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Houston, we have a problem
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January 18, 2002: 6:15 p.m. ET
Andersen exes said to nudge Enron auditors on document destruction
By Luisa Beltran
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NEW YORK (CNN/Money) - Former Andersen partner David B. Duncan told Congressional investigators Wednesday that from mid-September Andersen officials at the company's Chicago headquarters participated in conference calls with its Houston office and discussed what to do with Enron auditing documents, a source familiar with the situation told CNN/Money.
Duncan's information appears to be a response to efforts by Andersen to blame him for the destruction of vital evidence in the Enron bankruptcy case. Duncan headed up Andersen's Houston office and was in charge of the company's auditing work for Enron.
Last week Andersen fired Duncan, alleging he called a meeting on Oct. 23, after learning of an SEC probe, to organize the "expedited effort to dispose of Enron-related documents."
But Duncan is apparently pointing the finger of blame back at the company, telling investigators that executives in Chicago discussed on regular conference calls the need to comply with Andersen's audit and document retention policy in the Enron audit, according to the source.
That policy was understood to mean the destruction of all but the most basic audit work papers.
Andersen's audit work is at the heart of various investigations into the Enron bankruptcy. Thousands of employees lost their pensions and life's savings in the former Wall Street darling's downfall, which began last autumn when the firm acknowledged several hundred million dollars of previously undisclosed liabilities.
Investigators believe Andersen's audit documentation could shed light on how much Enron and Andersen executives knew about those liabilities and whether or not there was an effort to hide the information from investors. The destruction of most of those documents has added more suspicion and finger pointing to the case. Also, it could lead to criminal charges if the documents were destroyed after it was clear they would be needed for a criminal investigation.
According to the source familiar with the situation, Duncan told investigators executives at Andersen's home office were aware of all of the Houston office's work through regular conference calls. The calls, which occurred at least three times a week, included from 10 to 20 people, many of whom were from Chicago and some who were very senior staffers, according to the source.
The group, which referred to itself as the "core consultation group," discussed accounting practices at Enron and the need for Andersen's Houston office to "get into compliance" with document retention and audit policy. But Duncan said the group never specifically instructed Houston auditors to destroy documents, the source said.
However, Duncan told investigators that compliance was understood to mean "get rid of all extraneous stuff," the source said.
On Thursday, Enron fired Arthur Andersen as its auditor. The accounting firm is also under investigation for its accounting methods in the case.
Lay sold shares
Separate documents indicate that Enron Chairman and CEO Kenneth Lay sold shares of the energy trader's stock after receiving a letter warning of an accounting problem.
The Arthur Andersen internal memos, released by Congress Thursday, include a letter from employee Sherron Watkins and present a timeline for Lay's stock sales. On Aug. 20, whistleblower Watkins told Andersen executive James Hecker that she had scheduled a meeting with Lay on Aug. 22 to discuss Enron's accounting issues, the letter said.
Enron CEO Kenneth Lay acquired 25,000 Enron shares at $20.78 each on Aug. 20 and then 68,620 shares at $21.50 each on Aug. 21 via the exercise of options. Lay bought the 93,620 shares for about $2 million though they were worth $3.5 million at the time, according to data from Thomson Financial.
A lawyer for Lay told CNN/Money that some of those shares were used to repay a loan from Enron. Lay had a revolving line of credit, described by the source as "substantial," which he could repay in cash or stock, including stock of Enron, the attorney said.
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CNNfn's Tim O'Brien takes a look a the widening probe into the Enron collapse.
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From Feb. 2001 through the end of October, Enron made a number of loans to Lay. As Enron's stock and collateral dropped, Lay, to avoid margin calls, borrowed under his line of credit and then used Enron stock to repay the loans. Lay obtained the majority of the loans prior to Aug. 20-21 but did obtain loans after those dates, the attorney said.
The New York Times first reported Friday that Lay repaid loans with Enron stock.
Lay has not reported selling the shares and doesn't have to, due to an exception. Corporate stock sales must be disclosed by the tenth of the month in which the sale takes place, unless the shares are turned over to the company to repay a loan, according to the U.S. Securities and Exchange Commission.
Enron could not be reached for comment.
A second opinion
Enron corporate lawyer Jordan Mintz told CNNfn that he hired law firm Fried Frank Harris Shriver & Jacobson last summer to take another look at Enron's financial structure. Fried Frank then reportedly recommended that Enron end its partnership deals.
Securities and Exchange Commission Chairman Harvey Pitt worked at the law firm until last fall.
Fried Frank co-managing partner Michael Rausch declined comment.
Andersen could not be reached for comment Friday.
The Justice Department and the Securities and Exchange Commission are investigating Enron's collapse. The firm's bankruptcy filing on Dec. 2 was the largest in U.S. history. 
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