Executive Summary Of The USA VS. Arthur Andersen LLP Case
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Executive Summary of the USA v. Arthur Andersen LLP Case
This comes as a follow up to Rusty Hardin's presentation regarding the inside story of the Arthur Andersen case. The following paragraphs summarize the essence of the Andersen case and briefly explain how an 89 year old accounting firm with 28,000 employees collapsed in less than one year.
The government alleged that Andersen attempted to obstruct justice by the wholesale destruction of documents. The indictment charged Arthur Andersen in part, as follows:
In the summer and fall of 2001, a series of significant developments led to Andersen 's foreseeing eminent civil litigation against, and government investigations of, Enron and Andersen.
On or about October 16, 2001, Enron issued a press release announcing a $618 million net loss for the third quarter of 2001. That same day, but not as part of the press release, Enron announced to analysts that it would reduce shareholder equity by approximately $1.2 billion. The market reacted immediately and the stock price of Enron shares plummeted.
By Friday, October 19, 2001, Enron alerted the Andersen audit team that the SEC had begun an inquiry regarding the Enron "special purpose entities" and the involvement of Enron's chief financial officer.
. The next morning, an emergency conference call among high-level ANDERSEN management was convened to address the SEC inquiry. During the call, it was decided that documentation that could assist Enron in responding to the SEC was to be assembled by the ANDERSEN auditors.
After spending Monday, October 22, 2001, at Enron, Andersen partners assigned to the Enron engagement team launched on October 23, 2001, a wholesale destruction of documents at Andersen 's office in Houston, Texas Andersen personnel were called to urgent and mandatory meetings. Instead of being advised to preserve documentation so as to assist Enron and the SEC, Andersen employees on the Enron engagement team were instructed by Andersen partners and others to destroy immediately documentation relating to Enron, and told to work overtime if necessary to accomplish the destruction. During the next few weeks an unparalleled initiative was undertaken to shred physical documentation and delete computer files.
On or about November 8, 2001, the SEC served Andersen with the anticipated subpoena relating to its work for Enron. In response, members of the Andersen team on the Enron audit were alerted finally that there could be "no more shredding" because the firm had been officially "served" for documents.
THE CHARGE: OBSTRUCTION OF JUSTICE
The government alleged in its indictment that:
On or about and between October 10, 2001 and November 9, 2001, within the Southern District of Texas and elsewhere, including Chicago, Illinois, Portland, Oregon, and London, England, Andersen, through its partners and others, did knowingly, intentionally, and corruptly persuade and attempt to persuade other persons, to wit: Andersen employees, with intent to cause and induce such persons to (a) withhold records, documents and other objects from official proceedings, namely: regulatory and criminal proceedings and investigations, and (b) alter, destroy, mutilate and conceal objects with intent to impair the object's integrity and availability for use in such official proceedings.
THE OBSTRUCTION OF JUSTICE STATUTE
Title 18 USC §1512(b) provides that:
Whoever knowingly and corruptly persuades another person, or attempts to do so with intent to cause or induce any person to withhold a record, document or other object from an official proceeding, or alter, destroy, mutilate, or conceal an object with intent to impair the object's integrity or availability for use in an official proceeding shall be guilty of a crime.
In order to prove Andersen guilty of violating the obstruction of justice statute, the government had to prove each of the following two elements beyond a reasonable doubt:
1. First, that on or about the dates charged, the Andersen firm, through its agents, corruptly persuaded or attempted to corruptly persuade another person or persons; and
2. Second, that Andersen, through its agents, 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.
THE JURY INSTRUCTIONS
The judge instructed the jury that it could find Arthur Andersen guilty for the acts of its employees if the partnership agent was acting with the intent, at least in part, to benefit the partnership
The specific jury instructions to the Andersen jury read, in part, as follows:
In order for a partnership agent to be acting within the scope of his or her employment, the agent must be acting with the intent, at least in part, to benefit the partnership. It is not necessary, however, for the government to prove that the agent's sole or even primary motive was to benefit the partnership. Furthermore, the government need not prove that the partnership was actually benefited by the agent's actions....
An agent must also be acting in line with his or her duties as an agent of the partnership in order to be acting within the scope of his or her employment. An agent is acting in line with his or her duties when the agent's acts deal with a matter the performance of which is generally entrusted to the agent. Stated another way, an act is in line with an agent's duties if it relates directly to the performance of the agent's general duties for the partnership. It is not, however, necessary for the particular act itself to have been authorized by the partnership.
