Document retention in the wake of Andersen

In the wake of Arthur Andersen's demise after its involvement in the Enron case, and the subsequent U.S. Supreme Court ruling, we've all learned something about retaining (or not retaining) business documents. 

There are certainly some instances when it's appropriate to withhold or dispose of business documents. The Supreme Court in Arthur Andersen LLP vs. United States(1) pointed out that it's not necessarily wrong for an attorney to persuade a client to withhold privileged documents even with the intent to prevent government access to those documents. Nor is it always wrong for a corporate manager to instruct employees to shred documents under a valid document retention policy. However, it's equally true that there are limits to a company's ability to dispose of documents, particularly when litigation or a government investigation is pending.

For three years, much of the world has viewed Arthur Andersen as having obstructed justice by shredding Enron documents. Yet, in May 2005, the U.S. Supreme Court overturned the guilty verdict of the District Court that led to the collapse of the accounting and auditing giant. This is not to say the former 89-year-old firm was vindicated for its actions. Rather, the Court reversed Andersen's guilt because improper jury instructions were used in Andersen's trial.

Because document retention policies play an enormous role in the preservation of evidence for litigation, and because it's currently difficult to decipher what a valid document retention policy means, this column will attempt to address several unanswered questions.

• What exactly is an "official government proceeding"?
• What is compliance under "ordinary circumstances"?
• What effect does Sarbanes-Oxley have on document retention?
• What protocols should companies take to ensure proper legal compliance with a valid document retention policy?

Timeline of events
Following an August 2001 article in The Wall Street Journal, which suggested financial improprieties at Enron, the Securities and Exchange Commission (SEC) began an informal investigation of the energy giant. Shortly thereafter, Andersen formed an Enron "crisis-response" team, noting, "some SEC investigation" was "highly probable." Less than two months after the SEC's commencement of its informal investigation, Andersen urged employees to comply with the company's valid document retention policy, which called for document shredding. Soon thereafter, the SEC notified Andersen of its investigation, but this didn't stop the accounting firm from shredding.

On Nov. 8, 2001, the SEC served Enron and Andersen with subpoenas for records, and Andersen's shredding allegedly ceased. In March of the following year, Andersen was indicted for "... 'knowingly, intentionally and corruptly persuad(ing) ... other persons ... with an intent to cause' them to withhold documents from, and alter documents for use in, 'official proceedings, namely: regulatory and criminal proceedings and investigations.'"2 Following a month of testimony, and 10 days of deliberation, a federal jury found Andersen guilty. On appeal, the District Court's verdict was affirmed, and the Supreme Court granted certiorari to hear the case. 2 

Supreme Court ruling
The issue addressed by the Supreme Court was whether the District Court's jury instructions properly conveyed the elements of a "corrupt persuasion" conviction under 18 U.S.C. §§1512(b)(2)(a). 3  

The Supreme Court found that the instructions to the jury "failed to convey the requisite consciousness of wrongdoing." Andersen was charged with violating a federal statute which made it a crime to knowingly ... corruptly persuade another. Therefore, in applying the facts of this case to the law, the jury should have been required to find that the defendant had knowledge (that is, awareness, understanding, or consciousness) of wrongdoing in order to attribute guilt to the defendant. In Andersen, the jury was instructed that, "even if (defendant) honestly and sincerely believed that its conduct was lawful, you may find (defendant) guilty." Under such instruction, the jury was able to find the defendant guilty without finding that it actually have knowledge that its actions were wrongful.

In addition, the Supreme Court found that the jury was incorrectly instructed as to the meaning of "corruptly." The statutory language used to form the instruction defined "corruptly" as "'knowingly and dishonestly, with the specific intent to subvert or undermine the integrity' of a proceeding." How-ever, the jury instructions omitted the word "dishonestly" from the definition. The jury was also instructed to impose guilt upon Andersen if it found that that the company intended to "subvert, undermine, or impede" the government's ability to gather facts (for example, by shredding documents). This instruction allowed the jury to convict the company if it found that Andersen simply interfered with the government's fact gathering, regardless of whether it was legally entitled to impede the government's investigation (for example, by withholding attorney-client privileged documents).

