Andersen’s Appeal Odds Seen as Poor

Accounting firm Arthur Andersen faces long odds if it appeals the verdict against it, despite the novel legal issues raised in the landmark criminal case, legal experts said Sunday.

The wide discretion afforded to judges and juries by federal law, analysts said, makes it unlikely that higher courts would reverse the decision to convict the firm of obstruction of justice in the Securities and Exchange Commission’s inquiry into the collapse of Enron Corp.

With Andersen rapidly losing clients, however, many doubt the onetime accounting giant will last long enough to see an appeal through--a process that could take 18 months or more. The company announced Saturday that it would cease auditing public companies Aug. 31--an action the Securities and Exchange Commission was widely expected to demand as a result of the verdict.

But Andersen, the first major accounting firm to be convicted of a felony, has vowed to survive and to challenge the verdict. The company still can audit private companies.

“We are going to continue to be an ongoing business in the foreseeable future, and we fully intend to pursue an appeal,” Andersen spokesman Patrick Dorton said Sunday.

The company said in a statement that the grounds for a reversal included “flawed jury instructions and erroneous evidentiary rulings” by U.S. District Judge Melinda Harmon that prevented its lawyers from putting on a complete defense.

Throughout the trial, Andersen raised potential avenues for pursuit of an appeal in the event of a guilty verdict.

One was an early decision by Harmon to allow prosecutors to introduce accounting fraud allegations filed against Andersen involving its audits of two other clients, Sunbeam Corp. and Waste Management Inc. Federal rules of evidence prohibit prosecutors from citing prior “bad acts” to tarnish the character of a defendant. But the rules include an exception that permits prosecutors to use the previous acts as evidence of motive.

Based on Harmon’s ruling, prosecutors told the jury that Andersen--fearing harsh sanctions for yet another audit failure--had the motive to impede the SEC’s inquiry on Enron, an Andersen client for 16 years.

Harmon was reversed by the U.S. 5th Circuit Court of Appeals in 1997 for making a similar decision to allow “bad acts” evidence in a case involving Houston banker John Riddle. The higher court ruled that Harmon had erred by allowing evidence of Riddle’s involvement in questionable dealings that were not related to the fraud charges against him.

But analysts said her decision in the Andersen case is likely to stand up on appeal.

Robert Mintz, a former federal prosecutor who specializes in white-collar criminal defense, said the accounting firm will be able to argue “quite compellingly that [Harmon’s decision] had a significant impact.” But he said the SEC’s allegations related to Waste Management and Sunbeam “fall pretty squarely within those widely recognized” exceptions to the “bad acts” rule.

Andersen also has raised questions about Harmon’s rulings on evidence turned over to the government for use in the case.

Andersen lead attorney Rusty Hardin told Harmon during the trial that she had committed “reversible error” by allowing prosecutors to ask witnesses about personal notes taken by Andersen staff lawyer Nancy Temple, who was not present. Temple invoked her right against self-incrimination and refused to testify at the trial.

Andersen’s lawyers could argue that Harmon’s decision meant they couldn’t test the veracity of the notes or examine what Temple meant when she wrote on Oct. 9 that an SEC inquiry was “highly probable.” But Mintz and other analysts predicted that prosecutors would be able to convince a higher court that Harmon had acted within her discretion on that point.

Andersen may have a better chance of winning a reversal based on the drama that unfolded after closing arguments.

A week into deliberations, the jury told Harmon it had become deadlocked. Harmon decided to read the jury a so-called dynamite charge, a special directive that tells jurors that failure to reach a verdict will result in a mistrial and that the two sides have spent enormous amounts of time and money trying the case.

The judge took her instruction from a basic form written by a panel of judges in the 5th Circuit, which includes Texas. But--over Andersen’s objection--she decided to leave out a line reminding the jury that the defendant is presumed innocent.

Laurie Levenson, a constitutional law professor at Loyola Law School and a former federal prosecutor, said the argument that the dynamite charge was improper “has some substance to it, but it depends on the [judicial] circuit.”

The U.S. 9th Circuit Court of Appeals doesn’t look favorably on modifications to its model charge, Levenson noted. But the ultimate importance of the dynamite charge may be learned only by digging into jurors’ recollections of their deliberations, and “there is a big question mark about how much of the deliberative process becomes part of the record,” she said.

Prosecutors say that in general, the dynamite charge serves an important function by pushing tired jurors to take another stab at reaching a consensus. But defense attorneys say the instruction can be coercive.

A recent University of Central Florida study of several hundred federal cases found that, in cases in which a dynamite charge resulted in a conviction, higher courts reversed about 24% of the verdicts in full or in part.

Andersen also may seek to overturn the verdict based on the jurors’ comments after the trial. Jurors said Saturday that they were not convinced by the government’s theory that Andersen ordered executives to shred documents to impede the SEC inquiry. Jurors said they concluded that Temple had criminal intent when she asked Houston-based auditor David B. Duncan to remove her name and potentially damaging language from an internal memo before he drafted a final version.

Randal Picker, a professor at the University of Chicago law school, said that the practice of having an executive run a memo past his company’s legal department for review amounted to “plain vanilla normal” conduct.

“If that’s all there was, then it strikes me that Arthur Andersen has got a very good basis for an appeal,” Picker said. “I find that sort of astonishing.”

But other experts disagreed, saying higher courts have given juries leeway in developing their own theories of cases.

“Generally, the appeals court will not get into what went on in the jury room,” Mintz said. “Unless it’s something completely beyond the pale, like the jury considering evidence that was not part of the trial, they have to sort of give the jury every benefit” of the doubt.

“That sometimes creates a strange-sounding result, but it is not that unusual for a jury to make a decision that ‘we believe this case turns on something none of the lawyers thought was important.’ That is something that is within their purview.”

Levenson agreed that appellate courts, as a general rule, don’t second-guess a jury’s line of thinking.

“The reasoning behind this rule is we would never have finality,” she said. “We presume in our system, maybe unfairly or incorrectly, but we presume that if we give the jurors the right instructions and the right evidence that their verdict is the right verdict.”

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Times staff writer Lisa Girion contributed to this report.