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Federal prosecutors have charged a former Ernst & Young partner with obstructing an investigation into a failed dot-com, making him one of the first to be charged for that offense under 2002′s Sarbanes-Oxley Act. As part of an ongoing investigation, Berkeley, Calif., resident Thomas Trauger, 40, was arrested and appeared before U.S. Magistrate James Larson Thursday. He was released on a $1 million bond and is expected to plead not guilty during his next court appearance. Trauger is alleged to have altered documents relating to the firm’s audits of San Francisco-based NextCard Inc., allegedly to provide a better basis for Ernst & Young’s conclusions about the company’s financial health. NextCard is now bankrupt. None of the charges derive from Trauger’s work on the NextCard audits themselves. “He intends to fight these charges,” said Trauger’s lawyer, Edward Swanson of Swanson & McNamara. “Tom’s a good man, he’s a respected accountant, and we’re confident he’ll be exonerated.” One of the counts relates to the alteration of the documents. The other concerns representations about the documents made earlier this year to federal regulators. That is what triggered the charge under Sarbanes-Oxley, the package of financial reforms and criminal penalties enacted last year in the wake of the Enron scandal. “It’s a great new tool to get at this kind of conduct,” said Robert Mitchell, head of enforcement for the SEC’s San Francisco office. The SEC initiated administrative actions against Trauger, Oliver Flanagan and Michael Mullen, all Ernst & Young auditors who worked on the firm’s NextCard account. Flanagan, who preserved information relating to the audits he was allegedly told to destroy, settled his case with the SEC, and is cooperating with federal authorities. He has pleaded guilty to one count of obstructing a financial investigation. His lawyer, Stanley Arkin of New York, said Flanagan is an honest man “who didn’t have a very good mentor.” “Oliver Flanagan has made his peace with the government,” said Arkin, who would not comment on the specifics of Flanagan’s cooperation. It was not clear whether Flanagan would serve time in prison. 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, 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 an internal investigation] to assist in its own investigation of the matter.” Ernst & Young is represented by Heller Ehrman White & McAuliffe partner Michael Shepard, a white-collar crime specialist. He did not return a call seeking comment. The case is expected to be closely watched. “To our knowledge, this is one of the first cases of document destruction brought against a professional under the recently enacted Sarbanes-Oxley Act,” said Ross Nadel, criminal chief of the U.S. Attorney’s Office. Following the collapse of WorldCom, Enron, Arthur Andersen and others, the Department of Justice made it a priority to prosecute lawyers, accountants and other professionals who aid in corporate fraud. The U.S. Attorney’s Office in San Francisco has several cases against lawyers pending. “The U.S. attorney’s office will bring those professionals to justice who join in the criminal acts they are supposed to uncover and expose,” U.S. Attorney Kevin Ryan said in a statement. Trauger allegedly began ordering the documents altered in November 2001, after government banking regulators began investigating the company. He presented the documents to investigators, including SEC lawyers in San Francisco, without telling them they had been altered. According to an FBI affidavit that quoted internal e-mails, Trauger wanted to make it look like Ernst & Young was “right on the mark” all along, so he would not be second-guessed by “some smart-ass lawyer.” The case is being prosecuted by Assistant U.S. Attorneys William Kimball and Anne-Christine Massullo. At the SEC, lawyer Cary Robnett and accountant Adrienne Miller worked on the investigation.

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