Indicting corporations revisited: lessons of the Arthur Andersen prosecution.

• Author: Ainslie, Elizabeth K.

1. INTRODUCTION

   In June 2002, a federal jury in Houston, Texas convicted the major accounting firm of Arthur Andersen (1) of obstruction of justice in connection with its destruction of documents relating to its accounting work for Enron Corporation. (2) The film agreed to stop auditing public companies by the end of August, in effect closing its business. The Andersen firm was subsequently sentenced to pay a fine of $500, 000 and sentenced to five years probation. Approximately 28, 000 people lost their jobs at the company in the United States alone. (3)

   Enron was not Andersen's only crisis; the summer of 2001 brought problems to Andersen on other fronts. In July 2001, just months before the Enron scandal heated up, Andersen settled a dispute with the Securities and Exchange Commission regarding its accounting and auditing work of Waste Management Corporation, paying some $7 million and suffering censure under SEC Rule 102(e). Also in July 2001, the SEC sued five officers of Sunbeam Corporation and the lead Andersen partners on its audit. Meanwhile, events at Enron began to accelerate. By the middle of August, Enron warned Andersen about the possibility of an accounting scandal; within a month Andersen formed a "crisis-response" group. (4) On October 8, Andersen attorney Nancy Temple noted that an SEC investigation was "highly probable." (5) Two days later, on October 10, Michael Odom, a Houston-based Andersen partner, urged Andersen personnel to comply with the document retention policy, noting "if it's destroyed in the course of 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." (6) On October 26, a senior partner at Andersen circulated a New York Times article discussing the SEC's response to Enron, and commented that "the problems are just beginning and we will be in the cross-hairs." (7) Throughout this period Andersen's Houston office shredded documents. Almost two tons of paper were shipped to Andersen's main office in Houston for shredding. This shredding continued until the SEC served its subpoena for records on November 8. Enron filed for bankruptcy less than one month later. Andersen was indicted on March 14, 2002 for obstruction of justice on the grounds that it knowingly, intentionally and corruptly persuaded its employees to shred Enron-related documents. The only individual to be charged criminally in connection with these events was David Duncan, the Andersen partner who led the Enron "engagement team"; Duncan was charged separately from the indictment of the Andersen firm, and he pied guilty in April 2002.

   By all accounts, then, many problems brought an end to what was once one of America's top accounting firms. (8) There was, however, a clear causal connection between the firm's felony conviction and its consequent inability to audit public companies, an inability that, for a public accounting firm, amounted to death.

   The prosecution that thus directly contributed to the demise of Arthur Andersen did not suggest at trial that the firm's management as a whole or even in significant part was corrupt. It did not have to. The prosecution's only burden was to prove, beyond a reasonable doubt, that any one of Andersen's 28, 000 U.S. employees "acted knowingly and with intent to cause or induce another person or persons to (a) withhold a record or document from an official proceeding, or (b) alter, destroy, mutilate or conceal an object with intent to impair the object's availability for use in an official proceeding." (9) In order to prove the necessary intent, the government was not even required to prove that the Andersen employee in question acted solely for an improper purpose, so long as the action was taken "at least in part, with [the] improper purpose" of impeding an official proceeding. (10)

   And, as stated by the district judge, so long as this agent or employee "was acting within the scope of his or her employment, the fact that the agent's act was illegal, contrary to the partnership's instructions, or against the partnership's policies [did] not relieve the partnership of responsibility for the agent's acts." (11) Furthermore, under the law, "the agent of a partnership who commits an act need not be a high-level or managerial agent in order for the act to be attributable to the firm. A partnership may be held responsible for the acts of agents who are subordinate or low-level employees." (12) Finally, in a more debatable decision, when asked by the jurors if each one of them had to find the same Andersen employee guilty, the trial judge responded that a guilty verdict could be rendered even though the jurors could not all agree on which employee had the intent to commit obstruction. (13)

