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It’s been two years since a federal jury in Houston found accounting firm Arthur Andersen guilty of obstruction of justice in connection with its work for energy company Enron Corp. The trial, which lasted six weeks in U.S. District Judge Melinda Harmon’s court, was the first for the task force of federal prosecutors investigating the collapse of Enron, and voir dire began only five months after Enron filed for bankruptcy in December 2001. At the time, Houston was reeling from the fall of Enron, with layoffs putting thousands out of work, and the collapse of the company led to a public outcry for corporate governance reform. On June 16, almost exactly two years after the verdict in the Andersen trial, the 5th U.S. Circuit Court of Appeals affirmed the judgment of conviction. A three-member panel of the 5th Circuit found no reversible error on the part of Harmon, who sentenced Andersen to the maximum of five years’ probation and a $500,000 fine. In the two years since the June 15, 2002, verdict against Andersen, a federal grand jury has indicted numerous Enron officials and others connected to the company. Several of the defendants negotiated plea bargains, and some agreed to testify for the government, but not a single additional defendant has gone to trial yet. Meanwhile, while high-ranking Enron officials, such as former chief financial officer Andrew Fastow and former chief executive officer Jeffrey Skilling were indicted, the fate of the official who perhaps best symbolized Enron, former chairman Ken Lay, is still an open question as the Enron Task Force’s investigation continues. Michael Ramsey, the prominent criminal-defense attorney in Houston representing Lay, continues to maintain his client should not be indicted on criminal charges. “Ken’s in good shape,” says Ramsey, a solo practitioner. Two former Enron officials should have been in trial on the two-year anniversary of the Andersen verdict, but U.S. District Judge Ewing Werlein of Houston decided on June 7 to delay the start of United States of America v. Daniel Bayly, et al. until August. In that case, two former Enron officials and four former Merrill Lynch employees face criminal charges in connection with a December 1999 deal known as the Nigerian barge deal, in which Merrill bought some electricity-producing barges from Enron. While there hasn’t been a steady stream of trials over the past two years, the Andersen verdict has had an impact outside the courtroom. “The Arthur Andersen debacle played a large role in bringing about enactment of the Sarbanes-Oxley Act [of 2002], and the new accounting standards board … it helped bring about the SEC’s adoption of new rules which caused financial officers of companies and the CEO to certify as to the accuracy of the financial statements,” says former federal prosecutor Christopher Bebel of Houston. “The Andersen case didn’t do it alone, but it certainly was a major development in beefing up the integrity of the capital markets and [of] those who regularly play significant roles in financial matters,” says Bebel, a partner in Sachs, Bebel & Boll who watched much of the Andersen trial in 2002. WATCHING AND WAITING For months, members of the Enron Task Force and defense lawyers with Enron-related clients have been watching and waiting for the 5th Circuit to rule on the Andersen appeal in United States of America v. Arthur Andersen LLP. In an opinion written by Judge Patrick Higginbotham, the 5th Circuit panel found no reversible error in Andersen’s conviction. “We like it,” says Andrew Weissmann, an Assistant U.S. Attorney on the trial team in the Andersen case who now heads the Enron Task Force. “The conviction of Arthur Andersen was an important milestone in promoting responsible corporate behavior and respect for the law. Weissmann says the 5th Circuit opinion “vindicates” what the government was arguing at trial: that the obstruction of justice prosecution against Andersen was much more than an attempt to criminalize a document retention policy. Prosecutors had alleged Andersen engaged in a massive destruction of Enron-related documents at a time when it should have known the Securities and Exchange Commission was investigating Enron’s financial reporting. In its defense, Andersen’s lawyers maintained the company’s efforts to follow its document-retention policy were not intended to obstruct justice. Several jurors interviewed after the trial say they agreed that Nancy Temple, an in-house lawyer at Andersen, acted with the corrupt intent to obstruct justice by keeping information away from the SEC. Andersen defense attorney Rusty Hardin, of Houston’s Rusty Hardin & Associates, declines to comment on the 5th Circuit opinion and refers comment to Andersen spokesman Patrick Dorton. In a prepared statement, Dorton says, “We are disappointed by the appellate court ruling. However, given the constraints of the appellate process, we were not surprised by this decision.” “We continue to believe strongly that the criminal prosecution of a firm of 28,000 people was unjustified and the ensuing collapse of Arthur Andersen was an undeserved tragedy for its employees, clients and the business community at large,” he says in the statement. As to further appeals, Dorton says, “The firm is examining all options going forward.” In the opinion made public on June 16, the 5th Circuit panel rejected arguments by Andersen’s appeals lawyers that Harmon erred by not allowing Andersen’s defense lawyers to introduce evidence showing the jury the volume of Enron documents that were not destroyed and retained. The panel also found Harmon did not abuse her discretion by allowing, under Federal Rule of Evidence 404(b), evidence of prior SEC enforcement actions involving former Andersen clients Sunbeam Corp. and Waste Management Inc. At the time of the trial, Andersen was under probation under a consent decree in 2001 stemming from its work for Waste Management, with penalties including the loss of the right to certify audited financial statements. The panel also found Harmon did not commit reversible error by refusing to admit as evidence FBI reports of an interview with an Andersen employee assigned to the Enron account, and found the definitions of “corruptly