Auditor pleads guilty in Enron shredding

Under plea deal, Duncan to testify for government

April 10, 2002|By Marego Athans | Marego Athans,SUN NATIONAL STAFF

David B. Duncan, the Arthur Andersen auditor who orchestrated the widespread destruction of Enron-related documents, pleaded guilty to obstruction of justice yesterday and became a potential blockbuster witness for the government as it investigates events surrounding the largest bankruptcy in history.

Duncan, fired by Andersen in January, led the team of accountants responsible for Enron's financial statements, giving him intimate knowledge of the accounting practices that led to the energy giant's implosion in December.

He signed off on Enron partnerships that concealed money-losing transactions, then coordinated the destruction of evidence after learning on Oct. 21 that the U.S. Securities and Exchange Commission was looking into the deals.

"I also personally destroyed such documents," Duncan told U.S. District Judge Melinda Harmon, who is presiding over the case in Houston. "I accept that my conduct violated federal law."

"We are surprised and disappointed by Mr. Duncan's statement in court, as it completely contradicts what he has stated up until this point," said attorney Rusty Hardin, who is defending Andersen against a criminal charge of obstruction of justice filed by the government last month. "For months, Mr. Duncan has contended that he had no intent to commit any criminal act."

Duncan became the first target of investigators to plead guilty in the Enron investigation, and legal experts say his agreement to cooperate bolsters the prosecution of Andersen, which is accused in its March 7 indictment of destroying "tons of paper," e-mail and computer files in its offices worldwide.

Andersen, which has entered a not-guilty plea, has called the indictment a "gross abuse of government power" that threatens its survival.

"The facts of this case are now in the government's favor," said Frank Partnoy, a law professor at the University of San Diego who specializes in white-collar crime. "It has all of Duncan's facts and admissions, and now it has what Duncan is going to tell them about all the boxloads of documents and who else was involved. He's going to have to spill his guts."

Duncan's plea is also the first building block in a criminal case against Enron, whose former chairman, Kenneth L. Lay, invoked his Fifth Amendment privilege against self-incrimination during a congressional appearance.

In exchange for cooperation, Duncan got "a pretty darned good deal," said Partnoy of the plea agreement, which says prosecutors could significantly reduce his sentence if he cooperates fully. The wording makes it "very likely he'll do no prison time," Partnoy said. "This shows the government needed him."

The maximum sentence for obstruction of justice is 10 years in prison and a $250,000 fine, but federal sentencing guidelines rely on an array of factors such as criminal history and degree of cooperation.

At the hearing yesterday, Judge Harmon warned Duncan that she could impose a sentence more severe than anything prosecutors might have discussed with him.

Duncan will remain free until a sentencing hearing Aug. 26.

Court documents filed yesterday say that he did "knowingly, intentionally and corruptly persuade and attempt to persuade other persons ... to withhold records, documents and other objects from an official proceeding."

The shredding took place between Oct. 23 and Nov. 9, the documents say, ending only after the SEC told Andersen on Nov. 8 that it planned to issue a subpoena for Andersen's Enron-related materials.

Lawyers for Andersen met Friday with the Justice Department in Washington to try to negotiate a settlement, but no deal was reached.

Pleading guilty could precipitate other problems for the firm, such as barring its core function of performing audits and preparing financial statements required by the SEC, unless it could obtain a waiver from the regulatory agency.

The case is scheduled for trial May 6.

Andersen's most obvious defense strategy would be "to characterize him [Duncan] as a rogue employee, somebody who did all this without authorization," said Stephen L. Meagher, a former federal prosector who now specializes in whistleblower cases at the Phillips & Cohen law firm in San Francisco.

The law under which the government charged Andersen is not the traditional obstruction of justice statute, but one that makes it illegal to corruptly persuade someone to destroy documents.

"This is clearly new territory, and it's not at all clear that the government will be able to make this particular indictment stick," Partnoy said. "There aren't a lot of precedents."

Andersen has lost about 150 public audit clients this year, including Federal Express, Merck & Co., Freddie Mac, Delta Airlines and Kerr McGee. More than 100 of those clients have defected since the indictment.

Andersen has also been sued in a spate of lawsuits filed by Enron shareholders and creditors who accuse the firm of misleading them.

On Monday, Andersen announced plans to lay off 7,000 employees. It also is trying to raise cash by selling off its tax and consulting businesses.

Thousands of Andersen employees have demonstrated against the federal indictment, saying the government is jeopardizing their livelihoods because of the alleged crimes of a few.

Wire services contributed to this article.

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