Andersen Hit With Maximum Penalty

H By Lee Hockstader

hOUSTON – A federal judge Wednesday imposed the maximum punishment on Arthur Andersen LLP for its part in obstructing a federal inquiry into the collapse of former client Enron Corp., saddling the onetime accounting giant with a $500,000 fine and five years of probation.

As part of the probation, U.S. District Judge Melinda Harmon imposed tough conditions, placing the once-proud firm and its key remaining activities under tight court supervision and forbidding it from destroying other Enron-related documents.

The message, said Harmon, is that “the destruction of documents cannot be tolerated” when a firm is facing an investigation by the Securities and Exchange Commission, as Enron was last year when its Andersen auditors shredded thousands of documents and deleted many e-mail messages.

Wednesday’s sentencing amounts to a postmortem on an 89-year-old firm that was once one of the most prestigious in American corporate life. Although Andersen has not declared bankruptcy, its U.S. payroll, once about 28,000, has dwindled to fewer than 1,000 and its worldwide staff of some 85,000 has been similarly decimated. Of 111 offices nationwide, only about 10 remain, with just three of them actively doing business, company officials said.

Andersen’s lead trial attorney, Rusty Hardin, said the government had only compounded the Enron calamity. He said prosecutors had engaged in massive overkill by “vaporizing” one of the nation’s Big Five accounting firms and tens of thousands of jobs because of the misdeeds of a few.

“Two tragedies don’t make it right,” said Hardin, who noted that far more jobs were lost in Andersen’s meltdown than in Enron’s collapse. “Ruining this company made no sense.”

Andersen is appealing the conviction.

Attorneys for the government said the blame for Andersen’s dissolution should be borne by Andersen’s management. “The lesson is to company management – any company management,” said Leslie Caldwell, head of the federal task force on Enron. “Don’t forget that you owe your duty to the shareholders, you owe your duty to the public. You don’t owe your duty to yourselves. And if you find out that someone in your company has done something wrong … the solution is not to hide it, the solution is not to destroy documents and the solution is not to lie about it. And unfortunately Arthur Andersen chose to go down the wrong path on all those fronts.”

Caldwell added: “The government did not destroy Arthur Andersen. Arthur Andersen’s management destroyed Arthur Andersen.”

Andersen’s decision to go to trial when facing criminal charges is rare.

Drexel Burnham Lambert Inc. sought bankruptcy protection within two years of pleading guilty to securities fraud in 1988. And a weakened E.F. Hutton & Co. merged with a rival after it settled criminal fraud charges and again ran afoul of the Justice Department.

“Companies that depend on their reputation or integrity have been particularly vulnerable to collapse after they acquire the stigma of a criminal conviction,” said John Coffee, a law professor at Columbia University.

In fact, some companies have successfully used that argument to avoid prosecution. New York Attorney General Eliot Spitzer has said publicly that he did not charge Merrill Lynch & Co. with crimes related to its analysts’ conflicts of interest this year because he did not want to risk killing the firm.

In imposing her sentence Wednesday, Harmon said Andersen would need a court-approved plan 90 days before it can re-enter the accounting business.

The verdict in the Andersen case came after a contentious six-week trial and 10 days of jury deliberations. Some jurors said afterward that they had set aside the government’s central contention that the firm had tried to impede the SEC’s investigation of Enron’s demise.

Instead, they said, they based their guilty verdict on a single e-mail by an Andersen lawyer advising a key auditor to delete certain language from a memo to Enron about a misleading earnings statement.

In a statement to the court before the sentencing, Linda Thomsen, the SEC’s deputy director for enforcement, stressed that Andersen had tried to undercut the government’s attempt to get to the bottom of Enron’s misdeeds, an offense she said warranted a “sentence that delivers a strong message.”

Prosecutors called for the judge to impose the maximum sentence to deter other firms and because of Andersen’s role in the settlement of accounting fraud charges involving Waste Management Inc. and Sunbeam Corp.

As the government’s Enron prosecutors left the courtroom Wednesday, a former partner in Andersen’s Houston office – still looking the part of accounting executive in a dark-blue suit and tasseled black wingtip loafers – glared at them in contempt.

“Who committed the crime?” demanded Bob Palmquist, 50, who said he lost $3 million in Andersen’s demise. “No one can tell us. There are a lot of displaced people, and the Justice Department should be ashamed of itself. I find it incredible that the government does this to a bunch of innocent people.”

“Good luck, guys,” he called out to the prosecutors, who were waiting for the elevator. “Take it to your grave.”

The government team did not respond.