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.''