HOUSTON, May 7 (UPI) -- A Securities and Exchange Commission official was called Tuesday as the first witness in the trial of Arthur Andersen LLP to detail the accounting firm's past problems with the federal regulatory agency.
Andersen, once the nation's fourth-largest accounting firm, is charged with obstruction of justice for allegedly shredding documents sought in an SEC investigation of Enron Corp.
Thomas C. Newkirk, assistant director of the commission, was called after Tuesday's opening statements. His testimony began after the judge overruled defense objections to the government's introduction of two previous SEC cases.
The investigations involved Waste Management Inc. and Sunbeam Corp. Andersen agreed in June 2001 to pay a $7 million fine to the SEC for overstating the financial health of Waste Management, although not admitting any wrongdoing. In May of 2001, the accounting firm agreed to pay more than $110 million to settle a suit alleging that Andersen allowed Sunbeam to file false financial reports.
During Newkirk's testimony, prosecutors introduced consent agreements from the Waste Management case in which executives at Andersen agreed to certain sanctions only months before Enron began to collapse and the alleged illegal shredding began.
"Every partner at Andersen was subject to the injunction from the Waste Management case," Newkirk said.
During cross examination, Andersen attorney Rusty Hardin pointed out that the Sunbeam and Waste Management cases involved only two out of 10,000 audits that the firm performed in the period from 1996 to 2001, which was an outstanding record.
Hardin also got Newkirk to admit that when the government alleged Andersen began destroying documents in October 2001 the firm was not under an official SEC order to turn over documents. The firm was under informal inquiry and the official order did not arrive until Nov. 8, when they stopped the shredding.
Newkirk said less than half of the SEC informal inquiries in an investigation ever become official investigations with subpoena power.
In opening remarks earlier in the day, prosecutor Matt Friedrich said the government case would outline "a simple series of choices" by Andersen management that led to the destruction of the Enron documents.
Friedrich said David Duncan, who supervised the Enron account for Andersen and pleaded guilty to obstruction of justice, would be a witness for the government.
However, Andersen attorney Rusty Hardin said when the trial was over the jurors would view it as "one of the greatest tragedies of the criminal justice system in the history of this country."
Hardin said it was ironic the government's case is based on documents that the accounting firm preserved. He called the alleged conspiracy "bizarre" because it was conducted in the open in e-mails and other communications.
At one point, he held a five-inch-thick stack of memos in which Andersen employees discussed their internal disagreements about Enron. He asked the jury why they were not destroyed if there was some conspiracy afoot.
The Justice Department alleges that "tons" of documents were destroyed in the widespread shredding operation that was largely carried out in Houston.
Andersen has called the indictment a "gross abuse of government power."
If convicted, Andersen could be fined up to $500,000 or put on probation, which could mean restitution, a moratorium on certain types of business or other restrictions.
Since the Enron bankruptcy last December, Anderson has lost more than 200 clients and laid off 7,000 of its 26,000 employees. Attempts to settle the case out of court have fallen through in recent weeks.
In another case, Andersen agreed Monday to pay $217 million to settle a civil lawsuit over its audits of the Baptist Foundation of Arizona, which lost $570 million in investors' money. The accounting firm did not admit or deny any wrongdoing in the case.
"We believe this resolution is fair and reasonable to investors and to our firm and recognizes the responsibility of a number of parties in failing to stop this tragedy," Andersen said in a statement that sought to blame several former foundation officials, lawyers and state regulators for the losses.
In addition to settling the trust case, the agreement also ends a civil lawsuit filed by the Arizona attorney general, a class-action case filed by some foundation investors, and a state agency proceeding.