BEFORE THE ENRON TRIALS—BEFORE KATHY Ruemmler and Sean Berkowitz joined the task force—just as the team was created, Michael Chertoff, the head of the criminal division at Main Justice, assigned its first case: Arthur Andersen. Andersen, one of the remaining Big Five accounting firms, had audited Enron’s books. In the fall of 2001, Andersen employees destroyed documents to cover up how enmeshed the two companies were. Congressional hearings revealed documents related to the Andersen shredding. The media attacked the story like white blood cells ganging up on a diseased organ. The Justice Department realized it had to investigate. Chertoff called up Leslie Caldwell, the head of the task force, to tell her to work the Andersen angle as hard as she could.1 After several weeks of work, the Department of Justice concluded that the government could prosecute the storied and stalwart accounting firm. The task force wanted to avoid such a serious move if it could. On Sunday, March 3, 2002, Arthur Andersen executives and its legion of lawyers came to meet Chertoff and the Enron team to encourage this line of thinking: please go easy.
Such meetings have rituals. The principals on both sides bring large retinues. The defense team comes as a supplicant and does most of the talking. The important meetings happen in windowless conference rooms with austere and formal furniture and lined with law tomes that haven’t been cracked. This Sunday conference took place at the Robert F. Kennedy Building in Washington, a white neoclassical pile with Art Deco flourishes that takes up the block between Pennsylvania and Constitution Avenues and Ninth and Tenth Streets.
Andersen’s CEO Joseph Berardino rushed back from a business trip to Japan to join his lawyers for the meeting. But he wasn’t the lead orator for the company’s performance. That role fell to Robert Fiske Jr., a renowned former US attorney for the Southern District of New York. Fiske, then seventy-one, worked at the New York law firm Davis Polk & Wardwell, the grayest graybeard on the Andersen side. They did not come more patrician than Fiske.
Chertoff, then forty-eight, belonged to the generation behind Fiske, but they had similar pedigrees and prosecutorial experience. Despite Chertoff’s Ivy League education (Harvard College and Law School degrees and a Supreme Court clerkship), he cultivated an image as a tough guy. Talking him out of an idea shared odds with finding a clean politician from his home state of New Jersey. One L, Scott Turow’s semifictional account of attending the first year of Harvard Law, depicted a student, modeled after Chertoff, who engaged in an argument with a professor for two days straight. Tall, with dark rings around his eyes and thin cheeks, Chertoff had the forbidding look of the Sam the Eagle Muppet.
As a US prosecutor in New Jersey in the early 1990s, he had overseen the Crazy Eddie corporate fraud case, one of the biggest corporate scandals of its time. Run by Eddie and Sam Antar, Crazy Eddie was a discount electronics chain with a famous TV pitchman touting prices that were “INSANE!” But the Antars had been falsifying the company’s inventory and its books. Before working that case, Chertoff had, as an assistant in the Southern District in the mid-1980s, spearheaded several cases against the New York Cosa Nostra, including the Mafia Commission trial that included crime bosses “Big Paul” Castellano and “Fat Tony” Salerno as initial defendants. When Chertoff was promoted, Salerno cracked that Chertoff owed him a thank-you note.2 In 2001 he became Bush’s first head of the Justice Department’s criminal division.
When Chertoff had been at the Southern District in the mid-1980s, his boss, Rudolph Giuliani, had introduced the “perp walk” to the white-collar world. FBI agents frog-marched Wall Street Masters of the Universe off the trading room floor in handcuffs, their pictures snapped by waiting news photographers. Deterring corporate crime, Giuliani believed, began by making the penalties personal.
But in the decade between the Michael Milken and Ivan Boesky insider trading and the stock manipulation scandals and prosecutions of late 1980s and the 2000s, the Department of Justice had begun a subtle shift in its approach to corporate crime. Prosecutors began to believe it wasn’t enough to go after individuals. They saw that corruption ran all through Drexel Burnham Lambert, Milken’s investment banking firm. They indicted Drexel; the company went out of business. Rotten corporations were not different from Mafia organizations. They could corrupt an honest person.
Fiske and his right-hand man, Denis McInerney, attended the Justice Department meeting to prove otherwise. They presented their case, pointing out that only a small group of employees had destroyed documents. The wrongdoing was isolated. If the Justice Department indicted the firm, the Davis Polk lawyers said, Andersen would go out of business. “Death, death, death,” Fiske intoned. Chertoff scoffed. He reminded the lawyers he’d been a mob prosecutor who’d taken on cases of actual life and death.3 He asked, Would Andersen automatically lose licenses to operate if it were to be indicted? The Andersen lawyers looked at one another and then had to admit that, no, it wouldn’t be automatic.
Arthur Andersen was not an ice cream company, unsophisticated about corporate investigations. It was in the business of working with large companies in litigation, for God’s sake, Chertoff thought. Proper handling of documents was a core aspect of its business.
The firm was a recidivist as well, as Chertoff explained to Fiske and McInerney. Enron was not the only problematic Andersen client. The SEC had recently put Andersen on probation for past auditing negligence involving Waste Management, the garbage removal giant. The firm had pledged not to break the securities laws again. This time the penalty had to be severe. Chertoff told Andersen lawyers the Justice Department wouldn’t take a deal without an admission of wrongdoing.
