Tuesday, June 26, 2007

Guilty Verdict in the Case Against Arthur Andersen

Verdict seen as fatal blow to firm
By TOM FOWLER - Copyright 2002 Houston Chronicle - June 19, 2002

"I think everyone understands the firm is dead," said Columbia University law professor John Coffee.

Surprisingly, the jurors said they didn't consider the company's extensive shredding of documents to be an important part of the case.

The nine-man, three-woman jury delivered the verdict at 10:25 a.m., more than five weeks after testimony began and after 72 hours of deliberations over 10 days.

Despite the prosecution's elaborate description of widespread document destruction, jurors told reporters it had been the effort of Andersen in-house lawyer Nancy Temple to remove her name from the draft of a memo that led them to convict the firm.
Jury foreman Oscar Criner described the Temple memo as a "smoking gun."

"You read it, you read the law in the charge, and it just stands out," Criner said.

The memo in question, created and revised several times in mid-October, was designed to document how Andersen handled a disagreement with Enron over using the word "non-recurring" to describe a loss.

In an Oct. 16 e-mail to lead Enron auditor David Duncan and others, Temple said her name should not be left on the final memo because " ... it increases the chances that I might be a witness, which I prefer to avoid." She also mentioned checking into other ways to " ... protect ourselves from potential Section 10A issues," referring to a provision in Securities and Exchange Commission auditing regulations.

Jurors said by changing the memo and mentioning the SEC issues, it was clear Temple's intent was to keep information away from investigators.

Discussing the verdict afterward, prosecutors said they were not initially aware that the memo was central to the verdict.

But when told what jurors had said to reporters about the Temple memo, they said the jury's finding was consistent with many aspects of their case.

"That memo was an important one that we referred to several times in our case," said Assistant U.S. Attorney Andrew Weissmann. "She made every effort to sanitize their files."

Jurors also said they all agreed Temple was the "corrupt agent" in the case, indicating that a ruling on Friday that the jurors did not have to agree on a single culprit was not as significant as previously thought.

Lead Andersen attorney Rusty Hardin praised the jury for its diligence but said the firm was a victim of "a system out of balance."

He criticized prosecutors for bringing the charges against Andersen and U.S. District Judge Melinda Harmon's rulings on a variety of issues.

"Our position as to whether Arthur Andersen committed a crime has not changed. They did not," he said.

The company plans to appeal after it is sentenced Oct. 11. Andersen officials said in a statement Saturday that the company expects to cease its audit practice by Aug. 31.

Andersen partner C.E. Andrews, who sat through much of the trial, said the company has no regrets about fighting the charge.

"We started with what was supposed to be an open-and-shut case and kept up the fight for our honor and dignity," Andrews said.

Andersen is already a shell of its former self. The firm has lost 690 of its 2,311 public company clients since Jan. 1. It has shrunk from 27,000 employees in the United States to no more than 10,000, a result of layoffs and departures of whole offices and practices to competing firms.

Prosecutors were cheered by the verdict, saying it will help them as they seek indictments against Enron and its executives.

Weissmann denied Andersen's accusations that the Justice Department destroyed the livelihood of 28,000 U.S. workers with the indictment, saying it was Andersen's management decisions that led to the trial, the verdict and the likely death of the accounting firm.

"No other audit firm in the nation has more problems with the SEC than Andersen," Weissmann said, referring to fines and warnings the firm received for its work with companies Waste Management and Sunbeam. "They chose to handle it this way and made martyrs out of their employees."

The case was initially thought to be an easy win for prosecutors, but Assistant U.S. Attorney Sam Buell said he never assumed it would be a slam-dunk case.

"We were prosecuting the largest, most resourceful defendant in the country that brought the most resources it could to bear," Buell said.

Indeed, up until a few days ago the lengthy jury deliberations had many assuming the trial would end with an acquittal or a deadlocked jury.

The jury did indicate that it was deadlocked at the end of day seven, on June 12, but was told by Harmon to keep trying.


Martin Bienenstock, an attorney for Enron, said he didn't want to pass judgment until the appellate process was completed, but he acknowledged he was surprised by the verdict.

"The verdict accentuates how so many innocent, hard-working people at Andersen and Enron have been hurt badly by the actions of a few people," said Bienenstock. "I was hoping the acts of at most a handful of people wouldn't destroy a fine institution."

Andersen was the auditor for Enron, the Houston-based energy trading giant that collapsed in a crisis of investor confidence late last year. Government investigators charge that Enron used complicated accounting schemes, many of which were sanctioned by Andersen, to report misleading financial results.

Enron officials have denied the charges.

Former Enron CEO Jeff Skilling had no comment, according to his wife, encountered pulling out of the family's River Oaks home driveway.

Kelly Kimberly, spokeswoman for former Enron Chairman Ken Lay, said Lay had no comment. And efforts to reach former chief financial officer Andrew Fastow were unsuccessful.

Neither side disputes the events in question behind the trial. They differ on how those events should be interpreted.

