The Supreme Court threw out the government's high-profile conviction against Arthur Andersen yesterday, saying in a unanimous and swift decision that jurors relied on flawed instructions in 2002 when they found that the accounting giant had obstructed justice by destroying reams of Enron-related files.
The ruling comes too late for the former Big Five accounting firm. Its indictment during the heat of the Enron scandal and its subsequent conviction amounted to what lawyers called a "corporate death sentence." The Chicago-based firm that once employed 28,000 is nearly defunct, with a skeleton staff of about 200.
But the case - the first of the recent corporate scandal prosecutions to reach the Supreme Court - was closely watched by corporate executives, in-house lawyers and defense attorneys who feared that it would set a dangerous precedent on routine matters of dispensing legal advice and disposing of sensitive business documents.
"Arthur Andersen is never going to come back. They're never going to be resurrected. But the conviction, when it came down, sent tremors or ripples throughout the legal community and certainly the in-house community," said Frederick J. Krebs, president of the American Corporate Counsel Association. "This sort of, 'There but for the grace of God go I,' sentiment was quite pronounced."
The decision was a setback for federal prosecutors who aggressively pursued Arthur Andersen amid public scrutiny of President Bush's personal and political ties to former Enron chief Kenneth L. Lay.
Acting Assistant Attorney General John C. Richter said the Justice Department was disappointed by the ruling and would evaluate whether to retry the case.
"The Justice Department's decision to charge Arthur Andersen was based, at the time, on the determination that the substantial destruction of documents in anticipation of an investigation by the Securities and Exchange Commission violated the law," Richter said. "We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law."
At the center of the case against Arthur Andersen was a memo from one of the firm's lawyers that urged colleagues in the weeks before the formal launch of the Enron investigation to follow the firm's policy of purging all nonessential paperwork. An estimated 2 tons of documents related to the Houston energy trader Enron were destroyed.
A corporate responsibility law enacted later, the Sarbanes-Oxley Act, makes clear that companies must retain all records that might be needed in pending federal investigations. But at the time, Andersen employees believed that it was permissible and proper to purge the files, their lawyers argued.
Justice Department lawyers said the memo amounted to a pre-emptory cover-up.
The government noted that at a training meeting in the month before the Securities and Exchange Commission served Enron and Arthur Andersen with subpoenas for records, one Andersen partner told employees: "If it's destroyed in the course of the normal policy, and litigation is filed the next day, that's great. ... We've followed our own policy, and whatever there was that might have been of interest to somebody is gone and irretrievable."
In an e-mail a day after the subpoenas were served, an Andersen secretary instructed, "No more shredding. ... We have been officially served for our documents."
Prosecutors pursued the accounting firm under a federal law that makes it a crime to "knowingly and corruptly persuade" others to destroy documents that could be relevant in an "official investigation." But the Supreme Court held yesterday that jury instructions at the trial in 2002 were too convoluted to reach that conclusion.
"The jury instructions here were flawed in important respects," Chief Justice William H. Rehnquist wrote for the unanimous court, which handed down its ruling less than five weeks after hearing arguments.
The court noted that "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."
In a statement after the ruling, the accounting firm said: "We pursued an appeal of this case not because we believe Arthur Andersen could be restored to its previous position, but because we had an obligation to set the record straight and to clear the good name of the 28,000 innocent people who lost their jobs at the time of indictment."
The government faced an uphill battle almost from the start. Prosecutors were accused of overreaching when they brought the case. During the trial, the Houston jury that heard the case announced that it was deadlocked after seven days of deliberations and reached its guilty verdict only after instructions from the judge to keep trying and three more days of discussion.
At the Supreme Court, the government met with an unusually united and skeptical bench. Justice Antonin Scalia called the government's theory of the case "weird," and Justice Anthony M. Kennedy said it would "cause problems for every major corporation or small business in this country."
Kennedy said from the bench that it was like "the rule in the Army: Make two copies of everything you throw out. I mean, that's what they're going to have to do."
The National Association of Criminal Defense Lawyers warned in a friend of the court brief that if the Andersen conviction were upheld, it would put attorneys at risk for doing their jobs, something that might at times require "causing delay and sowing confusion" or generally "deflecting potential government investigations."