White-Collar Prosecutions May Face Higher Hurdle

The government’s hardball tactics in prosecuting white-collar crime may face a new wave of scrutiny after the Supreme Court on Tuesday threw out former accounting giant Arthur Andersen’s obstruction-of-justice conviction.

The decision could have an immediate effect on another high-profile case -- that of former Silicon Valley financier Frank Quattrone, who is appealing his obstruction-of-justice and witness-tampering convictions on grounds similar to what Andersen argued: that he did not intend to break the law.

Quattrone’s legal team said in court papers filed in New York on Tuesday that the Supreme Court ruling had an “important bearing” on his appeal.

But in the broader context of the government’s crackdown on alleged business wrongdoing since Enron Corp. imploded in a financial scandal in 2001, the Justice Department still has an array of powerful weapons to use in pursuing cases, legal experts said.

The sweeping Sarbanes-Oxley corporate reform law, passed by Congress in 2002, set explicit new rules for business conduct and ordered harsh penalties for transgressors.

What’s more, the law requires accounting firms to be much more vigilant in spotting and reporting potential financial fraud. “The accounting profession has learned a lot in the last few years, and those lessons aren’t going to be reversed,” said Barry Melancon, chief executive of the American Institute of Certified Public Accountants.

The first important case brought under Sarbanes-Oxley, involving fraud charges against HealthSouth Corp. founder Richard Scrushy, was seen as unaffected by Tuesday’s court decision.

Among the charges Scrushy faces is false certification of financial statements at the healthcare chain as part of a scheme to artificially inflate profit by $2.7 billion. The Sarbanes-Oxley law forces top executives to swear that corporate financial data are accurate.

A Birmingham, Ala., federal jury today begins its ninth day of deliberations in the Scrushy case, after a nearly four-month trial.

What may be changed by the Supreme Court ruling, experts said, is the care with which prosecutors demonstrate that a white-collar defendant meant to break the law, and how judges instruct juries in finding guilt or innocence.

Andersen, Enron’s accounting firm, was accused of shredding tons of Enron-related documents in the fall of 2001, as early hints of a massive accounting fraud caused the Houston-based energy-trading firm to skid toward bankruptcy. The shredding flurry was triggered by an e-mail from an in-house lawyer at Andersen reminding employees of the firm’s “document retention policy.”

Enron filed for bankruptcy protection weeks later, wiping out billions of dollars of stock-market value and putting the government under intense pressure to crack down on corporate fraud.

Prosecutors responded by bringing obstruction-of-justice charges against Andersen the firm, rather than just against individual employees. A Houston jury convicted Andersen in 2002.

The Supreme Court ruled that the Andersen conviction was flawed because the judge wrongly instructed the jury that the firm could be found guilty even if it believed its conduct in shredding documents was lawful. In order to obtain a conviction, the court said, the government had to prove that Andersen was “conscious of wrongdoing.”

Among high-profile white-collar crime trials, the case of Quattrone, once a star technology investment banker at Credit Suisse First Boston, may bear the closest parallel to Andersen.

Quattrone was accused of directing employees by e-mail to destroy evidence the government sought as part of an investigation of how shares were distributed in hot public stock offerings.

He has argued that he had no criminal intent of interfering with the investigation when he forwarded an e-mail to his staffers, encouraging them to follow company policies and clean out old files. But a jury convicted him in May 2004.

Quattrone’s legal team for his appeal was to have filed its final briefing papers Tuesday in the U.S. 2nd Circuit Court of Appeals in Manhattan. But the attorneys filed a motion asking for three more days to revise the brief, saying: “The Supreme Court’s decision in Andersen has important bearing on several arguments Quattrone made on appeal.”

Parts of the ruling support Quattrone’s argument that the evidence on which a jury convicted him was legally insufficient, wrote Christopher Hyde Giampapa, a Quattrone attorney.

As in the Andersen case, the Quattrone appeal contends that the trial judge gave the jury improper instructions. The defense had asked U.S. District Judge Richard Owen to tell jurors that Quattrone, to be convicted, must have known “what documents or categories of documents had been subpoenaed” by the Securities and Exchange Commission and a grand jury.

The defense argued that Owen instead adopted an “unduly lenient formulation” suggested by the prosecutors, one that allowed the jury to convict Quattrone if he had directed the destruction of documents called for in a subpoena “whether Quattrone knew that or not.”

While that is only one part of a lengthy and complex appeal, “It’s fair to say that the Andersen ruling is an encouraging sign,” said Quattrone spokesman Robert Chlopak.

Some legal experts said the Andersen decision could cast doubt on a section of the Sarbanes-Oxley law that bars companies from destroying documents “in contemplation” of a law-enforcement investigation, even if such a probe has not yet been launched.

“Those words in Sarbanes-Oxley are very broad. I think this decision suggests the Supreme Court will insist on some level of criminal intent in an obstruction case” based on document destruction, said Washington attorney James Dabney Miller.

Mark J. Biros, a white-collar defense partner at the law firm of Proskauer Rose in Washington, said that if a client of his was charged under that section of Sarbanes-Oxley, he would at a minimum use the Supreme Court’s ruling on Andersen to press for very precise jury instructions.

Times staff writer David G. Savage and Times special correspondent Dana Calvo contributed to this report.

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Dissolved by scandal

The chronology of Arthur Andersen’s collapse

January 2002 -- Enron Corp., struggling with its massive accounting scandal, fires Arthur Andersen as its auditor.

April 2002 -- Andersen initiates the breakup of its U.S. operations. It announces 7,000 layoffs planned for the next several months.

May 2002 -- Andersen agrees to a $217-million settlement of civil cases stemming from the collapse of the Baptist Foundation of Arizona. Andersen was accused of concealing losses on financial statements related to its auditing of the foundation. The accounting giant announces that rival Deloitte & Touche will hire away about 2,000 of its workers, including nearly 200 partners, across the U.S. KPMG Consulting says it plans to acquire as many as 23 business consulting units of Andersen Worldwide’s member firms for up to $284 million.

June 2002 -- A federal jury finds Arthur Andersen guilty of obstruction of justice in the Enron scandal.

August 2002 -- The company loses its license to practice in Texas and officially exits the public accounting business.

October 2002 -- Andersen is fined $500,000 and given five years’ probation in the Enron case.

April -- Andersen agrees to pay $65 million to settle claims of its liability in the collapse of telecom giant WorldCom.

Tuesday -- Supreme Court throws out Andersen’s obstruction-ofjustice conviction.

Sources: Associated Press, Times research

Los Angeles Times