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THE ANDERSEN VERDICT

Andersen Found Guilty of Obstruction

Courts: Jury says memo from firm's lawyer showed intent to hinder a securities probe of Enron officials. Defense claims judge offered flawed instructions.

June 16, 2002|JEFF LEEDS | TIMES STAFF WRITER

HOUSTON — A federal jury convicted accounting firm Arthur Andersen of obstruction of justice Saturday, sending the firm to the brink of extinction and giving the Justice Department a crucial win in its criminal probe of Enron Corp.

Jurors said the verdict arose not from Andersen's shredding of Enron documents--the crux of the government's case--but from the actions of an Andersen staff attorney who has not been charged and who invoked her right not to testify at the trial.

The jury of nine men and three women deliberated for about 72 hours over 10 days before reaching a unanimous decision. Andersen, long ago revered as the conscience of the accounting industry, becomes the first major auditor convicted of a felony.

Sentencing is set for Oct. 11, when the firm could face a $500,000 fine. The Securities and Exchange Commission also was expected to bar the 89-year-old firm from auditing public companies as a result of the verdict, but Andersen notified the SEC on Saturday that it would cease those audits by Aug. 31.

Andersen already has lost its biggest clients, but the firm nonetheless said it plans to appeal, citing what it called U.S. District Judge Melinda Harmon's flawed jury instructions and evidence rulings.

Deputy U.S. Atty. Gen. Larry Thompson said the evidence in the case proved that "Andersen intentionally interfered with an official investigation concerning Andersen's client Enron Corp. when it destroyed tons of papers, documents and a large quantity of electronic information" last fall.

But at a news conference after the verdict, four jurors said document destruction was not the key factor in their decision. The jurors said they voted to convict because they believed that Andersen staff attorney Nancy Temple had criminal intent when she urged Houston-based auditor David B. Duncan on Oct. 16 to revise an internal memo regarding a damaging Enron earnings release.

The memo documented a dispute about how Enron should classify about $1 billion in charges against earnings that it would be disclosing in a third-quarter press release. Enron wanted to downplay the charges by characterizing them as nonrecurring, but Andersen auditors believed that description could be misleading to investors because the losses stemmed from the energy trader's core business.

In the memo, Duncan wrote that he informed Enron Chief Accounting Officer Richard A. Causey of Andersen's concerns, but Enron used the term nonrecurring anyway. Enron's news release disclosed for the first time the extent of losses from its off-balance-sheet partnerships and triggered the energy giant's collapse.

In her Oct. 16 e-mail, Temple asked Duncan to remove her name from the list of recipients of his memo because she feared being called as a witness in litigation, and asked him to delete language suggesting that Andersen found the release "misleading."

Jury foreman Oscar Criner, a computer science professor at Texas Southern University, said the panel largely dismissed the prosecution's evidence of document destruction and its star witness, Duncan. Criner said jurors concluded the altered internal memo, however, was "a smoking gun."

"Arthur Andersen did not approve that [press release], and Enron went along anyway and did it," Criner said. "Then Arthur Andersen set about to change things, to alter documents to keep [information] away from the SEC."

During the trial, prosecutors cited the Oct. 16 e-mail from Temple to Duncan as evidence the firm feared an SEC inquiry and had a motive to shred documents. But prosecutors hadn't argued that Temple's directive was an act of obstruction. The March 7 indictment of the firm centered on Andersen's "wholesale destruction" of documents and makes no mention of Temple's instruction to alter the memo.

But outside the courthouse, Assistant U.S. Atty. Andrew Weissmann said the drafts of Duncan's internal memo, which reflected the sequence of the changes, were "exactly what was intended to be destroyed" in the firm's shredding. Weissmann said the memo was "a terrific document" for the jury to examine in considering its decision.

Andersen attorneys expressed disbelief at the jury's logic but said it meant that jurors had rejected the prosecutors' main argument--that Andersen shredded documents to impede the SEC.

I take the jury's remarks [as] a complete vindication of Andersen's position," said defense attorney Charles Rothfeld. "It's bizarre."

Defense lawyers also noted that the firm didn't learn of the SEC inquiry into Enron until Oct. 19, three days after Temple sent her e-mail to Duncan.

Andersen lawyers further suggested that jurors acted under duress. After seven days of deliberations, the jury told the court Wednesday that it was deadlocked. That prompted Harmon to give them the so-called Allen charge, urging them to continue deliberating in hopes of avoiding a hung jury and a mistrial.

Andersen lead attorney Rusty Hardin vowed to appeal but noted that an appeal could not be filed until after Andersen's sentencing.

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