A former Ernst & Young audit partner pleaded guilty late last week to impeding a federal probe into the collapse of NextCard Inc., according to the U.S. Attorney’s Office for the Northern District of California.
Thomas Trauger admitted that he knowingly altered, destroyed, and falsified records with the intent to impede and obstruct an investigation by the U.S. Attorney’s Office. But at heart, his goal was seemingly to avoid being “second-guessed” for failing to recognize red flags at a company that he had audited.
The investigation into NextCard — a San Francisco-based issuer of credit cards over the Internet — began after the company handed out too many cards to deadbeat borrowers, according to the Associated Press. Federal regulators shut down NextCard’s banking subsidiary in February 2002. When the company filed for bankruptcy later that year, reported USA Today, NextCard owed its creditors $464 million.
Securities and Exchange Commission official Robert Mitchell, in an interview at the time of Trauger’s arrest in September 2003, said that the audit partner was trying to “downplay or eliminate evidence of problems” that would have been red flags, according to USA Today. Earlier, noted the paper, he had given NextCard’s financials a clean bill of health.
At that time, The Recorder, a San Francisco-based legal newspaper, cited internal emails quoted in an FBI affidavit that also seem to indicate the former Ernst & Young partner’s state of mind. Trauger, according to the affidavit, wanted to give the appearance that E&Y’s audit of NextCard had been “right on the mark” so that “some smart-ass lawyer” wouldn’t be able to second-guess him.
In his plea last week, Trauger admitted that during testimony before the SEC, he did not tell the commission that NextCard documents and quarterly working papers had been altered and that considerable portions had been deleted. “This is one of the first cases in which an auditor has pled guilty to destroying key documents in an effort to obstruct a federal investigation,” said U.S. Attorney Kevin V. Ryan, in a statement.
In fact, when Trauger was first charged about a year ago, his was one of the first cases of document destruction brought under the Sarbanes-Oxley Act. He originally faced two counts of conspiracy to obstruct the examination of a financial institution and one count of falsifying records in a federal investigation.
In the wake of Sarbanes-Oxley, Trauger could have been sentenced to 25 years in prison and fined $500,000, according to USA Today. Under the terms of his plea agreement, he faces five years in prison, reported the Associated Press.
Trauger is scheduled to be sentenced on November 18.