Posted on 06/03/2005 3:28:18 PM PDT by MRMEAN
June 3, 2005
If Arthur Andersen were a man on death row, he could be released after his conviction was overturned. But the accounting firm, which was ruined by a 2002 witness tampering indictment that scared away its clients, is beyond saving.
As a law professor told The New York Times, "The government gave the corporation a death sentence, and the corporation died." Andersen, which once had 28,000 employees in the United States, has been reduced to a skeleton crew of 200.
The U.S. Supreme Court's unanimous decision overturning Andersen's conviction nevertheless can do some good if it reminds legislators, prosecutors, judges, and jurors of a crucial legal principle: Without mens rea, a "guilty mind," there is no crime. The Justice Department's insistence that Andersen could commit a crime without intending to do so resulted in the embarrassing reversal of a conviction that was supposed to demonstrate the government's seriousness about cracking down on corporate malfeasance in the wake of the Enron scandal.
On October 10, 2001, when Andersen officials began reminding employees to follow a pre-existing company policy of destroying unneeded documents, suspicions about shady accounting practices at Enron, one of Andersen's clients, had been in the news for more than a month. The Securities and Exchange Commission formally opened its investigation of Enron on October 30, and nine days later it served Andersen with a subpoena for Enron-related records, at which point the shredding stopped.
Since the SEC investigation had not officially begun when Andersen started destroying its documents, the government could not charge the company with obstructing justice. Instead it accused the firm of violating the Victim and Witness Protection Act, which makes it a crime to "knowingly" and "corruptly" persuade someone to withhold documents from an "official proceeding."
When the Supreme Court heard oral arguments in the case, Justice Antonin Scalia took issue with the government's application of this provision. "It doesn't make any sense," he noted, "to make unlawful the asking of somebody to do something which is itself not unlawful, so that the person could do it, but if you asked [him] to do it, you're guilty, [while] he's not guilty....That is weird."
Equally weird was the government's argument that Andersen could be convicted even if its officials honestly believed their conduct was lawful, a position that became part of the jury instructions. "It is striking how little culpability the instructions required," the Court noted in an opinion by Chief Justice William Rehnquist. The Court also found that the jury instructions had "diluted the meaning of [corrupt persuasion] such that it covered innocent conduct."
To obtain a conviction, the Court concluded, the government needed to prove criminal intent. Alarmingly, that requirement sometimes seems to be falling by the wayside, especially in high-profile cases where prosecutors' desire to send a message overrides the demands of fundamental fairness.
After the 1989 crash of the Exxon Valdez in Prince William Sound—by all accounts an accident—the oil company faced felony charges of "discharging hazardous substances and refuse without a permit" and "killing migratory birds without a license." The indictment, notes Hoover Institution scholar Paul Craig Roberts, implied that "Exxon intentionally ran its tanker aground in order to discharge hazardous oil and kill migratory birds."
Martha Stewart, who completed a five-month prison term in March, may have intentionally misled federal investigators looking into her sales of ImClone stock. But the alleged action that supposedly justified the investigation—selling stock based on what her broker had told her about other clients' sales—had never before been defined as insider trading, so she couldn't have known it was illegal. That's assuming it was; Stewart ultimately was not even charged with insider trading. To add insult to injury, prosecutors accused her of committing "securities fraud" by proclaiming her innocence (a charge that was tossed out by the judge).
This year McLean, Virginia, physician William Hurwitz, whom the Justice Department accused of facilitating drug abuse by writing inappropriate painkiller prescriptions, was sentenced to 25 years in federal prison. The prosecutors successfully argued that Hurwitz could be found guilty of drug trafficking "regardless of whether he had a good faith belief that he was fulfilling a legitimate medical purpose."
A prosecutor can hardly be faulted for doubting a defendant who says he did not mean to break the law. But a prosecutor who insists it doesn't matter cares about winning more than he cares about justice.
Jacob Sullum is a senior editor at Reason and the author of Saying Yes: In Defense of Drug Use
I thought what killed Andersen was the fatal blow to its reputation... who is willing to hire an auditor of questionable honesty?
I’m not a lawyer and am not going to try to understand and nitpick through the intricacies of insider-trading… but I’ve been through a dozen of the insider-trading classes at work.
My understanding is that if you make ANY trade based on information that is not publicly recorded and accessible by the general public – that’s insider trading.
That’s why the trading windows open AFTER earnings announcements, etc.
It’s probably overkill and a simplification, but that’s the gist of what I’ve been told many times.
Having been a broker and passed her series-7 tests (or whatever they’re called), she knows good and well what does/does not constitute insider trading, and I’m told frequently by those that purport to know, that she DID do it but historically there has been little/no punishment for those that break a variety of policies/laws regarding stock trades.
There you go thinking again. Their license to conduct public audits was suspended during the investigation and revoked upon conviction. The government killed AA.
Yes, well, if you follow the arguments in this post, and go read the decision, what was charged may not have been illegal at all, and may in fact have been common practice.
A wise company would have simply boxed up all the documents and returned them, allowing the owner to shred them at their own risk.
But if they were not guilty of an actual crime, as the decision states, and their reputation was given this fatal blow by an off-base prosecution, you have what amounts to an assination by the AG's office.
Because you can't put humpty dumpty together again, and this ruleing opens the door to a MASSIVE law suit, which could claim simply HUGE amounts of money for business lost going forward for decades.
Note, I do not defend Andersen here, simply point out that if the Government does not RETRY and WIN this case AGAIN, the financial claims could be stagering.
