Auditor’s Plea a Blow to Andersen, Enron

Accounting firm Andersen’s former lead auditor for Enron Corp. pleaded guilty Tuesday to felony obstruction of justice, a move that legal experts predicted would strengthen the government’s prosecution of Andersen and provide critical help in its pursuit of a possible criminal case against Enron.

The plea by David B. Duncan and his agreement to help the government’s investigations may prove to be a dramatic turn in the Enron saga because Duncan had access to senior executives at the company, experts said.

“Career prosecutors would love to have [former Enron Chief Executive] Ken Lay’s head as a trophy, and the only way they are going to get proof of fraud at Enron is by first getting employees from Arthur Andersen to ‘roll’ on Enron executives,” said Robert Rigg, who heads the criminal defense program at Drake University.

Standing before a federal district judge in Houston, a somber Duncan waived his right to a trial and pleaded guilty to one count of obstruction of justice for his role in the shredding of documents related to Andersen’s audits of the collapsed energy trader.

Reading from a statement, Duncan said that on Oct. 21, two days after learning about a Securities and Exchange Commission investigation of Enron, he instructed Andersen employees to destroy documents “so that they would be unavailable to the SEC.”

“I also personally destroyed such documents,” Duncan told U.S. District Judge Melinda Harmon. “I know they were destroyed” so that the documents would be “unavailable to the SEC,” he said.

In the plea agreement, which had been expected since Monday afternoon, Duncan agreed to be “fully debriefed” by the Justice Department, to testify at any court hearing as requested by the DOJ, and to furnish “all documents and other material that may be relevant to the investigation and that are in the defendant’s possession or control.”

In return, the Justice Department agreed to limit criminal charges against Duncan to one obstruction-of-justice charge. Under federal guidelines, an obstruction conviction carries a sentence of up to 10 years in prison and a fine of as much as $250,000. Duncan will be sentenced Aug. 26.

Also on Tuesday, Judge Harmon turned down a motion from Andersen seeking to quash the Justice Department’s use of grand jury subpoenas in its investigation. Andersen argued that the subpoenas went beyond the proper scope of the government’s probe, but the Justice Department countered that Andersen was simply seeking to slow down the investigation.

Duncan, 42, was fired by Andersen in January when the firm accused him of “unethical behavior, gross errors in judgment or willful violation of our policies.”

As the highest-ranking official at either Andersen or Enron to agree to help the government, Duncan may have assured himself a lighter penalty, experts said.

“Generally, the first guy gets the best deal,” said Brian O’Neill, a partner at O’Neill, Lysaght & Sun in Santa Monica.

Beyond the documents filed in federal court in Houston, Justice Department officials refused to discuss their strategy in the cases.

But legal analysts said the guilty plea gives prosecutors tremendous leverage in their ability to investigate possible criminal acts by Enron executives and to bring securities fraud and conspiracy charges if warranted.

Several observers said Duncan, as the partner in charge of the Enron account, is one of only a handful of top executives privy to inside details of what took place at Andersen, Enron and the law firms that handled their business dealings. It’s likely he already has given prosecutors a detailed proffer, explaining what the government can expect from his future testimony, experts said.

The government has indicted Andersen on one count of criminal obstruction of justice over the shredding and document destruction. The firm has denied any wrongdoing. A trial is set to start May 6 in Houston.

Duncan’s cooperation deals a severe blow to Andersen’s defense, several experts said, because a company can be found liable for the criminal acts of its employees.

“The Duncan plea is devastating for Arthur Andersen,” said Jacob Frenkel, a former prosecutor now at Smith Gambrell & Russell in Washington. “In essence, the government has tightened the noose around Arthur Andersen.”

Rusty Hardin, Andersen’s lead criminal-defense attorney, said in a statement that the firm was “surprised and disappointed by Mr. Duncan’s statement in court.”

“It completely contradicts what he has stated up until this point,” Hardin said. “For months, Mr. Duncan has contended that he had no intent to commit any criminal act.”

Andersen is trying to reach a settlement with the Justice Department. Duncan’s cooperation with prosecutors puts more pressure on the firm to resolve the case before trial, several experts said.

If the case goes to trial, Andersen faces a tough decision as to how to treat Duncan and his testimony. The firm could try to distance itself from Duncan, portraying him as a rogue employee whose criminal acts weren’t sanctioned by Andersen.

But such defenses often have proven unsuccessful in the past, experts said. What’s more, prosecutors would try to debunk that argument by pointing to Duncan’s 21-year career at the firm and his high-level role heading up a major account.

The government is certain to use information from Duncan to lean on other Andersen and Enron employees to provide incriminating evidence against top Enron executives, experts said.

Because Duncan likely dealt regularly with former top Enron officials such as Jeffrey K. Skilling, its onetime chief executive, and Andrew S. Fastow, the finance official who was at the center of many of the murky investment partnerships that helped trigger the company’s collapse last fall, Duncan will help prosecutors piece together the intent and workings of the complex deals, experts said.

Duncan also might be able to contradict statements by Lay and Skilling that they were unaware of many of the controversial financial deals and misleading accounting by saying he discussed sensitive issues with them, some analysts said.

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Hart reported from Houston, Lichtblau from Washington and Hamilton from Los Angeles.