June
17, 2002
In Andersen Case, Single E-Mail Led to Guilty Verdict, Jurors Say
By JONATHAN
WEIL, ALEXEI BARRIONUEVO and CASSELL BRYAN-LOW
Staff
Reporters of THE WALL STREET JOURNAL
HOUSTON -- After doing business for 89 years and being indicted for destroying "tons" of documents, Arthur Andersen LLP's death sentence may have been sealed by a single e-mail.
A federal jury here on Saturday convicted the embattled accounting firm of one felony count of obstructing the Securities and Exchange Commission's investigation into Enron Corp.'s collapse. The verdict capped a six-week trial in one of the most widely followed white-collar criminal prosecutions in decades. And it gives the Justice Department a badly needed momentum boost as it pursues indictments for more serious crimes at Enron. A special federal Enron grand jury impaneled three months ago in Houston is continuing to investigate potential criminal conduct by Enron and its former officers, including possible fraud, perjury and obstruction of justice. Prosecutors Saturday said the government's broader investigation into Andersen and its personnel is continuing as well.
Saturday's verdict was a much closer call than the jury's unanimous decision might suggest. In a special jury verdict form, the jurors all stated that they agreed on the identity of one Andersen employee, who had encouraged document destruction. In interviews with reporters after the trial, four of the jurors identified that person as Nancy Temple, an in-house Andersen lawyer based at the firm's Chicago headquarters.
These jurors said that the panel had focused not on the mounds of shredded documents highlighted by the government but on a single e-mail written by Ms. Temple that had received little attention from either side at trial. To jurors, the e-mail showed that Ms. Temple at Andersen's Chicago headquarters, had at least attempted to get Mr. Duncan to edit one of his file memos at a crucial point last October "to protect ourselves" from SEC regulatory scrutiny. Under the law, that one thread was all the government needed to achieve its chief ambition: holding Andersen itself criminally responsible.
The finding marks an ignominious end for a firm that opened its doors on Dec. 1, 1913, in Chicago and grew into one of the world's most trusted institutions, with offices in 84 countries. After the verdict, Andersen announced that it had notified the SEC it planned to cease auditing publicly owned clients by Aug. 31 -- a major step toward winding down its affairs.
The twin implosions of Enron and Andersen now stand as watershed events in a historic plunge in faith in American markets and corporations. In their wake, prosecutors and regulators have opened dozens of investigations into conflicts-of-interest among Wall Street analysts and the accounting practices of several major corporations, and prominent CEOs have been charged with tax evasion and insider trading.
Sentencing is scheduled for Oct. 11, after which the firm said it plans to appeal. The maximum sentence is five years probation and a $500,000 fine.
After delivering the verdict, four jurors met with reporters and revealed just how difficult the decision was. The jurors said the panel gave little weight to the admissions of the Justice Department's star witness, former Andersen partner David B. Duncan, noting the cooperation agreement he entered with the government as part of his April guilty plea to an obstruction-of-justice charge. In effect, Andersen lawyer Rusty Hardin was able to get the jury to discount a centerpiece of the government's case. Despite Mr. Duncan's admission to massive document shredding, Mr. Hardin was able to convince the jury to disregard him as a culprit.
The evidence that Andersen auditors were ordered to shred Enron-related documents to impede an SEC probe was "superficial," said the jury's foreman, Oscar Criner, a computer-science professor at Texas Southern University. Document shredding "had almost nothing to do" with the jury's task of determining if any Andersen partner or employee had tried to corruptly persuade another person "to do something that would result in the impairment of a fact-finding capability of an official proceeding," Mr. Criner said.
Instead, the jury embarked on 72 hours of deliberations over 10 days, searching reams of evidence and testimony to determine if there was anything else on which they could agree that an obstruction conviction would be warranted. They spent days picking apart the complex maze of legal instructions delivered to them early this month by U.S. District Judge Melinda Harmon.
The upshot: What began as an indictment for massive illegal document destruction by the firm's accountants ended with the finding, the four jurors said, of a lone instance of attempted illegal document alteration by a newly hired Andersen lawyer. The jurors unanimously agreed Ms. Temple had acted as a "corrupt persuader."
Whatever the jury's reasoning, for the government, a win is a win. The nine-man, three-woman jury heeded prosecutor Samuel Buell's closing-argument plea to "call Andersen to account for acting to protect itself when it should have been responsibly fulfilling its duties under the laws of the United States."
