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Ernst & Young ex-partner arrested

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SAN FRANCISCO — Signaling their intent to crack down on corporate cover-ups, federal authorities Thursday arrested a former Ernst & Young partner for allegedly tampering with documents providing insights into the collapse of online credit card issuer NextCard Inc.

Thomas Trauger, 40, is accused of altering records used in the financial audits of NextCard after regulators raised doubts about the San Francisco-based company's accounting practices in October 2001. Court documents say the accountant then destroyed key documents to cover up his alleged malfeasance.

Trauger, who pleaded innocent to obstruction and falsifying records charges, was released on $1 million bail.

"He's going to fight this case vigorously," said Edward Swanson, Trauger's attorney.

The obstruction count could result in a maximum prison sentence of five years and a $250,000 fine. The charge of falsifying records could result in a maximum prison sentence of 20 years and a $250,000 fine.

Corporate crime fighters described the case as one of the first times the government has used expanded powers granted under last year's Sarbanes-Oxley act to crack down on an alleged manipulation of financial records.

Thursday's arrest "should remind accountants and lawyers . . . of our strong commitment to enforcing the law," said Robert McCallum, an acting U.S. deputy attorney general heading the Bush administration's task force on corporate crime.

Trauger is the second NextCard auditor to be charged by the government. Oliver Flanagan, formerly a senior Ernst & Young manager who worked on the audit, has already pleaded guilty to one count of criminal obstruction. His plea, which was entered last month but only unsealed Thursday, provided evidence that led to Trauger's arrest, authorities said.

The Securities and Exchange Commission is also investigating Trauger and Flanagan, as well as a third man, Michael Mullen, a former Ernst & Young audit manager. The administrative case alleges unethical and improper professional conduct. Flanagan is the only one of the three so far to settle the administrative case.

Ernst & Young's policies require papers underlying a corporate audit to be stored and kept untouched for at least six years, according to court records.

Trauger, who was fired by the firm earlier this year, decided to tinker with the papers because he was concerned the documents would make him look bad for not flagging some of the changes that led to NextCard's demise, according to court records.

A one-time darling of the dot-com boom, NextCard fell into trouble with regulators a year ago after issuing too many credit cards to deadbeat borrowers. Federal regulators shut down NextCard's banking subsidiary in February 2002, and the company went bankrupt 10 months ago.

NextCard's downfall saddled its shareholders and the taxpayer-backed Federal Deposit Insurance Corp. with huge losses.

The company's stock, once valued at a peak of $53.12 per share, no longer trades on public exchanges. The FDIC has estimated its losses on NextCard could run as high as $400 million.