The once-mighty “Big Five” international accounting firm Arthur Andersen may be dead and all but buried, but its legal legacy and the lessons learned for in-house lawyers on document retention polices will live on for years to come.

Observers say the May 31 U.S. Supreme Court ruling – overturning the company’s conviction for obstruction of justice through the destruction of documents – will keep alive the debate whether the government went too far in its ardor to prosecute alleged corporate criminals.

“This case shows there will be limits, and that there are legitimate protections,” said Susan Hackett, senior vice president and general counsel for the Association of Corporate Counsel.

The decision (Supreme Court No. 04-368) didn’t specifically address when records may or may not be destroyed. This means in-house counsel must still carefully determine which records to keep or purge (and when to destroy them) so as to ensure that their companies don’t become the next Arthur Andersen.

“I don’t think [retention] policies will be changed, but they will be refined as people look at more case law and as court rulings continue to provide more specificity,” said Hackett.

Andersen was in charge of auditing the books at Enron, the Houston energy giant whose financial implosion in 2001 wiped out the savings of thousands of employees and other small investors. Andersen was found guilty of obstructing justice as a result of destroying documents pursuant to its document-retention policy as Enron’s financial difficulties became public.

The ruling is little more than a consolation prize for the once powerful accounting firm. The 2002 conviction led to a $500,000 fine and five years probation. Since then, Andersen has become a shell of its former self, with some 28,000 employees out of work and a handful of employees left to attend to post-closure issues.

Although the high court’s ruling focuses mainly on an erroneous jury instruction – which construed the single statute (18 U.S.C. Sect. 1512) under which Arthur Andersen was indicted – many believe it will have broader implications and may even rein in overzealous prosecutors.

“The overriding message from this opinion is that it tells the Justice Department to stop, look, and listen a little harder,” said Barton Sacher of Sacher Zelman in Miami, whose clients include accounting firms.

In a unanimous opinion written by Chief Justice William Rehnquist, the court found that the trial judge should not have granted the government’s request to loosen the standard jury instruction.

The jury instructions, according to the court, were flawed because they did not require proof of “conscious wrongdoing” on Anderson’s part, nor was there any connection between the motivation to destroy documents and a pending or anticipated investigation.

Rehnquist noted that it was “striking how little culpability the [jury] instructions required.” He said the jury instructions should not have suggested that Arthur Andersen could be found guilty for its conduct without the criminal intent required by existing law.

“The government was able to lead the jury to believe that they could convict Andersen, even if Andersen didn’t know what they were doing was wrong,” said Rebekah Poston, chairman of the white collar criminal defense practice at Steel Hector & Davis in Miami. “The [trial] court read dishonesty out of the statute.”
Retention Policies Endorsed

The Supreme Court endorsed routine destruction of corporate records, noting that document retention policies are common in corporate America.

Rehnquist wrote that it “is not inherently malign” to persuade someone to withhold documents from the government, and that “it is not wrongful for a manager to instruct his employees to comply with a valid document retention policy, even though the policy, in part, is created to keep certain information from others, including the government.”

Andersen’s policy essentially said records should not be destroyed when there is an investigation or litigation. The question was when did Andersen know there was a formal government investigation?

The government contended that document destruction occurred when Andersen’s in-house attorney, Nancy Temple, removed her name from a memo regarding Enron’s

finances and deleted any reference to her having been consulted about the matter as Enron’s collapse became public. Anderson contended that its policy was to put

a halt to document destruction only when an official investigation was underway and that as soon as it was served with a subpoena, it stopped the shredding.

“The most significant thing that the court left open was the question of when does a proceeding become official? When does a company have enough knowledge that they have to say ‘stop the shredding?'” said Geoffrey Millsom, a partner with Adler Pollock & Sheehan in Providence, R.I.

That is something the lower courts will have to hash out.

Hackett added: “It’s a real hydra now for folks who are trying to figure out which head to chop off without getting two new heads.”

The ACC endorses a number of “best practices” developed by the American Records Management Association, a not-for-profit association for records and information management professionals.

The ACC, according to its website, endorses having a written policy that defines corporate records and standard procedures for storage, retrieval, dissemination, protection, preservation and destruction; creating retention guidelines that specify how long records should be kept; having procedures for timely, secure destruction of records when their prescribed retention periods elapse; and storage of active and inactive records that need to be retained for legal, fiscal, regulatory or administrative reasons.
Stricter Policies

The statute under which the Justice Department prosecuted Andersen was amended by the 2002 Sarbanes-Oxley Act, which makes it easier for the government to prosecute wrongful destruction.

“The laws that came out of Sarbanes and the amendments are such that retention policies are much stricter,” said Sacher. “Any violation of them, particularly in the face of any knowledge that the SEC or other government agency is in the process of initiating an investigation, could easily result in future problems because of the wording and language and requirements of the law at this point.”

Sarbanes-Oxley is intended to prevent destruction of documents relevant to audits of companies that report their financial information to the Securities and Exchange Commission and increases penalties for the destruction, alteration and falsification of records in certain circumstances.

Experts noted that if in-house counsel have been complying with the law as it has changed, then they have nothing to worry about. In fact, they note that the Supreme Court ruling in the Anderson case and subsequent changes to Sarbanes-Oxley should allow them to sleep a little better.

Still, caution remains the word of the day. If there is even a doubt in their mind that the government might be sniffing around, companies need to be aware of what the retention policy is and how it is being enforced, attorneys said.

“In-house counsel and companies that are heavily regulated have to be careful. These document retention polices are good, but should be enforced consistently,” cautioned Millsom.

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