If an agent 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, does not relieve the partnership of responsibility for the agent's act. A partnership may be held responsible for the acts its agents perform within the scope of their employment even though the agent's conduct may be contrary to the partnership's actual instructions or contrary to the partnership's stated policies. You may, however, consider the existence of Andersen 's policies and instructions and the diligence of its efforts to enforce any such policies and instructions, in determining whether the firm's agents were acting within the scope of their employment. The fact that some agents of the partnership may not have committed any improper acts or possessed any improper intent does not relieve the partnership of responsibility for the improper acts or intents of the other agents of the firm. Finally, 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.
LESSONS LEARNED FROMTHE ARTHUR ANDERSENCASE
Corporations and other business entities can be criminally prosecuted for the acts of its employees.
On January 20, 2003, Deputy Attorney General Larry D. Thompson issued a memorandum revising the principles that the Department of Justice prosecutors will follow when determining whether to criminally prosecute a corporation or other business entity. These principles revise earlier Department of Justice guidelines that are contained in a memorandum prepared by Deputy Attorney General Eric Holderin 1999. The new prosecution principles revise the "Holder Memorandum" by focusing on the authenticity of a corporation's cooperation and whether corporate compliance plans are in place to insure compliance with federal laws.
Factors for Consideration
In addition to the likelihood of success at trial and the probable deterrent benefits of a conviction, prosecutors will now consider the following factors when deciding whether to criminally prosecute a corporation:
1. the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime;
2. the pervasiveness of wrongdoing with the corporation, including the complicity in, or condonation of, the wrongdoing by corporate management;
3. the corporation's history of similar conduct, including prior criminal, civil, and regulatory enforcement actions against it;
4. the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection;
5. the existence and adequacy of the corporation's compliance program;
6. the corporation's remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies;
7. collateral consequences, including disproportionate harm to shareholders, pension holders and employees not proven personally culpable and impact on the public arising from the prosecution;
8. the adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and
9. the adequacy of remedies such as civil or regulatory enforcement actions.
The most troubling factor is in paragraph 4 where the government generally seeks a waiver of the corporate-attorney client and work product privilege in order to determine whether the corporation should be criminally prosecuted.
Analysis of Each Charging Factor
1. Nature and Seriousness of the Offense. The nature and seriousness of the offense, including the risk of harm to the public from the criminal conduct, are primary factors in determining whether to charge a corporation.
2. Pervasiveness of Wrongdoing Within the Corporation. The Department of Justice recognizes that a corporation can only act through natural persons, and it is therefore held responsible for the acts of such persons attributable to it. The government will charge a corporation for even minor misconduct if the wrongdoing is pervasive or undertaken by a large number of employees. For example, if salesmen are engaging in criminal conduct, or conduct is condoned by upper management, then this factor favors criminal prosecution of the corporation. However, a company with a compliance plan in place may avoid being prosecuted for an isolated act that is performed by a rogue employee.
3. The Corporation's Past History. The government expects corporations to learn from their prior mistakes. If a corporation has been previously subject to noncriminal guidance, warnings or sanctions and it has not instituted a compliance plan to prevent future unlawful conduct, this factor favors criminal prosecution of the corporation.
4. Corporation and Voluntary Disclosure. A corporation's timely and voluntary disclosure of the wrongdoing and its willingness to cooperate with the government's investigation are key factors in determining whether to prosecute a corporation. For example, the government expects corporations to:
(i) identify the wrongdoers within the corporation;
(ii) make witnesses available to the government for interviews;
(iii) disclose the complete results of its internal investigation; and
(iv) to waive attorney-client and work product privileges.
As we learned from the Arthur Andersen case, deciding whether to waive the attorney-client privilege and provide the government with documents is a critical decision. While most CEOs favor waiving the attorney-client privilege, one must remember that a simple email by one of Andersen 's in-house lawyers appears to be the main reason that it was convicted at trial.
5. Corporate Compliance Programs. In light of the Arthur Andersen and Enron case as well as others, it is now politically correct for the government to criminally prosecute corporations. The new guidelines outlined in Deputy Attorney General Thompson's memorandum provide a stern warning for corporate America However, the Thompson memorandum also provides a method for corporations to protect themselves. Specifically, the Thompson memorandum states that compliance programs that are established by corporate management to prevent and detect misconduct may absolve the corporation from criminal liability. However, even a well-designed corporate compliance program must be more than a "paper program." In other words, the compliance program must be enforced in a consistent manner in order to protect the corporation from prosecution.
