Posted on: Wednesday, June 1, 2005
High Court clears accounting firm
By David G. Savage
Los Angeles Times
WASHINGTON — The Supreme Court overturned the criminal conviction of the Arthur Andersen accounting firm yesterday, 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 as a result 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.
The memos, notes and drafts were destroyed in October 2001 as Enron was collapsing, but before the government triggered 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.
Yesterday's decision throws out the Bush administration's largest prosecution to date growing out of the Enron debacle. While the administration moved quickly to prosecute Enron's Chicago-based auditor, it had been slow to bring charges against the top officials of the bankrupt energy trader in Houston.
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 Anderson'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. All persons deserve a "fair warning" that their conduct is illegal, he said.
Experts said the decision may ease fears among corporate lawyers over how to handle documents or e-mails. "We're breathing a sigh of relief," said Robin Conrad, a lawyer for the U.S. Chamber of Commerce. "Companies have been nervous over this document retention issue. This is also a little bit of 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. Most of its accountants were hired away by Deloitte & Touche.
Some former partners in the firm pursued an appeal, however, hoping to protect themselves against pending civil lawsuits.
The Justice Department said it was disappointed with the decision and will 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 Attorney General John C. Richter.
In the past, the court has been wary of allowing someone to be criminally prosecuted for failing to aid the government during an investigation. The justices, both conservative and liberal, have insisted that a crime include some element of deliberate wrong-doing.
That issue turned out to be central in the Andersen case.
On Aug. 14, 2001, Enron CEO Jeffrey Skilling resigned without explanation, and the Wall Street Journal soon afterward 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. In practice, this 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. In the meantime, however, officials 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," Michael Odom, an Andersen partner, 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.
