Prosecutor: Andersen Feared The Law

Partners at Arthur Andersen "realized the law was coming" when they decided last fall to shred Enron-related documents, a federal prosecutor said Tuesday as testimony began in the accounting firm's obstruction of justice trial.

Assistant U.S. Attorney Matt Friedrich told jurors that Andersen had paid a $7 million fine a year earlier to settle allegations of wrongdoing in an unrelated case and that was enough motive to destroy documents and computer files related to Enron's complicated web of financing.

Friedrich cited notes by an Andersen attorney in early October that warned a government investigation of Enron was "highly probable."

The accounting firm has pleaded innocent to a single count of obstruction. Its attorneys have insisted Andersen did not authorize the destruction of information related to the government investigation.

A conviction could be the final blow to Andersen, which has lost clients, partners and employees in the Enron fallout.

The case also is being watched closely because the government's likely star witness — former Andersen auditor David Duncan, who was in charge of the Enron account — could reveal details on the complicated partnerships that led to Enron's controversial bankruptcy filing in December.

Defense attorney Rusty Hardin said Andersen was simply following a "document retention policy" and should have been shredding needless files for months. At one point, he held up for jurors a thick stack of papers.

"These are e-mails and documents that reflect differences" between the Chicago headquarters and the Houston audit team over Enron, he said. "If these documents showed internal arguments ... wouldn't you expect those to be destroyed?"

Hardin labeled the government's case a "rush to judgment" to find Andersen officials who, according to the indictment, "corruptly persuaded" others to wipe out documents.

But prosecutors suggested Andersen was still hurting from a $7 million fine paid to settle Securities and Exchange Commission allegations that Andersen had issued false and misleading reports on behalf of Waste Management Inc. Andersen also had promised not to break SEC rules again.

"Those (Andersen) partners realized the law was coming and those partners made a simple series of choices, which is what this case is all about," Friedrich said.

The first witness, SEC investigator Thomas Newkirk, was called to bolster that argument. He said accounting firms that repeatedly violate SEC rules can be barred from auditing public companies.

"In cases of recidivism, the commission has said it will deal more harshly with people who are repeat offenders," Newkirk said.

U.S. District Judge Melinda Harmon ruled Tuesday that prosecutors can introduce evidence of similar SEC allegations regarding the firm's audit work for Waste Management and Sunbeam Corp. Last year, Andersen agreed to pay $110 million to Sunbeam shareholders to settle a fraud lawsuit alleging the firm helped the appliance maker inflate profits in 1997-1998.

Hardin vigorously protested the introduction of Andersen's earlier "bad acts" and much of Newkirk's testimony, which centered on his investigations of Sunbeam and Waste Management. He was not involved in the Enron probe.

Because Newkirk had no direct knowledge of the SEC investigation into Enron-related shredding at Andersen, Hardin questioned why he was on the stand in this trial.

"Did (prosecutors) tell you to come in here and throw a bunch of mud on the wall?" Hardin said over government lawyers' objections. "Did they ask you to bring in a bunch of extraneous stuff?"

Newkirk later acknowledged he did not know whether the shredding had anything to do with Andersen's spotty recent history.

The trial is expected to last at least three weeks.

If convicted, Andersen could face up to a $500,000 fine and five years of probation. However, it could also be fined up to twice any gains or damages the court determines were caused by the firm's action.