Andersen appeals '02 conviction

AUSTIN, Texas -- A federal judge prevented former Big Five accounting firm Arthur Andersen from getting a fair trial last year when it was convicted of destroying Enron Corp.-related documents to thwart investigators, the firm's lawyer told an appeals panel Thursday.

Maureen Mahoney, Andersen's lead appellate lawyer, told a three- judge panel of the U.S. 5th Circuit Court of Appeals that U.S. District Judge Melinda Harmon in Houston wouldn't let the company show jurors that many more documents were preserved than destroyed.

She also said prosecutors were allowed to present prejudicial evidence of previous run-ins with the Securities and Exchange Commission.

Elizabeth "Liza" Collery, the government's appellate lawyer, countered that the shredding began "to beat the subpoena they knew was coming from the SEC," which started probing Enron's finances several weeks before the energy company collapsed in 2001.

Each side was given 30 minutes for arguments in Andersen's appeal that its conviction should be overturned. It is unknown when the panel will issue its decision. The appeals court is based in New Orleans, but the panel held the hearing in Austin.

The Big Five became the Big Four last year after Andersen was indicted and convicted of obstruction. The firm hemorrhaged clients and employees who bolted to other firms.

Now a convicted felon barred from auditing publicly traded companies, Andersen has just 250 of 28,000 U.S. employees left on the payroll and little more than a shattered reputation to save.

A year ago the company was sentenced to five years of probation and a $500,000 fine. Upon Harmon's orders, Andersen paid the fine immediately before dozens of pending lawsuits and other costs could eat up the firm's remaining assets.

One of the appellate judges, Patrick Higginbotham, noted Thursday that when a felon dies while a criminal appeal is in progress, the case dies too.

"In a practical sense, that's happened here," Higginbotham said.

Much attention was given in the trial to an e-mail sent to Andersen's Houston office Oct. 12, 2001, by in-house Andersen lawyer Nancy Temple. The e-mail reminded workers of a little-known policy to destroy unneeded documents.

The e-mail came four days before Enron announced staggering third- quarter losses and a $1.2 billion writedown in shareholder equity and seven days before Enron told Andersen the SEC had launched an informal inquiry into the energy company's finances.

The next week David Duncan, Andersen's former top Enron auditor, called a mandatory meeting of the Enron audit staff and said it should follow the policy. Mass shredding ensued. The destruction stopped late Nov. 8, when Andersen received a subpoena from the SEC.

Thousands of documents were preserved, many of them used against Andersen during the trial.

Mahoney said Temple's e-mail wasn't criminal because the SEC hadn't yet informed Enron of its initial probe. Also, Andersen had no reason to believe the informal SEC inquiry into Enron would blossom into a formal investigation because most inquiries don't get that far, she said.

But Higginbotham countered, "Everyone must have known at that point the SEC is coming."

Mahoney also said Harmon shouldn't have allowed prosecutors to present evidence of previous problems with misleading audits and inflated earnings for Waste Management Inc. and Sunbeam Corp.

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