Finally, the high court held that the jury should have been instructed to find a nexus between Andersen's direction to shred the documents and a particular official proceeding in which the shredded documents might be material for the government. Suffice it to say, one who persuades others to shred documents under a valid document retention plan without having contemplated a particular official proceeding in which the documents might be material, is not a "knowingly ... corrupt persuader." Furthermore, according to the court, "if the defendant lacks knowledge that his actions could affect the judicial proceeding ... he lacks the requisite intent to obstruct."

Official proceedings
At the crux of the issues surrounding Andersen is whether the firm continued shredding documents under its document retention policy after official proceedings had commenced. What exactly is an "official proceeding?" Andersen continued to shred documents following knowledge of the SEC's informal investigations but ceased these actions when it received a subpoena from the SEC for Enron documents.

Criminal sanctions have been recently added to section 1512(c) of the Sarbanes-Oxley for the corrupt alteration or destruction of documents "with the intent to impair the object's integrity or availability for use in an official proceeding." However, the Supreme Court has yet to address whether "informal investigations" fall under the scope of an "official proceeding." In Andersen, the court focused on the "consciousness of wrongdoing," thereby perhaps suggesting that when a company knows that it's shredding important documents relevant to a particular "informal investigation," its intent is sufficient for a finding of guilt even though a "formal investigation" has not commenced.

In July 2002, 18 U.S.C. §1519 was added to narrow the scope of when destruction under a document retention policy must cease. Under §1519, it's a crime to alter or destroy any document "with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States ... or in relation to or contemplation of any such matter or case" (emphasis added). Thus, although the high court did not specifically annunciate the meaning of "official proceeding" as under §1512, companies would be safe in assuming that any SEC investigation, formal or not, could be grounds for prosecution should shredding continue following the company's knowledge of any federal investigation.

Compliance under ordinary circumstances
Following the descent of Enron, criminal statutes were amended to require auditing firms to preserve all documents and records relevant to an audit. Most businesses, however, may destroy documents under a valid document retention policy, assuming "official investigation" hasn't commenced.

The Court in Andersen stated, "it is ... not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances." Yet, like "official investigation," the court didn't define "ordinary circumstances." Because "ordinary circumstances" is a subjective phrase - in that each company contains different business protocols, oversight, and administration - it seems as if courts will interpret "ordinary circumstances" on a case-by-case basis.

To err on the safe side, companies should follow their document retention plans in the ordinary course of business but should refrain from destroying documents during a sensitive period, such as an informal or preliminary investigation. Nixon Peabody LLP, a law firm specializing in corporate compliance and governance notes that there's a "recent trend in civil litigation (indicating) that numerous types of circumstances are likely to be deemed not 'ordinary' and, therefore, to be triggers of the duty to preserve evidence." 4 In determining what "ordinary circumstances" are, each company must always consider what circumstances might be extraordinary to a court.

The effect of Sarbanes-Oxley on document retention
Sarbanes-Oxley is known for its ultra-rigorous approach to oversight of financial records. During its creation, Congress implemented new criminal obstruction of justice statutes 18 U.S.C. §§1512 and 1519, mentioned earlier.

Section 1512(c) originally criminalized those who knowingly and corruptly caused others to destroy relevant evidence. As stated earlier in this column, the court in Andersen interpreted this statute to require that the individual who erroneously destroys a document under the statute be conscious of his wrongdoing. This is because the court reasoned that one who "knowingly... corruptly persuade[s]" is inherently "conscious of wrongdoing." It's important to note that the amended statute now eliminates the word "knowingly."

Section 1519, however, uses the word "knowingly" without "corruptly." Unlike §1512(c), this statute provides that one who destroys documents must only have the "intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States ..." This statute appears more far-reaching than §1512 and will likely appeal to prosecutors more than §1512 in document destruction cases.

Ensuring legal compliance
An effective document retention policy requires that a company: (1) establish retention protocols before it foresees litigation or official investigation; (2) develop, review, and/or amend a policy for compliance with applicable state and federal laws and regulations; (3) ensure the reasonableness of the policy according to your company's business practices; (4) provide a concise explanation of what is to be destroyed and when; (5) provide adequate protocols for management of electronic documents; and (6) clearly set forth when the policy should be immobilized due to a pending investigation or foreseeable litigation.

