A federal grand jury has indicted the Andersen accounting firm, charging it with obstruction of justice, the first criminal charge brought in the scandal surrounding the collapse of energy trader Enron Corp.
The one-count indictment unveiled Thursday by the Justice Department alleged that Andersen “knowingly, intentionally and corruptly” shredded thousands of documents related to its audits of Enron. The Houston-based energy company collapsed and filed for bankruptcy protection last year after disclosing that questionable accounting methods approved by Andersen had inflated its earnings and hidden hundreds of millions of dollars in debt.
After learning that the Securities and Exchange Commission was likely to subpoena Andersen’s Enron-related records, employees in the firm’s Houston, Portland, Ore., London and Chicago offices led an “unparalleled initiative” to destroy paper records and delete computer files, the indictment alleged.
Andersen, meanwhile, criticized the Justice Department action as a “gross abuse of governmental power” based on “flimsy” evidence and vowed to fight the charge. Though Andersen’s lawyers repeatedly have warned that the filing of a criminal charge might destroy the firm, an Andersen spokesman said the firm has no plans to file for bankruptcy.
In a briefing for the media, Andersen’s lawyers also lamented the Justice Department’s refusal to settle the case without forcing Andersen to plead guilty to a felony charge.
“We had proposed a number of alternative sanctions, both civil and criminal, that could have been appropriate,” one Andersen lawyer said. “None of those were seriously entertained by the department.”
In January, the accounting firm revealed that its employees shredded thousands of documents related to its Enron audits. The firm blamed a Houston-based partner in charge of the Enron account, David Duncan, and said it would fire him and discipline other Andersen partners involved in the document destruction.
Although the Justice Department charged no one individually, it said its investigation is continuing.
The indictment alleges that Andersen partners and others held mandatory meetings during which employees were instructed to immediately shred Enron-related records. Employees were told to work overtime to accomplish the task if necessary, the indictment asserts, and “tons” of documents were destroyed in marathon shredding sessions.
Andersen staff engaged in the “wholesale destruction” of Enron-related records, said Deputy U.S. Atty. Gen. Larry Thompson at a Washington news conference. The maximum penalty against Andersen, Thompson said, is a $500,000 fine and five years of probation.
Andersen’s operations already have been hit hard by client defections in the widening scandal. Real estate developer Amrep Corp. and National Bank of Canada, one of that country’s largest financial institutions, late Wednesday joined a growing list of clients that have dumped Andersen as their auditor in recent weeks.
As of Wednesday, Andersen had lost 2 percent of its revenues because of client defections, Andersen spokesman Charlie Leonard said. “We’re looking at a significant hit to the business, but we have to see how this plays out,” he said. The firm’s managers, Leonard added, “are putting in place a business plan to respond to changes in our revenues and client base.”
Duncan, the man singled out for blame by Andersen, consistently has denied that he led the shredding exercise, claiming that he was encouraged to do so by an e-mail from an Andersen attorney, Nancy Temple, reminding him of the firm’s document retention policy.
In a strange turnabout on Thursday, Andersen lawyers found themselves defending Duncan. “We’re not convinced … that any partner at Andersen violated this obstruction of justice statute, including Duncan,” one Andersen lawyer said. Duncan, the lawyer asserted, was dismissed “because he exercised exceptionally bad judgment” but not criminally bad.
Also emerging in Thursday’s Andersen briefing was the apparent crux of the company’s legal defense to the obstruction charge: that the firm’s Houston-based employees destroyed documents because they were “embarrassed” that “the files of this particular audit were a mess,” not because they were trying to thwart the SEC’s investigation, one lawyer for the firm said.
Sticking point
Andersen lawyers said a principal sticking point in their negotiations with the Justice Department was that they could not agree to a felony plea without a waiver first from the SEC rules, which automatically suspend an accounting firm convicted of a felony from auditing publicly traded companies. The SEC, the lawyers said, was unwilling to provide such a waiver.
In an effort to minimize the damage to its business, Andersen said it plans to move for dismissal of the case or a trial within the next 90 days, following speedy-trial rules.
“We’re going to move as fast as possible to dismiss this ridiculous charge,” said a member of Andersen’s legal team. “We do not believe a crime was committed.”
The firm’s comments were met with skepticism from U.S. Rep. James Greenwood (R-Pa.), a key member of the House Energy and Commerce Committee investigating Enron’s collapse.
“I did not believe Andersen when they said that this could have all been directed completely, independently from Houston without the knowledge of the main office in Chicago,” Greenwood said. “It was not credible to me to think that the boys in Chicago were sitting there watching the meltdown of their biggest client and not even making any inquiries into Houston as to how they were responding.”
The Justice Department had set Thursday as a deadline for Andersen to plead guilty to avoid being indicted for obstruction of justice. An indictment was returned by a Houston-based grand jury last week but was sealed pending the outcome of negotiations between the department and Andersen.
On Wednesday, Andersen wrote to Assistant Atty. Gen. Michael Chertoff, who is leading the prosecution, with a last-ditch appeal for leniency.
Andersen offered to undertake sweeping changes that would have resulted in a breakup of the firm into separate consulting and auditing units. The company said it would sacrifice “all individuals at whatever level” who were responsible for the document destruction efforts and adopt SEC sanctions aimed at the Houston office, which was responsible for auditing Enron.
Andersen said the death of the 89-year-old firm would leave 28,000 U.S employees without work, hurt its 2,300 publicly traded audit clients and “severely diminish” its ability to provide compensation to Enron investors and employees damaged by Enron’s failure.
Internal probe results
Also Thursday, Andersen released details of its much-discussed internal review of the document destruction. That review determined that the high-volume document shredding and e-mail deletion was confined “to a relatively few partners and employees” and was “almost entirely limited to the Houston office.”
The Andersen inquiry, which was conducted by two outside law firms at the auditing company’s request, contended that “none of the destruction occurred with the knowledge, much less the consent, of senior firm management.”
Andersen did not make available the actual study but instead summarized the research. The company noted that its document policy, “with its lack of clarity and ambiguities,” played a key role in the destruction of Enron-related documents.
But while the summary appears to exonerate Andersen higher-ups, it also claims that there is a “dearth of credible evidence” that the relatively small number of employees who destroyed documents actually acted “with the willful criminal intent to obstruct a governmental investigation.”
It does suggest, without providing specifics, that there was “some documentary evidence” that the massive destruction of documents that took place in the days following a series of Oct. 23 partner meetings in Houston was related to the filing of civil lawsuits regarding Enron’s collapse.
