This earlier post noted the 180 that the Enron Task Force has recently taken in regard to defunct accounting firm Arthur Andersen. After demonizing the firm, gutting it with a misguided prosecution, and alleging that a number of the firm’s former partners were co-conspirators in several Enron-related prosecutions, the Task Force is now embracing several former Andersen partners as prosecution witnesses in its upcoming legacy trial against former key Enron executives Ken Lay, Jeff Skilling, and Richard Causey. In short, after putting Andersen out of business as an accomplice of the evil Enron, the Task Force is now contending that Enron duped Andersen just like everyone else.
On the heels of that development, David Duncan, the former Andersen partner-in-charge of the Enron account at the time of the company’s demise, earlier this week requested — without opposition from the Enron Task Force — that U.S. District Judge Melinda Harmon allow him to withdraw his previous guilty plea under this cooperation agreement for allegedly obstructing the federal investigation of Enron. Duncan had testified — albeit ineffectively — during the Andersen trial in 2002 as a Task Force witness against Andersen, and has been awaiting sentencing ever since.
Meanwhile, the Task Force also requested dismissal of its criminal case against Andersen after publicly stating that it was prepared to retry the case just a couple of weeks ago. As a result, the Task Force will not be providing an “Andersen annuity” for Andersen defense attorney Rusty Hardin after all.
The Task Force’s decision to drop the misguided Andersen prosecution is at least somewhat consistent with the Supreme Court decision overturning the Andersen conviction and the Task Force’s recent change of heart toward Andersen. However, the Task Force’s decision not to oppose Duncan’s motion to withdraw his acceptance of his plea deal with the Task Force is another clear sign of desperation in the Task Force as it prepares to go to trial in less than two months in its legacy case against Messrs. Lay, Skilling and Causey. My bet is that the Task Force is playing nice with Duncan to send him a signal that if he elects not to testify in the Lay-Skilling-Causey trial, then the Task Force will quietly back off the criminal case against him after conclusion of that trial. Such an approach with Duncan would be consistent with Task Force’s tactic of trying to avoid having all relevant testimony and evidence considered during the Lay-Skilling-Causey trial.
Stepping back for a moment from the details of trial tactics, however, the Task Force’s recent change of heart toward Arthur Andersen simply highlights the dubious nature of the Task Force’s decision to prosecute Andersen out of business in the first place, depriving over a dozen communities of thousands of jobs in the process. Is there any adult supervision whatsoever within the Bush Administration’s Justice Department? Ellen Podgor has more cogent thoughts here.
Update: The best mainstream media article that I have read on this development in the Enron-related criminal cases is this Carrie Johnson/Washington Post article, which includes the following quote from Clear Thinkers favorite, Larry Ribstein:
“There was an initial outbreak of moral condemnation after Enron and the bubble burst,” said Larry E. Ribstein, a corporate law professor at the University of Illinois at Urbana-Champaign. “That was a time for people to take a deep breath. Instead, a lot of these things were rushed into prosecution, and now we’re seeing the fallout.”
Update II: Peter Henning agrees with me regarding the Task Force’s purpose in not opposing Duncan’s request to withdraw his plea bargain.
Mr. William Treacy
Executive Director
Texas State Board of Public Accountancy
Dear Mr. Treacy,
I am disappointed to read that the Texas State Board of Public Accountancy is going to hold disciplinary hearings regarding Andersen auditors. Given the misinformation in the media, it is perhaps not surprising.
Attached is an article updating an earlier published article detailing the facts available in the public domain. Would it surprise you to know that:
1) Enron’s fraud was committed within Enron’s off-balance sheet partnerships (SPEs), none of which were Andersen’s clients.
2) Enron Bankruptcy Examiners found widespread documentation at various prominent financial institutions that those institutions signed contracts, bank confirmations and representation letters — all fraudulent — in order to disguise loans as investments in the SPEs. The financial institutions include Citigroup, JPMorgan Chase, Bank of America, CreditSuisse First Boston, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto Dominion Bank, Royal Bank of Scotland, Barclays, BT/Deutsche and Merrill Lynch.
3) The SEC under the chairmanship of Arthur Levitt enabled the fraud by exempting Enron from long-standing investor protection laws.
4) The SEC granted Enron’s exemption at the urging of the House Committee on Energy & Commerce, under the leadership of Rep. Billy Tauzin (R-LA), Rep. John Dingell (D-MI) & Rep. James Greenwood (R-PA).
5) The so-called “consulting fees” earned by Andersen did not include any systems design or installation. It was all audit or tax-related. Trial testimony indicates that a considerable portion of the “consulting fees” were generated because Andersen required advance SEC approval before Andersen allowed Enron to set up the various SPEs. Testimony indicated that in many cases, the SEC agreed with Enron’s more aggressive accounting rather that Andersen’s more conservative accounting.
