On Tuesday, the Supreme Court handed down a decision reversing the conviction of the accounting firm Arthur Andersen for violating a federal obstruction of justice statute in connection with the destruction of documents in connection with its work with Enron. (The opinion is styled Arthur Andersen LLP v. United States, (May 31, 2005)).
In the aftermath of the financial meltdown of the Enron empire, federal prosecutors looked for someone to blame. In addition to focusing on individuals, they took on the entire firm. Their thinking on this is somewhat mystifying to me. True, the firm had been involved in other investigations of financial restatements. Sunbeam and Waste Management were both Arthur Andersen clients. But this was a large enterprise, employing thousands of people. A criminal conviction for the firm would spell its demise, as opposed to punishing those who were directly responsible for the wrongdoing. Putting thousands of people out of work does not seem like a good result in a case like this, but that is what happened.
The core issue here was the interpretation of what the following statutory language:
“Whoever knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to ... cause or induce any person to ... withhold testimony, or withhold a record, document, or other object, from an official proceeding [or] alter, destroy, mutilate, or conceal an object with intent to impair the object's integrity or availability for use in an official proceeding ... shall be fined under this title or imprisoned not more than ten years, or both."
It was quite clear that a firm partner urged or directed Enron employees to destroy documents, but this urging was at least nominally consistent with following the company’s document retention policy. No "official proceeedings" were then pending, which might invoke the need to preserve these documents. Thus, in this context, it was not clear whether the persuasion was “knowingly … corrupt”.
This may sound hypertechnical, particularly if you assume that they knew an investigation would ultimately come. However, on the face of it, following a document retention policy is not bad in itself. It is actually a good thing to do, especially if you have lots of paper sitting around. Like Jay Leno, who has on occasion claimed for purposes of comedy that he tapes his entire life to ensure against legal liability, some people or firms are packrats. That might mean they collect information that makes it easier to prove wrongdoing. Or maybe it disproves wrongdoing (as Mr. Leno hopes). But there is no basic requirement to keep that kind of information around. We don't have to make the government's case for them by collecting information on ourselves, and if we do wrong, then keep it for a time when the government wants it to punish us. Of course, that all changes if we know that an official action is going on that might make a document relevant. But when do we know that? Is merely the hypothetical possibilty enough? I think not. And apparently the Court sees it that way, too.
The Supreme Court held that the Government was required to prove the actor know that they were urging others to do something that was wrong. To the contrary, the jury was told "even if [petitioner] honestly and sincerely believed that its conduct was lawful, you may find [petitioner] guilty." This cuts out the heart of the traditional mens rea requirement otherwise needed to impose a criminal punishment in connection with an act that is, on the surface, perfectly moral and appropriate. Following a document retention policy may well be an appropriate reason to destroy a document, and the question is whether there is something “knowingly … corrupt” in asking someone to follow that policy. It may be if you know it will obstruct a legal proceeding, but that is something the Government should have to prove.
It is interesting to note that the Washington Legal Foundation and the U.S. Chamber of Commerce weighed in on the side of the firm on this battle. Among other things, they argued that a ruling imposing liability without proof of mens rea ends up adding costs to every business, as document storage costs mount. Their brief states in part:
“Companies and employees will be consumed by inefficient caution. If an official investigation even approaches the horizon, it will become impossible as a practical matter for a company to advise its employees to comply with its efficient and legal document retention policy for fear of running afoul of the law. In a company with thousands of employees which generates reams of paper, such an approach is onerous. For a small business, where space limitations, storage costs, and legal advice are relatively more burdensome, such a rule is even more oppressive. If Congress wants to impose those burdens and to criminalize failure to act in accordance with a federal rule of *18 document retention, then it should do so expressly and unambiguously. Absent that, prosecutors should not be invested with a roving commission to stretch criminal law to fit conduct not clearly prohibited. “
This group also noted:
“Andersen was eviscerated, because an incorrect and overbroad legal standard was applied. It may be too late to undo the damage to Andersen and its employees, but it is clearly not too late to prevent this mistake from being repeated.”
So, Andersen partners can at least sigh and say “I told you so.” That is cold comfort, indeed. But in this case, I think the Court got it right. This case is a reminder, however, of the power of government prosecutors. Errors, if made, can affect lots of people adversely, and those effects are difficult to reverse.