Gauging the response to its tough stance, Chertoff and his Enron Task Force were getting the sense that nobody on the Arthur Andersen team thought the government dared take the firm to trial. Chertoff, decisive and straightforward, never wrong and never in doubt, lectured Fiske and McInerney and the Andersen executives: “You guys were the auditor for the biggest accounting scandal in modern times. We can’t let that go away. Don’t doubt that we will take you to trial.” Then Chertoff made a pronouncement. He wanted to make it clear that the evidence was devastating. He straightened and said, “If we take this case to trial, we are taking head shots.”4
Arthur Andersen was built on a legend of stalwart midwestern ethics. Arthur Edward Andersen, a Northwestern University professor of accounting, founded the firm in Chicago in 1913. He drew its motto from his Norwegian mother: “Think straight, talk straight.” In a story that would pass into firm lore, Andersen himself refused to change an accounting decision for a client, no matter how lucrative the business was. “There is not enough money in the city of Chicago,” he is supposed to have said.
Over time, Andersen’s consulting division began to grow faster than its auditing business. Consultants came to dominate the firm. Unglamorous auditors merely looked over a company’s books. Consultants had lucrative relationships, sitting at the right hand of CEOs and advising them on strategy. The firm expected the number crunchers to push consulting business. Ethics receded. The firm’s employees called themselves “Androids,” a moniker that elevated fitting in and sacrificing for the company.5 This conformity ameliorated Andersen’s accounting standards.
Even before the stock market crash of 2000, investors and regulators worried about the bubble and accounting excesses. In 1998 President Bill Clinton’s chairman of the SEC, Arthur Levitt, gave a speech titled “The Numbers Game,” in which he declared, “We are witnessing an erosion in the quality of earnings and, therefore, the quality of financial reporting. Managing may be giving way to manipulation; integrity may be losing out to illusion.” Levitt was particularly critical of the auditing profession. The industry was an oligopoly, with five big firms dominating the business of handling large corporations’ books. The industry had no regulator. Instead, it shared a body of self-governance called the Public Oversight Board. In essence, they policed each other. Deloitte & Touche had only recently conducted a peer review of Arthur Andersen. The accounting firm emerged cleanly.6
Come March 2000, the dot-com boom that had taken up the last half of the 1990s came to a spectacular end. Stock market plunges reveal fraud. When the tide goes out, you get to see who is swimming naked, as Warren Buffett said famously. In the five years following the crash, thousands of companies restated their earnings.7
The SEC, struggling to deal with the volume of fiascos, started making noises about investigating the accounting industry. It asked the Public Oversight Board to investigate whether the firms kept auditors, who oversaw corporate books, independent from the consultants at the same firms, who advised companies on strategy. In response, in early May 2000 the industry stopped funding for the Oversight Board.8
The accounting profession had lost its way. Arthur Andersen was one of only five major accounting firms. While all of them had problem clients, the list that Andersen had compiled stood out for its length and variety. The company paid out more than $500 million to settle lawsuits between 1997 and 2002, much more than its fraternal accounting firms.9 In 2002 alone, Andersen clients WorldCom, Sunbeam, Boston Chicken, and Qwest had to restate billions in earnings. In 1998, after revealing a massive financial fraud that falsely inflated its profits, Waste Management had to take what was then the largest restatement in corporate history: $1.7 billion.10 Andersen had been its auditor.
The SEC settled its securities fraud investigation with Arthur Andersen and three partners years later, in June 2001, just months before Enron’s bankruptcy. In the fashion of the regulatory time, the company did not admit anything (though it was prohibited from denying wrongdoing).
So egregious was the Waste Management scandal that the SEC sanctioned Andersen, too. The accounting firm entered into a consent decree—a binding agreement—permanently enjoining the firm from violating securities laws again. It was the first time the SEC had ever accused a top accounting firm of securities fraud because of bookkeeping failures.11 The SEC found that Andersen partners had not only known that Waste Management’s financial statements were inaccurate but also had enabled the company’s financial shenanigans. During the SEC investigation, Andersen promoted one of the partners who had contributed most to helping the fraud, making him the firm’s head of global risk management. In this role, he would write a new document retention policy that provided the framework for the later Enron file destruction. This policy stated that information gathered or considered in connection with Andersen work should be culled and “only essential information to support our conclusions should be retained.”12
Astonishingly, Andersen kept Waste as a client, and Waste kept lavishing the firm with fees. In 2000, the year before Enron’s collapse, the company paid Andersen $79 million in fees. Only after Enron imploded did Waste Management, not Andersen, sever the relationship.13
Andersen’s wrongdoing had gone back years. In 1996 the firm faced the threat of criminal prosecution. But it settled federal charges over accounting fraud at Colonial Realty Co., a real estate company that had been looted by its partners. Earlier, Andersen received a light censure from the state of Connecticut, where Colonial was based, barring the firm from a narrow portion of its business activities in the state for two years. Punishments such as these were equivalent to a tossed snowball on a passing semi.14
In May 2001 the SEC charged Sunbeam’s celebrity CEO, Al “Chainsaw” Dunlap, nicknamed for his relentless cost cutting, and an Andersen auditor with perpetrating a “massive financial fraud.” The accounting games Sunbeam was playing, with Andersen’s help, had come undone in the late 1990s. The company restated its earnings.15
Andersen faced thirteen major state and federal investigations over accounting frauds in the years before and just after Enron. Among them: McKessonHBOC, Global Crossing, Supercuts, and the Baptist Foundation of Arizona, then the largest bankruptcy of a nonprofit in history.16
Bernie Sanders, then the left-leaning congressman from Vermont, excoriated an Andersen partner at a hearing of the House Financial Services Committee on July 8, 2002:
Arthur Andersen failed in their audit of WorldCom. You failed in the audit of Enron. You failed in the audit of Sunbeam. You failed in the audit of Waste Management. You failed in the audit of McKesson. You failed in the audit of Baptist Foundation of Arizona. What was Arthur Andersen doing? I mean, how do you—it is incomprehensible to me that a major accounting firm can have such a dismal record in trying to determine what the financial health of a company is. It’s almost beyond comprehension.17
Enron hired at least eighty-six accountants who had worked at Andersen, including Richard Causey, the firm’s chief accounting officer, and Ben Glisan, the company’s treasurer. (Both eventually went to prison for their roles in the Enron fraud.) More than top Wall Street banks and law firms, Andersen was Enron’s great enabler.