6) Enron officers — as well as those at WorldCom, Quest, etc. — have been charged with defrauding Andersen.
7) The Department of Justice has dropped all charges against Andersen and has said that it will not oppose David Duncan’s motion to change his plea. In other words, the DOJ has admitted that its charges against Andersen and Duncan were bogus.
Given these facts, it would be appropriate for the Texas State Board to stand up for auditors who have been defrauded, rather than subject them to disciplinary hearings. When auditors can be framed, scapegoated and the facts covered up, then no CPA is safe.
Sincerely,
Mary Ashby Morrison
CPA – Inactive
Edmonds, WA
My understanding is that the Enron Task Force wants David Duncan & other Andersen personnel to testify as to how the frauds were committed and why they could not be uncovered in the Enron audit. If the prosecution cannot get the jury to understand the frauds, how are they going to get a conviction?
In summary,
1) The frauds were committed WITHIN Enron’s SPEs, most of which were audited by KPMG.
2) According to Enron Bankruptcy Examiners, prominent banks aided and abetted Enron officers in their fraud by being willing to sign documents stating they were investing in Enron’s SPEs when in reality, they were loaning the SPEs money.
3) Therefore every document held at Enron (& within the SPEs) was signed by a prominent financial institution and was consistent with the way Enron booked the transactions, i.e. investments in SPEs.
4) In contrast, at the banks, the very same transactions were booked as loans, despite the fact that all supporting paperwork stated that they were “investments”. If anybody at the banks — their internal auditors, bank examiners, outside auditors — had looked at any of these transactions, it would have been obvious that the banks were participating in a fraud. The various banks were audited by KPMG, PricewaterhouseCoopers and Deloitte Touche.
5) According to the Enron Bankruptcy Examiners, the frauds were documented at the banks in loan committee agendas, loan committee minutes and loan approvals. Frequently the question was asked, “Why are we making a loan 9for example, $750 million) without having any loan agreement?” “Because Enron won’t get its desired accounting from Andersen if we write it down.” The banks went ahead.
5) Two of the banks — Citigroup and JPMorgan Chase — admitted to the Senate Governmental Affairs Committee that they had sold the idea of Enron-style frauds to “at least” 10 other corporations. The government report did not name these rogue corporations so we don’t know their identity, which auditors they defrauded or the extent of their political contributions. What we do know is that there are “at least” 10 more Enrons out there.
6) The government knew that Andersen was not the auditor of Enron’s SPEs and that at least one bank was complicit in the Enron fraud by the end of 2001 — long before the “fact finding” hearings of the House Committee on Energy and Commerce and long before Andersen’s indictment.
I have written an article footnoting the above facts as well as many more.
Mary, my understanding is the same as yours with regard to several former Andersen partners, just not Duncan.
My bet is that Duncan has never been comfortable with the plea deal and that the SCOTUS decision overturning the Andersen conviction was the impetus for him to seek to withdraw from it. The Task Force knows that he was not a particularly effective witness for the prosecution in the Andersen trial, and they probably believe that they can get what they want in the Lay-Skilling-Causey trial from other former Andersen partners. On the other hand, they don’t want Duncan testifying for the defense in that trial.
That’s why I speculate that Duncan and the Task Force are doing this little dancestep in regard to his attempt to withdraw from his plea deal. The Task Force would prefer that he stay on the sidelines of the Lay-Skilling-Causey trial. Continuing to hold prosecution of his individual case over his head until after the Lay-Skilling-Causey case is completed is one way to accomplish that goal.
If you read the trial transcript, Duncan consistently said that he told employees to follow Andersen’s document retention policy…which he did. He also admitted that he personally destroyed duplicate copies of old memos, old magazines and requests for charitable contributions.
At the time, Andersen had not been issued a subpoena nor had there been any mention of a possible subpoena. The SEC had requested information from Enron REGARDING ENRON’S SPEs. Because Andersen had never been hired to audit those SPEs, neither Duncan nor any Andersen auditor had any reason to believe an investigation of SPEs would lead to them. Every Andersen person who testified said that they understood the request to follow Andersen document retention policy to mean that everything should be clearly documented in the audit workpapers and duplicate copies and personal papers should be shredded. This is a routine part of any audit.
Duncan never said he did anything illegal. In fact, he very clearly said that he didn’t think he did anything illegal. It was months later, in February – March 2002, after months of interrogation by DOJ lawyers, FBI, House & SEC investigators that he decided to plead guilty.
Why did Duncan plead guilty? Think of what he knew by February 2002. Duncan knew that neither he nor Andersen were auditors of the entities where the frauds were committed… and he knew the government knew. Duncan knew that the Enron frauds were aided and abetted by prominent financial institutions…and he knew the government knew. Duncan knew that the SEC had exempted Enron from investor protection laws AND had approved in advance Enron’s setting up various SPEs…and he knew the government knew.
