Enron’s Auditors
by
Sally Ramage®
The Supreme Court’s recent unanimous
decision overturning the conviction of the now defunct Arthur Andersen accounting
firm for obstruction of justice is an important milestone for prosecutions
based on the execution of document retention programs in the corporate and
professional setting. Andersen was
prosecuted for “knowingly and.
corruptly persuading” the programmatic destruction of documents in
Andersen’s possession relating to its client Enron, after receiving notice of
an impending SEC investigation, but before the actual receipt of a
subpoena. Subsequent to the conduct in
Andersen, Congress added additional obstruction crimes in the Sarbanes-Oxley
legislation to add to the prosecutor’s arsenal of charges on which to prosecute
document destruction cases in the future.
Whether under prior or new obstruction
statutes, the Supreme Court’s decision in Andersen will affect future
prosecutions and should make prosecutors think twice about prosecuting
corporations or corporate executives for document destruction done pursuant to
pre-existing document retention programs.
Andersen Decision
The Andersen decision could be read
narrowly as a case about a flawed jury instruction, i.e., the lower court’s
erroneously substituting “impede” for “dishonestly” as an element of “corruptly
persuading.” Read more broadly, it is a cautionary tale that knowledge and
criminal intent remain requirements that prosecutors will have to affirmatively
prove in obstruction cases. Read even
more broadly, it is a message to the Justice Department and the lower courts to
scrutinize carefully prosecutions for ancillary crimes, particularly ones with
serious collateral consequences.
Although the Court declined to .
explore the “outer limits” of the requisite state of mind, it is clear
that 1) negligent destruction, or 2) destruction without knowledge that such
action will impact a pending investigation is not adequate to sustain a
conviction.
The Andersen indictment was brought under
18 USC Section 1512 (b)(2)(A) and (B)
which makes it a crime to “knowingly ...
corruptly persuade another person ...
with intent to ... cause” that person
to “withhold” documents from or “alter” documents for use in an “official
proceeding.” The Supreme Court found that the District Court failed to follow
the Fifth Circuit’s pattern instruction which defined “corruptly” as “knowingly
and dishonestly.” The District Court, at the request of the prosecutor,
erroneously added “impede” and struck “dishonestly” in the instruction. The Supreme Court held that simply impeding
the Government was not enough for a conviction, unless it was done with the
requisite criminal intent as well.
Sarbanes Legislation
Andersen was indicted under the existing
obstruction statute. Sarbanes Oxley
expanded the existing obstruction statutes to punish anyone who:
“corruptly alters, destroys ... or conceals a record, document...with the
intent to impair the object’s integrity or availability for use in an official
proceeding, “ or
“knowingly altering, destroying ... any record [or] document ... with the intent to impede, obstruct, or influence
the investigation or proper administration of any matter .... or in relation or in contemplation of any
such matter or case.”
An analysis of the Court’s findings in
Andersen suggests that lower courts would be unlikely to let prosecutors disregard
proving criminal intent in future prosecutions based on document destruction
pursuant to pre-existing document retention programs.
Key language from the Andersen decision
which will influence future prosecutions:
“‘Document retention, ‘ policies which are
created in part to keep certain information from getting into the hands of
others, including the Government, are common in business.”
“It is, of course, not wrongful for a
manager to instruct his employees to comply with a valid document retention
policy under ordinary circumstances.”
“‘Knowledge’ and ‘knowingly’ are normally
associated with awareness, understanding, or consciousness.”
“Only persons conscious of wrongdoing can
be said to ‘knowingly ... corruptly’
... ”
“It is ... one thing to say that a proceeding ‘need not be pending or about
to be instituted at the time of the offence, and quite another to say a
proceeding need not even be foreseen.”
A reading of both the pre- and
post-Sarbanes obstruction statutes suggests that the Court’s language applies
with equal force to both. Companies and
corporate executives do not violate either set of statutes by routinely
destroying documents to” among other .
things, keep them from government eyes.
Indeed, the Court recognizes that this is one of the reasons for
establishing a document retention program in the first place.
Companies
should continue to implement and execute document destruction programs, as
these programs have significant advantages.
Corporations should also continue to suspend such programs upon notice
of an investigation. However, the
Andersen decision puts some reality back into what will constitute a criminal
act.
Sally Ramage® © 24/09/05
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