Lessons Learned From The Arthur Andersen Case
By: RICHARD H. KYLE, JR.
September 2005
On May 31, 2005, the Supreme Court issued a unanimous decision in Arthur Andersen v. United States, reversing the accounting firm's conviction for obstructing an official proceeding by ordering the destruction of documents in the wake of the Enron scandal. The Court held that 18 U.S.C. 1512(b)(2) is not violated if the defendant is not conscious of his or her wrongdoing, was not aware of a particular official preceding the conduct (i.e. document shredding) would obstruct, or did not act dishonestly or intend to do more than impede a government investigation. Although the decision addresses the law as it existed prior to enactment of the Sarbanes-Oxley Act of 2002, Andersen will have a significant impact on future federal prosecutions as well.
In 2001, as the financial and accounting irregularities of its client, Enron, became public, Andersen managers urged employees to destroy documents in accordance with Andersen's document retention policy. The company had not been formally notified of any government investigation; that would happen a month later. Compliance with the policy, however, had been inconsistent.
Based on its instructions to destroy documents, the Government charged Andersen with violation of the witness tampering statute, which makes it a crime for a person to "knowingly . . . corruptly persuad[e] another person to . . . alter, destroy, mutilate, or conceal an object with intent to impair the object's integrity or availability for use in an official proceeding."
The critical issue at trial was whether Andersen managers "corruptly persuaded" their employees when they ordered the destruction of Enron documents. A principal piece of evidence was an email from an in-house Andersen attorney that stated: "It might be useful to consider reminding the [accountants assigned to the Enron account] of our document retention policy." Over the objections of defense counsel, the trial judge instructed the jury that it could find Andersen guilty even if Andersen did not act "dishonestly," and even if it intended to "impede" but not to "subvert" or "undermine" an official proceeding. The Court also instructed the jury that "even if [Andersen] honestly and sincerely believed that its conduct was lawful, you may find [Andersen] guilty."
The Supreme Court's decision to review the case provided the justices with their first opportunity to address under what circumstances a company can legally destroy documents. In a 9-0 ruling, the justices concluded that the jury instructions at issue failed to convey the requisite "consciousness of wrongdoing." Chief Justice William Rehnquist wrote, "Indeed, it is striking how little culpability the instructions required."
The Court expressly recognized that "'[d]ocument retention policies, which are created in part to keep information from getting to others, including the Government, are common in business," and that it is "not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances." Rehnquist noted that prosecutors should have been more careful in their pursuit of Andersen. "Such restraint is particularly appropriate here, where the act underlying the conviction - 'persuasion' - is by itself innocuous. Indeed, 'persuading' a person to 'withhold' testimony from a Government proceeding or Government official is not inherently malign. Consider, for instance, a mother who suggests to her son that he invoke his right against compelled self-incrimination . . . or a wife who persuades her husband not to disclose marital confidences."
The Andersen case raises important questions for companies and their lawyers as to when compliance with an internal document retention policy might result in criminal exposure, especially in light of the recently enacted Sarbanes-Oxley Act. The Supreme Court's opinion answers some questions and leaves others unanswered.
One important aspect of the Andersen holding is that companies and individuals are no longer criminally liable absent proof of a connection (or nexus) between the direction to destroy documents and an intent to affect a governmental proceeding or investigation. A comprehensive policy that is routinely and consistently enforced at all levels of the company is the best way to avoid costly and lengthy criminal investigations.
Companies must also recognize that the Supreme Court's decision was made before enactment of Sarbanes-Oxley by Congress. Of particular importance is 18 U.S.C. 1519, enacted as part of the Sarbanes-Oxley Act, which prohibits the knowing destruction of documents "in relation to or contemplation of" "any matter within the jurisdiction of any department or agency of the United States." Most federal prosecutors will now use Section 1519, which does not require proof that the defendant engaged in corrupt persuasion, to prosecute document destruction cases. Again, regular enforcement of document retention policies will be critical to lessening criminal exposure.
The government will undoubtedly be more conservative in its prosecutions of corporations after the Andersen decision. It has since entered into deferred agreements with a number of corporations. Recently, accounting firm KPMG made headlines when it admitted selling fraudulent shelters to assist wealthy clients avoid paying billions in taxes. As part of a deferred prosecution agreement with federal prosecutors, the company agreed to pay $456 million and submit to an independent monitor to avoid a criminal indictment. No company, however, can afford to assume that the Andersen decision gives it a green light to destroy documents without a well developed and routinely enforced document retention policy.