Enron Fallout Spurs Securities Fraud Bill: The Corporate and Criminal Fraud Accountability Act Would Create Penalties for Illegal Document Shredding and Increase Protections for Whistleblowers. (Capital Edge: Legislative & Regulatory Update)

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In the wake of the Enron/ Arthur Andersen scandal, Washington policy makers are pursuing reforms that would affect how records and information managers do their jobs in the future.

On April 25, the Senate Judiciary Committee overwhelmingly approved by voice vote Senate Bill 2010, the Corporate and Criminal Fraud Accountability Act of 2002. The bill establishes penalties for illegal document shredding, increases protections for corporate whistleblowers, requires that auditing documents be preserved for five years, and prevents violators of securities laws from using bankruptcy as a shield to escape liability.

Sen. Patrick Leahy (D-Vt.), chairman of the Senate Judiciary Committee, introduced the bill on March 12 with co-sponsors Sen. Thomas Daschle (D-S.D.), Sen. Richard Durbin (D-Ill.), and Sen. Tom Harkin (D-Iowa). The measure aims to prevent corporate fraud, protect corporate fraud victims, preserve material evidence related to a corporate fraud incident, and hold corporate fraud scofflaws accountable for their criminal wrongdoing. S.2010 provides for criminal prosecution and enhanced criminal penalties for those who defraud investors in publicly traded securities or alter or destroy physical or testimonial evidence related to the fraudulent transaction. It also disallows the debt incurred in violation of securities fraud laws from being discharged in bankruptcy.

"As a former prosecutor," Leahy said, "I was surprised to learn that unlike bank fraud, healthcare fraud, and bankruptcy fraud, there is no specific federal crime of `securities fraud' to protect victims of fraud related to publicly traded companies."

In securities fraud cases, federal prosecutors at present must use statutes relating to mail and wire charges that carry maximum penalties of only five years' imprisonment and require prosecutors to directly link the securities fraud to the use of mail or interstate telephony to carry out the fraud. Alternatively, a charge of willful violation of certain specific securities laws or regulations may be brought, but proving willful violations of existing law has allowed defendants to argue that they did not possess the requisite criminal intent.

Closing Loopholes

Supporters hope the bill, if passed, will help standardize laws that apply to records and information management. Currently, criminal laws relating to the destruction or fabrication of evidence, including the shredding of financial and audit records, are a patchwork of laws that is often misinterpreted. Lawmakers said that S.2010 is necessary because current federal law relating to obstruction of justice in document destruction cases is littered with loopholes and burdensome proof requirements. For example, under current provisions it is a crime for an individual to persuade another person to destroy documents, but it is not against the law if that individual destroys the same documents himself/herself.

"This bill is about accountability and transparency," Leahy explained. "Transparency instills confidence, and accountability helps enforce transparency and forthright financial decisions."

Currently, U.S. federal statutes lack a clear requirement of what kind of work product auditors must retain in order to support auditing conclusions that may be examined at a later time by federal regulators and law enforcement officials.

The current obstruction of justice charges against Arthur Andersen have been brought under a "witness tampering" statute of the federal criminal code because no specific charge of document shredding exists that can be brought against the firm. According to the Senate Judiciary Committee Report on S.2010, the Andersen example has forced prosecutors to "proceed under the legal fiction that the defendants are being prosecuted for telling other people to shred documents, not simply for destroying evidence themselves. Although prosecutors have been able to bring charges thus far in the case, in a case with a single person doing the shredding, this legal hurdle might present an insurmountable bar to a successful prosecution. …