I used to be an auditor, and I can tell you that it is absolutely common practice. As soon as an opinion issued, all documents that are not part of the official workpaper file are shredded. This isn't to hide anything, but rather to only maintain those docs that actually support your opinion. Many docs are kept throughout the audit that contain incomplete conclusions, were drafted by junior staff, are flat out incorrect, or bear no pertinence to the final opinion. These are and should be shredded upon completion of the audit.
I'm not well versed in what the law is on Andersen's actions, and what the common practice is, so I have no judgement to make on those. However, the very purpose of the company was to ensure honest audits, and consulting to make sure companies could comply with audits. They were caught doing dishonest (even if possibly legal) consulting, helping a company to substantially misrepresent its financial condition.
In this context, what group of shareholders would permit their own company to be serviced by such an auditing company? It defeates the very purpose of having an audit, which is providing agenda-free hard, accurate, and honest information which can be used as a reliable basis for decision-making.
I'm not well versed in what the law is on Andersen's actions, and what the common practice is, so I have no judgement to make on those.
AND...
They were caught doing dishonest (even if possibly legal) consulting, helping a company to substantially misrepresent its financial condition.
It would seem that you DO HAVE A JUDGEMENT, and it would seem that the Supreme Court disagrees with your Judgement. See prior posts in this thread about what is common practices in the industry.
Sure. My judgement is on the job that they did, not the law, and not the common practice. Where the common practice is corrupt, the work product that follows that practice is also corrupt, and can be independently judged to be so, even in complete ignorance of common practice. What I am hearing from you is that there was nothing special about Andersen, which, if true, would lead to the conclusion that the auditing industry as a whole is hopelessly corrupt and functionally worthless.
Or that the vast majority of companies do, by and large, keep pretty good books....
When was the last time you saw an audit point out gross misconduct or financial shenanigans?
It is far easier and less painful to simply report the bad news, than to have an audit discover them. These audits are pretty much pro-forma, and high-level, in my opinion, and when I vote my shares of any stock I always vote against the Boards recommendation to select a particular Auditor.
That is an oversimplification, I've also studied the regulations. There is no specific law against "Insider Trading," there is a law against securities fraud, which was intended to protect the investing public against dishonest brokers or fraudulent issuance of stock. The SEC over the years has creatively expanded that, through lawsuits and issuance of regulations, to apply against the investing public the law was originally intended to protect. This means more cases (and easy cases) which provides for a larger budget, more employment for lawyers, a larger bureaucratic empire, and the illusion that the government is protecting "the little guy," while actually putting him (or in this case her) at risk. This complex and evolved law has never been rationalized by legislation; the SEC has opposed clear rules because they want a wide gray area that provides them opportunities for litigation. The law is actually different in different Federal circuits, because the law depends on the different cases decided under different theories in different circuits, except where cases have gone to the Supreme Court.
she knows good and well what does/does not constitute insider trading, and I’m told frequently by those that purport to know, that she DID do it but historically there has been little/no punishment for those that break a variety of policies/laws regarding stock trades.
Martha was not charged with "insider trading," she was charged with securities fraud for daring to assert that she had done nothing wrong, under a novel theory that by asserting her innocence that she was fraudulently manipulating the stock of her own company; this charge was thrown out by the judge. She was charged with and convicted of with lying to Federal officials about her motivation for selling her ImClone stock, she was never criminal charged with "Insider Trading," and she was never an "insider" of ImClone. In other words, because that she said she didn't do what the government said she did, she was tried and convicted of "obstruction of justice." But "obstruction of justice" of what crime?
See The Interminable Persecution of Martha Stewart by Alan Reynolds
What’s Wrong with Insider Trading? The railroading of Martha Stewart by Stephen Moore
You are just dealing with abstractions --a very common liberal trait.
Concretely there were some guilty parties at Arthur Andersen connected with Enron. The justice department overreacted (mainly because of the baying of the Democrats that Enron = Bush).
Rather than prosecute those who had actually been involved the justice department killed the entire company. Of course a Howard Dean viewpoint would be that they were all evil capitalist who never worked an honest day in their life. Sorry, I can't help feeling for some of the schmucks who weren't working in Houston and were doing a decent job.
More recent prosecutions like this have targeted individuals in a company, not the entire corporate entity.
I'm afraid you misunderstand me, I'm not commenting on the merits of DoJ action at all. I'm explaining why, from a business perspective, the company's behavior cost them the very thing they trade on - trust. After Enron, what stockholder would trust an Andersen audit?
How does a large company or organization respond to malfeasance by a small number of its members?
Tylenol was able to recover from poisons being put into their product. Abu Gharave has been investigated and the actions of ten or twelve dirtbags have been demonstrated to violate policies in effect. Is a city mayor responsible for criminal behavior of policement? Again, you generalize that everything that happened was pervasive criminal corporate behavior but the rush to judgement (evidenced by supreme court reversal) does not make that clearly convincing.
If AA had been able to demonstrate that the actions of their employees were isolated, your hypothetical might not be true. This would have been more clearly revealed had the real, responsible parties been prosecuted.
I would have been very happy to see the market appropriately deal with this problem after GUILTY parties were identified. Instead, driven by national politics, many innocent people were hurt by criminalization of actions of a corporate entitity (which this supreme ct decision suggests were not criminal).
What remains is a highly symbolic Public Hanging that will keep accounting firm partners a little narrower and a little straighter for a generation. Nothing wrong with that. |
Well IRS agents are auditors of questionable honesty.
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Sometimes good things happen for the wrong reasons. For every client Anderson lost, there was another firm who picked it up and suddenly needed more people. So on the whole, we can assume that the vast majority of the Anderson People were picked up by one-time competitors.