Myriad Andersen employees either worried about the energy trader or looked the other way. “Enron is continuing to pursue various structures to get cash in the door without accounting for it as debt,” one Android warned colleagues in 1998.18 Andersen had labeled the client “high risk.” Auditors said Enron had a “dependence on transaction execution to meet financial objectives.” They wrote that the company relied on “form over substance” transactions.19 At one point, to make its quarterly earnings, Enron borrowed money from Merrill Lynch but disguised the transaction as a trade (with Merrill’s full understanding of the dodginess). Andersen threatened Enron: if the company unwound the sham trade, the energy trader would have to restate its earnings. Sure enough, Enron unwound the trade right away in the next quarter. But Andersen didn’t follow through on the threat, and Enron did not restate.20
Andersen employees warned repeatedly about Enron’s accounting, but the high-level partners ignored them. A top Andersen accountant and member of its Professional Standards Group, a body that issued rulings on thorny accounting questions, campaigned against Enron’s accounting but was routinely ignored by David Duncan, Andersen’s partner in charge of servicing Enron, and the rest of his Houston team. Duncan, an Andersen lifer who had taken over the Enron account at the age of thirty-eight, had become enmeshed with the company, becoming close friends with executives.21
In March 2001 Bethany McLean’s story in Fortune, “Is Enron Overpriced?,” came out. The piece didn’t uncover the fraud, but it crushed the fantasy and wounded the company irrevocably. Critical stories, revealing questions about the company’s business, came out all summer. Investors sold. Hedge funds shorted. By early fall, Enron had lost control over public perception, and the fraud unraveled.
On October 9, 2001, Nancy Temple, an Andersen lawyer in the Chicago office, wrote a memo saying it was “highly probable” there would be an SEC investigation. She added that there was “probability of charge” for Andersen for violating the cease and desist order over Waste Management. The next day, an Andersen executive gave a presentation to the Houston team explaining the document retention policy and that everything that wasn’t an essential part of the audit file should be destroyed. Two days later, on October 12, Temple sent another reminder, which would become famous: “It might be useful to consider reminding the engagement team of our documentation and retention policy.” Any sentient professional understands what that hint means.
On October 16, 2001, Enron announced that it would reduce its shareholders’ equity—a common measure of a company’s value—by $1.2 billion. Astonished by the size of the wipeout, Enron investors fled and the stock crashed. In an email, Temple suggested “deleting some language that might suggest we have concluded [Enron’s] release is misleading.” Andersen had indeed determined that Enron was being misleading but wanted any hint of that excised so that the public didn’t see it. Temple asked for her name to be taken off a document. Being named, she complained, “increases the chances that I might be a witness, which I prefer to avoid.”
The SEC opened an inquiry the next day, officially requesting information from Enron officials. Two days later, on October 19, Enron notified the Andersen audit team about the SEC’s probe. Top Andersen partners scrambled an emergency meeting the next day. Two days after that, on October 22, Andersen’s engagement team, which headed up the audit of the company’s books, spent the day at Enron headquarters.
On October 23, six days after the SEC had launched its Enron inquiry, Andersen’s Houston team started its enormous document destruction program, overseen by Duncan, the lead partner on the Enron account. In a matter of three days, the firm shredded more documents than were usually destroyed in a year. It also deleted around 30,000 computer files and emails.22 On just one day, October 25, in an orgy of policy compliance, Andersen employees obliterated 2,380 pounds of documents, compared with the average of about 80 pounds a day.23 One executive testified at trial that he told Duncan he could not delete an email about a conversation with Sherron Watkins, an Enron whistle-blower. Duncan deleted it anyway.
Andersen would receive the SEC’s official subpoena for Enron-related records only on November 8. That notice prompted an Andersen secretary to send out an emergency email the next day: stop the shredding. The firm had been “officially served.”
Andersen’s chief executive, Joseph Berardino, was new to his role. He’d just ascended to CEO in January 2001, after Andersen spun off its consulting business, now called Accenture. Partners pushed him to attack. His PR advisors tried to save him from the partners’ bad instincts.
The first tack of Andersen messaging was an audacious campaign of denial and misdirection. The Wall Street Journal op-ed page was, as ever, at the ready to provide a platform to defend corporations and undermine the government. On December 4, 2001, just weeks after the festival of shredding, Berardino wrote an opinion piece in which he called Enron a “wake-up call.” A wake-up call, that is, to reform some rules, somewhere, sometime. He presented the same arguments that bankers would make only a few years later after the 2008 crisis. Enron, he wrote, “made some bad investments, was overleveraged, and authorized dealings that undermined the confidence of investors, credit-rating agencies, and trading counter-parties.”
Berardino continued: “Enron’s collapse, like the dot-com meltdown, is a reminder that our financial-reporting model—with its emphasis on historical information and a single earnings-per-share number—is out of date and unresponsive to today’s new business models, complex financial structures, and associated business risks.”24
The problem wasn’t fraud, but something else. There may have been recklessness. There may have been some stupidity. But at bottom, went the argument, was a lack of updated financial disclosure rules and a failure of government to keep up with innovation.
