U.S. Indicts Enron Auditor Over Shredding

WASHINGTON —  Federal prosecutors Thursday hit accounting firm Andersen 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 collapse of energy giant Enron, which filed for Chapter 11 bankruptcy protection Dec. 2 amid an accounting scandal.

The indictment, which does not name any individuals, was handed up March 7 by a federal grand jury in Houston and unsealed Thursday after negotiations to reach a plea agreement with Andersen broke down.

Deputy Atty. Gen. Larry Thompson accused Andersen, which was Enron’s auditor until early 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 probe of 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 document 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 in Andersen’s office at Enron headquarters ran almost constantly, according to the indictment.

Andersen previously had admitted to 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 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 85,000 employees worldwide 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 this week 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 could face a maximum fine of $500,000 and five years’ 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 internal investigation of the shredding, which was provided to prosecutors.

According to a portion of the internal report obtained by The Times, Andersen partner David B. 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 wrong-doing, 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 said Duncan “is continuing to cooperate with all ongoing investigations.”

Additional Charges Still a Possibility

Andersen also complained that the government refused to let the company present its own evidence to the grand jury, and insisted that there was no evidence that either the company or its employees acted with willful criminal intent.

The lawyers said that in negotiations with the firm prosecutors primarily had been seeking an admission of guilt from the company. Some observers had speculated that the Justice Department would seek to use 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 now will seek to force the Justice Department to identify the Andersen partners who prosecutors believe had the “criminal intent” needed to convict under the obstruction law. They said they also will seek to have the indictment dismissed and, failing that, a speedy trial.

Thompson said Thursday that additional criminal charges against Andersen and its employees are still a possibility. The department also is pursuing a much larger inquiry into Enron and its executives.

By rejecting a plea, Andersen essentially dared the Justice Department to serve the indictment on the partnership, legal experts say. But 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.

Forcing the Justice Department to serve the indictment 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.

SEC Could Seek to Bar Andersen

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 it would have if the company had admitted guilt under a plea agreement this week.

“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.

Until Wednesday, Andersen attorneys apparently had held out hope of reaching a global settlement with the Justice Department and the SEC in which the company could plead guilty but receive a waiver from the SEC rules or some other limited penalty. It previously offered to pay as much as $750 million to Enron shareholders and other creditors.

A Wednesday letter from Andersen to the Justice Department indicates it would be willing to accept SEC sanctions as long as they were largely directed at its Houston office. Andersen also offered to appoint a special monitor to oversee its compliance with a new document retention policy and to fire all individuals involved in the shredding.

But a waiver would place the SEC in an awkward position because the agency just last year censured Andersen for its handling of the finances of another company, Waste Management Inc., and won an injunction barring the firm from future wrongdoing. That settlement put pressure on the SEC to impose a harsh punishment on Andersen in the Enron case, analysts said.

SEC Approves Emergency Measure

The indictment may have far-reaching implications for Andersen’s 2,300 publicly traded audit clients, many of whom have annual financial reports due to the SEC by the end of the month.

In an apparently unprecedented move, the commission approved emergency measures Thursday that would 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 immediately 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 in a statement.

Andersen joins a handful of other companies that have faced obstruction of justice charges in recent years.

Similar Charges for Other Companies

A year ago, Moody’s Investors Service Inc., a credit-rating firm, pleaded guilty to obstruction of justice after it was discovered that an employee had destroyed documents that had been subpoenaed by federal prosecutors in an antitrust investigation.

In that case, Moody’s paid a $195,000 fine for failing to notify the government about the destruction, even though senior executives knew about it, or should have known about it.

Other corporations that have been charged with obstruction of justice in recent years include Royal Caribbean Cruises Ltd., which pleaded guilty and paid $9 million in fines in an ocean dumping probe, and Ortho Pharmaceutical Corp., a wholly owned subsidiary of Johnson & Johnson that persuaded employees to destroy documents relating to a federal investigation of the drug firm’s Retin-A. Ortho paid $7.5 million in fines.

Sanders reported from Washington and Leeds from Los Angeles. Staff writers Richard Simon, Robert L. Jackson and Josh Meyer in Washington and Thomas S. Mulligan in New York contributed to this report.

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Fleeing Clients

A number of major companies have dropped Andersen as their accounting firm since January, including:

*--* Delta Enron Freddie Mac Heller Financial FedEx Merck SunTrust Banks Kerr-McGee Riggs National Keystone Automotive Group Household International Valero Energy *--*