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Auditor indicted in Enron collapse
©Los Angeles Times WASHINGTON -- Federal prosecutors on Thursday hit the Arthur Andersen accounting firm with a criminal indictment for allegedly orchestrating the "wholesale destruction" of tons of Enron Corp. documents, raising new doubts about Andersen's survival. The one-count indictment is the first of what Justice Department officials hinted could be a string of criminal charges arising from the bankruptcy of energy giant Enron, which collapsed in an accounting scandal Dec. 2. The indictment, which does not name any individuals, was handed up by a federal grand jury in Houston on March 7 and unsealed Thursday after negotiations to reach a plea agreement with Andersen broke down. Deputy Attorney General Larry Thompson accused Andersen -- Enron's auditor until earlier this year -- of destroying "literally tons" of Enron-related documents and e-mails in a frantic effort that began shortly after Andersen partners learned about a Securities and Exchange Commission investigation into Enron's partnerships and aggressive accounting practices. "At the time, Andersen knew full well that these documents were relevant to the inquiries and to Enron's collapse," Thompson said. "Arthur Andersen is charged with a crime that attacks the justice system itself by impeding investigators and regulators from getting at the truth." In seeking the indictment, Thompson said, prosecutors were swayed by a variety of factors, including Andersen's history of wrongdoing and a desire to set an example to deter similar conduct. Thompson noted that shredding was not isolated to a few individuals and occurred at Andersen offices in Houston, Portland, Ore., London and the company's Chicago headquarters. Andersen managers ordered employees to work overtime, if necessary, to complete the destruction; one shredding machine at Andersen's office at Enron headquarters ran virtually nonstop, according to the indictment. Andersen had previously admitted the shredding but blamed it on a handful of partners in the Houston office. It warned that a criminal indictment could destroy the company. After the indictment was unsealed, the Chicago-based firm blasted the Justice Department, calling it "an extraordinary abuse of prosecutorial discretion." "A criminal prosecution against the entire firm for obstruction of justice is both factually and legally baseless," the company said in a statement Thursday. Andersen attorneys said the primary reason for ending plea discussions was their inability to secure a waiver from the SEC that would allow Andersen to continue auditing public companies if it admitted guilt. A collapse of the 89-year-old firm would put 28,000 employees out of work and leave 2,300 customers scrambling to find a new auditor. Andersen has been attempting to sell itself to a rival, but two likely candidates -- Deloitte Touche Tohmatsu and Ernst & Young -- said Wednesday that they aren't interested. Justice Department officials expressed little sympathy for Andersen's plight or the ramifications of its potential collapse. "There are serious charges, and it shouldn't be a surprise to anyone that serious charges have serious consequences," Thompson said. "It would be unfortunate for our criminal justice system if any individual or any entity could say that he or she or it was too big or too important, so as it couldn't be indicted." The indictment suggests that Andersen may have been motivated to destroy documents to cover up its own accounting mistakes in handling Enron's books, an allegation Andersen vehemently denies. Andersen faces a maximum fine of $500,000 and five years of probation. But the greater harm will come from the blow to the firm's reputation and the continued exodus of clients. Andersen attorneys accused government prosecutors of stretching the legal definition of obstruction of justice and said the firm did not receive enough credit for voluntarily disclosing the shredding in the first place. Much of the government's indictment is based upon Andersen's own internal investigation into the shredding, which was provided to prosecutors. According to a portion of the internal report obtained by the Los Angeles Times, Andersen partner David Duncan and other Houston-based partners met Oct. 23 -- the day after Enron restated its earnings and revealed the SEC inquiry -- and ordered the destruction of 26 trunks and 26 boxes of Enron papers during a three-day period. "The most intense destruction activity occurred at a time when there should at least have been serious questions whether the policy allowed destruction," the report concluded. The report also blames Duncan and other Houston managers for ordering the shredding in the Portland and London offices. It said the destruction of documents in Chicago was routine and minimal. Duncan has denied any wrongdoing, saying he was following orders from the Chicago headquarters, including an Oct. 12 e-mail from Andersen attorney Nancy Temple, reminding employees about the company's document retention and destruction policy. Vince DiBlasi, an attorney for Duncan, declined to comment on the specifics of the report Thursday, but he said Duncan "is continuing to cooperate with all ongoing investigations." Andersen also complained that the government refused to let the company present its own evidence to the grand jury, and it insisted that there was no evidence that either the company or its employees acted with willful criminal intent. The lawyers said prosecutors had primarily been seeking an admission of guilt by the company. Some observers had speculated that the Justice Department would seek to use such a plea arrangement to extract evidence against Enron, but Andersen attorneys said the desire for such evidence did not appear to be a "centerpiece" of the negotiations. Andersen lawyers said they will now seek to force the Justice Department to identify the Andersen partners whom prosecutors believe have the "criminal intent" needed to convict under the obstruction law. They said they also will seek to have the indictment dismissed and, failing that, to receive a speedy trial. Thompson said Thursday that additional criminal charges against Andersen and its employees are still a possibility. The department is also pursuing a much larger inquiry into Enron and its executives. Attorneys predict Andersen will have a difficult time defending itself at trial, given its admission that the shredding took place. Legal experts say a plea agreement is still considered more likely than a trial. Andersen may be trying to buy more time to pursue one of a narrowing list of potential survival strategies, including a sale of partnership assets or a bankruptcy filing to shield itself from creditors, experts said. Charlie Leonard, an Andersen spokesman, said the company has no plans to seek bankruptcy protection. Forcing the Justice Department to indict also allows Andersen to avoid -- at least temporarily -- triggering a securities rule that could block the firm from auditing public companies. Under SEC rules, any entity convicted of a serious crime is banned from practicing public securities work, including signing off on audits of public companies. The SEC, which also is investigating Andersen and Enron, could still seek to bar Andersen from the auditing business. But that process could take months longer than if the company had admitted guilt. "Quite possibly, Andersen knows it doesn't have a prayer, but it's timing the decision of when it will be found guilty," said John C. Coffee, a professor at Columbia University's law school. The indictment may have far-reaching implications for Andersen's 2,300 publicly traded audit clients, many of whom have annual financial reports due with the SEC by the end of the month. In an apparently unprecedented move, the commission approved emergency measures to allow Andersen clients to file unaudited financial statements if they are "unable to receive services from Andersen to complete their audits or . . . choose not to have Andersen complete audits that are currently in process." The agency also said, however, that it has "received assurances from Andersen that it will continue to audit financial statements" and will advise the SEC if it becomes unable to do so. "The relief for clients of Andersen is intended to minimize disruption to the U.S. capital markets and the affected issuers," SEC Chairman Harvey Pitt said.
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