Critics mocked Berardino’s self-serving and blinkered argument. But when bankers and defense attorneys made versions of the same argument in the wake of the 2008 financial crisis, they convinced official circles. The crisis, these people parroted, involved overly complex, overly risky, but nonetheless legal activities. The crisis might warrant changes, the argument went, but prosecutions were too blunt an instrument to solve the problem. The reasoning persuaded many people after 2008, including prosecutors and regulators.
After news of Andersen’s document destruction emerged, Billy Tauzin, then a Republican representative from Louisiana and chairman of the House Energy and Commerce Committee, decided to investigate. The committee subpoenaed documents. Tauzin was one of the accounting industry’s stalwart friends in Congress. (Intimate with the drug industry as well, he left later to head PhRMA, the main lobbying group of the pharmaceutical industry.) When, in 2000, SEC chairman Arthur Levitt pushed rules to prohibit firms from consulting and auditing the same companies, Tauzin and others blocked the reforms.25 But now the 2002 midterms were coming up. The accounting scandals made corporate friendliness briefly toxic. Tauzin and his fellow Republicans had to distance themselves from their erstwhile allies to protect their places in Congress.
In late January 2002, just ahead of the hearings, Berardino accepted an invitation to appear on the TV news program Meet the Press, hosted by the aggressive Tim Russert. The PR advisors had counseled against it, but his partners urged him to accept. CNBC would be a better option, the PR team suggested; it was a friendlier and more familiar format. Berardino wasn’t a politician who had been on television hundreds of times. Undeterred by his botched foray into opinion writing, he decided to go on air. Berardino fumbled. Enron failed “because the economics didn’t work,” he told Russert. The PR reps cringed.
During the early, intense period, Andersen’s law firm Davis Polk made a call that the Andersen team would come to believe was a significant error. Davis Polk had discovered the email deletions and brought them to the attention of the Justice Department.26 Now Tauzin requested any materials about the document destruction. In response to the congressman’s request, the firm advised Andersen to give over everything en masse. The executives took the firm’s advice. The law firm didn’t even interview any employees before handing over the documents, as far as several Andersen employees knew. Andersen executives felt Davis Polk had been overly cooperative. Lawyers must have legitimate reasons for not turning over documents from their clients for an investigation, but they have enormous leeway to slow the process down.
The result of the disclosure was a press bonanza. Reporters scored leaks, and Andersen faced unrelenting daily stories based on its internal documents. Patrick Dorton and Charlie Leonard, public relations specialists, hunkered down in their own small office in Andersen’s quarters on K Street in Washington to head up crisis response. Dorton was young, only thirty-two years old, and had come from a PR position in the Clinton White House. He’d held his breath when he made his salary request. Andersen, to his disbelief, topped it. Having just left the torrid pace of the DC mire, he expected a sleepy job. Leonard, who ran his own PR consultancy, won the position by bringing in a shirt on a hanger and promising to stay in the office overnight during the crisis if needed. The firm set up a website and a war room and a rapid response team, all part of a reportedly $1.5 million PR campaign—a fortune at the time. The Andersen media frenzy would be nothing like either had ever seen or would ever see again.
They girded daily to save Andersen. Mornings were quiet. Then in midafternoon, the phone lights went berserk, and they entered into verbal combat with reporters. The Enron scandal—and often Andersen—was front-page and evening-broadcast news almost every day for months. Multiple reporters from the same papers would call. Dorton and Leonard would clash late into the night, when international reporters took over after the American reporters closed their pieces. The two would leave the office around midnight, have martinis across the street, and get ready to do it again the next day. This kind of media scrum doesn’t exist anymore. Today fewer reporters would cover such a story, and they wouldn’t pay attention as intently for as long.
In the early months, Dorton and Leonard battled leaks. Every reporter would tell Andersen’s reps the same opening statement: “I just got a document.” Dorton and Leonard figured it was coming from Congressman Billy Tauzin’s people—a gotcha every single day. They would scramble to find the document among the firm’s trove and interpret it, but it was so late in the day that the responses were often perfunctory. Tauzin was killing them.
Tauzin’s House hearings were held in January 2002. The PR folks knew they would be dangerous. To get ahead of the news, Andersen fired David Duncan, the lead partner on Enron who had overseen most of the document destruction. In its press release, the firm accused Duncan of having “directed the purposeful destruction of a very substantial volume of documents—and in doing so, he gave every appearance of destroying these materials in anticipation of a government request for documents.” Rather than placate critics, Andersen’s release infuriated people further. The company appeared to be shirking the blame by making it seem as if the document destruction were an isolated event orchestrated by one person. (Many of the emails and other damning information about the document destruction emerged later.)27
But it was even worse from the lawyers’ standpoint: Andersen had just admitted wrongdoing. Sure enough, when the hearings started, the representatives couldn’t beat their colleagues fast enough to express their umbrage. Tauzin topped them, warning the Andersen witnesses that they would likely face criminal charges.28
With the Andersen furor raging, the Department of Justice forged ahead with its investigation. Through the early months of 2002, Andersen, under the influence of attorney Bob Fiske, the Davis Polk eminence, made a show of cooperating with the investigation. Andersen insisted to the government that it was taking the investigations and need for reform seriously. In late January, Berardino brought in Paul Volcker, the former Federal Reserve chairman and one of the most respected figures in finance, to propose a reform program. But Andersen kept bungling its efforts. The partners were too split and didn’t act on Volcker’s proposals. Many partners were too busy forming escape plans.
In negotiations, the Justice Department made it clear it was seeking tough sanctions. Despite ostensibly cooperating with the government, Andersen held to a bright line in the talks: the firm would not admit any wrongdoing. Andersen remained so adamant because its problems were not just federal. Connecticut, where the Colonial Realty scandal had taken place, was making dangerous noises. The company fretted that other states would start following suit.
