Trial of Andersen Will Begin Today
Arthur Andersen’s accounting practice has been shredded almost as thoroughly as the boxes of Enron Corp. audit documents it admitted destroying.
But there still is plenty on the line for the company--and the federal government--as it heads into court today to combat an obstruction of justice charge.
A conviction probably would bar Andersen from auditing public companies, ending the firm’s chance for resurrection. An Andersen acquittal, conversely, could set the fallen accounting giant on a path to emerge as a smaller, audit-oriented practice and potentially bolster its credibility in battling civil lawsuits arising from its Enron audit.
The Justice Department’s credibility also is at stake. A loss in the obstruction case would badly undermine prosecutors’ momentum and leverage in pursuing potential witnesses and defendants in its probe of Enron--the main target of federal investigators.
A conviction “puts the fear into everyone else who comes in contact with the investigation, and I think that was the point,” said Robert Plotkin, a Washington defense lawyer who specializes in white-collar cases. “It shows that if you can do this to Andersen, you can do this to anybody. If they were to lose, it would undermine everything. The message becomes, ‘We don’t have the evidence. We’re not going to be able to scare you into cooperating.’ But I think it’s going to be hard for Andersen to defeat these charges.”
Prosecutors will enter the courthouse this morning--just a few blocks from Andersen’s Houston office, the scene of the alleged crime--essentially holding all the cards.
David B. Duncan, the former Andersen partner who led the firm’s audit of Enron and later orchestrated a document-shredding frenzy in the Houston office after learning of an SEC probe into the energy giant, has agreed to testify for prosecutors. Duncan already has pleaded guilty to a separate obstruction charge.
His admission radically altered the dynamics of the case. Before his plea, Andersen had been pushing for a quick trial--potentially forcing prosecutors to take a case to a jury before they had time to gather more evidence. In addition, Andersen believed that its best hopes for survival lay in getting the criminal case resolved early.
After Duncan admitted to obstruction, Andersen entered settlement talks with the government and--when it became clear there would be no deal--reversed its earlier position and asked for a delay in the start of the trial.
But U.S. District Judge Melinda Harmon in Houston rejected the firm’s request. Harmon has said she wants the trial to close before the end of May to avoid conflicting with her vacation plans. Jury selection is expected to start today, and witnesses should begin taking the stand by midweek.
Duncan, a 20-year veteran of the firm, was fired shortly after Andersen admitted to the document destruction in January. As a witness for the prosecution, he is expected to provide an account of the chronology of events inside Andersen’s sprawling operation.
He also is expected to say that, contrary to Andersen’s account, the document destruction was sanctioned by high-level Andersen executives. Duncan has said previously that his shredding campaign followed an Oct. 12 e-mail from Nancy Temple, an Andersen attorney based in the firm’s Chicago headquarters, reminding employees of document destruction policies.
Moreover, the prosecutors may seek to show that numerous other Andersen executives had become aware of internal problems at Enron in the months before the destruction began.
Senior Andersen executives--including the head of its U.S. operations--participated in a February 2001 conference call with the Houston office in which they discussed such issues as Enron’s aggressive deal-making and internal conflicts of interest.
And Andersen employees in Houston got warnings about accounting troubles from Enron Vice President Sherron S. Watkins.
Duncan’s cooperation also gives the government an edge in the legal and procedural battles that are expected to unfold. Case law has generally determined that a company acts through its employees, so Duncan’s admission could be used to win a conviction.
The prosecution will be led by a three-lawyer team--Samuel Buell, Andrew Weissmann and Matt Friedrich. Buell and Weissmann have experience in prosecuting organized crime.
Andersen is expected to counter the government’s case by arguing that, in spite of the legal technicalities, Andersen management did not have full knowledge of Duncan’s actions. That argument marks a return to Andersen’s initial response to the shredding. In January, Andersen portrayed Duncan as a renegade who undertook the shredding on his own, then retreated from that position as it became clear he might hold the keys to the case.
Andersen officials have since said Duncan’s plea--in which he admitted destroying documents with the intent of keeping them from the SEC--contradicted his earlier representations.
Another component of the firm’s defense is the argument that Andersen has publicly proclaimed for weeks that the Justice Department is unfairly threatening to ruin a firm of 28,000 employees because of the actions of a few. Andersen is being represented by veteran Texas attorney Rusty Hardin, a former prosecutor who has proved adept at capitalizing on nuances of public opinion.
Hardin has said the firm’s actions represented “a failure to communicate. But not a crime.”
If Andersen can persuade a jury to see the distinction and acquit, the firm may gain traction in its efforts to settle civil litigation stemming from Enron’s meltdown.
“It will be, in effect, a mock jury for the civil cases,” said John Baker, a law professor at Louisiana State University.
Though the outcome of the criminal trial has no legal bearing on a civil case, an acquittal could provide Andersen with leverage in persuading plaintiffs that the firm can continue operating in some smaller form. Such an outcome would position the firm to reach settlements that wouldn’t bankrupt the company, analysts said.
But even if Andersen manages to pull out an acquittal, its troubles would be far from over. The SEC could launch proceedings to bar the firm from auditing the books of public companies. And prosecutors could return to court and file different charges against Andersen or individual partners.
Jacob Frenkel, a former prosecutor and SEC attorney, said the indictment against Andersen on a single charge meant that “the Department of Justice was exercising considerable restraint.” He said the government’s actions so far--including convening a special grand jury to examine the Enron case--means there “is a whole set of other potential charges,” including securities fraud, that could be brought against the firm.
Frenkel also said that by obtaining a quick indictment against the firm and pursuing the trial instead of settling, prosecutors are broadcasting a warning to potential Enron defendants.
“I think they send a very clear message that they’re serious about this,” he said. “There’s much more to this than Andersen and David Duncan.”
