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To: Cactus Jack who wrote (48642)	3/14/2002 11:18:57 AM
From: stockman_scott	Respond to of 65232

Putting a Bloodhound on Enron's Trail By Gary Weiss in New York BusinessWeek Online Daily Briefing: NEWS ANALYSIS Thursday March 7, 11:13 am Eastern Time When New York City police officer Edward Byrne was shot to death on Feb. 26, 1988, authorities became convinced that the execution-style slaying was ordered by Howard ``Pappy'' Mason, head of a violent drug mob. Mason was in prison at the time, and obstacles to proving his guilt seemed almost insurmountable. But after a trial in U.S. District Court in Brooklyn in late 1989, Mason was convicted. The clincher was damning testimony from three former Mason gang members -- who had been persuaded to cooperate by a 32-year-old novice federal prosecutor named Leslie Ragon Caldwell. Since then, in prosecuting mobsters, drug dealers, crooked ``chop house'' brokerage firms, and corporate malefactors, Caldwell has gained a reputation as a master of cases of mind-numbing complexity. Along the way she has become a master of the ``flip'' -- the cultivation of ``cooperators'' who can turn dry documents and staticky tape recordings into flesh-and-blood crimes. All of this is bad news indeed for former executives of Enron, Arthur Andersen, and other companies being targeted by Caldwell, a Pittsburgh native who was named in January to head a Justice Dept. task force exploring criminal charges in the Enron Corp. scandal. ``I think any potential defendants in the Enron case will have a bleak and weary day ahead of them,'' says Joel Winograd, a New York criminal lawyer. DAUNTING CASES. The conventional wisdom -- that any Enron prosecution would face huge obstacles -- ignores the impressive array of weapons available to prosecutors, as well as the recent spate of successful cases involving complex frauds. Some of the most daunting, which also resulted in the heaviest sentences, were prosecuted by Caldwell and her deputy, Andrew S. Weissmann, who is chief of the criminal division of the U.S. Attorney's office in Brooklyn. One weapon that may be used against future Enron defendants is a little-noted recent change to the federal sentencing rules that beefs up sentences for frauds in excess of $100 million. Such schemes previously would have warranted a 51-month sentence for a first offender but now can draw a sentence of 10 years or more. To be covered by the new guidelines, some part of the fraud must have occurred after Nov. 1, 2001 -- which may turn out to be a crucial date on the calendar for people involved in the Enron mess. Ironically, Caldwell's appointment was necessitated by an embarrassment -- the recusal of Attorney General John Ashcroft and the U.S. Attorney's office in Houston because of their Enron links. Caldwell, who moved from Brooklyn to San Francisco in 1998, has not granted interviews, and the composition of her team has not been announced. But BusinessWeek has learned that among the lawyers on board with Caldwell is Zachary Harmon, an attorney from the Justice Dept. tax division -- a sign that investigators are probing possible tax-law violations. Also joining the team are Thomas Hanusik from the Justice Dept. fraud division, William Kimball, who worked with Caldwell in San Francisco, and Samuel W. Buell, who prosecuted leading Boston mobsters. EFFECTIVE DEFENSE? The difficulties facing Enron prosecutors are epitomized by the defiant public stance of former Enron CEO Jeffrey Skilling. In his testimony before Congress, Skilling insisted that he was not aware of what went on at Enron because, among other things, the company's practices were endorsed by its accountants at Arthur Andersen. While Skilling's story was openly mocked in Congress, it could prove an effective defense against criminal charges. Overcoming the ``Andersen