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Washington-In the government’s aggressive and largely successful pursuit of corporate fraud in recent years, the conviction of Arthur Andersen LLP was its first major, high-profile victory. A retrial after last week’s stinging reversal by the U.S. Supreme Court is unlikely, said a number of legal experts, and that will be a difficult pill for government prosecutors to swallow. The U.S. Department of Justice’s deliberations on the retrial question unfold against a backdrop of other high-profile and difficult corporate fraud prosecutions now under way-and a significant increase in the department’s use of alternatives to indictments of corporations. Many defense attorneys and legal experts attribute the increased use of those alternative tools-such as pretrial diversion agreements and nonprosecution agreements-to the department’s recognition of the devastating impact its prosecution had on Arthur Andersen. The Supreme Court, in a unanimous opinion crafted by Chief Justice William H. Rehnquist, reversed the former accounting giant’s conviction for obstruction of justice through destruction of documents. The high court held that the jury instructions in Andersen’s trial were flawed for two reasons: They did not require proof of “conscious wrongdoing” on Andersen’s part, nor any nexus between the persuasion to destroy documents and a pending or anticipated investigation. Arthur Andersen v. U.S., No. 04-368. “This was their poster child case, their crown jewel,” said Senior Executive Counsel Paul Kamenar of the Washington Legal Foundation. “The Justice Department used it to say, ‘Let’s show the public how we’re going after corporate crime.’ “ Andersen’s 2002 indictment itself was extremely controversial in both the legal and business worlds. As the Justice Department examines the high court ruling to determine whether to retry the case, former prosecutors and others predicted a tug-of-war within the department and an equally controversial reaction outside of the department if it decides to prosecute again the largely defunct company. “I think what perhaps may have shocked the department and the business sector was the essential destruction of Arthur Andersen resulting from this criminal prosecution,” said Roma Theus, vice chairman of the Defense Research Institute’s white-collar crime subcommittee and a partner in Edwards & Angell’s Fort Lauderdale, Fla., office. What followed, he said, was consolidation of big accounting firms, with a negative anti-competitive effect, and a “tremendous” human tragedy in which hundreds, if not thousands, of Andersen employees lost their jobs. “Since 2003, there has been greater balance in the disposition of criminal matters concerning companies,” said Theus. “I believe there’s no interest on the part of DOJ to destroy business entities.” Weighing retrial While a number of former prosecutors, defense attorneys and others agree that the department ultimately will decide not to retry Andersen, they do not necessarily agree on what the outcome of a retrial would be. What is clear is that Andersen can’t be retried under the Sarbanes-Oxley Act of 2002, which amends the statute Andersen was convicted under, because it was enacted after Andersen’s indictment and conviction and doesn’t apply retroactively. The Sarbanes provision, 18 U.S.C. 1519, which makes it a crime knowingly to destroy or conceal a document to obstruct or impede a government investigation, may be a broader standard for prosecutors, but it could be vulnerable to a challenge after the Andersen ruling. And it’s unlikely that the statute under which Andersen was prosecuted, 18 U.S.C. 1512, which makes it a crime to “knowingly . . . corruptly persuade” others to withhold documents from an official proceeding, will be used again against companies other than Andersen. Yet William B. Mateja, a principal in Fish & Richardson’s Dallas office who formerly was an attorney on DOJ’s corporate fraud task force, said the department would have an “equally good chance” of winning a retrial. “The Supreme Court didn’t take anything away from the facts,” he said. “Arthur Andersen destroyed tens of thousands of records when it was readily apparent an SEC investigation was looming. Andersen violated its own document-retention policy. You don’t need to send out memos saying, ‘Let’s dust off our document-retention policy,’ if the policy is in place and is the normal course of business for that company. Andersen also had been punished two times for prior acts.” Mateja, however, does not think the government will retry the case. He said the department will consider the following calculus in its internal tug-of-war: “First, there is the appearance: Do they want to try to save some face?” he said. “I do think that’s large on their minds . . . .The department had success on WorldCom; it convicted CEO Bernard Ebbers,” he noted. “But if you lose Andersen and you have a jury that might hang in HealthSouth, all of a sudden everything the government’s done doesn’t look so good. “The second angle is just common sense,” said