Lies, corruption, and document destruction: never before in the history of American business has a global corporation been destroyed by acts directly related to document retention and destruction.

At the Core

This article:

* Reviews the RIM implications of Enron/Andersen

* Examines when document destruction is illegal

* Explains how to ensure records disposal in lawful

Many people labor under the misapprehension that, unless and until they receive a subpoena, they can destroy documents with impunity. Such suppositions are legally invalid. When trouble appears imminent for employees or the organization for which they work, the law prohibits destroying evidence that may be relevant to the issues at hand, particularly documentary evidence that may be construed as incriminating. If such records are destroyed, those who effected destruction--or the entire organization--could be liable for criminal prosecution and, if convicted suffer fines or even imprisonment. This is precisely what happened to Arthur Andersen, one of the world's preeminent public accounting firms.

The Case Unfolds

In early December 2001, Enron Corp., a large Houston-based energy company, filed for bankruptcy, one of the largest such actions in U.S. business history. In the weeks that followed, a series of allegations of financial mismanagement-and possible violations of law--began to surface. The affair soon began to spill over to Arthur Andersen, Enron's outside auditing and accounting firm. Among the allegations were charges that officials of Andersen's Houston office, who were responsible for managing Enron's audits, had illegally destroyed paper and electronic documents related to their representation of Enron.

On January 15, 2002, Andersen fired David B. Duncan, the senior partner in charge of the Enron account. The following day, Enron terminated the services of the entire firm. A spokesperson for Andersen stated that Duncan had ordered the destruction of documents shortly after Enron acknowledged that the U.S. Securities and Exchange Commission (SEC) had begun seeking information about Enron financial statements that Andersen had audited. Andersen stated that Duncan had directed "an expedited effort to destroy documents,' including "the deletion of thousands of e-mails and the rushed disposal of large numbers of paper documents." It further stated that the "activities were on such a scale as to remove any doubt that Andersen's policies and reasonable good judgment were violated." Andersen added that the document destruction "appears to have ended shortly after the lead partner's assistant sent an email to other employees on November 9 [2001], the day after Andersen received a subpoena from the SEC, telling them to `stop the shredding.'"

Prominent spokespersons from the U.S. legal community were quick to comment on the situation's gravity. Alan M. Cohen, a former federal prosecutor, stated, "This is very, very bad ... there is little doubt that prosecutors will view this as an act of obstruction." He further noted that even though Andersen maintained that the document destruction was not authorized by the firm, the law provides that a business has "vicarious liability" for acts committed by its agents or employees. Further, the destruction of documents at Andersen "would indicate some intent to deceive," according to Franklin B. Velie, another federal prosecutor. Finally, Joseph di Genova, a former U.S. attorney in Washington, D.C., stated that if it could be shown that anyone at Andersen destroyed documents "in the middle of a criminal or congressional investigation," that person could be charged with obstruction of justice, a crime punishable by fines and possible prison time.

Both Arthur Andersen and Duncan, through their counsel, issued statements that were designed to mitigate their culpability in the matter. In an apparent effort to contain the scope of the scandal to the Houston office and away from the firm's corporate headquarters, Andersen insisted that its senior management didn't know about the document destruction until long after the fact. Duncan's lawyer stated that his client had done nothing wrong, but was merely following instructions in an email dated October 12, 2001, from Nancy Temple, an Andersen lawyer from the headquarters office, who advised him and others to follow company directives relative to document retention and disposal. However, in an appearance on NBC's "Meet the Press," Andersen's chief executive, Joseph F. Berardino, stated that "Nancy just told people to use their judgment ... accountants are pack rats ... we save a lot of stuff' that's not relevant."

Within weeks, Berardino resigned.

Andersen's Document Retention Policy

As the scandal unfolded, some details emerged in the news media about Andersen's document retention policy. Two years ago, the firm assigned one of its partners, Richard Kutsenda, to review and revise the policy. When it was completed in May 2000, the new policy was sent to every Andersen employee via email. According to news accounts, this policy authorized the destruction of documents that are not needed as work papers to support an audit. Further, the 26-page retention policy reportedly authorized Andersen's audit offices to retain work papers for six years, after which time they are authorized for disposal. Client-related files, such as correspondence and other records, are kept only "until not useful," at which point they may be "purged."