said it was O.K.'' defense will require countervailing testimony from insiders. Lawyers who have defended and prosecuted white-collar cases are unanimous on the point: no cooperators, no successful Enron prosecution. By providing a ``road map'' for prosecutors, and explaining offenses to jurors, cooperating witnesses proved crucial in dozens of cases brought by Caldwell and her former colleagues in Brooklyn against organized crime and the operators of chop-house brokerage firms. One brokerage principal prosecuted by Weissmann, Robert Catoggio of Hanover Sterling & Co., was sentenced to 12 years in prison. As in all such cases, the Hanover case was strengthened by cooperating witnesses. ``If I know Andrew, he'll have six cooperators lined up by the time he gets to Houston,'' says Winograd, who has represented mobsters and rogue brokers prosecuted by Weissmann. FACTS OF LIFE. Lawyers say Caldwell is probably actively hunting for as many cooperators as she can assemble, be they high-level executives or lower-level employees who had access to crucial information. ``In this case, the key to a successful prosecution in Enron is the government's ability to explain the facts of life to low- or mid-level Enron employees and get them on board to cooperate against higher-ranking individuals,'' says Benjamin Brafman, a New York criminal lawyer whose clients have ranged from associates of John Gotti to rapper Sean ``Puffy'' Combs. Cultivating cooperators is a sensitive task, a mixture of threat and cajolery. The threat is the prospect of a heavy prison sentence. While it's possible to lure cooperators by offering immunity -- a ``no-pros,'' or no prosecution deal -- lawyers familiar with their work say Caldwell and Weissmann have not generally resorted to that. More commonly, cooperating witnesses have been persuaded to plead guilty to criminal charges or indictments that are placed under seal. This prevents former associates from knowing that they've ``turned.'' That can be crucial because cooperators often are asked to rat on their pals. To earn the possibility of a reduced sentence, they are commonly ``wired'' to record conversations with former associates -- a technique used effectively against both white-collar and organized-crime defendants over the years. Those incriminating recordings are then used to induce still more guilty pleas and, often, still more cooperating witnesses. NO COUNTRY CLUB. Enron defendants may face an additional inducement to cooperate -- the possibility of charges under the Racketeer Influenced & Corrupt Organizations Act, which carries stiff prison terms. But even without a RICO prosecution, the potential penalties for white-collar crime are far more severe than is commonly believed. Federal guidelines, introduced in 1987, curtailed parole and severely restricted the sentencing discretion of federal judges. Sentences are now largely determined by those guidelines, which incorporate a variety of factors. The new guidelines for megafrauds could mean hard time for Enron defendants in prisons that rarely match the ``country club'' stereotype. While federal minimum-security prisons are not bastilles, they are hardly pleasant places to spend a few years. ``Your whole life is regulated -- when you go to the bathroom, how many phone calls you can make, how much money you can spend in the commissary, when you get up and when you go to sleep,'' says Gustave Newman, a lawyer for Hanover's Catoggio, who is appealing his sentence. Of course, the machinations at Enron may not have sunk to the depths of criminal activity. But by naming prosecutors with a track record of nailing white-collar crooks, the feds have at least gone a long way toward ensuring that, if criminal acts were committed, the bad guys will actually go to jail. _______________________ Go to www.businessweek.com to see all of our latest stories.

