Andersen spurns government's deadline to plead guilty
From Houston Chronicle staff and wire reports
March 14, 2002, 10:25AM
WASHINGTON -- The Justice Department prepared to bring criminal charges against Arthur Andersen after the accounting firm spurned a government deadline to plead guilty in the Enron scandal, sources familiar with the proceedings said today.
Andersen accused the Justice Department of a "gross abuse of government power" and said criminal charges would be a "death penalty" against the firm. One person familiar with the matter indicated that federal obstruction-of-justice charges would be filed in Houston as early as this afternoon.
The 9 a.m. deadline set by Justice passed without any word from either side, but in a letter to the department, Andersen lawyers signaled strongly that there would be no guilty plea.
"We submit that there is no basis for the government to take the unprecedented step of bringing criminal felony charges against Arthur Andersen LLP, when the evidence of criminal misconduct on the part of the firm as an institution is so flimsy," one of Andersen's outside lawyers, Richard J. Favretto of the firm Mayer, Brown, Rowe & Maw, said in the letter. The letter went to Assistant Attorney General Michael Chertoff, head of the department's criminal division.
Representatives of Arthur Andersen, which has admitted massive shredding of Enron-related documents by its employees, have been repeatedly threatened with indictment by federal prosecutors over the past week to 10 days.
With clients abandoning the embattled accounting firm in droves and competitors steering clear until the criminal issues are resolved, Andersen officials strove desperately to ward off an indictment of the entire company.
But cognizant of Andersen's dire position, prosecutors with the U.S. Justice Department aren't just playing hardball, "they're playing rollerball," said a source close to the talks between Andersen and the Justice Department, referring to the movie about a blood sport played on skates.
Angered by prosecutor's tactics, senior Andersen executives have decided the firm will not plead guilty to charges of obstruction of justice in the Enron case, The New York Times reported Wednesday night.
The planned charges by the department constitute "a gross abuse of governmental power," the Times quoted from a letter Andersen lawyers sent to a senior official at the Justice Department.
Andersen, Enron's outside auditor, already has admitted its Houston office shredded numerous Enron-related documents.
Andersen's attorneys were scheduled to meet today with Michael Chertoff, head of the Justice Department's criminal division. It was unclear late Wednesday whether that meeting will now take place.
If Andersen can not reach an agreement with the federal government, the firm could face a federal indictment, as early as today.
Andersen officials have been trying to limit the scope of the guilty plea to the Houston office, but prosecutors want it widened.
Andersen lawyers believe they could fight such charges in court.
"There's a danger they will get an indictment for something that's not a crime," said one attorney close to Andersen.
In the letter to the Justice Department, Andersen attorney Richard J. Favretto of Mayer, Brown, Rowe & Maw wrote that the government's evidence does not merit a prosecution of the entire firm.
Though several Andersen "partners and employees unquestionably exercised poor judgment, a criminal prosecution against the entire firm for obstruction of justice would be both factually and legally baseless," Favretto wrote, according to the New York Times.
Attorneys say current and former Andersen employees have testified in recent depositions that Enron-related documents were destroyed pursuant to longstanding, industrywide practices, not as a coverup.
That testimony would undermine a charge of destruction of evidence, but Andersen might not survive long enough to challenge it in a trial.
Andersen's situation grew dicier Wednesday when two of the other Big Five accounting firms -- Deloitte Touche Tohmatsu and Ernst & Young -- announced they had abandoned merger talks.
Deloitte Touche said it was "unable to continue to the next stage of discussions due to Andersen's unresolved litigation and legal issues."
Ernst & Young noted that "as long as Enron and other Andersen litigation matters are unresolved, it is not in the best interests of our people, clients and our firm to pursue such a combination."
"I don't believe any of the other Big Five firms will be so unwise and naïve as to get into bed in a merger with Andersen," said Larry Lindsey, managing director for SageGroup Strategies, an adviser to troubled companies.
"Mergers are hard enough to pull off when the two sides want to be with each other," Lindsey said.
Even if a deal could be reached, Andersen's thousands of partners aren't likely to enjoy working for a longtime competitor.
"Andersen still thinks of itself as the Marine Corps of public accounting, but a merger would reduce them to grunts," said Michael Granof, an accounting professor at the University of Texas at Austin. "One would assume they'd be treated like al-Qaida prisoners in Cuba once they merged."
To extricate itself from its quagmire, Andersen could consider filing for bankruptcy protection.
But it would need the consent of all the partners to file for bankruptcy, and that could prove difficult, said Nancy Rapoport, dean of the University of Houston Law Center and a bankruptcy expert.
"Typically a partnership needs to have all the general partners' consent to file, but that never happens," Rapoport said.
To get around reluctant partners, a group of Andersen partners could first file an involuntary Chapter 7 bankruptcy. Since a Chapter 7 bankruptcy would mean liquidation of Andersen assets, the recalcitrant partners would have a powerful incentive to join the filing quickly and convert it to a voluntary Chapter 11 reorganization.
Under Chapter 11 the company could sell off certain practice groups to competitors, allowing some partners a way to transition to another firm without carrying a legal liability to their new employers.
What could make that route attractive to the SEC and creditors is that Andersen could also create a pool of cash to handle any settlement payments in the many civil suits filed against it, Rapoport said.
This was a strategy used by Johns Manville Corp. in the 1980s as a way to pay for millions of dollars in asbestos-exposure claims, Rapoport said. There's one major difference: Johns Manville re-emerged under its own name, and it's unlikely Andersen could.
"What may be good for Arthur Andersen is likely to be bad for creditors, hence they will do what they can to block any measures that limit their access to Andersen's resources," said Granof.
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