In addition, the policy provided that all documents should be retained if there was a threat of litigation. However, the policy apparently did not define "threatened" litigation, nor did it explicitly state whether suspension of document destruction would apply in cases involving a government investigation, either formal or informal.

The Indictment

On March 14, 2002, the U.S. Department of Justice indicted Arthur Andersen under a section of the obstruction of justice statutes dealing with witness tampering (18 USCS 1512). The statute states that:

   "Whoever withhold[s] testimony, or withhold[s] a record, document, or other
   object, from an official proceeding [or] cause[s] or induce[s] any person
   to ... alter, destroy, mutilate, or conceal an object with intent to impair
   the object's integrity or availability for use in an official proceeding
   ... shall be fined under this title or imprisoned not more than ten years,
   or both."

The indictment described "the wholesale destruction of documents by Andersen" and stated that, on October 19, 2001, Enron alerted the Andersen audit team about an SEC inquiry regarding Enron's accounting practices. The indictment went on to assert that" ... instead of being advised to preserve documentation ... employees were instructed ... to destroy immediately documentation relating to Enron, and told to work overtime if necessary to complete the destruction."

The indictment contended that "... between October 10, 2001, and November 9, 2001 ... Andersen, through its partners and others, did knowingly, intentionally, and corruptly persuade ... Andersen employees ... to (a) withhold records, documents and other objects from official proceedings, namely: regulatory and criminal proceedings and investigations, and (b) alter, destroy, mutilate and conceal objects with intent to impair the objects' integrity and availability for use in such proceedings."

Andersen was indicted for a single felony count. If convicted, the company would receive fines of up to $500,000. Worse, Andersen also would lose its license to audit public companies in the United States, which comprises the major portion of the firm's business. The latter penalty was widely considered tantamount to a "corporate death sentence." Thus, this case was about the company's very survival.

The Prosecution's Case

The trial began in Houston federal court on May 6, 2002, with Judge Melinda Harmon presiding. Prosecutors' opening statements made clear that, in order to sustain a conviction, they need only prove that one Andersen employee destroyed documents with the intent to keep them away from government investigators.

During his several days of testimony, Duncan testified that fear of lawsuits or regulatory investigations motivated the document disposal efforts in which he participated. He stated that he ordered subordinates to follow Andersen's document retention policy knowing that this instruction would direct them to destroy--not save--documents related to the firm's audits of Enron. Other testimony was elicited from several witnesses who indicated that, because legal proceedings were probable, the firm needed to get its files in order. For example:

* Jennifer Stevenson, a former Andersen manager, testified that Kimberly Scardino, another Andersen manager, approached her and "indicated that we may be subpoenaed so we need to get our files in order."

* An e-mail titled "Destruction of Files" from an Andersen staff member, dated October 10, 2001, stated "we were reminded that, once files have been coded, all other documents/electronic files, etc., should be destroyed ... this is especially important with pending litigation."

Commenting on the case's document retention aspects, Samuel Buell, one of the prosecutors, stated, "There's nothing criminal about having a document retention policy." Characterizing the policy as one that had "gathered dust on the shelf," he said, "What is a crime is to take it out and blow it off and implement it in the middle of an SEC investigation because you want to be able to control what documents the government gets to see and what documents it doesn't." Further, he dismissed Andersen's arguments that the document destruction was routine housekeeping. "The suggestion that this was some routine cleanup is ridiculous ... You don't worry about mopping the floors when the building is on fire," Buell said.

Andersen's Vigorous Defense

For a case that was supposed to be a "slam dunk" for the prosecution, the defense was surprisingly effective. Throughout the trial, Andersen steadfastly maintained that the firm never broke the law but was merely cleaning up its files as permitted under the firm's document retention policy. With respect to the timing of the document destruction, Andersen lead attorney Rusty Hardin argued strongly that his client was fully entitled to purge its files of unwanted material at its own discretion, so long as it hadn't received concrete notice, in the form of a subpoena, of threatened litigation or active government inquiries. "There's got to be something that puts [Andersen] on notice about it," he contended. "They just can't sit around and guess about it."

