Arthur Andersen’s Conviction for Shredding Overturned, But Only Because Jury Instructions Flawed
The U.S. Supreme Court has overturned Arthur Andersen’s 2002 criminal conviction for obstructing justice by deliberately shredding documents pertaining to Enron.1 This outcome is a rather hollow victory for Andersen, which was essentially put out of business by the criminal prosecution. Although the Supreme Court’s ruling might make it harder for the criminal authorities to successfully prosecute obstruction of justice cases, businesses should not interpret the case as sanctioning document destruction in the face of litigation. Relevant documents and electronic records should be preserved as soon as litigation or a criminal or regulatory proceeding is foreseeable.
Supreme Court Found That Jury Instructions Were Flawed
Andersen was convicted of "knowingly and corruptly persuading" employees to destroy documents and make them unavailable in a criminal proceeding. The Supreme Court reversed this conviction on the basis that the jury instructions were flawed. The trial judge told the jury that Andersen could be convicted even if it honestly and sincerely believed that its conduct was lawful. The Supreme Court disagreed with the trial judge’s interpretation (which had been affirmed on appeal) and said that Andersen could only be convicted of knowingly and corruptly persuading employees to destroy documents if there was proof of dishonesty and consciousness of wrongdoing. That is, because this was a criminal offense, the state had to prove the requisite criminal intent, or mens rea.
Document Retention Policies That Permit Ordinary-Course Purging Are Not Illegal
In the aftermath of the Enron financial scandal, the relevant U.S. criminal statutes and SEC rules were amended to require accounting firms to preserve all their paperwork and other records (including electronic records such as emails) that might be relevant to an audit. Other businesses, by contrast, are permitted, in ordinary circumstances, to destroy records in accordance with reasonable document retention policies.
Arthur Andersen had a document retention policy that provided for purging of documents. And its employees stopped shredding documents when the SEC served a subpoena for Enron-related records. Andersen employees knew, however, that Enron was in serious financial trouble, that Enron’s accounting practices were aggressive, that the SEC was investigating well before it issued the subpoena and that the firm would inevitably be involved in Enron-related litigation.
Records Should Be Preserved in the Face of Litigation
By destroying documents during a very sensitive period—when litigation was foreseeable but not yet formally initiated—Andersen’s employees were playing with fire. Obstructing justice by tampering with documents is a serious crime carrying heavy penalties (up to 20 years in prison). In addition to criminal liability, liability to private litigants can result from failing to produce documents2 or from spoliation. In private litigation, however, the plaintiff need prove mere negligence, not the higher standard of intentional misconduct that the Supreme Court required in the Andersen criminal case.
Because of the risks of criminal, regulatory and civil liability, businesses should take a very cautious approach to document destruction. In the face of any potential government investigation, private litigation or other similar proceeding, employees should be clearly instructed to halt any destruction or deletion of documents, including normal-course document destruction. Positive steps should be taken by management to ensure that relevant material (hard copy and electronic) is preserved. Document retention policies should require this practice.
Footnotes
1. The Supreme Court did not find that Andersen’s employees acted innocently, just that the jury was instructed incorrectly. The question of guilt will only be answered if prosecutors decide to retry the case.
2. The failure by a litigant to produce documents can lead judges to draw adverse inferences and impose serious financial penalties (see Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co.).
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