The Justice Department yesterday abandoned its prosecution of Arthur Andersen LLP, walking away from one of the signature cases in its drive to eradicate corporate fraud.
The announcement came six months after the U.S. Supreme Court tossed the accounting firm's 2002 conviction on obstruction-of-justice charges related to its work for client Enron Corp. In a 9 to 0 decision, the court ruled that the jury instructions were so broad that jurors could have found Andersen guilty even if officials did not intend to break the law and impede a looming investigation.
Andersen's indictment sent clients scrambling for the exits and quickly led the firm to shut its doors -- at a cost of 28,000 jobs in the United States.
"The government has determined that it is in the interests of justice not to re-prosecute Andersen," federal prosecutors wrote in a four-page motion filed with the U.S. Court of Appeals for the 5th Circuit.
Bryan Sierra, a Justice Department spokesman, said Andersen's nearly defunct status amounted to a "heavy factor" in the government's decision not to retry the firm.
"This represents an important step in removing an unjustified cloud over the professionalism and integrity of the people of Arthur Andersen," a spokesman for the firm said in a prepared statement.
Separately, former Andersen partner David B. Duncan, who pleaded guilty to a single count of obstructing justice and testified against his employer at trial, moved yesterday to withdraw the plea, citing the Supreme Court decision. Duncan did not signal in his plea deal that he "knew he was acting wrongfully," defense lawyers said. The government did not oppose the maneuver, but it has not ruled out bringing different charges against Duncan.
Andersen came under intense scrutiny in 2002 amid disclosures that the firm had shredded tons of Enron-related documents as investigators probed accounting troubles at the Houston energy trader. Several jurors said they voted to convict Andersen based on evidence that an in-house lawyer had tampered with language in a memo about Enron.
The controversy served as a catalyst for a series of significant changes to the accounting industry, which had been largely self-regulated for more than 70 years. Congress imposed new criminal penalties on auditors who destroyed or tampered with work papers. It also created an independent oversight board to monitor the work of accounting firms and inspect their operations.
"It was a wake-up call," said Donald T. Nicolaisen, who served as the chief accountant at the Securities and Exchange Commission until last month. "I believe that wake-up call has been largely heeded. . . . It has been a period of very dramatic change, and mostly good change."
Legal experts said the government was right to use its limited resources to focus on other cases. The Justice Department's Enron Task Force is scheduled to try former Enron leaders Kenneth L. Lay and Jeffrey K. Skilling on fraud charges in January. Both men have pleaded not guilty.
"It's the right thing to do," former Justice Department official William B. Mateja said of the Andersen decision. "I'm not sure there's any interest for the government left to vindicate. . . . We just need to move on."
At the time of the indictment, in March 2002, prosecutors said they based their decision on Andersen's questionable track record. The firm already had been on probation for improprieties in its work for Waste Management Inc. and Sunbeam Corp. The Enron debacle marked the firm's third strike, government lawyers said.
Critics of the government's aggressive efforts to crack down on business wrongdoing say the Andersen decision is the latest signal that prosecutors have overreached in an effort to boost investor confidence and calm the markets.
Earlier this week, for instance, New York Attorney General Eliot L. Spitzer dropped criminal charges against a banker who had been accused of violating murky after-hours-trading rules. A Birmingham jury acquitted former HealthSouth Corp. chief executive Richard M. Scrushy of three dozen fraud charges in June. Another prominent government target, investment banker Frank P. Quattrone, awaits an appellate decision on his obstruction of justice case. Quattrone cited the high court's Andersen ruling as one basis for his appeal.
"There was an initial outbreak of moral condemnation after Enron and the bubble burst," said Larry E. Ribstein, a corporate law professor at the University of Illinois at Urbana-Champaign. "That was a time for people to take a deep breath. Instead, a lot of these things were rushed into prosecution, and now we're seeing the fallout."
Today, only about 200 employees perform administrative duties for Andersen, which exists mostly to fight shareholder lawsuits related to its work for Enron, Global Crossing Ltd. and other clients.
The government's decision not to retry the firm could help insulate Andersen from some civil liability. But the firm's partners have long since dispersed, and it likely will not return to auditing and accounting work.
Justice Department officials took a markedly different approach with accounting giant KPMG LLP earlier this year. That firm was allowed to pay $456 million and institute stark changes to its business practices as part of a deal in which it avoided criminal prosecution over its sale and marketing of abusive tax shelters. KPMG could still face legal jeopardy if it violates the terms of the August agreement.