persuades” and “official proceeding” that Harmon used in the jury instruction were not flawed, as Andersen had argued. The 5th Circuit judges also found it was not reversible error when Harmon failed to instruct the jury the government had to prove Andersen knew its destruction of records was unlawful. “The district court did not err by refusing to give an “ignorance of the law’ instruction,” Higginbotham wrote in the 42-page opinion. The panel also included Judge Fortunato Benavides and Senior Judge Thomas Reavley, who did not attend the oral arguments held in October 2003 in Austin. DEARTH OF TRIALS While the Enron Task Force has just won an appellate ruling upholding Andersen’s conviction, the federal prosecutors haven’t had another opportunity to win more convictions in the courtroom. Weissmann contends the prosecution has made considerable progress in the past two years, despite the dearth of trials. He points out that in addition to the Andersen conviction, 30 individuals have been indicted in connection with the Enron investigation, and the task force has been able to freeze more than $161 million in allegedly ill-gotten assets. “And 10 people have actually been convicted, either after trial, which is [what happened with] Andersen, or after a plea of guilty,” Weissmann points out. “That’s quite a lot for two years.” Some of the pleas have been high profile. For instance, Fastow, the former CFO, pleaded guilty in January to two conspiracy charges and agreed to spend 10 years in prison and forfeit $23.8 million in assets. He is cooperating with the government and presumably will testify at the upcoming trial of Skilling, who was indicted in February on charges of conspiracy, wire fraud, securities fraud and insider trading at Enron. Skilling was indicted along with former chief accounting officer Richard Causey; both have pleaded not guilty and await trial in U.S. District Judge Sim Lake’s court in Houston. Along with Fastow’s plea, prosecutors also negotiated a plea bargain with the former CFO’s wife, Lea W. Fastow. She pleaded guilty in May to one misdemeanor count of filing a false tax return, and U.S. District Judge David Hittner of Houston sentenced her to one year in prison and one year of supervised release. She will report to prison in July to serve her sentence. Former Enron Treasurer Ben Glisan Jr. is serving a five-year prison term. He pleaded guilty to one count of conspiracy to commit wire and securities fraud in 2003, but at the time did not agree to cooperate with prosecutors. Weissmann says the investigation is continuing, but he will not say if any indictments are imminent. He would not comment on the status of an investigation into Lay’s actions. Ramsey, Lay’s criminal defense attorney, suggests that those who believe it’s inevitable that Lay be indicted are “misled.” He says it’s his understanding the prosecutors are broadly looking at Lay’s actions after he reassumed the CEO role in August 2001 after Skilling resigned. Bebel suggests that many of the people who were clamoring for Enron-related indictments back in 2002 are not necessarily knowledgeable about the white-collar crime process. “It’s a very time-consuming task to sort through millions of documents, and then select key passages and statements and put them into a mosaic and at the same time tie in the testimony of key participants,” he says. In a sense, he says, the Andersen trial bought some time for the U.S. Department of Justice. It is giving prosecutors time to develop strong cases, he says. “For a white-collar case, they [investigations] tend to be slower and they are difficult,” Weissmann says. “You have to prove beyond a reasonable doubt not only what happened, but beyond a reasonable doubt the intent of each actor.” Hardin, the Andersen defense attorney, says he can’t criticize the Enron Task Force for moving deliberately. He does find fault, however, with what he characterizes as the “rush to judgment” against Andersen, which led to a March 2002 criminal indictment against the accounting firm. “My only complaint has been of them rushing off the deep end after Andersen before they really investigated the case,” he says. Houston lawyer Philip H. Hilder, who represents Sherron Watkins, a former Enron executive who worked for Fastow and warned Lay in August 2001 about possible irregularities in Enron’s accounting, says prosecutors have made “significant progress.” “But it’s only a start,” says Hilder, of Philip H. Hilder & Associates. “The collapse involved very sophisticated schemes and was a very complex matter, and it’s taken them a while … to understand what they have got and to piece it together.” Dallas criminal defense lawyer Tom Mills, a partner in Mills & Williams, says the investigation is slowed by massive paperwork. “They are probably having to analyze whether or not there is sufficient proof for all kinds of federal offenses and having [FBI] agents just go through a gigantic amount of paperwork,” Mills says. The next big step in the prosecution may be the Nigerian barge trial, which Werlein reset for Aug. 16 after learning the lawyers did not expect to be able to finish the trial before his scheduled vacation in July. In Bayly, the government alleges that Enron parked the Nigerian barge assets with Merrill, promising to buy them back within six months at a profit, to “enhance fraudulently” its 1999 financial reports. Two former Enron employees and four former Merrill employees face charges. All have pleaded not guilty. Hilder says the results of the trial would be a kind of bellwether of the strength of some of the prosecution’s other cases. Bebel, the former federal prosecutor, says the case is over a “relatively insignificant” allegedly “sham” deal at Enron, but significant in the context of the involvement of an investment banking company. “It’s really somewhat of a landmark case in terms of … the extent to which investment banking firms may further the [allegedly] illicit efforts of their clients,” he says. He says, “If the government loses this trial, it’s going to be a big setback, and people who have been told that they are targets will feel emboldened to fight off the government and that will … ultimately hinder the level of cooperation.”

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