Deferral Talk Reported in Andersen Case
The New York Times
April 2, 2002
By KURT EICHENWALD
Justice Department officials
were willing to consider
deferring the prosecution of Arthur
Andersen, letting it avoid
indictment, if the firm publicly
acknowledged that it had illegally
destroyed documents in the Enron
investigation and if it
agreed to restrictions similar to
probation, people involved in the
case said yesterday.
But discussions of such an idea,
raised in talks between the
government and Andersen several
weeks ago, never got off the ground
because Andersen officials thought
that the firm had not broken any
laws and that such an admission
would have been just as
devastating to its fortunes as an
indictment or guilty plea.
The indictment last month has led
to dozens of defections by clients
and members of the global network
of Andersen partnerships, putting
the firm's survival at risk. Though
it is impossible to say whether
Andersen would have fared better
with a deferral of prosecution, such
an arrangement would have given
the firm a measure of finality in a
case that now threatens to drag on
for months.
An admission would have been part of what is known as a
deferred- prosecution agreement. When a judge approves
such a deal, the defendant must acknowledge criminal
wrongdoing, and then prosecution is deferred for a number of
years. After that time, the indictment is dismissed. But if
the defendant is found to have committed any other
misdeeds during the deferral period, the case can go to trial
and the admission can be used against the defendant as
evidence.
Though such deals are most frequently used in low-level
narcotics cases, the Andersen prosecution would not have
been the first to use a deferred-prosecution agreement in a
prominent white-collar case.
In 1994, Prudential Securities was allowed to enter into
such an agreement to resolve criminal charges that the firm
had defrauded investors in the sale of energy limited
partnerships. The brokerage firm emerged from its
probationary period three years later, and the charges were
never revived against it. The proposal in the Prudential case
was drafted by the government and lawyers for Davis, Polk &
Wardwell, which now represents Andersen.
But terms of such a deal in Andersen's case were never
discussed because the concept collapsed over the issue of an
admission. As a result, no financial penalties or other
aspects were discussed, so there is no way to know whether
the two sides could have reached a deal even if Andersen
had been willing to acknowledge wrongdoing.
A deferral without such an admission was said to have
appealed to Andersen, but the government would not
consider a proposal like that.
Legal experts said a deferred- prosecution agreement could
be an appealing compromise for the two sides, given that
Andersen has already suffered the consequences that it
feared an admission would bring.
"In the marketplace, people have already assumed that they
had" engaged in improper document destruction, said
Stephen M. Ryan, a former federal prosecutor who now
works at Manatt, Phelps & Phillips in Washington, meaning
that an admission would probably harm the firm no more
than the indictment has. "But with their current position,
they are balancing the future of the company on a knife edge
and handing it to a jury. That is a pretty good roll of the
dice."
Although there is no certainty the government remains
willing to consider such an arrangement, a deferred
prosecution would also have advantages for prosecutors -
allowing them to lock up a victory on their first case in the
Enron investigation without running the risk that a jury
might side with Andersen.
Such a defeat, given the devastating effect of the indictment
on Andersen, would open the prosecution's decision to
criticism from Capitol Hill. Several members of Congress
have already expressed skepticism about the decision to
indict.
In recent statements, the two sides have seemed to circle
around the concept of some sort of deferral. The offer of Paul
A. Volcker, the former Federal Reserve chairman, to take
charge of Andersen if prosecutors withdrew their indictment
contained several elements that were similar to a deferred
prosecution. Mr. Volcker said, for example, that under his
proposed arrangement - in which the indictment would be
withdrawn under a legal concept known as "without
prejudice" - the government would be free to refile the
charge if it was unsatisfied with reform efforts undertaken
by Andersen's new management.
The government has responded to that, both publicly and in
communications with Andersen, by saying that reforms must
be coupled with some sort of admission of wrongdoing, along
with an agreement to cooperate in the investigation. All
those components would be met by a deferred-prosecution
agreement with a provision requiring a public declaration by
Andersen that it was culpable for misdeeds.
The possibility for such an admission has seemed remote
recently as Andersen has begun an aggressive public
campaign criticizing the government's decision to prosecute
and declaring its innocence.
But some people involved in the case say that a small
window of opportunity exists in the coming days as Andersen
names a new management team to run both the
international firm and aspects of the national operations.
