New York Times

JUSTICES REJECT AUDITOR VERDICT IN ENRON SCANDAL

LINDA GREENHOUSE

DATELINE: WASHINGTON, May 31

With a brief, pointed and unanimous opinion, the Supreme Court on Tuesday overturned Arthur Andersen's conviction for shredding Enron accounting documents as that company was collapsing in one of the nation's biggest corporate scandals.

The court held that the trial judge's instructions to the jury failed to require the necessary proof that Andersen knew its actions were wrong.

But the decision represents little more than a Pyrrhic victory for Andersen, which lost its clients after being indicted on obstruction of justice charges and has no chance of returning as a viable enterprise. The accounting firm has shrunk from 28,000 employees in the United States to a skeleton crew of 200, who are attending to the final details of closing down the partnership. [Page C1.]

In its ruling, legal experts said, the Supreme Court did not ultimately settle the question of whether Andersen acted with criminal intent when it allowed many of Enron's accounting papers to be destroyed. But it made clear that prosecutors went too far by pressing District Judge Melinda Harmon in Houston to set such a low hurdle for the jury to reach a guilty verdict in the case in 2002.

''Indeed, it is striking how little culpability the instructions required,'' Chief Justice William H. Rehnquist said in his opinion for the court, issued just over a month after an argument in which justices across the ideological spectrum expressed great skepticism about the prosecution of Andersen. During the April 27 argument, Justice Antonin Scalia characterized the government's theory of the case as ''weird.''

The decision, Arthur Andersen v. United States, No. 04-368, was welcomed by both the criminal defense and corporate bars, which had joined together in friend of the court briefs to warn the justices that the government's position could imperil lawyers' efforts to provide a zealous defense for their clients.

The decision was ''truly a slap in the face of the government for overreaching,'' Robin Conrad, a lawyer with the United States Chamber of Commerce, said in an interview.

Tuesday's ruling, despite coming long after Andersen has effectively gone out of business, does provide some sense of vindication for the firm's accountants.

A spokesman for Andersen, Patrick Dorton, said, ''This decision represents an important step in removing an unjustified cloud over the professionalism and integrity of the people of Arthur Andersen.''

Maureen E. Mahoney, who argued Andersen's case, said in an interview that the removal of criminal liability could help the firm in its defense against civil lawsuits and in seeking reimbursement from its insurers.

However those lawsuits end up, the demise of Andersen as a result of the Enron scandal clearly paved the way for broad changes in the accounting world: the creation of regulatory agencies, greater willingness of auditors to stand up to clients and, paradoxically, a lot more business for accountants and lawyers.

The Sarbanes-Oxley Act, approved by Congress months after Andersen's trial and intended to address a wave of corporate fraud, has led to considerable additional work for accounting and consulting firms, many of them well populated with Andersen alumni.

Technically, the decision sends the case back to the United States Court of Appeals for the Fifth Circuit, in New Orleans, which upheld the conviction last year, and leaves the Justice Department free to seek a retrial under new jury instructions requiring proof that Andersen officials were ''conscious of wrongdoing'' when they ordered documents destroyed.

An acting assistant attorney general, John C. Richter, said in a statement Tuesday that ''we will carefully examine today's decision and determine whether to retry the case.''

But a number of defense lawyers suggested that a retrial was unlikely because it would be meaningless in practical terms.

''The government gave the corporation a death sentence and the corporation died,'' Prof. Ellen Podgor, a white-collar criminal law specialist at Georgia State University School of Law, said in a telephone interview.

Andersen was prosecuted for destroying paper and electronic records of its auditing work for its major client, Enron, as the energy company was imploding in October 2001, shortly before the Securities and Exchange Commission opened a formal investigation.

The government based its case on a 1982 law, the Victim and Witness Protection Act, which makes it a crime for one party ''knowingly'' to ''corruptly persuade'' another to destroy documents ''with intent'' to make them unavailable ''for use in an official proceeding.''

In its defense, Andersen argued that it did nothing wrong, simply instructing employees to follow the firm's own rules for disposing of unnecessary documents.

In parsing the statute, Chief Justice Rehnquist observed that the act of persuasion, standing alone, ''is by itself innocuous'' and that withholding documents from the government is not ''necessarily corrupt.'' And he added, citing three dictionaries, '' 'Corrupt' and 'corruptly' are normally associated with wrongful, immoral, depraved, or evil.''

Consequently, the chief justice said, ''Only persons conscious of wrongdoing can be said to 'knowingly corruptly persuade.'''

Given its analysis of the statute, the court identified two flaws in how the case was sent to the jury. First, Justice Rehnquist said, the instructions ''simply failed to convey the requisite consciousness of wrongdoing.'' Not only did the instructions fail to define ''corruptly'' as ''dishonestly,'' he said, but they also permitted a conviction if prosecutors could show simply that Andersen had sought to ''impede'' a government proceeding. The trial judge granted the prosecutors' request to add ''impede,'' a neutral term in the Supreme Court's view, to the phrase ''subvert or undermine.''

The other flaw in the instructions, according to the court, was the omission of a requirement for the jury to find a link between the document destruction and any particular official proceeding in which the documents would have been required to be produced. The S.E.C. served Enron and Andersen with subpoenas on Nov. 8, 2001, a month after the shredding had begun.

Beyond Andersen itself, the impact of the decision was uncertain. The Sarbanes-Oxley Act clarifies the obligation of companies to retain documents even in the absence of an imminent government proceeding and makes it unlikely that prosecutors will rely in the future on the statute the court interpreted in this decision.

And for all the costs associated with complying with the new law, accounting experts said, it has helped provide investors with far more reliable information than before the wave of corporate scandals that broke into the open with Enron's collapse.

''The firms stood like a brick wall against any meaningful reforms,'' said Lynn E. Turner, former chief accountant at the S.E.C. and now managing director of research at Glass, Lewis, an analytical research firm in San Francisco. ''It was going to take some kind of cataclysmic, Titanic-type event to overcome their obstruction to what was needed to protect investors.

''It certainly didn't work out well for the people at Andersen and I feel for them,'' Mr. Turner added. ''On the other hand, for investors it probably did work out better.''