In reality, Andersen's criminal trial was more about the firm's legacy than its fate. Andersen has been disintegrating since the government unsealed its indictment March 14. It's down to 10,000 U.S. employees from 26,000 less than six months ago. Even before the trial began May 6, scores of clients and partners had run for the exits and Andersen now says all but a few of its public-company clients are left. Of those roughly 1,200 public companies, about 750 or more have formally announced an auditor switch.
To the end, Andersen remained defiant. "The reality here is that this verdict represents only a technical conviction," the firm said in a news release. Andersen's lead trial lawyer, Mr. Hardin added: "This company did not commit a crime."
Some Andersen rivals say the case has caused them to redouble efforts to audit companies scrupulously. Still, that may not be the message that many would-be corporate criminal defendants take away from the trial. One unintended result of the Andersen prosecution may be that white-collar criminal-defense attorneys urge their corporate clients to button up after discovering potential wrongdoing by their personnel. Soon after learning of last fall's widespread shredding in Houston, Andersen's top outside lawyers advised firm executives to disclose all they knew to the Justice Department. Andersen agreed to waive its attorney-client privilege to almost all internal material related to document destruction through Nov. 9, when the firm's shredding ceased.
At the Government's Mercy
Andersen put itself at the mercy of the government. Prosecutors then used Andersen's own documents to indict the firm, after the two sides were unable to work out a settlement under which Andersen wouldn't have to plead guilty to a crime. Ultimately, it wasn't what the firm shredded that got it convicted, but what it turned over to the government. This example may well prompt large U.S. corporations and partnerships to think twice about reporting their own misdeeds to the government, says Judson Starr, a former Justice Department official, currently a corporate-defense lawyer in the Washington office of Venable LLP.
|
||||||||||||||||
For the government, a victory helps shape public opinion that the Department of Justice's actions -- criticized by many for being too harsh in indicting the whole firm and not just a few individuals -- were justified.
The whole case needs to be seen as "the preface to the book called [the government's] case against the Enron insiders," says T. Gerald Treece, associate dean of the South Texas College of Law in Houston.
The government could still choose to prosecute individuals at Andersen. "Our investigation of Andersen isn't over," said Andrew Weissmann, a Justice Department attorney, following Saturday's verdict.
It's unclear how much help the evidence gleaned from the Andersen trial will provide prosecutors in their broader Enron investigation. A number of Andersen accountants gave angst-ridden testimony alleging self-dealing activities by Enron executives and pressure by the company on Andersen auditors to approve aggressive accounting practices. Yet little emerged in the way of new incriminating facts about the energy-trading company or its former top executives.
Indeed, to the surprise of many following the case, Mr. Duncan, the firm's top Enron auditor, testified that he knew of just a few isolated instances of accounting irregularities at Enron. Those he identified were the same problems that Enron disclosed in November, when it announced that its financial statements no longer were reliable. By most other accounts, including public statements by Enron itself this spring, the company's financial misstatements in the years leading up to its December 2001 bankruptcy ran far deeper.
As for Andersen, its legal woes are far from over. It faces potentially crushing civil liability from Enron investors who argue that Andersen's audits whitewashed the financial sleight-of-hand that kept billions of dollars of liabilities off the company's books and massively overstated the company's earnings. Those claims could potentially reach into the billions of dollars and far outstrip Andersen's financial resources. The government's investigation of possible accounting fraud and perjury by Andersen and some of its partners is continuing.
Even if Andersen had been acquitted, the evidence that unfolded in court during the past month was enough to shake whatever confidence may have remained in its audits. Andersen's own senior partners, including the accounting specialist John Stewart of the firm's Professional Standards Group, rued on the stand how the firm had compromised its independence and allowed Enron to dictate its auditors' decisions. Enron even controlled which Andersen people worked on the company's audits.
Mr. Duncan's testimony was striking in his insistence that Enron's accounting practices were fundamentally sound. To the end, he stuck to the position that there were only three minor accounting issues that were handled improperly by the company.
"There was a lack of auditor independence," said juror David Schwab, an executive pastry chef from nearby Spring, Texas. Mr. Schwab had told lawyers during jury selection that he didn't even know what the SEC was. "David Duncan, we believe, got way too close to Enron," said juror Jack Gallo, an airline manager from Kingwood. "Andersen got way too close to Enron."
