Sucheta Dalal :Lessons from the Andersen trial
Sucheta Dalal

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Lessons from the Andersen trial  

June 14, 2005

The demise of Arthur Anderson raises several interesting questions about the role of aggressive prosecutors and a trial by the media. This New York Times article says that the Andersen trial serves as a stern reminder to corporate America that prosecutors can bring down corporations simply by indicting them on serious charges.

Over Before It Started



THE Supreme Court has overturned Arthur Andersen's conviction for obstruction of justice in the Enron case. But to Andersen, the court's ruling doesn't matter, the original trial at which it was convicted didn't matter and the verdict at any coming trial won't matter.


Andersen was destroyed when it was indicted. No exoneration at trial and no ruling by the Supreme Court will cause it to rise, Lazarus-like, from the dead.


History will decide whether it was right or smart to destroy Andersen before trial. But Andersen's demise did serve as a stern reminder to corporate America that prosecutors can bring down or cripple many of America's leading corporations simply by indicting them on sufficiently serious charges. No trial is necessary.


This prosecutorial power arises from a combination of market forces and legal realities. Corporations that depend on banking, brokerage, insurance, or other licenses are particularly vulnerable because an indictment that puts the license at risk puts the firm at risk too. Firms like Andersen that rely on pristine public reputations are vulnerable if competitors can pounce on their legal travails to gain market share. Firms that do business with the federal government can be debarred and then can't sell their services to their key customer. Firms that need access to the short-term money market learn that an indictment can quickly cut off their capital supply. To be sure, not all firms are equally vulnerable, but America's most powerful banks, brokerages, insurers, auditors and government contractors are among the most defenseless in the land.


Prosecutors are aware of their power, as are potential corporate defendants. Both sides have therefore reached an entente cordiale in which no major corporation has been forced out of business since Andersen's demise. Instead, corporations have entered into deferred-prosecution agreements, paid huge penalties, and undertaken fundamental internal reforms, all under conditions that allow the corporation to survive.


The current situation of the insurer American International Group is a case in point. Would you buy an insurance policy from a company that might be crippled by a criminal indictment that the New York attorney general, Eliot Spitzer, decides to file tomorrow morning? Neither would I. If the government insists that A.I.G.'s chief executive be fired as part of the price of not indicting the firm, the chief executive is gone. It doesn't matter that he ranks among the most powerful executives in America. A.I.G. has no realistic choice but to cooperate fully with the government, even if evidence might later demonstrate that the government's theories were legally infirm or that factual allegations couldn't withstand cross-examination. Who, after all, wants to be put out of business when indicted, only to be vindicated years later by a jury verdict or appellate ruling?


The upside of this arrangement is clear. Corporations now have an even more powerful incentive to abide by the law, to root out wrongdoing, and to cooperate with governmental authorities. Unbridled prosecutorial discretion will not end fraud in corporate America, but wrongdoing will certainly decline as executives learn that they are expendable if a prosecutor simply threatens the corporation. Because the only sure defense is not to attract the prosecutor's attention in the first instance, the rise of prosecutorial power may be society's strongest tool to enforce corporate integrity.


The downside is just as clear. The prosecutor's decision to indict is largely immune from judicial review. The prosecutor acts as judge and jury. Traditional due process safeguards, like the right to confront witnesses, can't protect the potential corporate defendant. The innocent can therefore be punished as though they are guilty, and penalties imposed in settlements need not bear a rational relationship to penalties that would result at a trial that will never happen.


WHAT is to be done? Perhaps nothing - if prosecutors are uniformly careful in interpreting the law, scrupulous in understanding the facts, and balanced in settlements imposed on effectively defenseless defendants. But Andersen's conviction was overturned last week because prosecutors persuaded the trial judge to interpret the law in a way that eviscerated the government's need to prove Andersen's criminal intent, provoking even our fractious Supreme Court to rule unanimously that the government had gone too far. Sober observers thus have some cause to search for checks and balances to assure that prosecutors exercise their life or death power over corporations responsibly.


Where will these safeguards come from? We can't look to the courts, because well-established doctrine protects the prosecutor's decision to indict as non-reviewable. At the federal level, will Congress and Justice Department officials more actively review the decisions made by line prosecutors? Will commissioners at the Securities and Exchange Commission exercise greater oversight of staff investigations and settlement negotiations? At the state level, the problem is tougher because prosecutors like Eliot Spitzer often need answer only to Eliot Spitzer, at least until the next election.


Or will the press become the watchdog, hunting for prosecutors who interpret the law too aggressively, or who construe evidence in an unbalanced manner? Corporations have no incentive to publicize claims of questionable prosecutorial conduct because these allegations can only inflame the prosecutor, and that wouldn't be in the corporation's best interest. The corporation's silence makes the story harder for the press to report while simultaneously making it more important to cover.


As Plato long ago observed, "That a guardian should require another guardian to take care of him is ridiculous indeed." But in the wake of the Andersen ruling, that is indeed the problem that looms before us now.


Joseph A. Grundfest, a professor of law and business at Stanford, was a commissioner of the Securities and Exchange Commission from 1985 to 1990.


-- Sucheta Dalal