Over a series of meetings with the Justice Department in the spring of 2002, Arthur Andersen’s lawyers often made their client’s situation worse by continuing to insist that the firm was so vulnerable to any reputational hit that the Justice Department must be lenient.
“Isn’t the SEC going to do something here? That’s going to hit the firm’s reputation,” Chertoff asked.
Clients and investors “don’t care about the SEC,” Fiske said. Prosecutors felt he was almost nonchalant, shrugging off the entire thing. He explained that the agency’s rebukes were routine for the company. Companies viewed the law as a tackling dummy to push aside. Companies habitually entered into agreements with the SEC without being forced to admit anything. They were insignificant punishments, and they didn’t change the conduct. The prosecutors realized: fines are just a cost of doing business.
Chertoff was enraged, in large measure because the lawyer was right. Fiske might have been trying to flatter prosecutors about their importance compared with the SEC but had inadvertently sent another message: the firm’s regulatory oversight was toothless. Davis Polk was treating the regulator with the same contempt that Andersen had when it destroyed documents. Something had to change, Chertoff thought.
He grew impatient with the parade of Andersen lawyers. In another meeting, Richard Favretto, lead lawyer from the Chicago firm Mayer Brown, stood up and screamed at Chertoff that Andersen was “too big” to indict. The markets would drop by 25 percent, he warned. Chertoff was furious but remained calm. He stood, too. The son of a rabbi from New Jersey, Chertoff punctuated his words. “If you are telling me that we cannot indict Arthur Andersen because it is too big,” he told Favretto, pausing for dramatic effect, “well, in this building, that dog don’t hunt!”
“Where the fuck did that come from?” thought Enron Task Force member Tom Hanusik, silently cheering Chertoff on.
Andersen and its lawyers found Chertoff unreasonable. They tried to appeal to his higher-ups. Fiske requested a meeting with Larry Thompson, the deputy attorney general. Thompson was talking with Chertoff often multiple times a day. He wanted the two parties to resolve their differences but supported Chertoff in his stalwart fashion. Thompson believed that he shouldn’t meddle in underlings’ investigations or decisions, and so he turned down Fiske. But Andersen didn’t stop there. The firm engaged in a nice bit of “bullet lobbying”: a technique in which a company enlists not an expert but someone close to the target, like a college roommate.
Early in his career, Thompson had been a young lawyer at Monsanto, where he met a young, black conservative lawyer named Clarence Thomas. Later, during Thomas’s confirmation hearings for the Supreme Court in 1991, he met John Danforth, then a US senator for Thompson’s home state of Missouri. Now Andersen hired Danforth to defend the firm in its fight with the government. Danforth had left the Senate with a glistening reputation to become a corporate lawyer, but he had no particular expertise in accounting shenanigans. When Danforth requested a sit-down, Thompson assented. They had an awkward meeting, mentee listening politely. Danforth repeated the Andersen line: the indictment would destroy the company and throw the markets into chaos. Thompson remained unmoved. He wouldn’t intervene.
Still, prosecutors were cautious. If they could reach a settlement, rather than having to indict, they would do so. Chertoff and the Enron team offered a deferred prosecution agreement to Arthur Andersen. In such a settlement, an outside attorney appointed by prosecutors might monitor the corporation. Such a settlement is less serious than an immediate indictment. By making this offer, government lawyers stuck to Chertoff’s nonnegotiable point: the company needed to admit wrongdoing. That was the bare minimum. Arthur Andersen refused.
The entire Enron Task Force gathered in the Main Justice offices to vote on the indictment. Prosecutorial teams often take such informal head counts. Prosecutors had demanded an admission of wrongdoing. They couldn’t call up Andersen and say, “Just kidding!” There had to be something behind the threat. All but one member of the task force favored the indictment. On March 7 the grand jury delivered a secret, sealed indictment of the firm. A week later, Larry Thompson announced the news publicly.
Negotiations continued nevertheless. Many would come to argue that it was the indictment—not the eventual guilty verdict—that put Andersen out of business. But Andersen didn’t go out of business upon indictment; it continued to negotiate with the Justice Department.
The experience seared the Davis Polk lawyers. Fiske and his junior colleague McInerney thought the Justice Department was unreasonable and found Chertoff intransigent. It was wrong to indict the firm, they believed. It would kill Andersen. And for what? The wrongdoing had been committed by only a limited number of people. Not only was Davis Polk about to lose the argument, but also Andersen was shunting the firm aside for other lawyers. The humiliation affected McInerney in particular.
For the trial, Andersen brought in another lawyer to be its local counsel: Rusty Hardin, a legendary Texas defense attorney with a colorful aw-shucks style sure to charm a Lone Star State jury. Hardin began to take control of Andersen’s defense. In early April he became infuriated about what he thought were government leaks to reporters. He called Caldwell, who was just settling into her position as director of the Enron Task Force. Hardin liked Caldwell. However, he couldn’t stand Weissmann. Ever the bulldog, Weissmann had sent Hardin a letter saying that if he didn’t stop talking to the media and making misrepresentations, he would seek sanctions against him. Hardin composed a response:
I thought you would like to know that some idiot is writing me letters and signing your name. You might want to investigate.
Regards,
Rusty
Davis Polk and Mayer Brown talked him out of sending it.
Now Hardin let loose. “What the hell is this in the paper?” he yelled at Caldwell. “What are these leaks? You know as sure as hell as I do that Andersen tried to get a deferred prosecution agreement, and Chertoff denied it!”
Caldwell responded as she did to all defense lawyer histrionics, in her measured tone:
“All I can tell you is that it didn’t come from my team.”
“I know where it comes from. It comes from that asshole you work for.”
