June 16, 2002

Arthur Andersen Is Convicted On Obstruction-of-Justice Count

HOUSTON -- A federal jury convicted Arthur Andersen LLP of a single felony count of obstructing an official government proceeding, delivering a verdict that will forever stain the legacy of this once-revered American institution.

The conviction, decided Saturday on the tenth day of deliberations, bars Andersen from auditing the financial statements of companies registered with the Securities and Exchange Commission.

It came one day after U.S. District Judge Melinda Harmon gave jurors greater flexibility to reach a guilty verdict by ruling that they didn't have to agree on who committed a crime as long as they all believed someone at the firm "acted knowingly and with corrupt intent" to thwart federal regulators investigating Enron Corp. by persuading another person to destroy or alter documents related to the energy company's accounting.

But the jury unanimously agreed on the same "corrupt persuader," meaning that Judge Harmon's ruling had no bearing on the outcome.

At a post-verdict news conference Saturday, four members of the 12-person panel, including the jury's foreman, said the jury based its guilty verdict solely on the actions of Andersen in-house attorney Nancy Temple -- not the government's key witness, former Andersen partner David Duncan, or others in the firm.

And the actions the jurors cited had nothing to do with the shredding campaign that occurred at Andersen's offices in Houston and elsewhere last fall, said foreman Oscar Criner, a computer-science professor at Texas Southern University in Houston. Mr. Criner said Mr. Duncan's cooperation agreement with the government -- he had pleaded guilty -- gave jurors reason to dismiss the significance his testimony.

Andersen's conviction, Mr. Criner and three other jurors said, was based on the jury's finding that Ms. Temple had attempted to persuade Mr. Duncan to alter a memo in mid-October with the intent of keeping the original version from the SEC. Andersen ultimately saved the original memo, in which Mr. Duncan raised concerns with Enron's chief accounting officer that certain terminology in the company's third-quarter earnings news release was misleading.

The verdict won by Justice Department prosecutors Samuel Buell, Andrew Weissmann and Matt Friedrich capped an unusually speedy federal trial, lasting just more than a month, in one of history's most closely watched white-collar criminal cases.

The decision, which will be appealed, marks a disgraceful end for the firm that opened its doors on Dec. 1, 1913, at 111 West Monroe St. in Chicago as Andersen Delaney & Co. Andersen eventually grew to become among the world's most-trusted professional-services firms. In the end, to borrow phrases from Enron Vice President Sherron Watkins and Andersen partner James Hecker of Houston, it imploded "in a wave of accounting scandals" and was convicted based on a series of "smoking guns" that "it could not extinguish."

Even before Andersen's trial began a month ago, the case appeared open-and-shut, based solely on a technical reading of the witness-tampering statute under which Andersen was indicted. Prosecutors merely had to prove that a single Andersen partner or employee had at least tried to persuade another to destroy documents pertaining to the firm's audits of Enron with the intent of keeping them out of the hands of the SEC last fall.

Then, a week into deliberations, the jurors asked if conviction required that they agree on the identity of who at Andersen acted corruptly. Judge Harmon considered arguments and briefs from both sides, taking a day before issuing a decision she said was on a point of law never directly addressed by a U.S. court.

Her ruling, for which she offered no immediate explanation, allowed the jury to hold Andersen criminally liable even if jurors wouldn't have voted unanimously to convict any of its partners or employees individually had they been on trial themselves.

The ruling had been seen as a major boost for the government. In the end, however, jurors said they had already reached their unanimous verdict even before they received Judge Harmon's answer to their question, rendering her decision a moot point.

Mr. Duncan, who pleaded guilty to obstruction of justice in April, testified as a government witness about his efforts to destroy Enron-related documents last fall as the energy concern was beginning to implode. He had been one of several Andersen figures singled out by prosecutors as culprits whose actions brought criminal liability on the firm as a whole. The strength of the government's case left Andersen's legal team, led by Houston attorney Rusty Hardin, with little choice but to pursue a high-risk legal strategy of convincing jurors that Mr. Duncan's admissions weren't credible.

And Mr. Hardin made a valiant effort of trying to portray the 43-year-old father of three young girls as an innocent man who pleaded guilty not because he had committed a crime, but out of fear of prosecution for more serious crimes like accounting fraud.

Andersen attacked the government's case at every level, homing in especially on government allegations that "corrupt persuaders" within the firm had specifically intended to impede SEC investigators pursuing information about Enron's collapse.

But the defense's efforts weren't enough.

"We, the Jury in the above entitled cause, find the Defendant, Arthur Andersen LLP, guilty of the offense charged in the indictment," the jurors stated in the verdict.

The firm now awaits sentencing, facing a maximum fine of $500,000.

'Totally Reversible Error'

Throughout the trial, Andersen has cited a bevy of potential grounds for appeal. During one exchange last month, Mr. Hardin accused U.S. District Judge Harmon of creating "totally reversible error" by allowing prosecutors in front of jurors to discuss personal notes taken by a witness that had invoked the Fifth Amendment in declining to testify. And throughout the proceedings, the firm's lawyers objected to the government's introduction of evidence related to Andersen's audit failures at Sunbeam Inc. and Waste Management Inc. as prejudicial. Judge Harmon permitted the government to present those prior "bad acts" as evidence of Andersen's motive to destroy Enron-related documents in the face of an imminent SEC inquiry into the firm's work.

Any finding by the SEC could have triggered a violation of a consent decree Andersen agreed to last year as part of a civil-fraud settlement with the SEC over its Waste Management audits during the 1990s. The order barred the firm from committing future violations of the nation's securities laws. Its implementation essentially placed the firm on probation with the SEC, which could revoke the firm's ability to audit public companies if Andersen ever violated it.

Andersen informed the SEC after the verdict Saturday that it will cease auditing public companies by Aug. 31, unless the SEC determines that another date is appropriate, the commission said. The firm has lost hundreds of clients since its indictment was unsealed March 14. Convicted felons are barred from auditing SEC-registered companies without a waiver from the commission.

In a public statement released after the verdict, Andersen vowed to appeal "based on flawed jury instructions and erroneous evidentiary rulings." The statement referred to the verdict as "only a technical conviction" that, if left to stand, would leave any company vulnerable to prosecution for "standard document disposal practices." (See the complete statement¹³.)

New Energy for Enron Probe

The conviction gives new momentum to the Justice Department's Enron Task Force, whose investigation continues. An acquittal had threatened to drain support for the government's broader probes into the actions of former Enron executives. And with the conviction, further indictments of Andersen personnel remain a possibility.

Prosecutors have told Judge Harmon that Andersen's Ms. Temple, among others, is a subject of the task force's criminal investigation. Ms. Temple's handwritten notes showing she had anticipated an SEC inquiry into the firm and its potentially disastrous consequences as far back as Oct. 9, a full month before the firm received a subpoena from the SEC, were among the key points of evidence that prosecutors cited throughout the trial.

Prosecutors charged that it was Ms. Temple's reminders to follow Andersen's euphemistically dubbed "document-retention" policy that sparked widespread destruction of Enron-related documents throughout the firm's offices in Houston, Chicago, London and Portland, Ore., in the fall. Ms. Temple took the Fifth last month when called as a witness in the firm's trial, and she has declined to comment publicly ever since she testified before Congress this past winter.

Write to Jonathan Weil at jonathan.weil@wsj.com¹⁴ and Alexei Barrionuevo at alexei.barrionuevo@wsj.com¹⁵

Updated June 16, 2002 11:28 a.m. EDT