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A former partner at Ernst & Young, L.L.P., is one of the first individuals to be charged with obstruction of justice under the Sarbanes-Oxley Act. Federal prosecutors claim that accountant Thomas Trauger ordered documents to be altered for a client who was under investigation by securities regulators. In September the U.S. attorney’s office in San Francisco charged Trauger with two counts. One relates to the alteration of the documents. The other concerns allegedly false representations about the documents that Trauger made earlier this year to federal regulators. The accountant’s alleged misrepresentations are what triggered a charge under Sarbanes-Oxley, the corporate governance law enacted last year in the wake of numerous business scandals. The act is “a great new tool to get at this kind of conduct,” says Robert Mitchell, head of enforcement for the San Francisco office of the Securities and Exchange Commission. Ross Nadel, criminal chief of the U.S. attorney’s office in San Francisco, adds, “To our knowledge, this is one of the first cases of document destruction brought against a professional under the…Sarbanes-Oxley Act.” The case concerns an audit that Ernst & Young conducted for NextCard Inc., a San Francisco-based dot-com that has since gone bankrupt. The government claims that in November 2001, after regulators began investigating the company, Trauger ordered documents relating to the audit to be altered. Prosecutors say he subsequently presented those documents to investigators, including SEC lawyers, without disclosing that they had been changed. The government says that Trauger altered the documents in order to provide a better basis for Ernst & Young’s conclusions about NextCard’s financial health. According to an FBI affidavit, the accountant wrote in an e-mail that he wanted to make it look like Ernst & Young was “right on the mark” all along so that it wouldn’t be second-guessed by “some smart-ass lawyer.” Trauger intends to fight the charges, says his lawyer, Edward Swanson of San Francisco’s Swanson & McNamara. “Tom’s a good man, he’s a respected accountant, and we’re confident he’ll be exonerated,” Swanson says. In addition to the criminal indictment, Trauger faces an administrative action from the SEC. The agency has also brought actions against Oliver Flanagan and Michael Mullen, two other Ernst & Young auditors who worked on the NextCard account. Flanagan pled guilty in August to one count of obstructing a financial investigation and is cooperating with federal authorities. According to the government, he destroyed and altered some documents after being instructed to do so by Trauger. Flanagan’s lawyer, Stanley Arkin of New York-based Arkin Kaplan, says his client “didn’t have a very good mentor.” Arkin would not comment on the specifics of Flanagan’s cooperation, and it’s unclear whether his client will serve prison time. Trauger and Flanagan are no longer with Ernst & Young; Mullen is on administrative leave. When asked if the accounting giant is itself a target of the investigation, the SEC’s Mitchell would say only that the investigation is ongoing. The actions by Trauger and Flanagan “were a clear and serious violation of firm policy and professional standards,” Ernst & Young spokesman Kenneth Kerrigan said in a statement. “We have provided the government with full and unfettered access to our people and records [of a company inquiry] to assist in [prosecutors'] own investigation of the matter.” Ernst & Young is represented by Michael Shepard, a white-collar crime specialist with Heller Ehrman White & McAuliffe. He did not return a call seeking comment.

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