Yet by February 2002, it was obvious that the government intended to destroy a firm of 85,000 worldwide plus thousands of retirees, most of whom had nothing whatsoever to do with the Enron audit. Duncan must have reasoned that if the government was willing to destroy the careers and retirement benefits of countless thousands of people who couldn’t possibly be guilty, what chance did he have?
As you know, a charge of fraud carries a sentence in proportion to the size of the fraud. If Duncan had not pleaded guilty to “witness tampering”, the government might have charged him with fraud, with a potential sentence of something like 80 years.
The sad truth is that even an innocent person can be coerced into pleading guilty if there is no hope for a fair trial.
Mary, so true. Take a look at the comments of U.S. District Judge Lynn Hughes in another Enron-related criminal case, and Yale Law Professor John Langbein’s comments on the coercive power of the government in prosecutions. Sir Thomas More had it right when he observed that, unless such misuse of governmental power is curtailed, “do you really think you could stand upright in the winds [of abusive state power] that would blow then?”
Professor John Longbein correctly analyzes the problem when he states that “plea bargaining merges…accusatory, determinative and sanctional phases of procedure in the hands of the prosecutor. Students of the history of the law of torture are reminded of…European inquisitional procedure [which]…concentrated in the investigating magistrate the powers of accusation, investigation, torture and condemnation.”
Let’s examine how this relates to the indictment and destruction of Andersen. Because the DOJ couldn’t pinpoint who — if anybody — at Andersen had done anything wrong, they accused the entire firm, knowing it would destroy the firm. In indicting an entire company, the DOJ becomes judge, jury and executioner. (To help the DOJ, government agencies overtly threatened Andersen clients.For example, Medicare told hospitals audited by Andersen that if they didn’t drop Andersen as auditors, the hospitals would lose Medicare reimbursements.)
The DOJ couldn’t charge Andersen with doing a bad audit, because the government would have then been forced to admit that Andersen wasn’t even the auditor where the frauds took place. The DOJ couldn’t charge Andersen or David Duncan with destroying paperwork because it was perfectly legal until receipt or notification of a forthcoming subpoena. Because Andersen was not the auditor where the frauds were committed, not surprisingly the SEC had not subpoenaed Andersen. So the DOJ charged Andersen with “witness tampering” on the novel premise that because Duncan told employees to do something entirely legal, he and, by extension, the entire firm were criminal.
The elements of the crime of “witness tampering” are (1) “knowingly” (2) “corruptly persuading” someone to destroy documents to keep them from a (3) “official proceeding”. Under the statute, the official proceeding need not be actually under way but there must be some nexus or connection to an official proceeding.
Under the prosecution’s theory which was adopted by Judge Harmon in her instructions to the jury (affirmed by the 5th Circuit), the prosecution was not required to prove any element, much less all three. The Judge instructed the jury that it didn’t matter whether Andersen people knew they had done anything wrong; therefore the requirements of “knowing” and “corrupt” persuasion were eliminated. Judge Harmon instructed the jury that an “official proceeding” included the performance of “any investigative activity, formal or informal, of any agency, that might be commenced at any future time for any reason, whether or not the actor had any reason to believe that specific agency activity was contemplated.” In fact, the District Court refused to instruct the jury that, to convict, it had to find that Andersen intended to affect a proceeding relating to Enron.
It is the Theater of the Absurd. If the accused’s actions are clearly within the law, just mischaracterize the law. Unfortunately, we are supposed to be governed by the rule of law, not the Theater of the Absurd.
Because of time constraints in arguments before the Supreme Court, Andersen limited its appeal to the misstated jury instructions. The conviction was promptly and unanimously overturned.
The erroneous jury instructions were not the only irregularities in the trial. Andersen’s appeal to the 5th Circuit lists numerous rulings echoing DOJ positions, any one of which would have been grounds for reversal.
Ironically, in a trial about “witness tampering”, Andersen lawyer Rusty Hardin had to file a formal complaint with Michael Chertoff, then head of the DOJ Criminal Division because the prosecution was threatening Andersen witnesses. At the time of Andersen’s appeal to the 5th Circuit, Mr. Hardin had heard nothing in response.
U. S District Judge Lynn Hughes’ opinion highlights another problem with the government’s smear and destruction of individuals they knew to be innocent. In subsequent trials of individuals who may be guilty of a crime, the jury may be reasonably be expected to be confused. The DOJ’s case rests on the true fact that Andersen was defrauded but the DOJ has smeared their best witnesses.
That’s the trouble with lynchings. Generally the wrong people get strung up and then it is difficult to bring the real perpetrators to justice.
I am an Australian writer who will be in Houston in December. Does anyone know if Jeff Skilling is giving media interviews at the moment? Is he using a PR firm?