On April 5, 2002, Hardin flew to DC. The gang was there: Davis Polk’s Denis McInerney, lawyers from Mayer Brown, Andersen executives, and in-house lawyers. They met with Caldwell, with Weissmann on the phone. The Andersen lawyers thought they had a deal: Andersen could get a deferred prosecution agreement. The firm wouldn’t have to admit guilt but instead to a narrow set of “mistakes.”29
Hardin flew back to Houston. When he got off the plane, he received bad news: Chertoff had vetoed the deal and chewed out the task force members. The final offer: a nonprosecution agreement, but Arthur Andersen had to admit wrongdoing.
Chertoff felt emboldened. Earlier that day, the task force secretly wrung a cooperation agreement out of David Duncan, the Andersen partner in charge of the Enron relationship. He would testify for the government in its trial with Andersen. Duncan pleaded guilty on April 9.
Arthur Andersen dared the Justice Department to make the hard decision. The government team believed Andersen had done something wrong and that the prosecution was just. They couldn’t be cowards. They had to go all the way to trial.
• • •
Hardin put up a formidable fight. Almost all the witnesses were former Andersen employees. To a person, they were hostile to the prosecution, resentful that their firm had been put out of business. Hardin, in contrast, was his folksy self, soothing and friendly on cross-examinations. But when the jury was excused and out of the room, he flew into histrionics, attacking the prosecutors, the judge, the outrageousness of it all. Davis Polk’s McInerney played his second fiddle, with unrelenting technical arguments on the law at every turn, enervating the prosecutors. The entire firm of Davis Polk seemed to be taking the case personally. Low-level associates came to the courtroom just to hear the decision being read. Sam Buell, who had conducted the trial with Andrew Weissmann, looked over and saw the young lawyers grimacing at him.
The jury was, as juries often are, quirky. The members struggled with their deliberations, asking whether it was necessary for them to agree unanimously on which employee was guilty. Judge Melinda Harmon instructed that while they all needed to believe someone at the firm “acted knowingly and with corrupt intent,” it didn’t matter if they all agreed on who that person was.
The jury returned its guilty verdict the next day of deliberations, its tenth day. The instruction turned out not to be particularly significant. The jury agreed unanimously that Nancy Temple, the lawyer, had been the “corrupt persuader.” She had intended to obstruct the government’s investigation when she told Duncan to cut out any suggestion that Andersen disagreed with Enron’s characterization of its earnings and also when she asked him to delete her name from the memo, worried that she might be called as a witness in any future Enron litigation.30
Trials are not about arriving at larger truths or depicting the whole story. Andersen partners, lawyers, representatives, and supporters would continue to maintain that the prosecution was unjust and abusive. Many would point out that the firm and its partners had not been accused of accounting fraud, as if that were the only measure of culpability. Andersen had to attest to Enron’s financial health. Auditors sign off that books are presented “fairly, in all material respects,” as the language goes. But Enron wasn’t healthy at all; its business wasn’t viable. Enron’s lie required Andersen’s complicity. It was immoral, it was a dereliction of professional duty, and it was criminal in the colloquial sense of the word. Now Arthur Andersen was criminal in the narrow legal sense of the word, too. But the verdict would not last.
Arthur Andersen had become the exemplar of a corrupt enterprise. It had been handmaiden to serial corporate fraud. It had engaged in a document destroying cover-up. The accounting industry held, as a principle, that a profit-seeking profession could advise CEOs but would also tell them the truth when they were pushing the numbers too far. Andersen fouled that ideal.
Congress acted. George W. Bush had entered office in 2001, inheriting an economy in recession. The GOP was the party of big business, and big business was rotten. Republicans had energetically pushed financial deregulation throughout the 1990s.31 Now they reacted in classic law-and-order fashion. Many old-line Republicans regarded the scandals with revulsion; a violation of the rules of capitalism. Belief in pure markets required that people play by the rules, in the naïve and idealistic view. “The vast majority of CEOs in America are good, honorable, honest people who have nothing to hide,” President Bush said at a July 2002 press conference. “It’s the few that have . . . created the stains that we must deal with.” Bush would repeatedly discuss the coming criminal crackdown. “We’ll vigorously pursue people who break the law” to restore confidence to the American people, he said.
The Bush administration proposed tougher punishments and called for moral behavior to reassert itself, perhaps magically, in the corporate boardroom. “America’s greatest economic need is higher ethical standards,” the president asserted. Having proposed an enforcement personnel cut in an earlier budget, Bush, bowing to political pressure, now reversed himself, calling for Congress to approve a hundred new enforcement staffers.32
The Democratic Party regarded prosecutions as secondary and insufficient. Its response was to push legislation that emphasized systemic regulation. Democrats proposed more statutory powers for prosecutors, but they argued that rot was pervasive, requiring the broad solutions of legislation and regulatory oversight. Their view was that the problem was not that corporate accounting was bad at a few firms. Corporate America needed an overhaul. The left wing of the party, in particular, rejected the rotten-apples thesis or the notion that moral suasion was the correct path. The liberal Democratic senator from Minnesota, Paul Wellstone, responded to Bush’s speeches by saying, “I don’t think the president or the administration gets what this is really about.” The need for legislation “goes way beyond Enron, goes way beyond WorldCom. The American investing public has lost its confidence in this corporate system.”33
In July 2002 Congress passed a would-be landmark law, Sarbanes-Oxley, named after Maryland Democratic senator Paul Sarbanes and Ohio House Republican Michael Oxley. Sarbox, as it came to be known, required corporations to have tighter internal bookkeeping controls. Chief executives and chief financial officers had to certify their companies’ books. Over objections, lobbying, and corporate resentment, the law set up a new overseer for the accounting profession: the Public Company Accounting Oversight Board. There was a period of optimism about Sarbanes-Oxley. Some believed the new rules would grant regulators and prosecutors powers of legal oversight. Law professor Kathleen Brickey predicted, “Sarbanes-Oxley firmly puts Andersen’s legal and factual arguments to rest while placing broad power in prosecutors’ hands.”34 She was wrong.
