April 10, 2002

Andersen Ex-Party Pleads Guilty, In a Significant Blow to the Firm

Dramatic Move by David Duncan Gives
Prosecutors Weapon to Pursue Charges


The Arthur Andersen LLP partner in charge of the Enron Corp. account pleaded guilty in federal court in Houston to obstruction of justice, turning the tables on his former employer and handing prosecutors a potent weapon in their criminal case against the firm.

David Duncan's move could have a profound impact on the case, which has roiled the world-wide accounting industry and spurred congressional calls for greater oversight of corporate governance. It raises the chances that Andersen, struggling for its survival, will have to accept the government's terms if it wants to settle the pending obstruction indictment against the firm. His testimony could also prove valuable in the broader investigation of Enron and the executives who presided over its efforts to inflate profit and hide debt before its bankruptcy filing late last year.

Mr. Duncan's cooperation has given prosecutors new information and could bring more indictments of former Andersen colleagues, according to investigators and lawyers close to the case. Nancy Temple, who was a lawyer in the firm's Chicago office, and Michael Odom, a manager in Houston who was also alleged to have been involved in shredding of Enron-related documents last fall, could face federal prosecution, the lawyers close to the case said.

Prosecutors said in federal court Tuesday that Mr. Duncan "knowingly, intentionally and corruptly" directed efforts in Andersen's Houston office last fall to alter, withhold and destroy documents and records, just as a Securities and Exchange Commission investigation was getting under way.

"On Oct. 23, I instructed local people at Arthur Andersen to begin destroying documents, with the knowledge and intent that those documents would be unavailable to the SEC and others," Mr. Duncan declared. "I also personally destroyed such documents and knew they would be unavailable to the SEC," he said. "I accept that my conduct violated federal criminal law and am fully responsible."

Mr. Duncan appeared before the packed courtroom in a charcoal suit and burgundy tie, and during the brief afternoon hearing uneasily read his statement to U.S. District Judge Melinda Harmon. He answered her questions in a quiet, deep voice and swayed noticeably on his feet when she told him that the charge could carry as much as a 10-year prison term.

Among the evidence that prosecutors have obtained against Andersen are e-mail directories showing widespread deletions, and a videotape in which a senior manager advises employees on shredding documents, investigators and lawyers close to the case said. In the video, Mr. Odom tells employees that if the firm's document policy is followed, and "litigation is filed the next day, that's great ... whatever there was that might have been of interest to somebody is gone and is irretrievable."

Ms. Temple's attorney has said his client didn't break the law; Mr. Odom's lawyer declined to comment Tuesday.

Rusty Hardin, an Andersen attorney in Houston, said after Mr. Duncan's court appearance Tuesday, "We are surprised and disappointed by Mr. Duncan's statement in court, as it completely contradicts what he has stated up until this point. For months, Mr. Duncan has contended that he had no intent to commit any criminal act.

"We believed Mr. Duncan and his statements served as the basis for our public statements on this matter and our discussions with the Department of Justice," Mr. Hardin said. Now, "Mr. Duncan told a completely new and different story to a judge in Houston. Arthur Andersen made the decision to terminate Mr. Duncan last January based on his exercise of extremely bad judgment in this matter. We stand by that decision."

But others at the besieged accounting firm said they now believe the decision to fire Mr. Duncan on Jan. 15 and publicly blame him for the shredding was a major blunder. He is expected to provide evidence to back up the government's charge that the effort to shred documents took place not just in Houston, but also in Portland, Ore., London and Chicago.

Mr. Duncan is expected to meet again shortly with Federal Bureau of Investigation agents, and appear before the grand jury. Because of his former position, he has direct knowledge of many of the transactions that are now under criminal scrutiny in the Enron investigation. He was intimately familiar with the creation of the so-called Chewco, LJM and Raptor partnerships which are alleged to have been used to inflate Enron profit and hide debt, those close to the case said.

As a result, Mr. Duncan's expected testimony could be especially troubling for Andrew Fastow, Enron's former chief financial officer, who profited personally from some of the partnerships, and other former Enron executives. And although Mr. Duncan's cooperation is a blow to Andersen in its criminal-obstruction case, some of his testimony could paradoxically help the firm defend itself from liability in any Enron case, because he may be able to show that the accounting firm was deceived by the Enron executives.


