Justices Draw Line After Firm’s Fall
The Supreme Court overturned the criminal conviction of the Arthur Andersen accounting firm Tuesday, ruling unanimously that its shredding of two tons of Enron-related documents did not prove its intent to obstruct justice.
The ruling comes too late to save Andersen, which employed 28,000 people until it was driven out of business because of the 2002 conviction. But the justices’ decision was welcomed by the business community, because the court issued a warning to prosecutors to tread cautiously in such cases.
Still, the government isn’t expected to retreat from pursuing alleged executive wrongdoing because of the Andersen case.
The Sarbanes-Oxley corporate reform law, passed by Congress in 2002, imposed a host of new rules on businesses and made it easier for prosecutors to attack fraudulent conduct.
The Andersen ruling is “more of a symbolic setback than a practical one” for the government, said former federal prosecutor Robert A. Mintz, a partner at the Newark, N.J., law firm of McCarter & English.
The Enron Corp. memos, notes and drafts were destroyed in October 2001 as the firm was collapsing, but before the government launched an official investigation of Enron or Andersen, its auditor.
A jury in Houston debated 10 days before finding Andersen guilty. But the Supreme Court said prosecutors had not been forced to prove that Andersen’s staff knew it was breaking the law by destroying old files -- that there had been criminal intent.
Tuesday’s decision throws out the Bush administration’s largest prosecution to date growing out of the Enron debacle. Though the administration moved quickly to prosecute Enron’s Chicago-based auditor, it was slow to bring charges against top officials of the bankrupt energy trader in Houston.
“The wrongful jury instructions that the [government] insisted on using in the Andersen case was an attempt to criminalize noncriminal conduct,” said Daniel Petrocelli, attorney for Enron Chief Executive Jeffrey K. Skilling. “While that attempt failed, 28,000 people and one of the top accounting firms in the world is now gone. That’s how dangerous these prosecutions are. They do not belong in a criminal courthouse.”
The court’s opinion, by Chief Justice William H. Rehnquist, warned against charging someone with a crime for failing to assist the government in a pending investigation. In Andersen’s case, the firm’s partners were not charged with willfully ignoring Enron’s actions or with lying to investigators. Instead, they were prosecuted for routinely destroying documents when a federal investigation was looming.
“We have traditionally exercised restraint in assessing the reach of a federal criminal statute,” Rehnquist said. People deserve a “fair warning” that their conduct is illegal, he said.
Experts said the decision might ease concerns among corporate lawyers over how to handle documents or e-mails. “We’re breathing a sigh of relief,” said Robin Conrad, a lawyer with the U.S. Chamber of Commerce. “Companies have been nervous over this document retention issue. This is also a little bit of a rebuke to the federal government for an overzealous prosecution.”
Andersen, one of the Big Five accounting firms before Enron’s collapse, lost its license to audit publicly held firms as a result of its conviction. Many of its accountants were hired away by Deloitte & Touche.
Some former Andersen partners pursued an appeal, hoping to protect themselves against pending civil lawsuits.
“We pursued an appeal of this case not because we believe Arthur Andersen could be restored to its previous position, but because we had an obligation to set the record straight and to clear the good name of the 28,000 innocent people who lost their jobs at the time of indictment,” the former partners said in a statement after Tuesday’s ruling.
The Justice Department said it was disappointed with the decision and would study it before deciding whether to retry the case. “We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law,” said acting Assistant Atty. Gen. John C. Richter.
In the past, the high court has been wary of allowing a party to be criminally prosecuted for failing to aid the government during an investigation. The justices, both conservative and liberal, have insisted that a crime must include an element of deliberate wrongdoing.
That issue turned out to be central in the Andersen case.
On Aug. 14, 2001, Skilling quit Enron without explanation. Shortly after, the Wall Street Journal reported on trouble at the once high-flying energy trader.
On Oct. 8 of that year, a Chicago lawyer for Andersen advised its Houston office to follow the firm’s “document retention policy” regarding its work for Enron. The policy called for disposing of notes and memos involving audits but not the audit documents themselves.
Andersen’s staff knew the Securities and Exchange Commission might begin an investigation of the audit firm. Officials said that in the meantime they thought it was safe to get rid of unnecessary documents.
“If it’s destroyed in the course of [the] normal policy and litigation is filed the next day, that’s great,” Andersen partner Michael Odom told the Houston staff. Over the next weeks, truckloads of files were taken away to be shredded, and tens of thousands of e-mails were deleted.
The document shredding ended Nov. 9, the day the SEC formally requested Andersen’s records related to Enron.
In March 2002, federal prosecutors charged the auditing firm with obstruction of justice for its systematic shredding of files.
The law makes it a crime for anyone to “knowingly [and] corruptly persuade” another person to withhold documents so as to impede an official investigation. Prosecutors in the 2002 trial said Andersen’s staff had done just that, knowing that an investigation was imminent. But lawyers for Andersen argued that its staff did not know it was a crime or believe it was corrupt to follow its document retention policy before receiving a subpoena.
The jury in Houston was advised that Andersen’s officials could be guilty of acting “corruptly” even if they “honestly and sincerely believed” their conduct was lawful. This was a mistake, Rehnquist said, and required that the conviction be reversed.
To win a conviction for obstruction of justice, the government must prove the defendant intended to do wrong and was “conscious of [its] wrongdoing.” The jury instructions in this case “diluted the meaning of ‘corruptly’ so that it covered innocent conduct,” Rehnquist said in Arthur Andersen vs. United States.
Enron’s two top former executives -- Kenneth L. Lay, who was the firm’s chairman, and Skilling -- are scheduled to go on trial in January on criminal charges. Attorneys for both men said the ruling would help their clients.
Times special correspondent Dana Calvo in Houston and staff writer Thomas S. Mulligan in New York contributed to this report.
