Andersen trial: Fight of its life

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Posted 9:12AM on Sunday, May 5, 2002

HOUSTON - Barring a last-minute settlement, Arthur Andersen LLP is in for the fight of its life for its alleged criminal role in Enron Corp.'s downfall. The smallest of the Big Five auditing firms faces trial starting Monday for shredding documents and deleting computer files related to Enron audits last October and November as the Securities and Exchange Commission started examining the energy trader's Byzantine accounting. That accounting, approved by Andersen, is credited with helping shove Enron into the largest corporate bankruptcy in U.S. history after top executives sold millions of dollars in stock. Thousands of workers lost their jobs and more watched retirement accounts loaded with stock evaporate when shares were reduced to pennies from an August 2000 high of $90. If convicted of obstruction of justice for intentionally thwarting the SEC's investigation, ``it's really a death sentence,'' said Frank Velie, a former federal prosecutor who handles securities and auditor liability cases for the New York-based Salans law firm. ``A criminal fraud prosecution, which is really what this is, will bar them from doing audits for financial statements of public companies registered with the SEC,'' Velie said. ``It would put them out of business.'' Andersen already is burdened by shareholder lawsuits, a loss of more than 10 percent of its publicly traded clients that forced thousands of layoffs and the defection of partners from more than 20 countries whose operations were part of Andersen Worldwide, the global company that oversees U.S. arm Arthur Andersen LLP. Rivals also have moved to acquire its tax practice and its auditing operations in at least nine U.S. offices, additionally siphoning Andersen's ability to pay multimillion-dollar fines and judgments. But a trial doesn't necessarily guarantee the firm's dissolution, said Randolph Beatty, dean of the Leventhal School of Accounting at the University of Southern California-Marshall. ``Picking up the pieces would take extraordinary talent and leadership ability,'' Beatty said. ``But Andersen is a fairly resilient firm. If they're able to survive is anybody's guess.'' If convicted, Andersen could become a mid-tier firm focusing on audits for private companies, Beatty said. The key would be whether Andersen could repair its reputation. ``Professional firms live and die on their reputations,'' he said. ``Ethics in our profession is tremendously important. Andersen originally reported the shredding to the Department of Justice and publicly acknowledged it in January. The firm then fired David B. Duncan, the partner in charge of Enron's account in Houston, and demoted or put on leave several other partners and employees involved in Enron. Duncan initially was cast off as a rogue. Top Andersen officials, including former chief executive officer Joseph Berardino, testified before Congress and promised sweeping reforms. Duncan remained silent, invoking his Fifth Amendment right against self-incrimination before Congress and during a February deposition related to the lawsuits. Andersen and Duncan later presented a united front, claiming neither did anything wrong as Andersen negotiated with federal prosecutors to settle the criminal case. Then Duncan struck his own deal. He pleaded guilty April 9 to an obstruction charge, admitting he ordered Andersen employees to comply with a policy to retain certain documents and destroy others on Oct. 21, two days after he learned the SEC was investigating Enron. In return, Duncan received immunity from any more prosecution related to the Enron case as long as he continues to fully cooperate with federal authorities - which could include testimony at future trials. He also agreed not to sell his story or otherwise profit from the debacle. Duncan's defection gave prosecutors their star witness, said Robert Mintz, a former federal prosecutor under Michael Chertoff, head of the Department of Justice's criminal division. ``The government doesn't have to show much more than Duncan's intentional destruction of documents,'' said Mintz, now a partner at McCarter & English in Newark, N.J. ``But in order to convince a jury that conviction of the partnership is a just and fair result, the government will have to demonstrate that Duncan's conduct was done with knowledge and complicity of other senior partners within the partnership,'' he said. Andersen could emphasize thousands of employees who had nothing to do with Enron are paying for the alleged illegal conduct of a few with layoffs and possible demise of the partnership, he said. ``Andersen could try to tap into the jury's sense of the government having overreached and approached this with a very heavy hand,'' Mintz said. But Thomas Ajamie, a Houston attorney and securities expert with Schirrmeister Ajamie LLP, said admission to directing illegal shredding by the lead partner in charge of one of Andersen's largest accounts begins to implicate the firm, he said. ``He wasn't working in isolation,'' Ajamie said. ``All the partners took in profits from the Enron account, bought houses, sent kids to school with it. They want to isolate the office, but not the money.'' Allegations of signing off on shady accounting has forced Andersen to pony up millions of dollars before. Last year the firm agreed to pay a $7 million civil fine to settle SEC allegations that it issued false and misleading audit reports that inflated profits at giant trash hauler Waste Management Inc. by $1 billion from 1993 to 1996. Also last year, Andersen agreed to pay $110 million to Sunbeam Corp. shareholders to settle a fraud lawsuit alleging the firm helped the appliance maker inflate profits in 1997-1998. Sunbeam filed for bankruptcy in February 2001. ``The government should have come down harder on Arthur Andersen a long time ago,'' Ajamie said. ``Perhaps that would have prevented this enormous financial loss for investors.''