The plea bargain that prosecutors struck with auditor David Duncan frees them to focus on other players and potential witnesses in the destruction of Enron-related documents at Arthur Andersen LLP.

Nancy Temple Chicago-based Andersen lawyer. Mr. Duncan cites her e-mail reminder about the firm's document-retention-and-destruction policy as the impetus for his shredding efforts.
Carl Bass Houston-based auditor removed from the Enron account after raising concerns about aggressive accounting at the energy company.
Michael Odom An auditor on the Enron team. He was relieved of management responsibilities when Mr. Duncan was fired and later told congressional investigators that Ms. Temple's e-mailed reminder was unprecedented.
Tom Bauer Oversaw commodities-trading issues on the Enron account. He worked on the same floor as Mr. Duncan, near a shredder.
Michael Lowther Partner on the Enron account and Mr. Duncan's boss. He was relieved of management duties when Mr. Duncan was fired.

Source: WSJ research

Some of the lawyers close to the case noted that the Justice Department didn't wade into a war of words with Andersen at Tuesday's hearing, suggesting there may be reason to hold out hope of a settlement with the firm. It may signal that the door is still open for a settlement, they said.

The Justice Department won another victory Tuesday in a related ruling by Judge Harmon in which Andersen lost its bid to shut down the grand jury investigating Enron-related crimes until after the firm's scheduled May 6 trial. Andersen had said the government was improperly using the grand jury to gather evidence against Andersen after the firm was already indicted, and complained that the government had issued subpoenas to Andersen employees soon after the firm's indictment was unsealed last month. The government had countered that the grand jury was merely investigating other defendants on other charges against the firm, which is permitted under the law.

In her ruling, the judge sided with the government in finding the grand jury was entitled to go forward so long as the "sole or dominant purpose" of its proceedings wasn't to develop evidence for its obstruction case against Andersen. The government, the judge ruled, "is acting in good faith to investigate unindicted charges against individuals and entities."

Mr. Duncan's plea could quicken the pace of settlement efforts, which began last Friday. The government and Andersen lawyers have already discussed a settlement approach that could include some sort of deferred prosecution agreement, with an admission of wrongdoing by Andersen.

Mr. Duncan's plea weakens Andersen's hand in any talks. "The mere fact that an employee of Andersen has committed a crime is devastating for Andersen itself, because that crime may be attributed to Andersen if he was acting within the scope of his employment, which it looks like he was," says Ted Fiflis, a law professor at the University of Colorado at Boulder. "The DOJ might be able to win right now after this plea, at least on legal theory."

"They [Andersen] are back to Plan A," said Peter Romatowski, a defense lawyer at Jones, Day in Washington, who is a former federal prosecutor. "The original strategy ... was to throw Duncan overboard, and say he is the wrongdoer, and that we should not be responsible for what he did." Later, the Andersen trial team embraced Mr. Duncan, arguing that he hadn't committed a crime. "That was Plan B," said Mr. Romatowski, who isn't involved in the Andersen or Enron cases. "Now, it is back to Plan A."

"As a technical legal matter, his guilty plea is sufficient to bind the company," Mr. Romatowski said. Lynn Turner, a former chief accountant for the SEC, is more blunt, calling the cooperation deal "a grand-slam hit" for the Justice Department.

Now, Andersen lawyers will have to regroup again, and will likely have to argue that Mr. Duncan is agreeing to the plea only to avoid prison, and that he never really intended to commit a crime. While the government and Mr. Duncan haven't come to terms on any sentence, a court filing by the government that described Mr. Duncan's cooperation made it clear that the defendant's substantial assistance to prosecutors would ease his sentence, which is scheduled for Aug. 26.

-- Richard B. Schmitt and Devon Spurgeon contributed to this article.

Write to John R. Wilke at john.wilke@wsj.com2, Jonathan Weil at jonathan.weil@wsj.com3 and Alexei Barrionuevo at alexei.barrionuevo@wsj.com4

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Updated April 10, 2002 12:58 a.m. EDT

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