FBI arrests former E&Y partners

Federal prosecutors arrested a former Ernst & Young partner yesterday on document destruction charges in a case they said reflected their new enforcement powers under the Sarbanes-Oxley Act.

Thomas Trauger, a former E&Y partner in San Francisco, was arrested by FBI agents and charged with one criminal count of obstructing a federal investigation and one count of falsifying records.

Authorities said Mr Trauger began in October 2001 to alter and destroy documents relating to an audit of NextCard, a California company that sold credit card over Internet.
He undertook the crime with the assistance of two other former E&Y executives, Michael Flanagan and Oliver Mullen, the government said, after bank regulator ruled that NextCard’s banking subsidiary, NextBank, would have to revise certain accounting assumptions that would leave it undercapitalised under federal banking regulations.

As part of the scheme, authorities said Mr Trauger instructed Mr Flanagan to change the date on his computer so that any electronic documents they had altered would reflect a date in early 2001, and also asked him to destroy a diskette with details from the original audit.

Mr Trauger later lied to the US Securities and Exchange Commission about the alterations during sworn testimony he gave them in April 2003, according to the government.

Prosecutors said the case marked one of the first for document destruction under the Sarbanes-Oxley Act, which passed a year ago in improve corporate reporting standards.

The legislation gave authorities more lee-way to link document destruction cases to obstruction of justice, according to lawyers, and also increased the maximum sentence for such crimes to 20 years in prison. The statute was inspired by Author Andersen, the accounting firm found guilty of shredding documents related to the government’s investigation of Enron.

Mr Flanagan pleaded guilty to one criminal charge stemming from the case, and agreed to settle a civil charge brought by the SEC. Mr Mullen has also been charged by the SEC.

None of the executives could be reached for comment yesterday. E&Y said it had fully co-operated with authorities and launched its own internal investigation as soon as it became aware of the alleged abuses.