The Supreme Court's resounding decision in favor of disgraced accounting firm Arthur Andersen LLP is a harsh rebuke for federal prosecutors but will not force a retreat in the Justice Department's three-year-old effort to prosecute corporate fraud, legal experts said yesterday.
Andersen's March 2002 indictment marked the first big federal prosecution of business abuses as multibillion-dollar frauds at Enron Corp., Rite Aid Corp. and WorldCom Inc. were exploding into public view. The accounting firm's conviction a few months later helped end the company's accounting practice, created momentum for other corporate prosecutions and helped silence critics who claimed that the Bush administration was too cozy with corporations to hold them accountable for fraud and misconduct.
Justice Department officials yesterday expressed disappointment with the high court's decision overturning Andersen's conviction for obstructing justice. They said they had not yet decided whether to retry Andersen, a once-respected Chicago accounting firm with 28,000 employees across the nation.
"We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law," acting Assistant Attorney General John C. Richter said in a prepared statement.
Defense lawyers and former prosecutors said the unanimous Supreme Court ruling will not substantially deter the government from prosecuting businesses and high-profile executives. One major reason is that the witness-tampering law under which former Enron auditor Andersen was indicted has been supplanted by a new obstruction-of-justice statute in the 2002 Sarbanes-Oxley Act, corporate accountability legislation Congress passed after investor outcry.
In addition, the President's Corporate Fraud Task Force has won important victories since Andersen went out of business, including several for obstructing justice. Prosecutors have convicted former WorldCom chief Bernard J. Ebbers, former Adelphia Communications Corp. chief John J. Rigas and domestic entrepreneur Martha Stewart, among others.
However, defense lawyers for investment banker Frank P. Quattrone yesterday asked an appeals court for more time to appeal his conviction to the U.S. Court of Appeals for the 2nd Circuit, citing the Andersen decision. In May 2004, Quattrone was convicted of two counts of obstructing justice and one count of witness tampering, with that charge under the same law as the one in the Andersen case..
"What [the ruling] ought to do is make the government more reflective before they pull the trigger in certain circumstances," said E. Lawrence Barcella Jr., a longtime Washington defense lawyer and former federal prosecutor."
Andersen has fewer than 200 workers, whose principal employment is helping the firm defend against civil lawsuits, which makes the Supreme Court decision something of an empty victory. Even so, spokesman Patrick Dorton issued a statement yesterday saying the court recognized "the fundamental injustice" of imposing what amounted to a corporate death penalty on the accounting firm. The indictment drew criticism from business groups, which argued that it would irreparably damage Andersen and reduce competition in the audit industry, by reducing the field from five big players to four.
Rusty Hardin, the Houston lawyer who served as Andersen's lead lawyer in the 2002 trial, said, "The next time these things come up, let's tread a little bit more lightly before we look for scalps."
The government already may have taken some of that criticism to heart. Since Andersen's demise, prosecutors increasingly have employed deferred prosecution agreements with companies accused of wrongdoing. Under the terms of those deals, companies will face increased financial penalties and other sanctions if they violate the terms of their corporate probation. That avoids the business-destroying approach prosecutors took with Andersen.
"Andersen was not without fault for what it did," said Arthur W. Bowman, an industry analyst and author of the Bowman's Accounting Report newsletter. "But Andersen became the scapegoat for a lot of things. Not only were accountants doing shoddy work and getting too close to clients, but so were investment bankers and lawyers."
The Sarbanes-Oxley Act imposed new requirements on auditors, corporate board members and top executives, in an effort to get them to take more responsibility for financial statements. It also created an oversight board putting discipline for accounting firms in the hands of an independent body for the first time in 70 years. In recent months, the U.S. Chamber of Commerce and other groups have argued that auditors are overreacting and performing too much work in an effort to insulate themselves from regulatory action.
Meanwhile, yesterday's government defeat provides ammunition to defense lawyers who continue to fight the Justice Department's Enron Task Force. Michael Ramsey, a lawyer for former Enron chief executive Kenneth L. Lay, who is to face trial in January, said the decision is a "vindication" of his arguments that prosecutors have overreached and damaged their credibility. Daniel M. Petrocelli, lead defense counsel for former Enron executive Jeffrey K. Skilling, who awaits trial alongside Lay, said, "The Supreme Court's message is loud and clear: You cannot criminalize innocent conduct."
Andrew Weissmann, director of the Enron task force, declined to comment yesterday. But the Justice Department's Richter said in his statement that prosecutors moved swiftly against Andersen because they believed the firm was shredding documents to impede securities regulators.