To: Cactus Jack who wrote (48642)	3/14/2002 4:17:34 PM
From: stockman_scott	Respond to of 65232

Bulletin: U.S. DOJ CHARGES ANDERSEN WITH OBSTRUCTION

To: Cactus Jack who wrote (48642)	3/14/2002 11:26:02 PM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

<<...''This is the beginning of what appears to be the corporate equivalent of a capital murder case for Andersen, and if you are a defendant in a capital murder case you fight as far as you can go.''...>> Andersen Charged for Shredding Documents By James Vicini and Kevin Drawbaugh Thursday March 14, 9:38 pm Eastern Time WASHINGTON (Reuters) - A federal grand jury has indicted accounting firm Andersen for obstruction of justice tied to probes of Enron Corp.'s collapse, federal officials announced on Thursday, prompting Andersen to say its business was damaged but it had no plans for bankruptcy. The U.S. Justice Department said Andersen was indicted in connection with the destruction of tons of documents and computer files sought in probes of fallen energy trading giant Enron, the center of a storm of controversy since it filed the largest bankruptcy in U.S. history on Dec. 2. Deputy Attorney General Larry Thompson said the indictment included allegations of widespread criminal conduct by Andersen, charging the firm sought to undermine the justice system by destroying evidence relevant to investigators. ``Dozens of large trunks were brought in to haul documents from Andersen's office and Enron's building to Andersen's firm office in Houston in order to destroy literally tons of documents,'' Thompson told a news conference. The indictment alleged that Andersen partners and others, at urgent and mandatory meetings, told employees to immediately destroy documents on Enron, a top campaign contributor to President Bush and others in Washington. Chicago-based Andersen, which had been Enron's auditor until January, blasted the prosecution of the firm by the government as ``a gross abuse of government power.'' Confirming business damage from client defections, Andersen spokesman Charlie Leonard said that, as of Wednesday, the firm had lost about two percent of its annual U.S. revenues. ``I would be the first to acknowledge that we're looking at a significant hit,'' Leonard said on a conference call. But, he added, ``There is no plan for bankruptcy ... We're affirmatively moving forward with our business in the U.S.'' Sources close to the firm said Andersen lawyers would likely move quickly to fight the government prosecution, possibly moving for a rapid dismissal of the charge. Andersen rivals Deloitte Touche Tohmatsu and Ernst & Young on Wednesday ended merger talks with Andersen, citing its legal troubles. ``I can't believe another firm would be interested in them at this point,'' Paul Brown, chairman of accounting at New York University's Stern School of Business, said. The Justice Department alleged that Andersen partners began a plan for the wholesale destruction of documents just days after Enron alerted the auditor on Oct. 19 that the U.S. Securities and Exchange Commission had begun an inquiry into special partnerships created by the energy firm. On Oct. 16, Enron had reported its first quarterly loss in more than four years and took $1 billion in charges on the poorly performing partnerships. SHREDDER RAN CONSTANTLY ``Employees were told to work overtime if necessary to finish the job of destroying documents. The shredder at the Andersen office and Enron building ran virtually constantly,'' Thompson said. The indictment ``alleges that, at the firm's direction, Andersen personnel engaged in the wholesale destruction of tons of paperwork and attempted to purge huge volumes of electronic data or information,'' Thompson said. According to the indictment, the destruction effort had spread far beyond Andersen's Houston office. ``In addition to shredding and deleting documents in Houston, Texas, instructions were given to Andersen personnel working on Enron audit matters in Portland, Oregon; Chicago Illinois; and London, England to make sure Enron documents were destroyed there as well,'' according to the indictment. Thompson said the records were destroyed in late October and early November, at a time when Andersen knew they were relevant to federal inquiries into Enron's collapse. Justice Department officials said no individual Andersen employees were charged, but that the investigation continued. The indictment was obtained last week from a federal grand jury in Houston, Texas, but was kept under seal until Thursday while the Justice Department tried unsuccessfully to reach a plea agreement with Andersen in which the company would admit guilt. The maximum penalty for the charges is a $500,000 fine and five years on probation. But Andersen, which has seen major customers defect after the Enron collapse, has warned that a criminal indictment would put the company in ``grave jeopardy''. Thompson said, ``These are serious charges. It shouldn't be a surprise to anyone that serious charges have serious consequences.'' ANDERSEN SAYS INDICTMENT IS BASELESS In a statement, Andersen said, ``A criminal prosecution against the entire firm for obstruction of justice is both factually and legally baseless.'' It said that none of the document destruction ``occurred with the knowledge, much less the consent, of senior firm management.'' ``Moreover, the department has not suggested that any of the discarded documents -- many of which have been retrieved -- actually contained any incriminating information that could have materially advanced a governmental inquiry,'' it said. A Justice Department spokesman said Andersen's initial appearance in court will be on Wednesday before a federal magistrate in Houston. Enron on Dec. 2 made the largest bankruptcy filing in U.S. history amid a steady stream of revelations about questionable accounting methods and extensive off-the-books partnerships, which concealed billions of dollars in debt and led to a $600 million reduction in four years' worth of earnings. At a Senate Banking Committee hearing, Connecticut Democratic Sen. Chris Dodd said, ``I am very concerned. I think there's a real possibility of Arthur Andersen going bankrupt.'' James Castellano, chairman of the American Institute of Certified Public Accountants, said the indictment of Andersen was unprecedented in the 110-year history of the accounting profession. ``While it must be said that these allegations remain to be proved, this profession has zero tolerance for any members who break the law,'' he said in a statement. Lawrence Mitchell, a Georgetown University law professor, told Reuters,''This is the beginning of what appears to be the corporate equivalent of a capital murder case for Andersen, and if you are a defendant in a capital murder case you fight as far as you can go.''