In October 2001, as the scope of the accounting problems for Andersen client Enron became clear, a number of Andersen employees in Houston and other offices destroyed documents related to their work with Enron.

The directive to destroy the documents was passed from Temple to the Enron team via e-mail, and later discussed in staff meetings and conference calls. It wasn't until the SEC subpoenaed Andersen on Nov. 8 that the document destruction stopped.

But what prosecutors called an organized effort to hide documents from the SEC was described by Andersen officials as an effort to catch up with long-overdue housekeeping motivated not by criminal intent but fear of reprisals from superiors at company headquarters in Chicago.

Before the trial began May 6, many observers said those differing views on the events would not -- and should not -- have led to a courtroom.

Andersen reported the shredding voluntarily in early January, and went so far as to fire lead Enron auditor Duncan, and put other top partners on administrative leave.

The company initially believed it could reach a settlement with SEC officials and investigators, a route followed by many corporations since major criminal cases against companies rarely make it to the courtroom.

But during February and March, attempts to settle never came together. Prosecutors saw Andersen's previous SEC problems, particularly its probationary status after accounting problems with client Waste Management, as too serious to ignore. Andersen wasn't willing to concede guilt in the case and kept insisting that a small group of Houston partners acting alone led to the document destruction.

An indictment against the entire firm for one count of obstruction of justice was unsealed March 14. Andersen clients began to flee the firm in droves and employees took to the streets to protest what they said would be the death of the 90-year-old firm.

There were other settlement efforts, and it was widely believed an eleventh-hour settlement would prevent the trial. But it never came.

"The Justice Department saw the prior record of Andersen and wanted blood, and Andersen didn't believe it had done wrong and didn't want to negotiate," said Art Bowman, author of a monthly accounting industry newsletter. "So they were both hard-headed and both fighting to the death. That's why it ended up in trial."

Prosecutors seemed to have the clear advantage going into the trial May 6, bolstered by a plea agreement with Duncan that had him admitting his guilt and agreeing to testify against Andersen in exchange for a chance at a lighter sentence.
... When Duncan finally began testimony on May 14, he appeared to deliver as promised for the prosecution. On cross-examination, however, his story appeared to wilt.

Hardin questioned him closely about his testimony that it wasn't until a couple of weeks before he signed the plea agreement that he really believed he was guilty. He suggested that it was fear of prison, not honest soul searching, that led Duncan to plead guilty.

The calm precision of many of Duncan's answers also came across as coached, particularly as Hardin asked him about whether he tried to keep information away from the SEC. Duncan repeatedly used the phrase that he "knew the documents that I destroyed would not be available for others to review," a statement that fell short of admitting a crime.

"We couldn't have paid David Duncan to be this good a witness," Hardin said when he finished testimony May 17.

Prosecutors came back with a vengeance the following week, however, introducing into evidence handwritten notes from Temple, which seemed to indicate that early in October 2001 she and others at the firm knew the SEC would be interested in Enron's accounting problems.

In notes from an Oct. 9 phone call with a handful of Andersen partners, Temple wrote, "Highly probable some SEC investigation," and that there was the " ... probability of charge of violating (cease and desist order agreed to after the firm was prosecuted for auditing violations involving Waste Management)."

The Temple notes, and many other pieces of evidence, had to be introduced by FBI agents simply reading them into record since Temple and two other witnesses refused to testify based on their Fifth Amendment right against self-incrimination.

The manner of presentation appeared to undermine the strength of the evidence, as indicated by comments from alternate juror Gloria Antia, who told the Chronicle she found it unseemly that the government spoke so badly about Temple without her being brought before the jury.

"I don't know if she refused to testify or if they didn't call her, but it seemed like they were talking behind her back," Antia said.

Just as Duncan proved beneficial to the defense, the defense's first witness on May 27 ended up benefiting the prosecution.


Andersen attorneys later tried to challenge key points in the indictment, such as the date the document destruction began and where it took place, through the testimony of several employees.

One former Andersen manager, Emily Madison, testified that she and a supervisor had e-mailed Andersen senior partner Michael Odom on Oct. 8 asking how the document-retention policy should apply toward a client that had just fired Andersen as its auditor.

The defense suggested that question may have been the motive for comments Odom made in a videotaped conference two days later, where he talked about how it was appropriate to destroy documents up until the day before litigation was filed against the firm.

Other Andersen employees testified that they didn't take the reminders about the policy to mean they should destroy documents, while Duncan's former administrative assistant, Shannon Adlong, said the Houston office was worried that their superiors in Chicago would see how far behind they had gotten in their regular document cleanup.

While Andersen is likely to be out of business before a full appeal can be heard, the company and its defense team is determined to go down fighting. The most immediate fight may be with state accounting regulatory agencies that will try to use the conviction to ban Andersen from doing audit work, a process the state of Texas has already begun.

"Everybody can jump in and pile on, and if an accounting board wants to, we say come on down," Hardin said. "We'll be there."

See full article, links to legal documents, Indictment, Andersen's ex-employees site, and timeline of Andersen event and Chronicle's archives of Andersen coverage
and Chronicle Archive of Enron coverage.

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