Mateja. “At the end of the day, I think DOJ is going to say it doesn’t make sense to anybody to retry. It is essentially a defunct company. It is Humpty Dumpty whose pieces can’t be put back together.” A former assistant to the solicitor general, Gregory Garre of Washington’s Hogan & Hartson, agreed with Mateja’s evaluation of the importance of the Andersen conviction to the department. “On the other hand, I think the Supreme Court’s decision sets the bar pretty high in terms of the proof the government would have to show to prevail on this claim at a retrial,” said Garre. “The fact the jury deliberated at some length on the obstruction-of-justice charge is going to make it all the more difficult for the government to secure a conviction with the knowledge standard the Supreme Court has set,” he said. “That’s not infrequently the key in these types of prosecution. One of the most difficult issues for the government to show is mens rea.” And then there is the present state of Arthur Andersen, added Sean O’Shea of New York’s Sean O’Shea & Associates, a former assistant U.S. attorney. “The company is still in existence, but only nominally,” he noted. “Couple that fact with the very favorable jury charge that the government got in the first trial-which has now been reversed-and a very difficult trial, and you have to wonder whether the government would be up for putting resources into a retrial. Even if the government wins, it would be a hollow victory.” Seeking balance? O’Shea and others believe that Andersen’s demise is directly behind a policy effort by the department since 2003 to use alternatives to prosecution in criminal matters involving corporations. Early that year, then-Deputy Attorney General Larry Thompson sent a memo instructing federal prosecutors to consider such tools as pretrial diversion agreements for corporations that cooperated with investigations. “There has been an increase in them since the Arthur Andersen prosecution and more of a willingness by the department to look at what the actual harm might be, whether explicitly or implicitly stated,” said Edwards’ Theus. In a nonprosecution agreement, Theus explained, the government commits to not filing charges if certain conditions are met by the corporation over a certain period of time. In a pretrial diversion agreement, the government will dismiss a criminal charge if there is compliance with certain conditions for some period of time, usually two years, he added. In its 2004 annual report, the DOJ’s Criminal Division noted: “One topic that continues to be particularly important is the decision to bring criminal charges against a corporation itself, and not simply against particular culpable employees of that corporation. This determination has weighty consequences for corporations under scrutiny, as demonstrated by the fate of Arthur Andersen when it was convicted of obstructing the SEC’s investigation of Enron’s collapse. “In certain cases, these flexible and innovative approaches can strike the right balance between diligent enforcement and deterrence on the one hand, and proper incentives for companies to self report and cooperate on the other.” The department has entered into these agreements with PNC Financial, Merrill Lynch, CBIC (a Canadian bank), American International Group, America Online, Monsanto Corp., Micrus Corp., AmSouth Bancorp., Health South, MCI and Banco Popular de Puerto Rico, according to the annual report and Theus. Department spokesman Bryan Sierra said DOJ has entered about 15 deferred or nonprosecution agreements with corporate entities. There are conflicting accounts of whether the department offered Arthur Andersen any of these alternatives prior to indictment. Some lawyers reported that they heard at the time that offers were on the table, but that Andersen was unable to agree to the terms. Others said Andersen sought deferred prosecution twice before indictment and it was rejected twice. DOJ’s Sierra said the department would not comment on precharging negotiations. Theus said he believes that if Arthur Andersen had entered into a nonprosecution agreement, it would still be in business today. Unlike Theus, James D. Miller of Washington’s King & Spalding does not attribute the increased use of alternatives to prosecution to the Arthur Andersen demise. “It’s tempting to say that in 2005 the Justice Department has an appreciation for how difficult these corporate criminal prosecutions are that they didn’t have in, say, 2001 and 2002,” said Miller. “But I know the people who made these decisions and they are very savvy, experienced prosecutors. I’m not sure why the defense bar and the Justice Department have found these so useful, but they have significantly increased recently.” But O’Shea said the fact that an indictment is a “corporate death penalty” informs the decisions of the defense bar and careful prosecutors. “Everybody has to count to 10 here on both sides of the equation,” he said. “There’s so much fallout to innocent parties-collateral fallout to shareholders and employees.”

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