FBI Arrests Accountant in NextCard Audit Case
Signaling their intent to crack down on corporate coverups, federal authorities Thursday arrested a former Ernst & Young partner on charges the accountant tampered with records providing insights into the collapse of online credit card issuer NextCard Inc.
Thomas Trauger, who oversaw Ernst & Young’s financial audits of NextCard, is accused of altering key financial documents after banking regulators raised doubts about the San Francisco-based company’s accounting practices in October 2001.
Trauger, who lives in Berkeley, later destroyed evidence to conceal his alleged malfeasance and subsequently lied about his alleged misconduct to securities regulators, according to court documents.
FBI agents arrested the 40-year-old accountant on one count of obstructing the examination of a bank and one count of falsifying financial records.
After pleading not guilty to the charges in a San Francisco court, Trauger was released on $1-million bail.
“He’s going to fight this case vigorously,” said Edward Swanson, Trauger’s attorney.
The obstruction count could result in a maximum prison sentence of five years and a $250,000 fine. The charge of falsifying records could result in a maximum prison sentence of 20 years and a $250,000 fine.
Oliver Flanagan, formerly a senior Ernst & Young manager who also worked on the NextCard audit, has pleaded guilty to one count of criminal obstruction.
Flanagan, 34, entered the guilty plea last month and provided evidence that led to Trauger’s arrest, authorities said. The guilty plea was unsealed Thursday.
Corporate crime fighters described the case as one of the first times that the government has used expanded powers granted last year to prosecute someone accused of trying to corrupt a financial paper trail.
Thursday’s arrest “should remind accountants and lawyers ... of our strong commitment to enforcing the law,” said Robert McCallum, an acting U.S. deputy attorney general heading the Bush administration’s task force on corporate crime.
The investigation prompted the Securities and Exchange Commission to launch administrative proceedings against Trauger, Flanagan and Michael Mullen, a former Ernst & Young audit manager.
The administrative case alleges unethical and improper professional conduct. Flanagan is the only one to settle the administrative case.
Ernst & Young’s policies require papers underlying a corporate audit to be stored and kept untouched for at least six years, according to court records.
Trauger decided to tinker with the papers because he was concerned the documents would make him look bad for not flagging some of the changes that led to NextCard’s demise, according to court records.
A darling of the dot-com boom, NextCard fell into trouble with regulators after issuing too many credit cards to deadbeat borrowers.
Federal regulators shut down NextCard’s banking subsidiary in February 2002, and in August a judge converted the company’s bankruptcy reorganization to a forced liquidation.
