In a rare unanimous decision, the Supreme Court overturned
the conviction of Arthur-Andersen Accounting for destroying documents related
to their client Enron in the early days of the scandal. The ruling, issued May
31, said that the jury instructions in the June 2002 trial failed to convey
that conviction requires "consciousness of wrongdoing," according to the law.
But for some 28,000 Arthur-Andersen employees who lost
their jobs, the effort to repair the damage rings hollow. And for corporations
that may come under federal scrutiny in the future, the Supreme Court ruling
provides little comfort that justice will be served.
Let us not forget the facts of the case. Enron Corporation
moved from operating natural gas pipelines to become an energy conglomerate in
the 1990s, and Arthur-Andersen preformed public as well as private audits for
the company during this time of aggressive accounting practices and rapid
growth. Then, in 2000, Enron's financial performance took a downturn. In August
2001, whistles started blowing and the Enron scandal loomed just over the
horizon.
In October 2001, federal prosecutors requested certain
documents and information from Enron, and Enron notified Arthur-Andersen. At
that point, Arthur-Andersen employee David Duncan, head of the Enron
"engagement team" and the only person to plead guilty at the Arthur-Anderson
trial, ordered the destruction of all Enron related documents.
On November
8, 2002,
Arthur-Andersen itself was served with a similar request for certain documents
and information. The next day, Duncan's
secretary sent an email: "Per Dave – No more shredding…We have been officially
served for our documents."
It did not take long for federal prosecutors to come down
hard on Arthur-Andersen, charging the firm for violating federal law which
makes it a crime to "knowingly…corruptly persuade another person" to "withhold"
or "alter" documents in an "official proceeding."
At trial and in appeals, Arthur-Anderson attorneys argued
that notes and drafts were destroyed in accordance with the firm's document
retention policy because they were preliminary and may have been misconstrued.
In the Supreme Court ruling, Chief Justice Rehnquist wrote
that persuading a person to withhold documents or testimony from the Government
is not to "inherently malign." If, on the contrary, this were the case, lawyers
could be prosecuted for advising clients to plead the 5th Amendment,
thus protecting them from self-incrimination. Moreover, Rehnquist writes,
"Under ordinary circumstances, it is not wrongful for a manager to instruct his
employees to comply with a valid document retention policy, even though the
policy, in part, is created to keep certain information from others, including
the Government."
With so many split decisions recently issued, the
unanimous ruling is a stinging blow to federal prosecutors, with all nine
Justices agreeing that the Government grossly overstepped their bounds. Prosecutors
convinced the judge in the Arthur-Andersen trial to instruct the jury in such a
way that, according to the High Court, acquittal was all but impossible. "Indeed,
it is striking how little culpability the instructions required," Rehnquist
writes. "For example, the jury was told that, even if petitioner honestly and
sincerely believed its conduct was lawful, the jury could convict. The
instructions also diluted the meaning of "corruptly" so that it covered
innocent conduct."
Had the Justices ruled against Arthur-Andersen, the
consequences for business across the country would have been incredible. Corporations,
who shred documents daily, would have found themselves in the position of
having to keep every single document ever created on the off-chance that
someday the Federal Government might ask to take a look.
Still, as it is, prosecutors face no real consequences for
their actions. The original guilty verdict forced Arthur-Andersen to stop
conducting public audits and surrender its accounting license. Mara Liasson of
National Public Radio pointed out the similarities between Arthur-Andersen and
Humpty-Dumpty: "You can't put the corporation back together again," she said.
Writing in the New York Times, Joseph A. Grundfest,
professor of law and business at Stanford, points out that no major
corporations have been indicted since Arthur-Andersen's demise. The reason? Corporations
have seen the irreversible damage an indictment can cause, regardless of the
verdict in a trial. Now, prosecutors need only to threaten indictment, and
corporations feel they have no choice but to give in to the Government's
demands. Grundfest sites insurer American International Group as a case in
point; the company's chief executive was recently fired at the request of the
federal government, by way of avoiding indictment.
As more corporations find themselves in similar
situations, forced to enter into deferred-prosecution agreements, the Supreme
Court ruling may have done nothing to curb the power of federal prosecutors,
after all. "The prosecutor's decision to indict is largely immune from judicial
review," writes Grundfest. If corporations have learned anything from
Arthur-Andersen, it is to avoid indictment at all costs. But in doing so, due
process is abandoned, and federal prosecutors become the judge and jury, free
to make whatever demands they wish.
Of course, in the current climate there is powerful
incentive for corporations to obey the law. But the real victims here are the
former Arthur-Anderson employees – even the case against them said as much. The
jury was asked to believe that employees were threatened, intimidated, coerced
– essentially, forced to do what they did and shred documents, regardless of
their own moral objections. If that were the case, the employees fell victim to
criminal wrongdoing. So ironically, through indictment, the Government
victimized the employees all the more, because the indictment cost 28,000
people their jobs.
And it may not be over yet. John C. Richter, acting
assistant Attorney General, said the Justice Department is considering whether
to re-try the case. The Bush administration has made a priority of prosecuting
corporate criminals, and is not surprisingly disappointed with the ruling. The
original guilty verdict was upheld by the Fifth Circuit Court of Appeals and
the Supreme Court did not find Arthur-Andersen innocent, only said the jury
instructions were improper. The ball is back in the administration's court. What
they will do with it remains to be seen.
