Houston Counts the Cost of Enron

A couple of tourists in shorts and T-shirts, one with a video camera fixed to his eye, amble down Smith Street in downtown Houston. They stop briefly outside the latest attraction, the gleaming Enron tower, and take pictures of themselves in front of the now infamous square logo at the front of the building.

Like many big American cities, downtown Houston is dead at weekends. The nine-lane freeway that disgorges the city's workers back into the suburbs every evening is relatively quiet.

Sugar Land, the expensive suburb where the former Enron finance executive Cliff Baxter took his own life, is supremely calm. The gated communities of vast houses each built around a series of artificial lakes is a testament to the wealth created in Houston over recent decades.

Jus' Stuff, the shop set up by former Enron chief executive Ken Lay's wife, Linda, to sell off family furniture on the edges of downtown is packed with white china rabbits and frilly cushion covers but has yet to open.

It is hard to escape the sense that this is the calm before the unwelcome storm that will break out over the city again this morning.

Just a couple of blocks away from the Enron tower, in a squat, mean-spirited-looking court house opened by John F Kennedy in 1961, the accountancy firm Arthur Andersen will begin its last, desperate fight for survival.

The auditing firm will be defending itself against criminal charges of obstruction of justice and, lawyers say, it will have a tough fight on its hands. Even if it wins the case, to be tried in front of US district judge Melinda Harmon, a 55-year-old Republican, there will be little left of the firm to rescue.

The indictment was opened in March, accusing Andersen of destroying "literally tons" of documents and emails related to the Enron audit while federal investigators were investigating the energy firm's spectacular collapse.

If the firm is found guilty, it will be a "death sentence", according to Frank Velie, a former federal prosecutor now at New York's Salans law firm.

"A criminal fraud prosecution, which is really what this is, will bar them from doing audits for financial statements of public companies," he said. "It would put them out of business."

The prosecutors' key witness will be David Duncan, the former Andersen partner in Houston who last month pleaded guilty to shredding the documents. Top Andersen officials maintained under questioning by Congress that Mr Duncan was solely to blame for the destruction. But even that, some legal experts say, is tantamount to an admission of corporate liability.

The speed with which Andersen has fallen apart has astonished the business world. Senior management at the firm admitted on January 10 that the document destruction had taken place. Barely four months later, the Chicago-based firm has been wrenched apart.

It has lost more than 200 clients while almost all of its worldwide affiliates, including the British office, have broken away and announced plans to merge with the local operation of one of the other large accountancy firms.

Enron last week presented to its creditors its plans for a pared down company that would take it back to its former core pipeline and power generation business. Similar moves to return Andersen to a smaller, US-only business, focused on auditing, now appear hopeless.

A rescue plan by former Federal Reserve chairman Paul Volcker depended upon the settlement of charges with the justice department and with the army of Enron shareholders and creditors that have filed suit against the accounting firm. Both have failed.

Andersen said last week that talks which were aimed at a broad settlement of the claims against it had fallen apart, largely due to wrangling among the plaintiffs over the division of the spoils. The firm had at first offered $750m to settle the claims but, as clients began to walk, it reduced its offer to $350m.

Although the local Houston economy appears to have weathered the Enron debacle so far, "there was clearly a psychological impact", said Barton Smith, an economics professor with the University of Houston. "But in Houston that had already been dissipating. A year from now, we will hardly hear about Enron, I hope."