The board of Andersen Worldwide is expected to meet this
morning in London and name a new chief executive.
According to people close to the situation, few Andersen
officials have expressed much interest in the job, at a time
when some international offices are selling themselves
piecemeal even as the rest of the division is in negotiations
for a merger with KPMG. So far, only a few partners -
mostly from Europe - have expressed any willingness to
take on the job, which will be largely legal and
administrative rather than involving any setting of grand
strategy for the future of the firm.
But even with new management in place, there are
numerous financial hurdles to any sort of deal. For example,
Andersen's insurer, Professional Services Insurance of
Hamilton, Bermuda, notified the firm last week that it would
be unable to pay $217 million to settle a civil fraud case in
Arizona. The insurance company was rendered technically
insolvent by the failure of the accounting firm to make a
$100 million payment, a person involved in the situation
said, confirming a report yesterday in The Wall Street
Journal.
The insurer is owned by the member firms of Andersen
Worldwide, the Swiss cooperative that serves as the central
hub for Andersen's global network of accounting firms in
various countries. But Andersen's United States division
owns less than 5 percent of the insurer, meaning that the
foreign companies would largely be paying for the
transgressions of their United States partner.
People close to Andersen portrayed the breakdown of the
insurance situation as the most obvious sign of troubles
between the firm's United States and international offices.
"This is a function of the spat between the U.S. and
international" offices, a person close to Andersen said.
A person who has reviewed Andersen's finances said that
Professional Services was the American firm's only source of
insurance for professional liability and that it could pay a
maximum of $250 million for each claim. Before Andersen
was indicted, its financial projections included the
assumption of $300 million a year to pay the cost of the
premium.
Patrick Dorton, an Andersen spokesman, said yesterday that
the firm had fully intended to pay its settlement in the
Arizona case but that its plans had been derailed by the
criminal indictment.
Andersen negotiated the Arizona settlement in good faith
and "at that time we believed the settlement would be
approved by the insurance company," Mr. Dorton said.
"The unalterable fact is that the decision by the Department
of Justice to indict the entire firm has changed the
landscape for all parties involved."
The path to the document destruction at Andersen appears
to have begun in September. The New York Times reported
last month that a controversy over a series of memos erupted
then between an elite group of accountants in the firm's
professional service group, which reviews the accounting
methods used by the audit partners, and Andersen's Houston
office. The memos appeared to indicate that the Chicago
accountants had approved a tactic used by Enron, when, in
fact, they had not given their approval.
The Times report last month said that the Chicago and
Houston accountants debated in conference calls for several
days about how to revise the memos, at times in consultation
with a lawyer for the firm. Those revisions were entered into
the memos, with written indications of the dates that they
had been revised. During one of those calls, an Andersen
lawyer reminded the accountants about the firm's rules for
destroying unnecessary documentation; after that reminder,
the Chicago accountants began deleting e-mail messages
concerning their conversations. Discussions about the firm's
document retention policy continued for several weeks, until
finally, according to the indictment, the shredding picked up
for the purpose of impeding a Securities and Exchange
Commission inquiry.
The primary witnesses for the government will be Andersen
employees themselves. For the last several weeks, many of
them have been cooperating with government investigators,
answering questions about the document destruction.
One of the partners who answered questions from the
government is a member of the professional service group,
Carl Bass, whose role was first identified in Business Week
magazine. As part of his work, Mr. Bass reviewed some of
Enron's accounting practices and was particularly skeptical
of them. Documents obtained by the House Energy and
Commerce Committee indicate that Mr. Bass was the target
of sharp criticism from Enron officials who thought he was
too hesitant to endorse their accounting. Indeed,
Congressional investigators said, Andersen removed Mr.
Bass from consulting on the account at the request of Enron
officials.
The anger of Enron left Mr. Bass perplexed, since he had
never spoken to anyone at the company about accounting
issues that led to certain criticism of him. In a March 4,
2001, e-mail message to a colleague, Mr. Bass noted his
concern, saying that he was "perplexed as to how the client
even knows I was consulted."
An Andersen spokesman referred questions to a lawyer for
the firm in Houston, Rusty Hardin, who did not return a
telephone call.
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