- The Washington Times - Wednesday, April 10, 2002

Arthur Andersen's fight for survival got tougher yesterday as its lead Enron auditor admitted in a Houston court that he directed efforts to shred documents and obstruct a securities-fraud investigation.

"Documents were destroyed so they were not available to the Securities and Exchange Commission" after it started a probe of Enron deals on Oct. 22, David B. Duncan said as he stood before U.S. District Judge Melinda Harmon yesterday.

Mr. Duncan's guilty plea fulfills the terms of a cooperation agreement with the Justice Department in which he agreed to testify and provide information against Andersen and Enron Corp. in exchange for leniency from the court.

Mr. Duncan, who by several accounts helped to devise the Enron accounting artifices that led to the company's demise and even defended them against internal critics at the Big Five accounting firm, will not be charged with any further crimes under the agreement.

But the agreement does not preclude prosecution by other federal, state or local authorities or civil cases by stockholders seeking restitution for their losses. It also requires him to cooperate with the Internal Revenue Service and pay any back taxes he owes.

Judge Harmon warned Mr. Duncan that he may face harsher penalties than he discussed with prosecutors. An obstruction conviction can carry fines and up to 10 years in prison. The judge set a sentencing hearing for April 26.

Mr. Duncan, by admitting he violated federal law, obliterated Andersen's best defense to the obstruction charges, leaving the firm with few options, former federal prosecutors said.

Andersen had contended that its employees did not intend to violate the law but were following the company's admittedly flawed document-retention policy that permitted them to destroy what they considered inessential e-mails and other documents related to the Enron audit.

"This definitely turns up the heat on Andersen," said Frank Velie, a former prosecutor and attorney at Salans. "It's pretty desperate" for Andersen now, he said.

"They're already bleeding pretty heavily," having lost a quarter of the firm's clients and employees since the March 7 indictment, he said. Andersen lost three more major clients yesterday Walgreen Co., International Paper Co. and Oracle Corp.

The best hope for Andersen now would be a settlement with the Justice Department that defers prosecution of the case as long as the firm avoids further violations of law during a probationary period lasting two years or so, Mr. Velie said.

Andersen attorneys, who broached the possibility of a settlement in talks with the Justice Department on Friday, did not return phone calls yesterday.

"The plea today is a turning point in the government's case," said Neil V. Getnick, business-integrity counsel at Getnick & Getnick in New York.

"It's clearly a big detriment to Andersen," but it also gives the government a big opportunity in its developing case against Enron, he said.

"Since Duncan was involved in the destruction of documents, he can say what was in those documents to help the Enron case," Mr. Getnick said. "He really is a double threat to Andersen and Enron."

Some lawyers said Andersen might profit, however, from Mr. Duncan's culpability as the lead auditor who approved Enron financial statements that deceived thousands of investors about the energy giant's financial condition.

"He obviously is subject to a cross-examination that's pretty strong: Didn't you make a much better deal for yourself when you were the person who ordered these events?" said attorney Stephen M. Ryan.

"This has only slightly ratcheted up the pressure on Andersen. I'm sure the Andersen lawyers anticipated this possibility."

The Big Five accounting firm got another blow yesterday when Judge Harmon ruled against its bid to block any further subpoenas from a Houston grand jury that is investigating the Enron matter.

Andersen argued that the government violated its right to a fair trial by asking employees to provide evidence against the firm after it was indicted.

But the judge said she could not restrict the grand jury because Andersen is not the only target of the investigation, which encompasses Enron and well as unindicted individuals at both firms.

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