To: Cactus Jack who wrote (48642)	3/15/2002 3:43:49 AM
From: stockman_scott	Respond to of 65232

Andersen: One Player in a Big Drama By Steven Pearlstein Washington Post Staff Writer Friday, March 15, 2002; Page E01 It is possible to view the indictment of Arthur Andersen as the simple story of a few rogue document-shredders in the firm's Houston office, or an act in the larger Enron drama, or a turning point in a morality play at one of the world's great accounting firms. There are those here in Washington who see it as the first of a five-part series on the corruption of the accounting profession. But in the broadest sense, Andersen may be seen as just one tragic character in the boom-and-bust saga of the 1990s -- a victim as much as a protagonist in the unfolding drama of cheap capital, fast fortunes and stock-price addiction. It is the story not just of Andersen and Enron but Global Crossing and MicroStrategy, WorldCom and Qwest, the dot-com bust and the two-year bear market and even the global recession. In Andersen's case, the path toward criminal indictment began on Wall Street, which by the mid-1990s was awash in money looking to be profitably invested: A surge in retirement savings of baby boomers; a tidal wave of investment capital from overseas investors unimpressed with opportunities at home; hordes of cash generated by newly efficient and profitable U.S. corporations. In time, this excess supply drove stock and bond prices through the roof, encouraging companies to rush out with new offerings to soak up the billions of dollars. And with their inflated shares, companies found they had a sought-after currency with which to buy other companies, secure loans, pay back creditors and compensate employees. In time, the stock-fueled demand drove up the price of everything from Park Avenue condos to the wages of hamburger flippers at McDonald's. For Andersen, Wall Street's boom presented both challenge and opportunity. In attracting and retaining key professionals, firms like Andersen compete with investment banks, consulting and law firms and large corporations. And by the late 1990s, the compensation for this talent was soaring. MBAs right out of the best business schools could command six-figure packages while top partners came to believe they deserved nothing less than seven. To pay these salaries, accounting firms had not only to find more business, they also had to find a business more profitable than the corporate audits and tax-return preparations that had been their bread and butter. The key was consulting services -- advice on everything from taxes and technology to management systems, pricing and corporate strategy. The pressure to cross-sell consulting work could be enormous. Bonuses, promotions and standing within the firms often depended on it. And the most natural clients for these services were the very same corporations whose books they were auditing. To the industry's critics, it looked as though an unhealthy, if unspoken, set of rules began to govern the relationship between companies and their auditors. Auditors who balked at aggressive accounting understood -- or were made to understand -- that they might jeopardize non-audit contracts that now represent more than half of accounting firm revenue. And corporate finance officers used the consulting contracts to involve accounting firms in helping to structure some of the deals that are the subject of shareholder lawsuits and Securities and Exchange Commission investigation. As long as the stock price continued to rise and businesses grew, the questionable accounting had no practical consequences for the companies or their auditors. Industry officials bristle at suggestions that these consulting arrangements amount to a subtle form of mutual extortion. The insights gleaned by accountants in their consulting work, they argue, make them better and more knowledgeable auditors. But in corporate boardrooms and on Capitol Hill, there is a growing consensus that the consulting contracts offer too much of a threat to auditor independence. "Strong public interest in fair and accurate financial reporting demands nothing less than an independent auditing voice of unquestionable integrity," said former Fed chairman Paul A. Volcker this week, proposing that Andersen split off its accounting arm. The Big Five accounting firms not only came to accept the more creative accounting moves of the late 1990s, they also turned them into new products that they marketed to other companies. Accounting partners were featured speakers at seminars on "structured finance" and "special purpose