Andersen Guilty; Aid in Enron Case?

June 17, 2002 -- While prosecutors say they are pleased with the jury's guilty verdict in the Arthur Andersen trial, the decision may not have made the government's ongoing case against Enron much easier.

After 10 days of deliberations, a Houston jury found Andersen guilty of obstruction of juctice, for destroying documents last October related to the Security and Exchange Commission's investigation of Enron, the now-bankrupt energy-trading firm.

Andersen faces up to five years of probation and a fine of up to $500,000. It also could be assessed damages for anything the court determines was caused by the firm's action and be barred from auditing publicly traded companies. U.S. District Judge Melinda Harmon will determine the firm's sentence.

Help in the Enron Prosecution?

Government officials are putting a positive spin on the outcome, implying it is an important building block in a successful case against Enron.

"This can only help us," said Leslie Caldwell, head of the criminal division of the Justice Department's San Francisco office and leader of its national Enron Task Force. "It sends a strong message that we are going to get to the bottom of the Enron debacle and those people responsible will be prosecuted."

But some observers question whether the outcome of the trial will make much of a difference as the government scrutinizes the actions of Enron and some of its former high-ranking executives.

"I don't think this prosecution of Arthur Andersen gets us any closer to tying down a case against Ken Lay and [Andrew] Fastow and several other individuals who really did damage to the public," said James Cox, a law professor at Duke University in Durham, N.C.

For one thing, the fact that the jury deliberated so long over obstruction-of-justice-charges, even though David Duncan, the former Andersen partner in charge of the Enron account, had himself already pleaded guilty to the same crime, may not bode well if federal prosecutors file the same charges against individuals at Enron.

And the Andersen case may not necessarily yield evidence that can be used to prove that executives such as Lay, a former chief executive officer of the company, deliberately misled the public about the health of the company.

But there may be more revelations about the actions of Enron management yet to come. The Wall Street Journal has reported today that 140 Enron executives received over $680 million in payments during the last year before the firm's collapse, with Lay himself receiving about $67 million.

Not Finished Yet

Andersen attorney Rusty Hardin promised to appeal the verdict, declaring: "This company did not commit a crime." He also said any states that try to take away the company's business licenses would face a legal fight.

Firm partner C.E. Andrews said it was too early for the company to talk about its future but said an immediate shutdown of Andersen was not likely.

"We don't have to rush out today and close our offices," he said. "Don't expect that. We will assess the outcome of this and make our decision. We're not going to stand here today on the courthouse steps and re-evaluate our business."

But Andersen's severest punishment may have already come in the form of lost business. In the wake of the government investigation and charges, hundreds of Andersen clients, including numerous publicly traded Fortune 500 companies, have dropped the auditing firm — in some cases terminating business relationships that predate World War II. According to the Associated Press, the firm has lost more than 650 of its 2,300 public clients.

"Andersen is history, no matter what," Itzhak Sharav, an accounting professor at Columbia University's business school, told the Associated Press after today's verdict.

Chicago-based Andersen has laid off thousands of employees and sold some of its overseas business to competitors, but its viability remains very much uncertain.

Charges Stemming From Enron Debacle

The obstruction-of-justice charges against Andersen stem from events last shortly after Enron announced it was worth roughly $1.2 billion less than it had previously claimed in its publicly filed financial statements — a declaration that quickly led it to a bankruptcy filing of historic proportions in November.

During the trial, prosecutors charged that in October, some Andersen managers encouraged other employees at the firm to dispose of evidence concerning Enron's financial irregularities, by emphasizing, in widely circulated memos, the importance of following the firm's document-destruction policy. Andersen's lawyers have said the firm was just following its normal policy of disposing of unimportant records.

The trial evidence included:

An Oct. 10 video of Andersen partner Michael Odom telling colleagues — including a dozen on the Enron audit team — that the document policy should be followed. He said anything destroyed before litigation is filed was "great" because "whatever might have been of interest to anybody is gone andirretrievable.

An e-mail from Nancy Temple, an in-house Andersen lawyer, to Odom on Oct. 12 that said it "might be useful to consider" reminding the Enron audit team "of our documentation and retention policy. It will be helpful to make sure that we have complied with the policy." Five days later, the Securities and Exchange Commission told Enron it was under an informal inquiry after the company announced a $618 million third-quarter loss and a $1.2 billion writedown in its own value.

An Oct. 24 e-mail from Shannon Adlong, an assistant to Duncan, who wrote: "AARRGGH. Send more shredding bags. Just kidding, we ordered some."

Shredding continued through Nov. 9, when the audit team learned that the SEC had subpoenaed Enron documents the day before. Andersen argued that workers simply were weeding out unneeded documents.

Hardin argued that since several important documents survived the shredding, there was no conspiracy. One of the key documents detailed Enron vice president Sherron Watkins' fears about rumors of secret side deals and the accounting of so-called Raptor entities, which were backed by Enron stock but reported as separate from the company in financial statements. The Raptors enabled Enron to keep hundreds of millions of dollars in debt off its books.