All Andersen witnesses who participated in document destruction (including Duncan, who testified for the prosecution) said they did not think they were doing anything wrong at the time. Indeed, Duncan testified that he didn't realize until March or April, after the law was explained to him, that he had obstructed justice. Moreover, the defense made extensive efforts to characterize Duncan's plea bargain as a result of his having been "railroaded" by pressure from prosecutors.

The Jury Deliberates

On June 6, 2002, after 21 days of testimony and eight hours of closing arguments, the case went to the jury. Either a conviction or an acquittal required a unanimous vote by the 12 jurors. Instructions prepared by Judge Harmon required the jury to answer one key question in order to convict Andersen:

   Did at least one "agent" of Andersen--a partner, officer or employee--try
   to "corruptly persuade" another person to prevent a document from being
   available for use in an official proceeding?

To clarify this instruction, Judge Harmon defined "corruptly" to mean acting with an "improper purpose," such as "an intent to subvert or undermine the fact-finding ability of an official proceeding"--in this case, informal and formal investigations by the SEC. To support a conviction, the jury needed to identify at least one person--one "corrupt persuader"--be it a low-level clerk or a senior partner.

To satisfy the tests in the judge's instructions, the prosecution described the illegal conduct of four corrupt persuaders: Duncan, Temple, Thomas Bauer, and Michael Odom. However, after several days of deliberations, the jury requested clarification on a crucial question: To convict Andersen, did they all have to agree on the identity of the corrupt persuader, or could a conviction be supported if various jurors each thought a different person committed acts as a corrupt persuader? Judge Harmon's answer was no, the jury was not required to unanimously agree on the single corrupt persuader's identity. In the minds of many observers, this decision sealed Andersen's fate.

The Verdict: Guilty As Charged

On June 15, 2002, the jury reached its verdict: Guilty of the single count of obstruction of justice. In a special jury verdict form, the jurors stated that they agreed on the identity of one Andersen employee who had encouraged document destruction, but then declined to name that person. However, in interviews with reporters after the verdict, four jurors identified Temple as that person.

Following the verdict, Andrew Weissmann, a prosecution attorney, told reporters that the case boiled down to a simple principle: "When you expect the police, you don't destroy evidence."

The verdict marked an ignominious ending for Andersen, a firm that opened its doors in 1913 and grew into one of the world's most-trusted institutions, with offices in 84 countries. Most observers predicted that the firm would go out of business. Itzhak Sharav, an accounting professor at Columbia University's business school, commented, "Andersen is history, no matter what."

In fact, soon after the verdict, Arthur Andersen agreed to cease practicing before the SEC by August 31.

Lessons Learned

What lessons can be learned from this debacle?

* First and foremost, records and information specialists must never put themselves in legal jeopardy in exchange for a paycheck from their employers. If employees have questions concerning the legality of any records disposal action, they should contact their legal department. If they are still not satisfied, they should contact government authorities. If any employee is forced to choose between their company and the law, they should comply with the law and cooperate with the authorities, even if it means resigning their position.

* Under most circumstances, it is perfectly legal to destroy unneeded records, regardless of whether disposal occurs under an established records retention program or as just the casual, somewhat arbitrary act of hitting the "delete" key, overwriting data, or simply discarding records as office waste. In short, business people routinely and lawfully discard unneeded records every business day. Disposal is illegal only when retention is required by law or regulation.

* It is a crime, punishable by fines and possible imprisonment, to destroy documents relevant to actual or pending litigation, government audit, or other official investigation. The prohibition on destruction begins the moment a person or organization learns of a possible lawsuit or government investigation, even though proceedings have not yet officially commenced.

* Courts generally have applied the "reasonably foreseeable" standard to the key question of the point in time at which document destruction becomes an illegal act. This means that, when litigation or government investigation becomes a "reasonably foreseeable" event, the destruction of relevant evidence becomes potentially criminal activity. However, for reasons that were never made clear, this standard was apparently not used in the judge's instructions in the Enron/Andersen case.

* The law makes no distinction as to whether documents happen to reside on paper, computer media, or any other format, nor whether they are of "official character," merely work papers, or duplicate copies rather than "original" records. If the content of any document is or may be deemed relevant to the lawsuit or investigation, that document may not legally be destroyed, and it must be turned over to authorities if requested.

