NEW YORK (CNN/Money) -
A government witness dragged Arthur Andersen LLP’s regulatory skeletons out of the closet Tuesday but the real fireworks may come Thursday when fired audit partner David Duncan may take the stand.
Thomas Newkirk, an associate director in the Securities and Exchange Commission's division of enforcement, laid out Andersen’s prior entanglements with the regulator and pointed to the firm’s probationary status. Newkirk was an SEC investigator in both the Waste Management Inc. and Sunbeam Corp. cases.
Last summer Andersen agreed to pay the SEC $7 million to settle charges related to its work for trash hauler Waste Management, producing the largest civil penalty ever against a Big 5 accounting firm. More importantly, as part of the settlement with the SEC, Andersen agreed to an injunction that forbade it from future wrongdoing.
Before Waste Management, Andersen got into trouble with Sunbeam Corp. which imploded in 1998 when the company restated its financial results for 1996 and 1997. Andersen, as Sunbeam's auditor, agreed to pay $110 million to settle shareholder lawsuits.
Prosecutor Sam Buell is attempting to use Newkirk's testimony to show that Andersen had a motive to obstruct justice because of its old "bad acts." Newkirk's testimony was allowed Tuesday after federal prosecutors won the right to show Andersen's history of prior offenses.
Andersen's lead defense attorney Rusty Hardin objected more than a dozen times to the questioning of Newkirk who told of Andersen's problems with SunBeam and Waste Management.
Meanwhile, an attorney for former Andersen audit partner David Duncan said he may testify on Thursday. Duncan had been expected to testify Wednesday but his testimony will be bumped, attorney Barry Flynn said. Duncan is the Andersen partner who was fired in January for directing the destruction of Enron documents.
Duncan last month agreed to plead guilty to one count of obstruction and will serve as government witness against Andersen.
The former audit partner's testimony had to be delayed because Andersen is trying to force Duncan's attorneys to produce their client records. "We are adamantly opposing [the motion]," Flynn said. "This needs to be done before David testifies."
Duncan will likely take the stand Thursday morning, Flynn said. But other persons involved in the trial said Duncan's testimony may be delayed until next week.
In addition to Duncan, the Justice Department plans to call Andersen counsel Nancy Temple, auditor Michael Odom and Duncan's secretary, Shannan Adlong.
When Andersen knew
Buell, in a dry, methodical line of questioning, tried to show that Andersen is very familiar with SEC audit investigations. Andersen has claimed that the documents were destroyed before it received a subpoena and thus before it was officially on notice of a federal investigation.
"Have you ever been involved in an audit investigation where there were no subpoenas?" Buell asked.
|Andersen attorney Rusty Hardin arrives at courtroom.
"No. [Andersen] knew that this was coming down," Newkirk said.
Newkirk also said it was a common practice to subpoena documents from a firm. "You want to look at everything to find out what really happened," he said. "You don't depend on one piece of paper."
Chicago-based Andersen, once the most powerful accounting firm in the world, is accused of obstructing justice when it destroyed "tons" of Enron documents while on notice of an SEC investigation. Andersen acted as Enron's auditor for 16 years before it was fired in January.
Enron allegedly used thousands of questionable partnerships to hide nearly $1 billion in debt and inflate profits. The Houston-based energy trader filed the largest bankruptcy ever in December.
Hardin began cross examining Newkirk Tuesday afternoon and took pains to show that the SEC official knew little of the Enron probe. In fact, Newkirk admitted that he was not involved in the SEC investigation against either Enron or Andersen.
Newkirk estimated that since 1996, when the Sunbeam investigation began, Andersen has performed more than 10,000 audits. Before the Enron scandal, Andersen had 28,000 employees in the United States, including 1,700 partners.
But the SEC has prosecuted only about five Andersen partners (four with Waste Management and one with Sunbeam) in the past five years. And only in the Waste Management scandal did the agency sue Andersen, Newkirk said on the stand.
Newkirk is set to continue testifying Wednesday morning.
The battle begins
Prosecutors spent nearly half an hour in opening arguments Tuesday morning painting a Web of conspiracy at Andersen for allegedly destroying Enron Corp. documents critical to a federal investigation.
Andersen partners knew that the firm would be in "deep trouble" for its role in Enron's collapse but saw a window of opportunity to destroy documents, federal prosecutor Matt Friedrich said in his opening remarks.
"A group of partners knew the law was coming...they did what they could to help the firm hinder the law, " Friedrich said.
"[Andersen] had been around block before," Friedrich said, referring to Andersen's role in the Sunbeam and Waste Management cases. "Andersen was already under probation with the SEC and they knew they could have their ticket pulled...that could've been the end of their business."
Andersen's Hardin spent an hour on his opening remarks, rebutting the DOJ's argument and called the indictment of Andersen a "rush to judgment," as well as a "horrible tragedy." Hardin called the government's investigation a game of "Where's Waldo?" to find those Andersen executives that were the "corrupt persuaders."
Andersen admitted destroying Enron documents in October, but Hardin characterized the destruction as routine, limited in scope and not organized.
"What you will see is the most incredibly incompetent conspiracy if there was one," Hardin said.
A defendant's prior history is generally not admissible in a criminal trial because it would bias the jury with acts not charged in the indictment. But federal prosecutors did manage to win the right to mention Andersen's "bad acts" -- at least for opening arguments -- under rule 404(b), which is part of the Federal Rules of Evidence, and permits the introduction of similar acts in the past to demonstrate motive, intent and plan, according to Ira Sorkin, a former assistant U.S. attorney in New York who is now a criminal defense lawyer with the New York law firm Carter Ledyard & Milburn
But Andersen's history cannot be introduced to show bad character, Sorkin said .
"It's a victory but not an unexpected one," said Stan Twardy, a former U.S. attorney for the state of Connecticut and now criminal defense lawyer with Day Berry & Howard. "Failure to let [Andersen's prior history] in would have been a huge defeat."
Arthur Andersen is expected to stick with its rogue employee defense and seek to blame fired audit partner Duncan for the destruction of documents, legal experts have said.
Duncan, who is now a government witness, is expected to implicate others at Andersen. Duncan has a deal with the Justice Department that protects him from future prosecution.
The testimony will get to the main point of the trial -- whether all of Andersen can be held liable for the actions of partners and employees who shredded the documents.