In a much-anticipated ruling, on May 31, 2005, the U.S. Supreme Court unanimously reversed the criminal conviction of Enron Corporation’s auditor, Arthur Andersen LLP, for destroying documents pursuant to its document-retention policy as Enron’s financial difficulties became public in 2001. At least one factor may limit the ultimate impact of the decision on corporate-fraud cases: the Sarbanes-Oxley Act of 2002 attempted to modify the criminal statute on which Arthur Andersen’s conviction was based to make it easier to prosecute the improper destruction of evidence in anticipation of a governmental investigation. Still, the decision does shed some important new light on issues surrounding corporate handling of document destruction.
Most companies already have document-retention policies in place, either as a long-standing "best practice," or in reaction to comments from accountants reviewing the "internal controls" of a company under the Sarbanes- Oxley Act. The Arthur Andersen decision reinforces a company’s need (and, indeed, its right) to establish such policies, to implement a program to review compliance with such policies regularly, and to put into place contingency plans for circumstances when governmental investigations or litigation is likely. And, although the decision should not be read as a carte blanche authorization to proceed with document destruction when a governmental investigation appears imminent, it does support the proposition that criminal statutes need to be interpreted strictly – even when applied to corporate entities.
Arthur Andersen’s involvement in the Enron debacle, and its ultimate conviction, are well-known. Arthur Andersen’s "engagement team" for Enron was headed by David Duncan, and, in August 2001, Sherron Watkins, a senior accountant at Enron, warned Duncan and Michael Odom (an Arthur Andersen partner who had supervisory power over Duncan) of the looming problems. Notes from one of Arthur Andersen’s in-house counsel, Nancy Temple, on October 9, 2001, reflected the belief that "some SEC investigation is highly probable." Odom and Temple issued repeated reminders that Arthur Andersen personnel should follow its document-retention policy, which provided for the destruction of audit-related documents not required to be kept as part of the permanent file. These reminders were followed by the substantial destruction of paper and electronic documents by Arthur Andersen.
On October 30, 2001, the SEC initiated a formal investigation and sent Enron a letter requesting accounting documents, and on November 9 served Enron and Arthur Andersen with subpoenas for records. The following day, Duncan’s secretary sent out an e-mail notice that the shredding should cease.
Arthur Andersen was convicted in the U.S. District Court for the Southern District of Texas on one count of violating one of the federal obstruction of justice statutes, 18 U.S.C. §§ 1512(b)(2)(A) and (B), which made it a crime to "knowingly … corruptly persuad[e] another person … with intent to cause" that person to "withhold" documents from, or "alter" documents for use in, an "official proceeding." (Emphasis supplied.) The court instructed the jury that it did not need to find any consciousness of wrongdoing in order to convict Arthur Andersen. Among other things, the jury was told that "even if Arthur Andersen honestly and sincerely believed that its conduct was lawful, you may find Arthur Andersen guilty." Based on the jury instructions, and after a lengthy deliberation, the jury convicted Arthur Andersen. The Fifth Circuit Court of Appeals affirmed the conviction.
The Supreme Court reversed the conviction because the jury instructions in the Court’s view improperly suggested that Arthur Andersen could be convicted for innocent conduct, without the criminal intent required by the statute. The Court first noted that it is not unlawful for one simply to persuade another to withhold documents or information from the government when that withholding has a lawful basis, such as the Fifth Amendment or the attorney-client privilege. The Court also pointed out that a manager’s reminder to company employees to comply with its document-retention policy is not wrongful "under ordinary circumstances." The Court held that the government needed to prove that the "persuader" was conscious of his or her wrongdoing. The jury instructions in the Arthur Andersen case failed that test.
Finally, the Supreme Court found the jury instructions improper because they led the jury to believe that it did not have to find any connection between the "persuasion" to destroy documents and any particular proceeding.
While it may not be necessary for a proceeding (e.g., a government investigation) to be pending or even imminent, the Court suggested that a proceeding should at least be "foreseen."
As noted above, a few factors may limit the ultimate impact of the decision in future cases. First, the Supreme Court’s holding turned on narrow, technical issues of statutory construction and jury instructions in criminal cases. Second, the decision addressed the 2000 version of the criminal statute, which has since been modified by the Sarbanes-Oxley Act of 2002 that was arguably intended to facilitate prosecution of cases of improper destruction of evidence. Section 802 of the Sarbanes-Oxley Act is a new criminal statute – with a 20 year maximum penalty – that makes it unlawful to knowingly alter, falsify or destroy documents with the intent to impede, obstruct, or improperly influence the investigation or administration of "any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of such matter or case." The "corrupt persuasion" standard has been replaced with a "knowing" standard and the rest of the section is intended to make it a crime to destroy documents if a Federal case is in "contemplation." On this latter point, it may be that an "investigation" is required before the statute applies; the language may not be as clear as it could have been, and may, under certain circumstances, have some of the infirmities of the statute addressed in Arthur Andersen.
The Arthur Andersen ruling still provides valuable insights into document-retention issues and is a reminder of how courts will interpret criminal statutes – including the provisions of the Sarbanes-Oxley Act.. The decision should not be interpreted as signaling a green light for companies or their auditors to destroy documents when charges of wrongdoing are or may be imminent or foreseen. Nothing in the opinion suggests that Arthur Andersen’s conduct would be proper today. On the other hand, the Court recognized the prevalence of documentretention policies and the destruction of records in the ordinary course of business, including policies "created in part to keep certain information from getting into the hands of others including the government." In the absence of true concern, instructing employees to follow "a valid document-retention policy" is not unlawful, and intent is still required for culpability. In the final analysis, companies should continue to develop and uniformly administer document-retention policies and routinely review compliance with those policies. But if there is any question as to whether an investigation is "foreseen," critical decisions regarding implementing or suspending the policies should be carefully made, and with advice of counsel, if possible, until the courts or the Federal agencies provide more bright-line guidance.
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