June 2, 2005
What does the Arthur Andersen decision say about compliance?
Kudos to Kurt Eichenwald for his piece yesterday in the New York Times (Analysis: Reversal of Andersen Conviction, 6/1/05) analyzing the Supreme Court’s Arthur Andersen decision. He makes the much needed point that the Court overturned Arthur Andersen’s conviction based solely on an erroneous jury instruction, and that the decision did not address the government’s evidence. Indeed, reading the Court’s statement of the facts (on the first five pages of its opinion), one wonders how well Arthur Andersen would have fared on a retrial.
I’ll return to the facts at the end of this post; let’s start with the Court’s legal decision. The government charged Arthur Andersen under the following federal statute (18 U.S.C. sec. 1512(b)(2)(A) & (B)):
Whoever knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to . . . cause or induce any person to . . . withhold testimony, or 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 fined under this title or imprisoned not more than ten years, or both.
All parties conceded that the issue was whether Arthur Andersen personnel “knowingly . . . corruptly persuade[d]” someone to destroy relevant documents, with the precise meaning of that phrase being the bone of contention. The government argued that “knowingly” and “corruptly persuade[d]” should be construed separately; knowingly refers to the person’s actions, and corruptly persuaded refers only to the effects of those actions. Under this reading, a violation would occur if a supervisor knowingly (but quite innocently) instructed an employee to destroy a document under the company’s document retention policy, as long as doing so would lead the employee (i.e., have corruptly persuaded the employee) to impede the government’s investigation. The Court offered two examples of similarly innocent conduct that might fall within the government’s broad interpretation:
- Consider, for instance, a mother who suggests to her son that he invoke his right against compelled self-incrimination, or a wife who persuades her husband not to disclose marital confidences. (p. 7) (citations omitted)
- Nor is it necessarily corrupt for an attorney to “persuad[e]” a client “with intent to . . . cause” that client to “withhold” documents from the Government [under the attorney-client privilege]. (p. 7) (citations omitted)
According to the Court, it was this broad interpretation that the trial court wrote into its jury instructions.
The Court rejected the broad interpretation in favor of a reading that linked the word “knowingly” to the phrase “corruptly persuade[d]”:
“[K]nowledge” and “knowingly” are normally associated with awareness, understanding, or consciousness. “Corrupt” and “corruptly” are normally associated with wrongful, immoral, depraved, or evil. Joining these meanings together here makes sense both linguistically and in the statutory scheme. Only persons conscious of wrongdoing can be said to “knowingly . . . corruptly persuad[e].” (p. 9) (citations omitted)
The actor must know not only that they are taking certain actions (e.g., instructing someone to destroy documents), but also that those actions are “wrongful, immoral, depraved, or evil.” Of course, this still leaves the question of when a person knows that their actions have crossed the line from innocent to wrongful. For example, must a defendant know that her instruction to destroy documents was illegal? Or is it enough that the person delivered the instruction for the purpose of destroying evidence (as opposed to carrying out a legitimate document retention policy)? What if the person sincerely believed that the order was technically legal because the government had not begun an official investigation? The answer to these questions must await another day, as the Court simply punted: “The outer limits of this element need not be explored here because the jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing.” (p. 9)
What does all of this mean for compliance professionals? The answer lies in a point no one in the case disputed: “‘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.” (pp. 7-8) (citations omitted) (Of course, “document retention policy” is quite the misnomer, given – as the Court acknowledges – that most such policies focus on document destruction. That said, just think of having to defend a “Document Destruction Policy” against an obstruction of justice charge.) So, ordinary operation of a document retention policy will not be wrongful or immoral (i.e., corrupt). The key is to have the policy up and running like clockwork long before a legal problem arises. That way when trouble occurs, nothing different need be said or done – just keep following the policy. If, however, the document retention policy changes either in letter or practice after a problem arises, a skeptical regulator may infer that the change was due to wrongful or corrupt reasons.
With this advice in mind, let’s return to the facts of the Arthur Andersen case. Consider the following excerpts from the Court’s opinion:
- On August 28, an article in the Wall Street Journal suggested improprieties at Enron, and the SEC opened an informal investigation.
- By early September, petitioner had formed an Enron “crisis-response” team, which included
- Nancy Temple, an in-house counsel.
- On October 8, petitioner retained outside counsel to represent it in any litigation that might arise from the Enron matter.
- The next day, Temple discussed Enron with other in-house counsel. Her notes from that meeting reflect that “some SEC investigation” is “highly probable.
- On October 10, Odom spoke at a general training meeting attended by 89 employees, including 10 from the Enron engagement team. Odom urged everyone to comply with the firm’s document retention policy. He added: “‘[I]f it’s destroyed in the course of [the] normal policy and litigation is filed the next day, that’s great. . . . [W]e’ve followed our own policy, and whatever there was that might have been of interest to somebody is gone and irretrievable.’”
- On October 12, Temple entered the Enron matter into her computer, designating the “Type of Potential Claim” as “Professional Practice—Government/Regulatory Inv[estigation].” Temple also e-mailed Odom, suggesting that he “‘remin[d] the engagement team of our documentation and retention policy.’”
- [On October 17], the SEC notified Enron by letter that it had opened an investigation in August and requested certain information and documents
- On October 19, Enron forwarded a copy of that letter to petitioner. On the same day, Temple also sent an e-mail to a member of petitioner’s internal team of accounting experts and attached a copy of the document policy.
- On October 20, the Enron crisis-response team held a conference call, during which Temple instructed everyone to “[m]ake sure to follow the [document] policy.”
- On October 23, . . . [Arthur Andersen’s lead Enron partner David] Duncan met with other Andersen partners on the Enron engagement team and told them that they should ensure team members were complying with the document policy. Another meeting for all team members followed, during which Duncan distributed the policy and told everyone to comply. These, and other smaller meetings, were followed by substantial destruction of paper and electronic documents.
- On October 30, the SEC opened a formal investigation and sent Enron a letter that requested accounting documents.
- Throughout this time period, the document destruction continued, despite reservations by some of petitioner’s managers.
If there was an effective, functioning document retention policy, why all the “reminders” to destroy documents? Did Arthur Andersen offer such reminders every time they spoke to an Enron employee? (“Morning Bob. How about those Astros? Oh, and don’t forget about the document retention policy.”) Or did the specter of a government investigation suddenly trigger interest in reviving a moribund policy? And was the purpose of reviving the policy to make relevant (incriminating?) documents “gone and irretrievable”? Regardless, the episode illustrates an important compliance maxim – to be truly effective, a compliance policy must be a living, breathing part of the organization, and not some corporate fire extinguisher sitting around until a legal fire flares.
June 2, 2005 | Permalink
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