Death sentence commuted—too late

Jun 1st 2005
From The Economist Global Agenda

The conviction of Arthur Andersen over its handling of Enron’s books has been overturned. This will relieve some who worried that the government was getting over-eager—and sloppy—in its prosecutions. But it won’t help the now-destroyed Andersen much

IF ENRON has become a symbol of corporate wrongdoing in the public imagination, Arthur Andersen has come to represent the lackeys who make it possible. In 2001, the Houston energy-trading giant began to show something rotten on its books. Andersen, its auditor, was accused of abetting Enron’s misdeeds, and in June 2002 a federal jury convicted the auditing firm for destroying documents related to the investigation against Enron. Andersen was devastated. Thousands of employees left, and now only a few hundred hang on, mainly to deflect lawsuits. But on Tuesday May 31st, America’s Supreme Court threw out Andersen’s conviction.

The court did not clear Andersen of having done anything untoward. Rather, it found that the federal government had muffed its case in trying to prove the firm’s activity illegal. The opinion written by the chief justice, William Rehnquist, was supported by all eight of his colleagues on the bench. It centred on the linguistic minutiae of the instructions given to the jury in the original case. Those instructions contained a particular interpretation of the law Andersen was convicted of violating, which makes it a crime to “knowingly…corruptly persuade another person” to withhold or tamper with information relevant to an official proceeding.

As Enron unravelled, Andersen became increasingly aware that it, too, could come under a spotlight. Andersen created a full-time Enron crisis-response team. An Andersen lawyer, Nancy Temple, wrote in an internal memo that an investigation by the Securities and Exchange Commission was “highly probable”. Under this mounting pressure, Andersen’s partners and lawyers carefully and repeatedly reminded employees of the company’s—entirely legal—document-retention policy. “Document-retention policy” is really a euphemism for its opposite. Thousands of “non-essential” papers and e-mails, including many related to Enron, were destroyed in late 2001 before Andersen was subpoenaed for the Enron records. At that point, the document-destruction immediately stopped.

Did Andersen’s bosses “knowingly…corruptly persuade” employees to shred documents? The prosecution had argued that “knowingly” did not apply to the adverb “corruptly”, only to the verb “persuade”. In other words, Andersen’s managers, to be guilty, did not need to believe that they were committing a crime. In the original trial this position prevailed, and the jurors were instructed accordingly. Tuesday’s Supreme Court decision said that this was too low a threshold to convict someone in a criminal case.

Government prosecutors had also managed to have a reference to “dishonesty” removed from the instructions to the jury. Instead, jurors were told Andersen was guilty if it merely “impeded” a proceeding, dishonestly or not. Wrong again, ruled the Supreme Court: under such a modified standard, the jury had been instructed to convict for something that was entirely legal. Justice Rehnquist used the analogy of a mother telling her son to invoke his constitutional right against self-incriminating testimony. This “impedes” an investigation into wrongdoing, but is not against the law.

While the Justice Department considers whether to refile its case against Andersen, what remains of the company is claiming vindication: a statement said that it “had an obligation to set the record straight and clear the good name of the 28,000 innocent people who lost their jobs at the time of the indictment”. But it won’t help the company much. The spokesman acknowledged that the Supreme Court victory was not intended to return Andersen to its former status as one of the “Big Five” accounting firms. Indeed, commentators point out that even if all the harm done by the conviction to Andersen could be undone, the firm would still be a mere shadow of its former self: its indictment alone—coupled with earlier scandals, such as its questionable book-keeping for Waste Management—was enough to destroy its reputation as a blue-chip services firm.

Just what they didn’t need

The Andersen ruling may have repercussions for another high-profile case arising from the dotcom bust. Frank Quattrone, a former star technology banker at CSFB, was convicted of obstructing justice and other offences in relation to another bout of file-shredding. He was convicted a year ago but an appeal is pending.

More broadly, the Andersen ruling is a blow for a government pledged to rid the country of corporate malfeasance. And it certainly shows that pursuing corporate wrongdoers is tricky when complicated laws meet expensive lawyers before a jury of laymen. It comes as the jury in the case of Richard Scrushy, who is accused of masterminding a $2.7 billion fraud at HealthSouth, continues its deliberations; the jurors have been locked away for over a week, unable to break an impasse after admitting that they were divided and confused. The difficulty of securing convictions will worry federal prosecutors as they prepare to put on trial Enron’s former chairman, Kenneth Lay, and its former chief executive, Jeffrey Skilling.

The law under which Andersen was tried has largely been replaced by Sarbanes-Oxley, a controversial bill passed during the height of outrage over white-collar crime. Its aim, to improve corporate governance, tighten the rules governing company accounts and clearly apportion responsibility to senior managers to certify public accounts, is laudable. But critics argue that it unfairly burdens the vast majority of fair-dealing firms with extra costs, without actually tackling the bad business decisions that many of the corporate crimes of the dotcom era sought to cover up.

But the decision in the Andersen case has cheered lawyers and bosses, and not only those who might be up to no good. The standard under which the government won its flawed conviction of Andersen was worryingly broad. Any lawyer, for example, who advised clients to take legal steps to defend themselves could have had reason to believe he was nonetheless breaking the law himself. For this reason, the main criminal-defence lawyers’ association weighed in on Andersen’s behalf. Now, the right of companies to destroy potentially incriminating information, so long as they are not currently under investigation, seems guaranteed. Cue the sound of relieved bosses turning on shredders across the land.

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