Shredded Papers Key in Enron Case
The New York Times
January 28, 2002
NEWS ANALYSIS
By KURT EICHENWALD
F or all its eye-popping revelations, the Enron (news/quote) case presents an
enormous challenge to government investigators, one that could require years
of digging to unravel. At this point, no one knows for sure whether the actions that
led to the collapse of the company constituted financial crimes, and, if they did,
which should be the focus of the investigation.
For that reason, legal experts said, the best things that happened for the criminal
investigators in the case were the decisions by employees at Enron and its auditor,
Arthur Andersen & Company, to begin shredding documents.
Unlike the financial investigations, which will require forensic accountants to
unwind complex transactions, the document shredding gives investigators
comparatively simple cases of possible obstruction of justice. In such cases,
witnesses are confronted, evidence is collected, the law is checked, and the
decision whether to seek an indictment is made.
As a result, these experts said, the focus in the earliest days will be on pursuing
possible criminal cases from those events.
The government's intent will be to use the leverage of potential indictments to push
possible defendants into the role of witnesses to get evidence for the broader
financial investigation. "The potential obstruction of justice is critical to the
progress of this investigation," said Efrem M. Grail, a former prosecutor who is a
partner with the Pittsburgh law firm of Reed Smith. "It is easier for the government
to make an obstruction of justice case than it is to make a case that people violated
criminal securities law or criminal fraud statutes."
It is critical to start with such limits, legal experts said, to
make sure that the case does not go off track, especially in
its earliest days.
"It's essential that the government disciplines itself during
the investigation and reins in the scope of the inquiry,"
said Chris Bebel, a former federal prosecutor and former
lawyer with the Securities and Exchange Commission.
"Otherwise, it is going to get bogged down in a sea of
documents and conflicting statements about complex
transactions."
According to people who have spoken with government
officials involved in the case, there is strong pressure from
senior Justice Department officials to show some quick
results from the investigation. That pressure will increase
the attention focused on matters like document
destruction, where the facts are relatively easy to
establish.
Until now, the most public investigations have been those
conducted by a series of Congressional committees. But
none of them have the power to bring charges in the case.
That responsibility falls instead to prosecutors working on
a special Justice Department task force and to a group of
agents with the Federal Bureau of Investigation.
On the regulatory side, one investigation is being handled
by the enforcement division at the S.E.C. The Labor
Department is also reviewing whether Enron violated any
rules while the stock price was plunging when it told
employees that they could not sell company shares from
their retirement accounts.
For government investigators, the scandal presents a
difficult challenge. In contrast with other well- known
white-collar investigations, this inquiry begins with the
government's having little guidance on where it should be
looking.
Unlike the insider trading scandals on Wall Street in the
80's - which began with revelations from Ivan F. Boesky,
a stock trader - the Enron inquiry has no central witness
to provide a map of criminal activity. Unlike the Treasury
market scandals that enveloped Salomon Brothers in the
early 90's, the Enron investigation begins with no
admission from the company that it did anything
improper. Unlike the price-fixing cases at the Archer
Daniels Midland Company (news/quote), later in the 90's,
the Enron case does not have years of incriminating tape
recordings provided by a cooperating witness.
"In this case, unlike in those in the past," said Stephen
Meagher, a former federal prosecutor who handled
white-collar cases in San Francisco, "there are many
dimensions, and you just don't have a clear trail to a
central theory of the prosecution."
As a result, the government begins the first major
corporate scandal of the new millennium with no strong
handle on whether the trouble was brought about by
criminal activity or folly. The distinction is critical. Experts
say any criminal case stemming from the Enron collapse
would be related to some sort of fraud: tax fraud, wire or
mail fraud, securities fraud.
But to get such an indictment, prosecutors would have to
prove that the people charged had criminal intent - that
they knew they were engaging in fraud when they were
committing the acts in question.
In other words, if Enron executives or advisers filed or disseminated information
about the company that has since proved to be false, the government must be able
to demonstrate that they knew about the falsehoods at the time. In this case,
establishing such proof could be challenging.
According to internal Enron documents, every major transaction between the
company and the series of partnerships that played a role in the collapse were
supposed to have been reviewed by senior company managers and by Arthur
Andersen, the company's auditor.
If information about such deals was presented to Andersen truthfully, and the
accountant rendering the opinion was clear of any undisclosed personal or
financial conflicts, those rulings by the accountants will be some of the most
important weapons in any defense lawyer's argument against indictment.
Enron officials would effectively be left saying that they had relied on the
professionals, and the professionals would maintain that they had offered unbiased
judgments - even if those judgments subsequently proved to be wrong. But here
again, legal experts said, the document destruction will probably prove to be
critical in giving investigators a means of combating that challenge.
"Without document destruction, the auditors would have been explaining that they
made judgment calls," said Franklin B. Velie, a former federal prosecutor now with
the law firm of Salans Hertzfeld & Heilbronn in New York, "and the company would
have been saying that they relied on the auditors.
"It would be hard to know whether this was a horrible mistake or a crime. With
document destruction, the path for the investigators seems a lot clearer."
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