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Court rules in firm's favor

| Wednesday, June 1, 2005

WASHINGTON -- The U.S. Supreme Court overturned accounting firm Arthur Andersen LLP's conviction for obstructing a government investigation into Enron Corp., dealing a unanimous rebuke to the Bush administration's corporate-fraud crackdown.

The court on Tuesday said the jury instructions were faulty because they didn't require proof that Andersen officials knew they were doing something wrong. Andersen, driven out of the auditing business by the criminal case, was convicted in June 2002 of illegally urging employees to shred documents connected to its Enron audits.

The instructions "simply failed to convey the requisite consciousness of wrongdoing," Chief Justice William H. Rehnquist wrote for the 9-0 court in Washington. "Indeed, it is striking how little culpability the instructions required."

The decision comes too late to revive an accounting firm that had been the world's fifth-largest, with 85,000 worldwide employees. The ruling, nonetheless, overturns a symbol of the administration's legal attack on corporate accounting fraud and provides new fodder for critics of the decision to prosecute Andersen.

"It's a tremendous vindication" for the firm and its employees, said Rusty Hardin, who served as Andersen's lead attorney during the trial. "They never intended to do anything wrong. They certainly never intended to obstruct justice."

The decision will have limited impact beyond Andersen, in large part because the 2002 Sarbanes-Oxley Act supersedes the legal provisions at issue, corporate-crime legal experts said.

It may help former Credit Suisse First Boston banker Frank Quattrone, who is appealing his obstruction-of-justice and witness-tampering conviction on similar grounds. In court papers filed yesterday, Quattrone's attorneys said the ruling has "an important bearing" on several arguments he is raising.

Acting U.S. Assistant Attorney General John C. Richter said the Justice Department is disappointed by the ruling. "We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law," he said.

Richter said the government hasn't decided whether to seek a new trial, something legal experts said was unlikely.

"I seriously doubt the government will go to the time and expense of retrying Andersen again, given what's left of the company," said Alan Bromberg, a securities law professor at Southern Methodist University in Dallas.

The high court ruled barely a month after hearing arguments.

"The speed with which they did this is fairly unprecedented," said James Wareham, a corporate-crime defense lawyer at Paul Hastings Janofsky & Walker in Washington. "It was a big 9-0 because it was so rapid."

The ruling overturns a $500,000 fine for the firm and may help Andersen's former partners as they try to resolve civil lawsuits seeking billions of dollars.

"It's not over for the partners by a long shot," said Richard Grafmeyer, a former Andersen tax partner who is now a partner at the lobbying firm Capitol Tax Partners in Washington. "We're still getting sued, we're still having to fight over partnership loans and capital contributions. The unpleasantness will continue for a long, long time."

Andersen was accused of persuading its employees to destroy almost two tons of paper and tens of thousands of e-mails, just as the Securities and Exchange Commission was preparing to open a formal investigation into Enron's accounting.

Enron, a Houston-based energy trader, lost $68 billion in market value in an accounting fraud that led to its December 2001 bankruptcy filing. Andersen was Enron's auditor for 16 years.

Prosecutors opted not to charge Andersen for the document destruction itself. Instead, Andersen was indicted under a federal witness-tampering law, which authorizes 10 years in prison for someone who "corruptly persuades" another to destroy evidence.

It was the first-ever prosecution of a major U.S. accounting firm, and it triggered an exodus of Andersen's 2,300 clients.

Andersen said firm officials, including in-house attorney Nancy Temple, merely reminded employees of its longstanding "document-retention policy." That policy called for elimination of duplicates, drafts and notes once an audit was complete.

In yesterday's opinion, Rehnquist faulted U.S. District Judge Melinda Harmon's instructions to the Houston jury. He pointed to a section in the instructions -- urged by Justice Department prosecutors -- that said Andersen could be convicted even if the firm "honestly and sincerely believed that its conduct was lawful."

Rehnquist, who announced the decision from the bench, also said document-retention policies are "common in business."

"It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document-retention policy," he wrote.

The ruling reversed a decision by the New Orleans-based 5th U.S. Circuit Court of Appeals upholding the conviction.

"This could be the beginning of the end for the government's zeal to make an example of people in corporate fraud cases," said Robert Zito, a New York-based litigator who defends large corporations in civil and criminal cases.

Enron, once the world's largest energy trader, sought bankruptcy protection following disclosures that it hid billions of dollars of debt in off-book partnerships. Some of its top executives, including former Chairman Kenneth Lay, are facing criminal charges for their alleged roles in the accounting fraud.

The case is Arthur Andersen v. United States, 04-368.

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