   On balance, the public benefits generated by prosecuting Andersen criminally were minimal or, if they existed at all, were exceedingly subtle. No one went to jail as a result of its conviction, nor could they have under the law. The criminal fine paid by Andersen was the maximum under the criminal law but was still vastly less than the fines and penalties that might have been, and had been, levied against the firm in civil enforcement actions taken by various government agencies. Yet, the indictment, the conviction, and the consequent prohibition against appearing before the Securities and Exchange Commission were sufficient to kill the company, a company made up not only of partners and managers, but also, of course, of lower-level employees and shareholders. In 2001, Andersen employed 85, 000 people in approximately 390 offices in 85 countries. By the end of the following year, only 3000 people remained. (14)

   Andersen employees have found other jobs. This was especially true of higher-level partners or auditors who worked with those partners. Some of those, however, who worked in other positions, including administrative staff, had a much harder time finding new employment. (15) Even in the case of the merger of Andersen's international subsidiaries, redundancy was inevitable, and many lost their jobs. (16) This was experienced in all of Andersen's offices, many located far from Houston--the locus of the activities that resulted in the conviction. (17)

   The purpose of this paper is not to attack the particular exercise of prosecutorial discretion that led to the indictment of Arthur Andersen. We believe, however, that the Arthur Andersen prosecution was, in retrospect at least, misguided and that a thoughtful revisiting of the decision to prosecute generates at least four conclusions:

   ----- Stringent civil sanctions can be imposed on renegade parts of business entities with far less collateral damage to innocent individuals than can criminal prosecutions of the business entity itself. Moreover, business entities, as legal fictions, cannot go to jail or feel shame, and these are the only sanctions that can be imposed exclusively through criminal prosecutions. For these reasons, criminal prosecution of business entities should be considered only when it is clear that no civil sanction or combination of civil sanctions will suffice to deter the corporate misconduct. A combination of civil sanctions would have been both more fair and more efficient than was criminal prosecution of the entire Andersen firm.

   ----- Because it is far from clear that the federal statute under which Andersen was prosecuted was intended to apply to corporations or other business entities, and because the original judicial rationale for indicting corporations in the first place is outdated, the legal justification for charging Andersen criminally was and is dubious.

   ----- Much of the collateral damage done by the Andersen prosecution was the result of the regulation linking criminal conviction with automatic debarment of the firm from practice before the Securities and Exchange Commission. (18) Laws that thus impose mandatory, automatic and drastic civil sanctions in the wake of criminal convictions are unnecessarily harsh and rigid. They also give federal prosecutors life and death power over business entities, particularly over entities that are not sole-source providers of important commodities.

   ----- The instructions given to the Andersen jury permitted conviction of Andersen regardless of whether the agent in question was a low-level employee or a high-level officer and regardless of whether his conduct was condoned or prohibited by management. Although the Andersen instructions were typical of current pattern federal instructions, this federal standard, based on the civil notion of respondeat superior, is far looser, and therefore more dangerous, than the standard generally employed in the various American states and other Western countries.

2. WHEN, IF EVER, IS CRIMINAL PROSECUTION OF A LEGAL FICTION WARRANTED?

   1. Judicial Approval of Corporate Prosecutions in the Past Was Premised On Conditions That No Longer Exist

      In the United States, the only early instances of corporate criminal liability were related to non-feasance by quasi-public corporations, such as municipalities which shirked duties to the public, thereby creating a nuisance. (19) This principle was gradually applied to commercial corporations as well as quasi-public ones. As Professor Coffee has pointed out, these cases presented no great theoretical difficulty at the time; in the first place, "no individual agent of the corporation was responsible for the corporation's omission" and in the second, "there was no imputation of guilt from agent to principal" because "only the corporation was under a duty to perform the specific act in question." (20)

      As time went on, American courts began to extend the principle to encompass instances of malfeasance as well as nonfeasance, so that, for instance, a corporation that had a duty to keep a public area clear could be charged criminally for its dumping in that...