Instead, Andersen became the great symbol of unjust white-collar prosecution. Andersen was the improbable terrain on which the American business and legal lobby chose to fight against the excesses of federal prosecutorial power. Those forces prevailed.
Andersen’s legal and PR teams fought tough, occasionally distorting facts and impugning prosecutors’ motives. Andersen honed its PR message, and its employees mobilized. They marched on the Justice Department offices in Washington. They held rallies in Houston and Philadelphia. They donned orange T-shirts and wrote letters to their elected officials. Legendary college basketball coach John Wooden wrote an open letter to President Bush. They took out full-page ads in the major newspapers. Andersen executives petitioned US ambassadors across the world to warn them that the local offices might close. Chertoff even had to change his email address because of the deluge. After Berardino resigned, the interim CEO began making more television appearances. Andersen’s PR executives capitalized on the mobilization, announcing that any Andersen employee who wanted could speak to the press.
The Enron Task Force prosecutors weren’t moved by the publicity stunts. But the notion that there were tens of thousands of employees at risk became indelible. When Andersen condemned the verdict against the firm, it decried what would happen to “a firm of twenty-six thousand innocent people.” (The number would be reported variously; sometimes it was twenty-eight thousand.)
Initially, the media was Andersen’s implacable enemy. The horde of reporters covering the firm rooted for its collapse, the Andersen team thought. Dorton and Leonard figured a way to counter it. Then at CNN, the conservative host Lou Dobbs was fighting a ratings war with CNBC. Nothing stokes cable ratings like a sustained campaign of outrage. The PR masters assigned an Andersen executive to check in with Dobbs’s show every day. Dobbs embraced Andersen, hammering the Feds for having gone after the accounting firm while supposedly letting Enron executives off. Andersen had its first media ally.
The company’s lawyers argued that government had abused the grand jury process by disallowing Andersen from putting its case in front of the body. Defense attorneys have no right to present evidence to a grand jury, which renders the typical grand jury a one-sided process run by prosecutors. In a departure, the Justice Department invited Andersen lawyers to submit exculpatory evidence to the grand jury. They didn’t respond. Nonetheless, the press echoed the claim. The Wall Street Journal reported, “The government didn’t give Andersen a chance to present its case to the grand jury investigating the firm.”35
One of the best spokesmen for the beleaguered employees of Arthur Andersen was Rusty Hardin, as its counsel. Davis Polk and Mayer Brown were cautious about talking to the press, but the charismatic defense attorney thought their approach was absurd. He courted the media.
Hardin had new talking points. Andersen would no longer concede anything. The new company line was daring, since Andersen partner David Duncan had pleaded guilty and Andersen itself had admitted wrongdoing in a press release. Hardin dismissed all that, insisting that no Andersen employee did anything wrong. None had destroyed documents to obstruct the government. They were just routinely clearing out materials. Hardin contended that Andersen was a victim of politics. He targeted Chertoff, a Justice Department political appointee. A company’s biggest nightmare, he would say, was to fall under criminal investigation amid a public fury and have to watch as politicos refused to acknowledge any rules. In the media before and during the trial, Hardin switched Andersen’s line on Duncan, no longer blaming him but transforming him into a victim of government pressure who didn’t believe what he was saying. Andersen partners thrilled to Hardin’s resolve. One employee would say later that he had helped the firm “find its heart.”
Andersen’s voice mattered more than its heart. All that work Dorton and Leonard did in their PR war room may not have kept the firm alive, but it had succeeded. Through an intentional strategy, they had put a human face on Andersen. No longer was Andersen about accounting fraud. It now stood for the government putting a major American company out of business. The firm, its PR team, Andersen, the corporate lobby, and the defense bar succeeded by changing the subject.
The notion that the indictment was solely responsible for putting Andersen out of business is a myth. (Technically, Andersen surrendered its accounting license but never filed for bankruptcy.) Between 2001 and 2010, no publicly traded company failed because of a conviction, the attorney and scholar Gabriel Markoff has found. According to him, “[T]he risk of driving companies out of business through prosecutions has been radically exaggerated.”36
The Andersen indictment and trial verdict accelerated Andersen’s downfall. The Justice Department moved uncharacteristically fast, making the government susceptible to accusations it overreacted in haste. Michael Chertoff, who pushed the indictment, saw his reputation sag later as the head of the Department of Homeland Security, overseeing the botched response to Hurricane Katrina in 2005. Chertoff had violated the unwritten rules of corporate criminal negotiations. He was not a man of proportion. The prosecution was a reminder that government power is awesome and consequential.
But clients were fleeing before the indictment because of the profound reputational damage Andersen had suffered as Enron’s auditor. The document destruction and the previous accounting settlements combined in a toxic swirl of irreparable harm. In the weeks before the indictment, major clients such as Merck & Co., Freddie Mac, SunTrust Banks, and Delta Air Lines all abandoned the firm. In the end, Arthur Andersen faced 175 shareholder suits. Partners had every incentive to dissolve the firm to avoid paying up in those civil settlements. Even if Enron had not killed Arthur Andersen, WorldCom would have. Ten days after the Andersen verdict, the giant telecom darling revealed a multibillion-dollar accounting fraud. WorldCom’s auditor? Arthur Andersen.
