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Deception, or Just Disarray (about Internet Technology), at Enron?
From: Dave Farber <dave () farber net>
Date: Sun, 08 Jun 2003 13:44:51 -0400
------ 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 *** FAIR USE NOTICE. This message contains copyrighted material whose use has not been specifically authorized by the copyright owner. The 'johnmacsgroup' Internet discussion group is making it available without profit to group members who have expressed a prior interest in receiving the included information in their efforts to advance the understanding of literary, educational, political, and economic issues, for non-profit research and educational purposes only. I believe that this constitutes a 'fair use' of the copyrighted material as provided for in section 107 of the U.S. Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond 'fair use,' you must obtain permission from the copyright owner. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml "When you come to the fork in the road, take it" - L.P. Berra "Always make new mistakes" -- Esther Dyson "Be precise in the use of words and expect precision from others" - Pierre Abelard "Any sufficiently advanced technology is indistinguishable from magic" -- Arthur C. Clarke "Bobby Layne never lost a game. Time just ran out." -- Doak Walker John F. McMullen johnmac () acm org johnmac () cyberspace org ICQ: 4368412 AIM & Yahoo Messenger: johnmac13 http://www.westnet.com/~observer ------ End of Forwarded Message ------------------------------------- You are subscribed as interesting-people () lists elistx com To manage your subscription, go to http://v2.listbox.com/member/?listname=ip Archives at: http://www.interesting-people.org/archives/interesting-people/
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