Although the Andersen decision didn't set forth much guidance on the distinction between informal and formal investigations, when ordinary circumstances arise, or when a company can deviate from its document retention policy, it emphasizes the importance of creating a valid policy that's consistently monitored and updated for legal sufficiency. To establish a document retention policy after you learn of an investigation or foresee litigation would cast serious doubt on your company's intent for creating the policy. Because a main purpose of a document retention policy is to preserve important documents and discard those that are trivial, a policy should be in place prior to investigation proceedings to support the idea that your company is involved in good business practice uniform with the company's industry.

When establishing a document retention policy, it's imperative that companies consider all federal and state laws and regulations regarding record-keeping requirements. Industries, such as health care, banking, and auditing, contain trade-specific rules for documenting and retaining records. Furthermore, companies should always check for legal updates concerning these requirements. To have a document retention policy that ignores pertinent record-keeping requirements could lead to additional statutory violations.

Because industries vary significantly in the type of document produced, received, and distributed, courts lean towards a subjective "reasonableness" standard in determining whether a particular policy is adequate. Thus, each company must develop a policy that's specifically tailored to its business practice. Retention policies of other companies are often helpful to turn to as a general guide when creating your policy but should not be used as your own. By establishing individual business policies and compartmentalizing low-value and high-value documents, companies can gain quick access to internal documents.

A properly planned and executed document retention policy will do little good if individuals within the company are unaware of it. Not only must employees be aware of the policy, they must also understand what's to be destroyed and when. According to the National Federation of Independent Business (NFIB), companies must provide specific procedures in document retention policies for employment documents, accounting and corporate tax records, legal records, and electronic records.5 "Employee records should be retained for the length of the employee's tenure with your business, and then for an additional period of time in the event an employee files a lawsuit," writes Beth Gaudio in NFIB's "Document Retention Policires."6 Furthermore, according to the NFIB, tax returns, gross receipts, expense receipts, books showing gross income, deductions, and credits should be maintained, and federal tax returns kept permanently.

While electronic communication continues to soar, companies struggle to catch-up with its agility. It's vital that companies include protocols for preserving and destroying electronic documents. Companies with IT departments should develop procedures for handling electronic data. Company counsel, executives, and managers should be aware of how electronic data is stored and destroyed. For example, an e-mail deleted by an employee may remain in the system until an administrator permanently deletes it. Such situations must be recognized and addressed when designing a document retention policy.

From what we've seen in Andersen, the accounting-auditing Goliath believed it needed only to stop shredding upon receipt of a subpoena for records. It didn't believe an "informal investigation" triggered suspension of its document retention policy. Although discrepancy still lies as to the exact point at which destruction may occur, companies should set forth in plain language that document destruction must stop following any indication that governmental investigation has commenced. Section 1519 of the U.S. Code makes this clear. Furthermore, the policy should hold leaders of the company responsibile for making such knowledge immediately known to all employees.

If you don't currently have a document retention policy, you should talk to your company's counsel about creating one. If you already have such a policy in place, you should make sure it has been updated in light of Andersen and the changes to Sarbanes-Oxley, and that executives, managers, and employees understand the policy. Although Andersen's conviction was overturned based on the language of the statute as it existed in 2001, it's very probable that the conviction would have been upheld under the new document retention statutes enacted as a part of the Sarbanes-Oxley Act.

Juliana Morehead, J.D., Associate Member, is a legal writer and editor for the ACFE.

1 Arthur Andersen LLP, Petitioner v. United States, 125 S. CT.2129
2 Id.
3 A writ of certiorari is an order by an appellate court (in this case, the U.S. Supreme Court) to hear or not hear an appeal. When granted, the writ essentially orders the lower court to certify the record and send it up to the requesting higher court for review.
4 This is the 2000 version of the federal statute. Congress has since amended it.
5 Nixon Peabody LLP, "Corporate Responsibility Alert: Developments in the law of Corporate Governance," June 7, 2005.
6 Beth Gaudio, "Document Retention Policies," National Federation of Independent Business, March 18, 2005. 
7 Id.