Nonetheless, years later, Arthur Andersen and its supporters would righteously point out that the firm was never convicted of accounting fraud.37 Critics of the prosecution make two potent arguments: The first was that the innocent, low-level employees who had nothing to do with wrongdoing suffered the most. High-level partners, for the most part, got new jobs easily. The law, however, cannot condone crimes simply because there are collateral victims. A convicted murderer’s family might suffer, too. The second contention was that indicting Andersen would tie the hands of regulators and prosecutors. They would become overly cautious for fear of putting one of the now–Big Four firms out of business. In a case against KPMG in the following years, that prediction came to pass.
Then the government suffered a blow. In May 2005, three years after the prosecution, the Supreme Court reversed the verdict in a unanimous vote. The court determined that trial judge Melinda Harmon’s instructions were overly generous to the government, failing to make clear that the prosecution had a burden to demonstrate that Andersen executives intended to obstruct justice when they destroyed or instructed others to destroy documents. The judge overseeing the Andersen trial had been inconsistent. At one point, she had told the jurors that they needed to find that Andersen employees committed fraud knowingly. At another, she had told the jurors that “even if [Andersen] honestly and sincerely believed that its conduct was lawful, you may find [it] guilty.” The Supreme Court called this instruction a crucial error. People need to know they are doing something wrong to commit a crime. The judge’s instructions “failed to convey the requisite consciousness of wrongdoing,” Chief Justice William Rehnquist wrote in his opinion. “Indeed, it is striking how little culpability the instructions required.”
Today legal observers argue over the ruling. Several aspects of the Supreme Court ruling are odd. Andersen had been charged under a statute that, by the time of the ruling, was no longer relevant. In July 2002, a month after Andersen’s conviction, Congress passed Sarbanes-Oxley. The new law closed loopholes related to obstruction of justice and document destruction, making the actions that Andersen had taken illegal in the future. So why did the Supreme Court, as overburdened as it is, pick up this case, considering a statute that had been euthanized by Congress? The court rarely takes on issues that have been already resolved by the legislature. Given that the Enron Task Force took flak for its overzealous approach, some prosecutors interpreted the highest court’s action as a warning to the government not to be so aggressive again.
The case against Andersen was overwhelming. The firm destroyed documents, with one partner pleading guilty. The firm did not go out of business undeservedly. Moreover, the prosecution did not lead to any economic or financial crisis, as the firm and its lawyers warned. The SEC had begun contingency planning for Andersen’s collapse, worried about the cascading effect that it would have on investor confidence as corporations scrambled both to switch auditors and clean up their accounting. The agency had even brought together Enron creditors, pensioners, and shareholders to try to push a modest settlement with Andersen to avoid its collapse. After the indictment, however, markets didn’t crash. Corporations just found other auditors. In the following months and years, investors the world over came back into the American capital markets. Most of the cashiered Andersen workers and partners found work quickly. The victory of Andersen PR’s efforts is all the more improbable given that the greatest fears about the consequences of Andersen’s prosecution went unrealized.
Yet opinion turned. In the later years of the 2000s and 2010s, top Justice Department officials invoked Andersen when discussing corporate investigations, certain that the government had gone too far. Expressing a commonly held belief, the former US attorney in Manhattan and future SEC chair Mary Jo White said in 2005:
The Justice Department came under a lot of criticism for indicting Arthur Andersen and putting it out of business.
That was justified criticism.
What has happened is that since Arthur Andersen, the Justice Department, to its credit, has focused on the awesome collateral consequences of moving against an entire entity criminally. The stigma of that, the reputational hit of that, is too severe for most companies to survive. And so, they have turned to what they consider to be a lesser sanction with lesser collateral consequences.38
By the end of the aughts, top Justice Department officials didn’t even have to mention the firm by name. Everyone knew what they were talking about. Lanny Breuer, who held the same role as Chertoff a half decade later as the Obama administration’s criminal division head, indicated in a speech on September 13, 2012, the caution with which the department approached corporate prosecutions:
[T]he decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes—though, let me stress, not always—these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multinational companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white-collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.39
The Andersen case ushered in an era of prosecutorial timidity when it came to taking on the largest corporations in America. The response to the financial crisis of 2008, which took down the nation’s largest banks and put the global financial system at risk, stands in contrast to the post-Nasdaq-bubble accounting-fraud emergency. Central banks poured in trillions of dollars in extraordinary lending. But fear for the fragility of the system dominated the political discourse and tormented Department of Justice officials.
Democrats, in possession of the White House and Congress by 2009, sought systemic solutions, as they had during the Sarbanes-Oxley debate. Congress passed a gigantic (though arguably insufficient) stimulus bill and moved on to writing and passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, a sweeping piece of financial reform legislation. The left mobilized to push specific pieces of law to protect individuals from predatory finance, to make the financial system safer, and to pull unregulated areas of finance under government supervision.
Here and there, elected officials called for greater enforcement. But the Obama administration did not emphasize that aspect of crisis response. Aside from a few speeches, the White House took little concrete action on the prosecution of white-collar crime. Attorney General Eric Holder did not mobilize a major law enforcement response right away. Prosecutions, they seemed to hope, would take care of themselves. But they wouldn’t, in no small measure because of the Arthur Andersen prosecution.
Today prosecutors remain reluctant to indict large corporations for fear of driving them out of business. In the decade following the accounting firm’s conviction, the Department of Justice would overhaul its approach to corporate prosecutions, moving to settlements over charges. The strategic shift came without any strategy or plan. A Pyrrhic victory for Andersen, the firm’s prosecution was only too real a triumph for corporate America. Andersen had to die so that all other big corporations might live, free of prosecution.