Early Inquiry Fear Seen at Andersen
The New York Times
April 22, 2002
By KURT EICHENWALD
A former Arthur Andersen partner
has told prosecutors that
members of the firm grew concerned
in August about the possibility of a
federal inquiry after allegations of
accounting fraud at Enron were raised
by a whistle-blower at the company,
according to people involved in the
case.
The statements by the former partner,
David B. Duncan, indicate that the roots of the obstruction of justice scandal reach
back further than previously believed, starting with the allegations of Sherron S.
Watkins, the Enron whistle-blower. Ms. Watkins has been praised by members of
Congress for raising concerns within Enron and Andersen about potentially
improper accounting at the company.
In response to the criticisms of Ms. Watkins and other problems, Andersen formed
an unofficial committee that month to begin reviewing the firm's documents
relating to Enron, Mr. Duncan has told government investigators. A decision to
destroy documents ultimately emerged as a result of discussions among members
of that group, he has said.
People involved in the case said that Mr. Duncan's statements form the foundation
of part of the government's criminal theory in the prosecution of Andersen.
Supported by Mr. Duncan's testimony, prosecutors will argue that the destruction
last October by Andersen of thousands of documents and e-mail messages related
to Enron was not the spontaneous decision of a few employees, but the
culmination of months of discussions about how to get the files on the firm's
troubled client ready for review by outside investigators.
The argument that officials throughout Andersen
anticipated a review of its Enron records by the Securities
and Exchange Commission in the weeks after learning of
the allegations of Ms. Watkins is critical to proving that the
document destruction was conducted to impede an official
inquiry. Document destruction is not a crime unless those
engaged in the shredding were acting to keep records out
of the hands of government investigators or civil plaintiffs.
The prosecution theory was said to run on two tracks. Mr.
Duncan, once a prominent partner in the firm, has
already pleaded guilty to obstruction, and, therefore, the
government can argue that Andersen itself had the intent
to commit a crime.
And with the additional information provided by Mr.
Duncan, prosecutors can also argue that the firm's intent
to impede a criminal investigation began even earlier.
That is because the prosecution is said to believe that Mr.
Duncan's information provides evidence of what is known
as "collective knowledge" within the firm of a potential
government inquiry.
In essence, the actions of a wide array of Andersen officials
can be used to argue that the firm, as a whole, was
anticipating an inquiry and had a criminal intent when
the shredding began.
Rusty Hardin, a lawyer for Andersen, said: "All of this is
news to us." He added, "these are not things Mr. Duncan
has told us and we are as curious as the rest of the world
about what he said in this regard."
Samuel Seymour, a lawyer for Mr. Duncan, said that his
client "was continuing his active cooperation with the
government."
Interviews with a range of people involved in the case lay
bare what prosecutors are said to believe were a spectrum
of events and decisions within Andersen, starting with the
allegations of Ms. Watkins and leading ultimately to the widespread destruction of
Enron records.
"This whole thing seems to have started far earlier than anyone has realized, back
with the Sherron Watkins's allegation," one person involved in the case said. "That
was the push that began to set everything in motion."
Ms. Watkins, who worked in Enron's finance division, began raising her concerns
about potential accounting improprieties at Enron around the third week of
August. Andersen, where Ms. Watkins had formerly worked, became aware of her
concerns on Aug. 20, when she placed a call to a former colleague at the
accounting firm to discuss the matter.
Her concerns involved a series of deals between Enron and a group of partnerships
originally formed to allow Enron to shift assets and liabilities off its books. But, a
committee of the Enron board has concluded, the partnerships were eventually
used to improperly manipulate the company's earnings.
The concerns of Ms. Watkins were brought to the attention of other accountants at
the Houston office of Andersen.
At almost the same time, a major accounting error was discovered. That error had
resulted in a $1 billion overstatement of Enron's net worth and the first signs
emerged of other serious financial problems at the company.
Mr. Duncan has told criminal investigators that these events pushed Andersen to
form an unofficial committee to focus on potential problems stemming from Enron,
people involved in the case said. He has told investigators that he and Michael C.
Odom, then the director of audit practice in Houston, urged the formation of the
committee, and that its membership changed frequently.
Such an effort is proper for any company or partnership confronted by allegations
of potential wrongdoing and seeking to determine the truth, legal experts said. But
Mr. Duncan has told investigators that, while he could not recall specific words that
were used, the effort was infused with the growing expectation that Enron's
problems could result in a federal inquiry.
Mr. Duncan has told prosecutors that the group decided lawyers for Andersen
needed to be part of the discussions to ensure that actions were taken with a view
toward the firm's potential liability.
At the beginning of the discussions, Mr. Duncan was said to have told investigators
that the members of the unofficial committee reviewed the Enron documentation to
ensure that it was complete and accurate. As a result, some memorandums were
revised to reflect contradictory memories, and other conversations that were not
properly documented were written up.
More than one lawyer participated, but over time the main attorney involved was
Nancy Temple, who worked in Andersen's Chicago office. She was the author of an
e-mail message to the Houston office on Oct. 12, regarding compliance with
Andersen's document-retention policy, which required the disposal of all records
that are not primary work papers. Mr. Duncan has cited that e-mail message as
one of the reasons that he began destroying documents that month.
But, in his discussions with the government, Mr. Duncan has also said that he
received similar instructions before Oct. 12, during conference calls with the
unofficial group, people involved in the case said. In one such call, Mr. Duncan has
told criminal investigators, he was asked by Ms. Temple about his compliance with
the firm's document-retention policy. He was said to have replied by indicating that
he failed to rigorously follow the policy, meaning that documents that should have
been shredded had been retained.
When questioned by criminal investigators, Mr. Duncan said that he had never
before been asked about the firm's document-retention policy, and never before
received an e-mail message asking him to make sure that he was in compliance.
Mark C. Hansen, a lawyer for Ms. Temple, could not be reached for comment. In a
previous statement he has said that his client did nothing wrong, and Ms. Temple
has told Congress that her instructions were proper and intended to be far more
limited than Mr. Duncan apparently took them to be.
Prosecutors were said to view these events as evidence that the unofficial
committee was preparing for possible litigation and regulatory review. Since the
document retention policy was enforced sporadically, the statements last fall about
ensuring compliance are said to be viewed by prosecutors as improper, given the
expectation of a possible investigation.
"The government position is that Andersen is getting enough impulses from what is
going on to let them know that they have a situation they have to deal with,"
Stephen M. Ryan, a former federal prosecutor who is now a partner at Manatt,
Phelps & Phillips, said when told of the theory. "Once you get those impulses, once
you begin to prepare to respond to an investigation, then you have to suspend
document destruction."
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