The Price of Victory over Andersen

It's a mixed bag as Justice pursues Enron execs

Federal prosecutors won't have long to relish their hard-won victory over Arthur Andersen LLP. For all the talk of "momentum" after the June 15 guilty verdict on an obstruction of justice charge against the accounting firm, the government likely faces a long, tough slog in its pursuit of the main culprits at the center of Enron Corp.'s collapse.

Indeed, the win against Andersen came at a price for Washington's more complex Enron cases. While Justice Dept. officials contend that they have been moving forward with their Enron investigations even as they pursued Andersen, the trial certainly stretched the department's resources and the attention of top officials. Legal experts figure that it could be months before there are any indictments, especially in light of the difficulties that the government had with what many considered a slam-dunk case against the accounting firm. Says Philip H. Hilder, who represents Enron whistle-blower Sherron S. Watkins: "Because of the complexity of the Enron investigation, I would not anticipate indictments being returned until late summer or early fall at the earliest."

The Andersen case was not only time-consuming but also a mixed bag in terms of advancing Justice's chances of successfully taking on Enron. The prosecution's star witness, for instance, former Andersen partner David B. Duncan, supported the aggressive accounting at Enron. That could help Enron executives to argue in their defense that they were merely following the advice of their outside accountants.

Just whom prosecutors will target first at Enron is a tough call. Former CFO Andrew S. Fastow and former CEOs Jeffrey K. Skilling and Kenneth L. Lay could all be feeling the heat. Securities fraud, insider trading, mail and wire fraud, and perjury are all potential charges. Still, "the person who has got the biggest problem here is Fastow," says one lawyer close to the case. Another calls Fastow the "hub" of Justice's investigation. That's because the ex-CFO, who made some $45 million from off-balance-sheet deals, appears to be the main architect of the complex structures that led to the downfall of the energy-trading giant. In some instances, Skilling and Lay have claimed that he acted without their knowledge. Fastow's lawyers would not comment.

Cases against Lay and Skilling could prove tougher, as the government will have to show that they knew financial statements were incorrect. Justice is also looking at their stock sales and is examining Skilling's congressional testimony for possible perjury. Says one lawyer close to Andersen: "A case against Lay is going to be difficult." Because the ex-Enron chief "is operating at a high level of generality," his direct involvement in any wrongdoing is hard to prove.

That's why prosecutors will probably go after the little guys first. The Justice Dept. isn't talking, but former prosecutors and lawyers close to the Andersen and Enron cases suspect that Justice will follow a tried-and-true approach: first gaining guilty pleas and cooperation agreements with lower and midlevel Enron employees, then working their way methodically to the top. "You look for an insider to interpret the facts for you," says Stephen M. Ryan, a partner with Manatt, Phelps & Phillips. "You pursue him and you flip him."

All the witnesses in the world won't help, though, unless the Feds come up with an easy-to-understand set of charges. In a point driven home by the Andersen trial, the simpler the case, the better. Even with the relatively straightforward obstruction of justice charge, jurors struggled for 10 days to reach agreement. That's why legal experts expect Justice to pursue cases where there were clear conflicts of interest--by Enron insiders, for instance, profiting from the off-balance-sheet entities at shareholders' expense and hiding information from the auditors and the board.

With one guilty verdict in hand, the Feds are eager to move on to Enron. But given how hard it was for Justice to win, the outcome of the Andersen trial could provide the government with as much worry as momentum.

By Wendy Zellner in Dallas, with Dan Carney in Washington

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