* If records relevant to litigation or a government investigation are requested and cannot be produced, the investigating authorities will demand an explanation. If the records were disposed of, the circumstances surrounding that disposal will be investigated. The investigators will want to know specifically what records were destroyed, what they contained, who destroyed them, when, and why. If it can be shown that the motivation behind the disposal was to suppress or conceal unfavorable evidence, those who authorized and/or carried out the disposal could be liable.

The foregoing requirements of the law supersede any and all organizational policies authorizing document destruction, including the authority granted in records retention schedules. In other words, organizations or employees cannot attempt to use the authority granted them in records retention policies as justification for destroying information relevant to actual or pending litigation or government investigation; that is, records retention cannot be a shield justifying the unlawful disposal of records.

Policy Recommendations

The entire case and its tragic results could have been avoided if Arthur Andersen had incorporated the following language into its document retention policy and all employees had fully complied with it:

   "The legal department is responsible for advising all departments and
   employees of actual or potential litigation, government investigations, or
   other circumstances that will or may necessitate the preservation of
   relevant evidence and/or the suspension of records disposal activities.

   All employees shall immediately cease the disposal of relevant records or
   information upon notification by the legal department of a disposal
   suspension for litigation or other reasons. This means, among other
   reasons, that the information contained in the records is or may be subject
   to production under a subpoena or document discovery order issued by proper
   authority, and that disposal under authority of the retention schedules is
   not authorized.

   Further, all employees shall promptly cease the disposal of any records or
   information that may be related to litigation or a government investigation
   as soon as either eventuality is reasonably foreseeable, even though a
   disposal suspension has not yet been formally instituted by the legal
   department.

   The term "reasonably foreseeable" is defined to mean the point in time at
   which an employee initially gains knowledge that any particular record or
   document may or will be relevant to a legal proceeding or government
   investigation, including lawsuits or government investigations that have
   not officially commenced. Employees who violate this policy are subject to
   disciplinary action by the company, up to and including dismissal, and/or
   judicial penalties imposed by courts of law."

If Andersen's lawyers and employees had only adhered to these principles of lawful recordkeeping conduct, the company might be alive and well today.

References

Barrionuevo, Alexei, and Jonathan Weil. "Andersen Keeps Chipping Away at Obstruction Charge." Wall Street Journal, 30 May 2002.

--. "Andersen Scrambled to Destroy Papers, Buell Says." Wall Street Journal, 6 June 2002.

--. "Andersen Takes Different View of Shredding." Wall Street Journal, 10 May 2002.

--. "As Trial Nears End, Andersen Proves Surprisingly Tough." Wall Street Journal, 4 June 2002.

--. "Duncan Knew Papers Would Be Lost." Wall Street Journal, 14 May 2002.

--. "Duncan Says Fear of Lawsuits Drove Shredding." Wall Street Journal, 15 May 2002.

Barrionuevo, Alexei, Jonathan Weil, and Cassell Bryan-Low. "Andersen Win Lifts U.S. Enron Case." Wall Street Journal, 17 June 2002.

Barrionueovo, Alexei, Jonathan Weil, and Kathryn Kranhold. "Andersen Verdict Could Hinge on Critical Ruling From Judge." Wall Street Journal, 14 June 2002.

Eichenwald, Kurt. "Andersen Misread Depths of Government's Anger." New York Times, 18 March 2002.

Hamburger, Tom and Jonathan Weil. "Cohort Backs Auditor's Account on E-mail." Wall Street Journal, 21 January 2002.

Johnson, Carrie. "Andersen Tape Shows Order to Clean Files." Washington Post, 21 May 2002.

Norris, Floyd. "For Andersen and Enron, the Questions Just Keep Coming." Wall Street Journal, 16 January 2002.

Schmitt, Richard B., and Jonathan Weil. "Jury Instructions Are Key in Andersen Trial." Wall Street Journal, 23 May 2002.

Wilke, John R., and Nicholas Kulish. "Indictment Puts Andersen's Fate on Line." Wall Street Journal, 15 March 2002.

Yost, Pete. "Investigators: Enron Shredded Papers." News & Observer, 22 January 2002.

David O. Stephens, CRM, CMC, FAI, is vice president of records management consulting for Zasio Enterprises. He may be reached at [e-mail].