HOUSTON – The timing of Arthur Andersen LLP's promotion last October of a policy that calls for destruction of extraneous documents could be the critical issue for jurors who will decide the firm's fate, experts said.
Multiple Andersen executives and employees have testified since the trial started four weeks ago that they didn't take a few partners' sudden promotion last fall of a policy that called for extraneous document destruction as a code to thwart a fledgling Securities and Exchange Commission probe into then-client Enron Corp.'s finances.
But the "smell factor" in the timing could be the defense's biggest challenge and the prosecution's biggest ally, experts said.
"There certainly is ambiguity as to the purpose of disseminating that document retention policy at that point in time," said Robert Mintz, a former prosecutor under Michael Chertoff, head of the Department of Justice's criminal division.
Andersen is accused of tacitly ordering workers to destroy documents to keep them away from the SEC. Andersen claims employees were following policy. Both sides expect to wrap up and send the case to the jury by midweek.
Mintz said the defense can argue that there was no clear direction to destroy documents. The firm also can argue that while documents were destroyed, plenty of potentially damaging papers and e-mails being used to prosecute Andersen were retained.
Current and former Andersen partners and accountants have testified that they either destroyed nothing or destroyed drafts, handwritten notes, personal or outdated e-mails and other documents unneeded to support final audits.
But the same witnesses testified that they either hadn't heard of the policy or had not been reminded to follow it until October.
"The timing of this sudden implementation of a policy that had apparently been on the books for quite a while strongly suggests that it was a way of accomplishing the destruction of records without explicitly directing people to obstruct justice," said Mintz, now a partner with McCarter & English in Newark, N.J.
Dennis Taylor, a former federal prosecutor who handles securities fraud for Shepherd Smith & Bebel in Houston, said the lack of explicit orders to destroy documents and the intent of those who did also are important factors for jurors.
On Oct. 10, Andersen partner and practice director Michael Odom in Houston told 89 partners and managers — about a dozen of whom were on the Enron audit team — that the policy should be followed. He said anything destroyed before litigation is filed was "great" because "whatever might have been of interest to anybody is gone and irretrievable."
Last week former Andersen partner Emily Madison testified that two days before that meeting, she consulted Odom about what to do with documents from the account of a company that had fired Andersen.
He replied in an e-mail that firm policy said "we have no need to retain anything" besides papers that support final audit conclusions.
Then Nancy Temple, an in-house Andersen lawyer, sent an e-mail to Odom on Oct. 12 that said it "might be useful to consider" reminding the Enron audit team "of our documentation and retention policy. It will be helpful to make sure that we have complied with the policy."
In prior days, Temple had been involved in talks of how Andersen should regard accounting practices related to several Enron financial entities, called Raptors, backed by the energy company's stock.
John Stewart, an Andersen audit adviser in Chicago, also was involved in those talks. He testified last week that he was "bothered" when Temple in late September or early October told him of the policy and said only old memos that incorrectly documented his advice and new corrected ones regarding the Raptors should be kept.
Temple is one of three witnesses who declined to testify in the trial.
The SEC informed Enron of its informal inquiry Oct. 17, the day after the company announced a $618 million third-quarter loss and a $1.2 billion writedown in company worth. Enron filed the largest bankruptcy in U.S. history on Dec. 2.
The SEC told Enron of its formal investigation Oct. 30. The agency subpoenaed Andersen records related to Enron Nov. 8.
"The question becomes, was the (Temple) memo just bad timing, or was it in fact a coded policy, really encouraging people to destroy documents because of the forthcoming subpoenas?" Taylor said.
In addition, David Duncan, Andersen's former top Enron auditor, said during more than four days of testimony that he told his staff to comply with the policy Oct. 23, 11 days after Temple sent the memo. He also said he determined months later that he committed a crime after multiple meetings with prosecutors and "a lot of soul searching."
Duncan pleaded guilty to obstruction April 9 and will cooperate with the government in exchange for leniency. He will be sentenced Aug. 26.
"Rather than hearing direct testimony on an intent to destroy documents to obstruct a government investigation, it's come down to the interpretation of e-mails and the timing of certain critical instructions," Mintz said.