Andersen Suffers Setback

Arthur Andersen, the stricken accountancy firm, yesterday suffered a heavy blow in opening exchanges of the first criminal trial to emerge from the collapse of the energy firm Enron.

In a ruling that infuriated Andersen lawyers, Judge Melinda Harmon allowed federal prosecutors to present evidence of the firm's involvement in previous accounting scandals. Andersen faces charges of obstruction of justice for destroying Enron-related documents.

Prosecutors argued successfully during a pre-trial hearing in Houston that its previous brushes with controversy could be presented as a motive for the shredding of Enron documents.

The crucial event appears to have been Andersen's involvement with the Fortune 500 firm Waste Management. The waste haulage firm was forced to admit to improper accounting between 1993 and 1996 and restated $1bn of earnings.

In June last year, Andersen entered into a $7m settlement with the securities and exchange commission in which it undertook not to make the same mistakes again. Assistant US attorney Sam Buell argued that fear of breaching that "probation" prompted the document destruction at Enron. He also said the previous experiences would have given Andersen partners knowledge of the kind of documents that investigators were seeking.

Evidence can also be presented relating to Andersen and another US firm, Sunbeam, which went into bankruptcy last year. Andersen agreed to pay $110m to Sunbeam shareholders to settle a lawsuit alleging the firm helped the appliance maker to inflate profits in 1997-98.

Rusty Hardin, the colourful Texan lawyer defending Andersen, told the judge that introducing the former cases would unfairly damage his client in the eyes of the jury. He accused the prosecutors of "throwing things on the wall to see what would stick".

In his opening statement, assistant US attorney Matt Friedrich told the 16 jurors that Andersen had begun plotting the destruction of Enron documents in early October when it first realised that the energy firm was crumbling. Andersen "saw a window of opportunity between the time they knew the law was going to come and the time the law got there. And they would use that window to sanitise their files."

Andersen had been too closely entwined with Enron, and partners knew they could be in "deep, deep trouble" when investigators began work.

With typical flamboyance, Mr Hardin described the case against Andersen as "one of the greatest tragedies in the criminal justice system".

Wielding a wad of bound documents, he said less than one box of records per member of Andersen's Enron audit team had been shredded. "This is an obstruction of justice case based on the evidence of documents we preserved and gave to them. Is there a certain irony in that?"

Prosecutors, he said, were presenting Andersen as an organised crime outfit. If there had been a conspiracy, it was the most "incredible incompetent conspiracy" that left a trail of clues in open discussions, emails and conference calls. "There was no massive destruction of documents. When this is over you will not find a corrupt persuader, you will find a destroyed company."

He also urged that Andersen employees should not be held accountable for the acts of particular partners.

The hearing continues.