entities." And when government regulators, or even the industry's own internal rule-writers, threatened to curb some practices, the Big Five lobbied heavily and successfully against them. The house of cards built on this foundation of easy money and financial engineering started to crumble two years ago this month, with the dramatic turn in the highflying Nasdaq Stock Market. The effects are still rippling through the economy. In the telecom sector in particular -- where more than $2 trillion in paper wealth has now disappeared -- it could be a year or more before all losses are taken and the painful restructuring is completed. The full extent of losses are yet to be revealed on the books of banks, insurance companies, pension funds and other big lenders. The number of investigations recently launched by the SEC suggest that more accounting scandals, involving other firms, are almost certain to follow. It is an exaggeration to say that the economic boom of the late 1990s was merely an accounting mirage. Most of the companies that rode the boom up had innovative products to sell, solid management teams and ample funding. And most came a cropper not because their stock prices fell or questionable accounting was revealed, but because of a sudden turn in the economic realities underlying their businesses. At the same time, it is clear that the accountants and other professionals -- the bankers and the lawyers -- acted as enablers in the boom-and-bust process. The boom was longer and stronger because of the financial obfuscation in which they willingly, and profitably, participated. And the bust is likely to be be equally exaggerated as investors and lenders express their lack of confidence in corporate financial statements and the professionals who stand behind them. © 2002 The Washington Post Company

To: Cactus Jack who wrote (48642)	3/15/2002 4:12:09 AM
From: stockman_scott	Respond to of 65232

Houston law firm under fire V&E attorneys testify they didn't know Enron facts By JULIE MASON Houston Chronicle Washington Bureau March 15, 2002, 12:53AM WASHINGTON -- Attorneys for Vinson & Elkins told skeptical lawmakers Thursday they didn't know all the facts about Enron Corp. when they discouraged company executives in October from investigating allegations of financial wrongdoing. During a contentious hearing on Capitol Hill, members of a powerful House subcommittee investigating Enron's collapse repeatedly upbraided the Houston-based firm, saying V&E had a responsibility to know what was happening at Enron. "The accountants have come in and told us that it didn't fail because of anything they have done. No one from the company's management has said it's failed because of anything that they have done wrong. And none of you have indicated today that the company failed because of anything that you have done wrong," said Rep. James Greenwood, R-Pa., chairman of the oversight and investigations subcommittee of the House Energy and Commerce Committee. "Once again the commentary from the witnesses is that the company failed because of loss of confidence of the investors, which sounds an awful lot to me like blaming the victims," Greenwood said. Testifying before the panel were Joseph Dilg, managing partner of V&E, and Ronald Astin, a partner at the firm. Former Enron lawyers James Derrick Jr., Scott Sefton and Carol St. Clair also appeared, in addition to Rex Rogers, current vice president and associate general counsel for Enron. In five hours of often contentious testimony, Dilg and Astin repeatedly claimed V&E's work as chief outside counsel for Enron was thorough and ethical. The six attorneys largely disclaimed detailed knowledge of many of the financial issues at the heart of Enron's devastating financial collapse. "Vinson & Elkins and other outside attorneys were employed by and directed to interface with Enron's legal department, not Enron's executives," Dilg said. The powerhouse law firm was chief outside counsel for Enron, which was its biggest client. Lawmakers were critical, however, accusing the lawyers of participating in a cover-up to hide what was going on at Enron, which paid V&E $36 million last year. "The closeness, the coziness of this relationship, is what's bothering many of us on this committee," said Rep. Bart Stupak, D-Mich. The firm's lawyers were grilled at length about their work investigating allegations raised by Enron Vice President Sherron Watkins in an Aug. 15 memo to former Chairman Ken Lay, warning the company could "implode in a wave of accounting scandals." In addition to numerous accounting issues, Watkins' portentous memo