrew
S. Fastow.

Moreover, there is plenty of the type of evidence that might convince a
jury that insiders knew something was amiss inside the broadband division.
The executives charged in the criminal case sold millions of shares of
Enron stock as the price was soaring over excitement about broadband. That
has led to criminal charges of insider trading, with the government
arguing that the executives lied about the division's capabilities for the
purpose of pumping up the stock price so they could dump their shares. For
that accusation to stick, however, the government will have to prove not
only that the statements were untrue, but that the defendants knew it.

But the primary charges against four of the seven defendants  Kenneth
Rice, Joe Hirko, Scott Yeager and Rex Shelby  state that certain
software-driven functions promoted by Enron as available on its network
were not. Prosecutors contend that Enron executives falsely said that the
company had products for shipping and streaming video and other media over
the Internet to corporations, and that it could meter and bill customers
based on use, as well as allow customers to select qualities of service
and schedule times for shipping data across the network.

In addition, the government argues that Enron's related software
initiative, known as the Broadband Operating System, or BOS, did not work
as Enron claimed. The initiative was intended in part to give outside
software developers access to the features of the Enron network.

Interviews with customers and others suggest that the functions were
available, although some in more rudimentary form than others. Indeed,
prosecutors' ability to prove the case, people involved in the
investigation say, will turn on subtle questions like whether a company
can claim to offer a function based on crude versions of software that may
not be marketable on a large scale.

Technology efforts like Enron's broadband venture have routinely begun
with a grand vision to which initial commercial products too often fail to
measure up, particularly in their early releases.

Indeed, version numbers of commercial software have long been a running
joke among customers who have come to expect that bugs and shortcomings
will not be ironed out until the second or even third major release. For
example, it was not until Microsoft, the world's dominant maker of
software, introduced Windows 3.1 that many industry analysts and
executives felt that it had a competitive product, despite grand claims
made nine years earlier when the product was announced.

There is no doubt the government has obtained evidence showing that
Enron's broadband division was deeply troubled. In an e-mail message dated
Dec. 20, 2000, Bill Collins, a former director of business development,
lamented that Enron's network software effort was fizzling, with no market
share, no purchasers and no one using it. "I don't care what lipstick and
rouge you paint that bitch up with," Mr. Collins wrote days before
resigning from the company. "She's still just dead meat lying on the sofa,
just threatening to stand up and steal the show."

But at the same time, programmers and engineers were sending e-mail
messages to their superiors  including several men now under indictment
boasting about tests of the software functions now at the center of the
charges. Those included tests for clients ranging from Warner Brothers for
its Drew Carey Webcast to countrycool.com, which streamed the 1999 Country
Music Awards over Enron's network.

"The results were successful," Kirk Wright, an Enron engineer, reported in
an e-mail to his bosses on Nov. 10, 1999, about a test of a project to
stream an episode of "The Drew Carey Show" over the network. He added,
"All of the streams worked and started within the acceptable time frame,"
signaling that Enron's broadband scheduling functions had performed
properly. The government indictment suggests that such functions did not
exist.

Moreover, data collected in the 1999 Webcast of the Country Music Awards
show that Enron was metering use of broadband by customers, at varying
levels of quality. These, also, are functions that the indictment suggests
did not exist.

Ultimately, many technical experts at Enron made public statements about
the technology that are virtually identical to comments cited in the
indictments, raising the possibility that there were true believers inside
the division.

For example, in a Jan. 12, 2000, conference call with Lehman Brothers
analysts, David Berberian, managing director of the E.B.S. technology
group, described the system's abilities in ways prosecutors now say are
false.

The network software "fundamentally controls how data is routed from
content providers to users, how quality of service is determined
appropriately by path, and how we channel the data down the right path,"
Mr. Berberian said, according to a transcript of the call. Mr. Berberian
did not return phone messages.

Legal experts say that it is unusual for a situation in which people argue
over a product's functionality to result in criminal indictment. That is
largely because of the difficulty in proving that a decision based on
conflicting opinions was knowingly false.

"If a decision was made that the broadband system worked, and that is
based on engineers and computer experts saying it worked, that should be
enough, period," said John J. Fahy, a former federal prosecutor in New
Jersey. "Indictments and criminal charges shouldn't be based on facts that
are the result of different people having different interpretations of
whether something works. That's just not fair."

The events that led to the recent charges involving broadband began with
Enron's purchase in 1997 of Portland General Electric, an Oregon utility.
The new subsidiary came with a start-up telecommunications business, which
Enron initially planned to shut down. But a successful fiber optic network
deal known as the Western Build  in which Enron sold a small portion of
the lines involved at prices that paid for the entire project  persuaded
Jeffrey K. Skilling, then Enron's chief executive, to pursue the building
of a broadband business.

Immediately, the effort descended into chaos, as the Portland unit and the
Houston headquarters pursued different visions of the future. Portland
embarked on an effort to build the ultimate broadband network for the
Internet, involving large-scale laying of fiber optic cable and
development of software. Broadband executives based in Houston, meanwhile,
focused on trading the use of bandwidth to allow companies to ensure they
had the ability to transmit data when they needed guaranteed levels of
quality. One strategy involved building a network, while the other focused
on creating a virtual network through trading capacity. In addition, Enron
embarked on efforts to provide content delivery, theoretically increasing
demand both for trading and for its own network.

