Today begins Act I in the prosecution of Enron.
No, the bankrupt energy giant is not on trial -- not yet, anyway.
And no, the case is not about the notorious accounting schemes that led to the nation's largest-ever corporate bankruptcy, put thousands of people out of work and wiped out the savings of small investors across the country.
The case concerns the mass shredding of Enron-related documents and the deleting of e-mail by its accountants, Arthur Andersen. The once-revered but now foundering firm stands accused of a single felony count of obstruction of justice.
Despite the trial's narrow focus, the evidence that begins unfolding today in federal court in Houston is expected to preview the case against Enron.
"What the government will be doing is setting the stage for the main attraction, which is the Enron case," said Robert A. Mintz, a former federal prosecutor in Newark, N.J., who specializes in white-collar crime. "In part they will be identifying key players and defining the central theme of their prosecution. If that theme is rejected by the jury in the Andersen trial, it will make it difficult with Enron down the road."
For the 88-year-old accounting firm -- once the nation's fifth largest, now on life support with clients and partners fleeing and civil suits mounting -- a guilty verdict could be a death knell. The firm would be barred under federal law from auditing publicly held clients -- the core of its business -- unless it secured a waiver from the Securities and Exchange Commission. Even without a conviction, states could move to rescind Andersen's license.
The trial focuses on a relatively simple matter: whether Andersen's document destruction was widespread in the firm and intended to thwart an SEC investigation.
In that sense, it will be easier for the public to follow than possible future trials that involve more substantive matters such as derivative trading and "special purpose entities" created to disguise debt from regulators and corporate balance sheets -- subjects which give even business professors headaches.
The government's star witness will be David Duncan, the former Andersen partner in the Houston office who was in charge of the Enron account. Duncan pleaded guilty to obstruction of justice last month and agreed to cooperate in return for a more lenient sentence. In other words, he must tell all on his former bosses and colleagues.
Duncan admitted in his plea that he ordered the destruction of documents to impede the government's investigation. Earlier, Duncan had attributed the decision largely to an Oct. 12 e-mail message from company attorney Nancy Temple reminding him of the firm's "documentation and retention" policy, which calls for the destruction of documents not central to an audit's conclusions. The policy was reportedly sporadically enforced.
Technically, the government needs to prove only that Duncan acted within the scope of his authority -- and acted for the benefit of the firm -- to prove Andersen is guilty of obstruction of justice.
But prosecutors are likely to cast a wider net and argue that the destruction was systemic within the company -- and happened with the knowledge and complicity of other senior partners. That strategy would avoid the prospect of a jury's ignoring the letter of the law in favor of fairness, reasoning that thousands of partners around the world should not be punished for the misdeeds of a few, Mintz said.
The indictment, which was returned by a grand jury in March, charges that document destruction was not isolated to Houston but took place at Andersen offices in such far-flung locations as Portland, Ore., and London.
Another key figure will be Temple, the Andersen attorney whose e-mail message Duncan said inspired him to begin shredding documents. Temple testified before Congress in January that she did nothing improper and that her e-mail was only a restatement of Andersen's existing policies, which call for work papers and preliminary audit information not central to the conclusions of an audit to be destroyed after the final audit report is completed.
"I never counseled any shredding or destruction of documents," she testified. "I only wish that someone would have raised the question."
For courtroom drama, the man to watch is Andersen defense attorney Rusty Hardin, a former Houston prosecutor with a North Carolina drawl and engaging smile who has become a celebrity for his searing cross-examinations, courtroom theatrics and high-profile clients, including former Houston Oilers quarterback Warren Moon and retired baseball star Wade Boggs.
In a case last year, Hardin ridiculed former stripper and Playboy centerfold Anna Nicole Smith's assertion that she was the light of her elderly husband's life by playing the Debby Boone hit, "You Light Up My Life." As a prosecutor, Hardin brought a pickax to court and hacked up a telephone book to demonstrate the crime of Daniel Garrett, who with his girlfriend Karla Faye Tucker hacked a couple to death with a pickax in 1983.
"He's got a technique of cross-examination that the experts tell you 'don't do,'" said Dick DeGuerin, a criminal defense lawyer in Houston whose clients included David Koresh, the leader of the Branch Davidian cult. "He doesn't control witnesses. He lets them say whatever they want and then crams it right back up their keisters. He lets it in just so he can ridicule them with it. I think he's going to let Duncan hang himself."
No one wanted this trial. Certainly not Andersen, which has lost about 225 of its 2,300 publicly held U.S. clients in the aftermath of revelations about the firm's role in the Enron collapse and is working feverishly to sell off parts of its operations to other accounting firms. Last month, the firm announced the reduction of about 7,000 jobs, or 27 percent of its 26,000-employee staff in the United States.
The government also wanted to avoid a trial, legal experts say, because its plate is full with the Enron case. The Andersen trial will only eat up resources and delay that case's prosecution as well as handing the Enron defense a road map of what's in store.
The government also appears to be in the thorny spot of having to impeach witnesses in this trial whom they hope to persuade to become cooperating witnesses in the Enron trial. Prosecutors also will be creating a record of sworn testimony that can be used by defense attorneys in a later trial to trip up important witnesses such as Duncan.
The two sides worked hard to reach a settlement. In the end, Andersen rejected an offer of "deferred prosecution" in which the government would have dropped the indictment and put the firm on probation. Andersen would have admitted criminal wrongdoing by some of its partners and stated publicly that the firm was responsible for their actions.
'Have nothing to lose'
"The only way I can understand it is they believe that their firm is dead and thus they have nothing to lose," said John Coffee, a professor at Columbia University Law School. "They all know that within weeks of this trial they're packing up and moving someplace else. ... Even if they have a 1 percent shot to get an acquittal, at least that will give them a psychological boost."
Though the trial might sidetrack prosecutors, the Justice Department couldn't back down, said Lawrence Mitchell, a corporate law professor at George Washington University Law School and author of Corporate Irresponsibility: America's Newest Export.
"It would have let them off the hook, and they shouldn't be allowed to be off the hook," Mitchell said. "Our governments have been apologists for the effects of big business for too long, and it's damn well time that someone was held accountable."
The case is an anomaly in the annals of corporate prosecution. The government rarely goes after an entire firm. And when corporations -- and individual agents within them -- are targeted, they almost always reach a settlement before trial because the public relations pressure is too great.
Down the road, prosecutors may come up with a securities fraud case against Andersen. Meanwhile, legal analysts have mixed views on the significance of the shredding trial.
"Originally the government's goal was not for Andersen to be convicted and destroyed," Coffee said. "The overall war is directed at the top brass at Enron, and Andersen was merely an instrumental battle in the campaign. But it blew up into an Armageddon."
But Daniel Goldberg, a professor at the University of Maryland's law school who specializes in tax law, said Arthur Andersen, not the energy company, is the most important story in the Enron debacle.
"Bad things sometimes happen in companies where there's a lot of money being handled," he said, referring to Enron. "The public's protection comes from an independent and honest accounting profession and full disclosure. And when the public doesn't have confidence in that, it can't have confidence in the capital markets.
"I continue to believe this will be the most lasting effect on the business world: the treatment of the accountants and the standards to which they are held."
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