Lessons for India from the Andersen verdict

WITHOUT CONTEMPT

The United States Supreme Court recently overturned a justice-obstruction conviction of audit firm Arthur Andersen in relation to its audit of Enron's operations.

The court ruled that the jury that held Andersen guilty had been wrongly instructed on the standard of evidence to be applied for reaching a "guilty" verdict against Andersen.

Seen in context with a pro-business lawyer taking charge of the US Securities Exchange Commission (SEC), one would think the Mecca of shareholder activism and investor protection is getting defiled. However, this is not so.

Let us deal with the Andersen case. In 2001, Enron's accounts audited by Andersen had to be restated. In October 2001, an investigation into Enron, and of course, into Andersen's role was considered imminent.

Andersen was even advising Enron on how to deal with the fallout, including potential investigations by the SEC. Internal records showed that Andersen was conscious of being a potential target of proceedings.

The firm activated its otherwise dormant document retention policy, which permitted documents of a certain age to be destroyed and commenced wholesale destruction of documents.

Starting with destruction of documents weighing about 500 pounds per day, the record destruction went up to records weighing 2,500 pounds per day.

The large-scale destruction continued until the SEC formally issued a notice directly to Andersen seeking information relating to Enron.

The department of justice sued Andersen and secured an indictment for violation of a law that prohibited "corrupt persuasion" of other persons to withhold or destroy records with an intention to impair their availability for official proceedings.

The jury that tried the case ruled that Andersen was guilty of violating this law because it was conscious that an investigation was imminent, although neither any investigation into Andersen had actually commenced, nor any request for information was formally issued to Andersen.

An appeal court upheld this view, also taking into account the fact that the partner concerned had pleaded guilty.

The US Supreme Court found that the instructions given by the trial court to the jury that found Andersen guilty failed to convey the requisite consciousness of wrongdoing.

The Supreme Court found the jury was instructed that no culpability was required to reach a conviction. The jury had been told that even if Andersen honestly and sincerely believed its conduct was lawful, the jury could convict - bringing innocent conduct within the ambit of corrupt conduct.

Contrary to popular belief, the US Supreme Court has not found Andersen innocent. The court has not gone into whether Andersen's conduct was innocent or guilty.

It has left it to the trial court to rule on, with fresh instructions on the standard of proof required to hold a person guilty. "The jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing," the chief justice wrote.

"Indeed, it is striking how little culpability the instructions required. Only persons conscious of wrongdoing can be said to 'knowingly corruptly persuade'."

In practical terms, the ruling means nothing for Andersen. After the initial conviction, now held to be an outcome of mis-trial, Andersen was forced to shut shop with all its clients taking flight.

The facts of this case are so terrible that a re-trial would only result in the infirmities in the original indictment being repaired.

However, the US Supreme Court found it necessary to clearly lay down the law so that the rest of the world would have predictable clarity while regulating their own conduct.

There are lessons here for India. In interpreting securities laws, courts in India have had to constantly grapple with the question of standard of proof required to inflict a penalty.

In a Takeover Code case, the Bombay High Court has dealt at length with how monetary penalties under the Sebi Act may be imposed for technical breaches without having to demonstrate an intention to violate the law.

Yet, ironically, in the same judgement, the court has done justice by doing away with penalty on the ground that there had been no intentional violation of the law.

Similarly, tired of failure in cases of alleged price manipulation, Sebi has amended the law to penalise market manipulation without intention having any role.

Now, the very term "manipulation" would have to entail an element of intention""unless one consciously indulges in deviant conduct, how can one be guilty of manipulation? This needs correction.

There is little point in waiting for a court to discharge the burden of cleaning up the law; or to uphold such law, and do justice by making exceptions.

The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own.

 somasekhar@jsalaw.com