Updated from 10:52 a.m. EDT
The Supreme Court Tuesday overturned the 2002 obstruction of justice verdict against Arthur Andersen, the accounting firm whose criminal conviction in Enron's aftermath put 30,000 people out of work and helped fuel the corporate governance movement codified in Sarbanes-Oxley.
The court deemed jury instructions in the Houston trial too vague when it came to explaining whether Andersen had acted "corruptly" in destroying documents that might have been helpful to Enron investigators.
The obstruction prosecution of Andersen was a cornerstone of the Bush administration's effort to go after corporate scoundrels. The audit firm's conviction, coupled with the accounting scandals at Enron and WorldCom, ushered in the federal Sarbanes-Oxley laws governing how public companies communicate with shareholders and the Securities and Exchange Commission.In a 13-page ruling penned by Chief Justice William Rehnquist, the court said the jury instructions were so inexact that they "diluted the meaning of 'corruptly' so that it covered innocent conduct.'' The court noted that the shredding of documents at Andersen took place pursuant to a document retention policy, which are common in business and specifically designed to "keep certain documents from getting into hands of others.'' Justices held that it isn't "wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.'' The trial court erred when its instructions "failed to convey the requisite consciousness of wrongdoing'' needed to violate the law against obstruction of justice. In other words, the trial judge's ruling was so poor that it permitted the jury to convict Andersen even if jurors believed Andersen executives thought they were behaving lawfully. All the jury had to find was that Andersen's document shredding had "impeded'' the government investigation. "Based on this opinion, it looks the jury instructions allowed the jury to convict based on conduct that Andersen employees believed was lawful,'' says Jill Fisch, a securities law professor at Fordham University School of Law. The decision is too late to save Andersen, which effectively ceased operating after being sentenced to five years probation and ordered to pay a $500,000 fine in October 2002. But legal experts say the ruling could make it more difficult for prosecutors to pursue obstruction cases when a company has a document destruction policy in place. "The implication of the Andersen reversal goes far beyond the accounting profession to any business organization that has to retain records -- which is virtually all of them,'' says Michael Young, a partner with the law firm Willkie Farr & Gallagher who specializes in accounting litigation. For Supreme Court watchers, the ruling wasn't a surprise. In oral arguments last month, the nine justices on the nation's highest court appeared to take a dim view of the government's theory of the crime. Prosecutors maintained that Andersen managers had tampered with witnesses by urging employees to selectively preserve documents in the wake of Enron's bankruptcy. "Just because something is Enron- related doesn't mean draconian sanctions should be instituted,'' says Ira Lee Sorkin, a white-collar criminal defense lawyer with Carter Ledyard & Milburn in New York. "Prosecutors have to be very circumspect before they bring cases.''