Corporations and other business entities, as well as individuals, can be criminally prosecuted for destroying any document that may impede an investigation by any agency of the United States
Law Prohibiting Document Destruction
The Sarbanes-Oxley Act of 2002 establishes harsh criminal penalties for entities or individuals that engage in destroying or altering "records," documents or tangible objects. Specifically, Section 802 imposes a 20 year prison sentence for individuals or entities who knowingly alter, destroy, mutilate, conceal, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States.
In other words, this statute applies to agencies other than the Securities & Exchange Commission. Before corporations destroy documents or computer records are altered or destroyed, counsel should be consulted regarding whether this statute applies. Additionally, the corporation's document retention/destruction policy should be reviewed and complied with.
Guidelines for Record Retention Instruction Policies
1. Corporations should review federal and state law and regulations and establish affirmative requirements for record retention. Records should be retained for the time required by law and for as long as records may be material.
2. Special procedures should be implemented to protect material records if litigation or other agency proceedings are possible. All procedures regarding record retention and record destruction should be consistently implemented and enforced by upper-level management. If individuals fail to comply with the corporation's record retention/destruction policies, they should be promptly disciplined.
3. Obviously, no records should ever be altered or destroyed if a government investigation or any type of government action is possible.
4. Outside counsel should review the corporation's policies and procedures and opine on any situations that are unusual.
An effective compliance plan can prevent corporations from being criminally prosecuted and minimize the risks of any prosecution.
EFFECTIVE CORPORATE COMPLIANCE PLANS
The fine and other sanctions can be substantially reduced if an organization has implemented an effective compliance plan. Corporations that are convicted of federal crimes are sentenced according to Chapter 8 of the Federal Sentencing Guidelines. The Sentencing Guidelines contain many benefits to corporations that have implemented effective compliance plans.
An effective compliance plan is one that prevents and detects violations of federal and state law. The program must be reasonably designed, implemented and enforced so that it generally will be effective in preventing and detecting criminal conduct. If the corporation fails to prevent or detect a specific offense, it does not mean that the program was not effective. However, the hallmark of an effective compliance program permits management to prevent and detect violations of law by exercising organizational due diligence. Due diligence requires, at a minimum, that the organization take the following steps:
1. The organization must have established compliance standards and procedures to be followed by its employees and other agents that are reasonably capable of reducing the prospect of criminal conduct.
2. Specific individuals within high-level personnel of the organization must have been assigned overall responsibility to oversee compliance with such standards and procedures.
3. The organization must have used due care not to delegate substantial discretionary authority to individuals whom the organization knew, or should have known through the exercise of due diligence, had a propensity to engage in illegal activities.
4. The organization must have taken steps to communicate effectively its standards and procedures to all employees and other agents (by requiring participation in training programs or by disseminating publications that explain in a practical manner what is required).
5. The organization must have taken reasonable steps to achieve compliance with its standards. For example, by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct by its employees and other agents and by having in place and publicizing a reporting system whereby employees and other agents could report criminal conduct by others within the organization without fear of retribution.
6. The standards must have been consistently enforced through appropriate disciplinary mechanisms, including, as appropriate, discipline of individuals responsible for the failure to detect an offense. Adequate discipline of individuals responsible for an offense is a necessary component of enforcement; however, the form of discipline that will be appropriate will be case specific.
7. After an offense has been detected, the organization must have taken all reasonable steps to respond appropriately to the offense and to prevent further similar offenses -- including any necessary modifications to its program to prevent and detect violations of law.
Department of Justice Revises
Memorandum on Principles to Determine
Whether a Business Organization Should be Prosecuted
Importantly, new substantive language regarding effective compliance programs has been added to the Deputy Attorney General Thompson's memorandum captioned "Principles of Federal Prosecution of Business Organizations." The Thompson memorandum adds the following language:
In evaluating compliance programs, prosecutors may consider whether the corporation has established corporate governance mechanisms that can effectively detect and prevent misconduct. For example, do the corporation's directors exercise independent review over proposed corporate actions rather than unquestioningly ratifying officers' recommendations; are the directors prevented with information sufficient to enable the exercise of independent judgment; are internal audit functions conducted at a level sufficient to ensure their independence and accuracy and have the directors established an information and reporting system in the organization reasonably designed to provide management and the board of directors with timely and accurate information sufficient to allow them to reach an informed decision regarding the organization's compliance with the law.
This new language in the January 20, 2003 Thompson memorandum is designed to ensure that internal corporate governance mechanisms are truly effective rather than mere paper programs.
In light of recent events, such as Arthur Andersen, and Deputy Attorney General Thompson's memorandum discussing the effectiveness of compliance programs, it is important for every major business organization to consider implementing and/or revising its compliance plan in order to benefit from the new Department of Justice Guidelines.