And the problems aren't just with Enron. Since last fall, a rash of former Andersen clients has been rocked by accounting issues. These include Dynegy Inc., Qwest Communications International Inc., WorldCom Inc. and Global Crossing Ltd. Any one of the companies' shareholder losses alone might have crippled Andersen. An Andersen spokesman, Patrick Dorton, says the firm believes it could have survived the difficulties of clients other than Enron.
As recently as the 1980s, the accounting profession's elite collectively were known as the Big Eight. Today they have been relegated to a Final Four. PricewaterhouseCoopers LLP, Deloitte & Touche LLP, Ernst & Young LLP and KPMG LLP each faces increasing scrutiny over audit blowups. Yet for all the early talk that Andersen's demise would spark broad reform efforts -- by the profession itself, Congress or the SEC -- those hopes have faded.
Andersen's competitors have shown little appetite for the kinds of reforms touted this spring by former Federal Reserve Chairman Paul Volcker, whom Andersen had enlisted in a long-shot effort to clean up the firm's management and procedures. Congress and the SEC are considering changes that would be modest at best. Efforts at more-substantive overhaul have died amid industry lobbying and partisan Congressional fighting as interest in Enron's fallout has subsided on Capitol Hill.
When Andersen's trial began May 6, the government's case had appeared clear-cut. A grand jury in Houston had charged the firm with violating a federal witness-tampering statute. Prosecutors were seeking to prove that at least one Andersen partner or employee -- no matter where on the organizational chart -- had attempted to "corruptly persuade" others to destroy Enron-related documents with the intent of keeping them out of the SEC's hands. Mr. Duncan already had admitted to doing just that.
Getting in Compliance
What's more, on Oct. 23 he'd instructed his entire audit team to begin complying with the firm's "document retention" policy, which required the destruction of any materials that couldn't be used to defend the firm's audit conclusions. He said he'd been prompted, in part, by an Oct. 12 e-mail from Ms. Temple reminding another Houston partner of the policy.
That left Andersen's lead attorney, Mr. Hardin, with no choice but to pursue a high-risk strategy of convincing jurors that Mr. Duncan's admissions weren't credible. The lawyer tried to portray Mr. Duncan, 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, such as accounting fraud. It worked, though it wasn't enough.
Less Than Emphatic
Under Mr. Hardin's questions, Mr. Duncan said he couldn't remember anything he had destroyed, except for one document, and couldn't remember destroying any documents for which there weren't other copies at the firm. Mr. Duncan stopped just short of saying he hadn't specifically intended to impede an SEC inquiry. He testified that he knew the SEC was just one of many parties, including class-action securities lawyers suing the firm, that wouldn't have access to information he destroyed. That wasn't the emphatic admission that many had expected. Mr. Duncan, however, was not the government's only focus.
Prosecutors also had handwritten notes by Ms. Temple, showing that she anticipated an SEC inquiry into the firm -- and its potentially disastrous consequences -- as far back as Oct. 9. That was three days before she gave her first known reminder to Andersen partners suggesting they enforce the firm's document-retention policy. The policy set in motion the document destruction in Houston, London and elsewhere.
The backdrop for all of this was a series of exchanges between top Andersen partners and attorneys as they were scrambling to unwind a series of improper accounting decisions that Mr. Duncan had allowed Enron to get away with -- against the advice of the firm's own top accounting technicians. The government showed that other Houston partners, including Thomas Bauer and Michael Odom, had taken pains to ensure that the firm's employees destroyed potentially damaging documents last October.
But in the end, none of that really mattered, Mr. Criner and other jurors said Saturday. What did matter was an Oct. 16 e-mail from Ms. Temple to Mr. Duncan, the top partner on Enron's audits, recommending wording changes to a file memo he'd drafted the day before.
Mr. Duncan's memo had documented how he'd told Richard Causey, Enron's chief accounting officer, on Oct. 14 that Andersen believed the company's third-quarter earnings news release was misleading. The release had characterized a $1 billion charge to earnings for investment losses as "non-recurring," though accounting rules regard such losses as a normal part of earnings.
Mr. Duncan also wrote that he'd cautioned Mr. Causey about how such presentations had triggered SEC disciplinary actions at other companies. Enron ignored the advice and issued the news release with the offending language anyway on the morning of Oct. 16. That left Andersen in a pickle.