In essence, Enron was trying to pursue multiple, contradictory business
lines  any one of which would have taken dedicated efforts by the company
and all within a single division that had yet to prove there was enough
customer demand to sustain any of it. Leading it all were Mr. Rice and Mr.
Hirko, two executives with backgrounds in the energy business whose
limited technical expertise was often the subject of ridicule within the
broadband division.

"We were trying to do too many things at once, and not focusing," said one
former Enron software programmer who spoke on the condition that he not be
identified. "The whole giant ambition was just too big. But that doesn't
mean that there wasn't a network and there wasn't software. But if you
have a thin market for these things to begin with, and you're trying to do
five things at once, it doesn't all add up."


THE disorganization led to a poisonous culture in the broadband unit,
former executives said, with the only available means for advancement
often being to attack the technologies and strategies of other executives.
In that environment, the technical experts working on building a network
decided in late 1998 to buy a tiny Houston-area software maker called
Modulus Technologies.

Modulus, founded in the 1990's, had created a programmer's tool kit called
InterAgent that was used to simplify the building of complex programs that
linked different kinds of computers and operating systems. Before Enron
approached, Modulus was negotiating to be acquired by Sun Microsystems,
and Sun executives were stunned when they learned that Enron had paid $30
million for the company, which had eight employees.

Although Enron deployed InterAgent widely on the computers that managed
its network, the company was slow to take advantage of its potential. Some
programs, like an application called Bandwidth Manager, were built
entirely without relying on InterAgent, according to former software
writers with Enron.

Still, the technical experts at Enron were singing the praises of
InterAgent, proclaiming its ability to provide services that the criminal
indictment appears to contend were unavailable. "InterAgent gives us an
intelligent delivery platform for the services traveling over our
network," Stan Hanks, Enron's former vice president for engineering, told
an industry publication in early 1999. "It also helps us ensure that
people are only getting content they've agreed to be billed for."

Mr. Hanks, who defense lawyers and former Enron executives said they
believe is now a witness for the government, declined to comment.

By that time, the Enron network had apparently become real enough so that
the company could make an aggressive pitch to a small Seattle-based
start-up, AtomFilms, which pioneered the idea of streaming digital videos
of independently produced films to personal computer users.

That year, AtomFilms was looking for a way to show videos to its customers
without the jerky interruptions that had plagued this technology, and
Enron assured the company it could do so by bypassing the dozens of hops
that data made as it typically traveled through the open Internet.
AtomFilms agreed to let Enron offer its movies, and soon the film company
was sending four million to five million video streams a month to its
customers from Enron's video servers at different sites nationwide.

An AtomFilms' executive, speaking on condition of anonymity, said his firm
needed to know details about who was watching which films, and for how
long. So it routinely used an online reporting system that Enron provided,
indicating Enron could offer metering and billing  again, services that
the indictment appears to argue did not exist.

At the same time, Enron embarked on its grand plan to create BOS  the
Broadband Operating System. But rapidly, former employees said, the entire
concept faced an important hurdle of nomenclature: in the chaos that was
Enron Broadband Services, the term BOS was interpreted differently by
various factions, according to former Enron employees and internal
documents.

To some, it described functions that Enron performed on its network; to
others, it was a software interface that allowed outside programmers to
gain access to those functions for writing applications; and to still
others it was simply the name of an industry protocol for the Internet.
Indeed, according to one former programmer, the name BOS was created
before anyone was sure what functions it represented.

On Jan. 20, 2000  at an analysts' meeting that prosecutors contend was
part of the effort to deceive  Mr. Skilling announced that the company had
shipped a beta test of BOS that would allow outsiders to develop
applications based on Enron's network software. According to a transcript
of the meeting, he said the complete set of software would not be finished
for six to nine months.


IN the indictment, prosecutors contend that Enron never disclosed at the
Jan. 20 meeting that BOS was in development. Asked about the apparent
discrepancy with Mr. Skilling's statement, a government official involved
in the case said that no beta test  in which an early form of a program is
sent to outside software writers  was ever conducted. In subsequent
interviews, however, software writers at major computer corporations said
they indeed conducted such tests for Enron on the functions described by
Mr. Skilling.

Over the next year, a shakeout began in the broadband industry. The
business of Enron's primary customers  Internet service providers for
consumers  fell apart, and the company shifted its attention to
business-to-business applications and video on demand. But by mid-2001,
the overall broadband marketplace was in a free fall, and Enron
effectively shut down E.B.S.

Now, former programmers and technicians lament the government's portrayal
of the broadband effort as little more than a lie given the patina of
success just to lift the stock price.

"There was more that existed than you would believe from reading the text
of the indictment," one Portland programmer said. "If we had been given
eight months to a year, it would have been amazing."

Copyright 2003 The New York Times Company
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