Lies, corruption, and document destruction: never before in the history of American business has a global corporation been destroyed by acts directly related to document retention and destruction.

• Author: Stephens, David O.

At the Core

This article:

* Reviews the RIM implications of Enron/Andersen

* Examines when document destruction is illegal

* Explains how to ensure records disposal in lawful

Many people labor under the misapprehension that, unless and until they receive a subpoena, they can destroy documents with impunity. Such suppositions are legally invalid. When trouble appears imminent for employees or the organization for which they work, the law prohibits destroying evidence that may be relevant to the issues at hand, particularly documentary evidence that may be construed as incriminating. If such records are destroyed, those who effected destruction--or the entire organization--could be liable for criminal prosecution and, if convicted suffer fines or even imprisonment. This is precisely what happened to Arthur Andersen, one of the world's preeminent public accounting firms.

The Case Unfolds

In early December 2001, Enron Corp., a large Houston-based energy company, filed for bankruptcy, one of the largest such actions in U.S. business history. In the weeks that followed, a series of allegations of financial mismanagement-and possible violations of law--began to surface. The affair soon began to spill over to Arthur Andersen, Enron's outside auditing and accounting firm. Among the allegations were charges that officials of Andersen's Houston office, who were responsible for managing Enron's audits, had illegally destroyed paper and electronic documents related to their representation of Enron.

On January 15, 2002, Andersen fired David B. Duncan, the senior partner in charge of the Enron account. The following day, Enron terminated the services of the entire firm. A spokesperson for Andersen stated that Duncan had ordered the destruction of documents shortly after Enron acknowledged that the U.S. Securities and Exchange Commission (SEC) had begun seeking information about Enron financial statements that Andersen had audited. Andersen stated that Duncan had directed "an expedited effort to destroy documents,' including "the deletion of thousands of e-mails and the rushed disposal of large numbers of paper documents." It further stated that the "activities were on such a scale as to remove any doubt that Andersen's policies and reasonable good judgment were violated." Andersen added that the document destruction "appears to have ended shortly after the lead partner's assistant sent an email to other employees on November 9 [2001], the day after Andersen received a subpoena from the SEC, telling them to `stop the shredding.'"

Prominent spokespersons from the U.S. legal community were quick to comment on the situation's gravity. Alan M. Cohen, a former federal prosecutor, stated, "This is very, very bad ... there is little doubt that prosecutors will view this as an act of obstruction." He further noted that even though Andersen maintained that the document destruction was not authorized by the firm, the law provides that a business has "vicarious liability" for acts committed by its agents or employees. Further, the destruction of documents at Andersen "would indicate some intent to deceive," according to Franklin B. Velie, another federal prosecutor. Finally, Joseph di Genova, a former U.S. attorney in Washington, D.C., stated that if it could be shown that anyone at Andersen destroyed documents "in the middle of a criminal or congressional investigation," that person could be charged with obstruction of justice, a crime punishable by fines and possible prison time.

Both Arthur Andersen and Duncan, through their counsel, issued statements that were designed to mitigate their culpability in the matter. In an apparent effort to contain the scope of the scandal to the Houston office and away from the firm's corporate headquarters, Andersen insisted that its senior management didn't know about the document destruction until long after the fact. Duncan's lawyer stated that his client had done nothing wrong, but was merely following instructions in an email dated October 12, 2001, from Nancy Temple, an Andersen lawyer from the headquarters office, who advised him and others to follow company directives relative to document retention and disposal. However, in an appearance on NBC's "Meet the Press," Andersen's chief executive, Joseph F. Berardino, stated that "Nancy just told people to use their judgment ... accountants are pack rats ... we save a lot of stuff'...