Exactly one year after Enron began its free fall into bankruptcy, its former auditing firm will be sentenced today for altering evidence of its work with the company.
Arthur Andersen is scheduled to be sentenced for obstruction of justice this afternoon by U.S. District Judge Melinda Harmon.
No one will go to prison. The only question is how much Harmon will fine and restrict the firm, which is but a shell of its former self. The maximum fine is $500,000 but the judge may also limit Andersen’s ability to do business during a possible five-year probation.
“This is a case where the execution was carried out well in advance of the sentencing, so there’s not much left for the sentencing judge to do,” said Robert Mintz, a New Jersey-based attorney and former federal prosecutor who has followed the case.
It was one year ago, on Oct. 16, 2001, when Enron, Andersen’s client, released its disastrous third-quarter financial report, revealing more than $600 million in losses and a $1.2 billion reduction in shareholder equity.
When investors learned that much of the loss resulted from a partnership run by Chief Financial Officer Andrew Fastow, who profited at the company’s expense, Enron’s stock price and credit rating spiraled downward. On Dec. 2, it filed for bankruptcy.
Andersen was the first target of the Enron Task Force. Prosecutors charged both David Duncan, a partner who later struck a plea bargain, and the company itself with obstruction of justice.
In June, a jury found Andersen guilty, singling out an e-mail by an in-house lawyer that suggested altering a memo, but ignoring the massive shredding of Enron-related documents,
The judge has received probation department reports about Andersen’s track record and current status. There likely will be no testimony today, but Harmon may hear from the Securities and Exchange Commission.
“The company’s over; there’s really not any business left for the judge to restrict,” said Houston lawyer Rusty Hardin, who defended Andersen.
Andersen lost the right to audit public companies at the end of August. Hardin said the 90-year-old firm is down to a few employees to handle existing lawsuits and run an Illinois training facility that could earn several million dollars annually.
He said the company does have some cash from the sale of its assets and release of employees to other firms, as well as profits remaining from its last year in business. He said the money will be used to pay vendors and settle as many lawsuits as possible.
After sentencing, Hardin said, Andersen will appeal to the 5th U.S. Circuit Court of Appeals.
“It’s not just about pride. It’s because they were convicted of something they didn’t do. Are they supposed to just walk away because it ruined them?” Hardin asked.
Appellate points will include some of Harmon’s rulings about what evidence the jury heard and what instructions it was given.
The company’s best chance to unravel the conviction may be the judge’s decision to allow testimony about the firm’s previous trouble with federal regulators. The appellate court overruled Harmon for allowing similar evidence in a 1997 case involving a Houston bank owner.
In January, Andersen revealed that the previous fall while Enron was preparing its third-quarter report employees in its Houston offices had destroyed and altered paper and electronic files related to its Enron work. Andersen fired Duncan, the lead Enron auditor, and began trying to work out a settlement with the SEC and Justice Department.
Andersen likely expected to receive the same punishment it had in the past, when clients Waste Management and Sunbeam were investigated for accounting fraud. Fined millions of dollars, the firm acknowledged no wrongdoing but promised not to repeat the behavior.
In this case, however, the government decided Andersen’s record was too egregious to ignore, so they treated it as a repeat offender. The negotiations failed and Andersen was indicted.
Often called “the Marine Corps of accounting” for its hard-nosed approach to auditing, Andersen had nearly 28,000 U.S. employees and thousands of customers at the beginning of the year. It now employs fewer than 3,000 and has practically no customers.
“They’re just trying to get to a point where they can turn off the lights and close the doors,” said Art Bowman, publisher of a monthly newsletter for the accounting industry.
The company has sold most of its practice to competitors, receiving about $150,000 for each partner and group of 10 employees acquired. In Houston, where about 1,700 Andersen employees worked, about 150 employees went to work for KPMG’s consulting business, 120 joined a new company named Protiviti, and 250 joined the tax practice of Deloitte & Touche. Another 90 local employees in the audit, tax and risk assessment business joined Ernst & Young.
Many had expected Andersen to file for bankruptcy shortly after its criminal conviction, but it has said since then that it does not intend to.
That could change, however, if plaintiffs in any number of lawsuits succeed in freezing the company’s assets. Lawyers representing the University of California Board of Regents in an Enron-related suit have already tried that, unsuccessfully.
In addition to the Enron related lawsuits, Andersen is expected to face legal action concerning other disgraced ex-clients, including WorldCom, Qwest Communications, Global Crossing and Peregrine Software.
Although Andersen’s trial was unusual, it is by no means the first business to be sentenced for a crime.
Enron Task Force leader Leslie Caldwell herself has been involved in two such health care cases against pharmaceutical company Genentech, which paid $50 million in civil and criminal fines, and nursing home operator Beverly Enterprises, which was fined $180 million.
Duncan pleaded guilty to obstruction and has cooperated with authorities. His sentencing is scheduled for next week, but the government has asked Harmon to postpone it at least eight weeks. Because Duncan’s attorney, Barry Flynn of Houston, said he does not object, the judge likely will not sentence Duncan until December or later.
Once someone in Duncan’s position is sentenced, he is typically released from obligations to help investigators. So, Mintz said, prosecutors will not want him sentenced until they have everything he has to offer.
“If he’s sentenced he could also testify on behalf of the defense with relative impunity, so I think they’ll keep him on the hook as long as they can,” Mintz said.
Although Duncan has not been before the specially called Enron grand jury, several other former Andersen employees have. The jury has indicted not only Andersen but also three British former bankers accused of stealing from their employer in a deal with Enron. The grand jury will likely soon indict ex-Enron CFO Fastow, who was charged with fraud and money-laundering on Oct. 2.