"Arthur Andersen did not approve that, and Enron went along anyway and did it," Mr. Criner, the jury foreman said. "Then Arthur Andersen set about to alter documents to keep that away from the SEC."
Ms. Temple had received a copy of Mr. Duncan's original file memo draft. After Enron issued its news release on Oct. 16, she sent him an e-mail that evening in which she recommended "deleting some language that might suggest we have concluded the release is misleading." She also suggested "deleting reference to consultation with the legal group and deleting my name on the memo. Reference to the legal group consultation arguably is a waiver of attorney-client privileged advice and if my name is mentioned it increases the chances that I might be a witness, which I prefer to avoid."
Ms. Temple concluded her "suggested comments" noting that she would "consult further within the legal group as to whether we should do anything more to protect ourselves from potential Section 10A issues." Under that section of the Securities and Exchange Act, auditors must notify the audit committees of their clients' corporate boards upon discovering an illegal act. Auditors can face punishment by the SEC if they do not. Mr. Duncan kept both his original draft of the Oct. 15 file memo and the revised version.
"It is against the law to alter that document with the intent to impair the fact-finding facility of an official proceeding," Mr. Criner said. Ms. Temple and her attorneys didn't return phone calls over the weekend.
The government now must decide whether to seek the indictment of Ms. Temple. Prosecutors declined to say if they'll do so, but Mr. Hardin has said she's been named a target of the government's investigation.
For their part, prosecutors say the jury's narrow focus on the single exhibit -- without which the jury easily could have been hung, resulting in a mistrial -- does not diminish the verdict. "That was one of the critical pieces of evidence," Mr. Buell said. "Arthur Andersen was papering the file. They were acting to protect themselves, not the public." Added prosecutor Andrew Weissmann: "It was a perfect illustration of Nancy Temple and others getting rid of drafts and sanitizing the record. That document was devastating."
Defense attorneys were aghast at the verdict. "I can guarantee that the government didn't indict the firm for editing a document," said Charles Rothfeld, a partner at Mayer, Brown, Rowe & May. Andersen partner C.E. Andrews, who sat at the defense table as Judge Harmon unceremoniously read the verdict at 10:24 a.m. local time, said: "It was bizarre."
Deadlocked
After starting out split 6-6, the jurors deadlocked at 9-3 in favor of a guilty verdict before Judge Harmon instructed them Wednesday to redouble their efforts and reconsider their positions in hopes of avoiding the time and expense of a second trial. Mr. Criner was the last holdout for a not-guilty verdict. Before he finally switched, the vote had been 11-1 to convict.
Saturday's verdict came less than a year after Andersen settled a civil-fraud lawsuit filed by the SEC over Andersen audits of Waste Management Inc. during the 1990s. Andersen paid a $7 million fine in that case and agreed to a court order barring it from future securities-law violations. It was fear of violating that order, prosecutors argued, that led Andersen's legal department to launch a major effort to hide damaging information about Enron from the SEC. To the Justice Department, Andersen had become a recidivist offender.
The indictment meant the jobs of Andersen's 26,000 U.S. employees would disappear. But prosecutors said after the verdict that those people should hold Andersen management responsible, not the government.
Throughout the trial, Andersen cited what it called promising grounds for appeal. During one exchange last month, Mr. Hardin accused Judge Harmon of committing "totally reversible error" by allowing prosecutors in front of jurors to discuss personal notes taken by Ms. Temple, who had invoked the Fifth Amendment in declining to testify.
Andersen lawyers also objected to the government's introduction of evidence related to Andersen's 1990s audit failures at Sunbeam Corp. and Waste Management. 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. And the firm's lawyers lost countless other rulings on evidentiary matters and the judge's jury instructions. Mr. Hardin described those defeats as "deadly for us."
"The chances of this verdict standing up is one in a million," Mr. Hardin said. Still, he acknowledged, with the firm rapidly disintegrating, "if this thing gets overturned a year and a half from now, no one will care about it."
-- Richard B. Schmitt and Anita Raghavan contributed to this article.
Write to Jonathan Weil at jonathan.weil@wsj.com11, Alexei Barrionuevo at alexei.barrionuevo@wsj.com12 and Cassell Bryan-Low at cassell.bryan-low@wsj.com13
Updated June 17, 2002 2:02 a.m. EDT