warned about conflicts of interest and questionable dealmaking that threatened to topple the company. Derrick, a former partner at V&E who recently retired from Enron, asked the firm to conduct a limited probe of Watkins' concerns. Under sharp questioning from lawmakers, the V&E lawyers said they never talked to many of the potential witnesses named by Watkins. They also did not pursue Watkins' claim that bankers may have been pressured to invest in questionable deals with Enron as a condition of future business with the company. Instead, the firm talked to accountants at Arthur Andersen and executives at Enron, who assured them that issues raised by Watkins were well-known and being managed, the lawyers said. On Oct. 15, the law firm reported that Enron's practices caused concern "because of the bad cosmetics" and could result in adverse publicity and litigation, but warranted no "further widespread investigation by independent counsel and auditors." The next day, Enron posted a devastating third-quarter earnings report that included a $638 million third-quarter loss and a $1.2 billion reduction in shareholder equity. The losses were attributed in large part to a complex series of partnerships undertaken by Enron executives to hide the company's massive debt. The disclosure sent Enron into a financial spiral from which it could not recover. For months, V&E has been defending its work on the Watkins probe, saying the firm was not asked to look at Enron's accounting practices. "If a transaction is not legal and it's been approved by the appropriate levels of a corporation's management, lawyers ... may appropriately provide the requisite legal advice," Dilg said. "In doing so, the lawyers are not approving of the business decisions that were made by their clients. Likewise, lawyers are not passing on the accounting treatment of the transactions." Greenwood took the firm to task for apparently accepting the assurances of former Chief Financial Officer Andrew Fastow regarding the partnerships and his own conflicts of interest. "I don't understand why you didn't feel responsible for Enron and its stockholders and make those calls right away," Greenwood said. "You just took Andy Fastow's word for it." Fastow collected an estimated $30 million in fees from the partnerships, which internal investigators and lawmakes have concluded were fraught with conflicts of interest. Rep. Edward Markey, D-Mass., said the V&E probe was more Inspector Clouseau than Columbo. "If you had not conducted this phony investigation, it might have been possible we would not have seen the collapse of Enron," Markey said. Several members of the subcommittee complained that V&E's probe amounted to the law firm investigating its own work, since the firm had done work on some of the partnerships. The $60,000 that V&E charged Enron for the investigation also drew scoffs from lawmakers, who said the relatively minor sum illustrates that neither Enron nor V&E took the investigation seriously. "Mr Dilg, your preliminary investigation was not a cover-up, was it?" Greenwood asked. "It was definitely not a cover-up," Dilg replied. Responded Greenwood: "OK, in what ways would a cover-up look different than your preliminary investigation?" Amid laughter in the hearing room, Dilg replied that he wouldn't know, he had never participated in a cover-up. Rep. Billy Tauzin, R-La., chairman of the House committee, noted that in previous testimony, former Enron CEO Jeff Skilling said V&E was aware of certain conflicts of interest now under investigation. Asked by Tauzin why such conflicts were not probed by lawyers, Derrick responded that Enron's code of conduct requires employees with conflicts of interest to come forward and obtain a waiver. "You've got to be kidding, Mr. Derrick," Tauzin said. "Any employee could go negotiate against the company, and it was up to them to come and get a waiver?" Derrick and others responded that the specific conflict Tauzin was referring to was not cited in Watkins' memo, and therefore not within the scope of their probe. "Had I been blessed with the gift of clairvoyance, had I been permitted to gaze into the future and foresee the events that would unfold in respect of Andersen, I would have advocated the choosing of another path back in August," Derrick said. Based on the facts they knew about Enron's dealings at the time, Dilg said, the firm stands by its conclusions about Watkins' allegations. Had they known about conflicts of interest, alleged self-dealing and financial improprieties, the firm would have made a different recommendation, according to Dilg.