Court Overturns Arthur Andersen Conviction

The Supreme Court on Tuesday overturned the conviction of the Arthur Andersen accounting firm for destroying Enron Corp.-related documents before the energy giant's collapse.


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In a unanimous opinion, justices said the former Big Five accounting firm's June 2002 obstruction-of-justice conviction -- which virtually destroyed Andersen -- was improper. The decision said jury instructions at trial were too vague and broad for jurors to determine correctly whether Andersen obstructed justice.

"The jury instructions here were flawed in important respects," Chief Justice William H. Rehnquist wrote for the court.

The ruling is a setback for the Bush administration, which made prosecution of white-collar criminals a high priority following accounting scandals at major corporations. After Enron's 2001 collapse, the Justice Department went after Andersen first.

Enron crashed in December 2001, putting more than 5,000 employees out of work, just six weeks after the energy company revealed massive losses and writedowns.

Subsequently, as the Securities and Exchange Commission began looking into Enron's convoluted finances, Andersen put in practice a policy calling for destroying unneeded documentation.

Government attorneys argued that Andersen should be held responsible for instructing its employees to "undertake an unprecedented campaign of document destruction."

But in his opinion, Rehnquist noted that jurors were instructed to convict Andersen if the accounting firm had an "improper purpose," such as an intent to impede or subvert fact-finding in an "official proceeding." He noted jurors were instructed to convict, even if Andersen mistakenly thought it was acting legally.

At trial, Andersen argued that employees who shredded tons of documents followed the policy and there was no intent to thwart the SEC investigation.

The probe into Andersen led to just one guilty plea, from the firm's former top Enron auditor, David Duncan. But the conviction of the Chicago firm forced it to surrender its accounting license and stop conducting public audits. Some 28,000 workers had to find other jobs, and the company was left a shell of its former self.

A ruling against Andersen would have had onerous consequences for businesses, whose discarding of files is an everyday occurrence. Experts say companies would have to keep all files for fear that any disposal, however innocent, could subject them to potential prosecution.

According to Andersen attorneys, notes and drafts of documents were thrown away under the firm's document-retention policy in part because they were preliminary and could have been misconstrued.

Andersen's appeal was backed by the National Association of Criminal Defense Lawyers. It argued in a friend-of-the-court filing that broad characterization of "obstruction" used in the jury instructions would also unfairly punish criminal attorneys who advise their clients to withhold evidence in legal ways.

Such a broad reading could open defense lawyers and others to prosecution if they merely advise clients of their rights to assert legal privileges or review document retention policies, the criminal defense group said.

The case is Andersen v. U.S., 04-368.

-- Hope Yen

liibulletin: Arthur Andersen LLP v. United States (04-368): "Supreme Court Oral Argument Previews
Arthur Andersen LLP v. United States (04-368)
Oral Argument: April 27, 2005

Appealed from: 5th Circuit Court of Appeals

CRIMINAL PROCEDURE, WHITE-COLLAR CRIME, Witness Tampering, Jury Instructions, Enron Scandal, Obstruction of Justice, Subpoena, Document Destruction

Arthur Andersen LLP was convicted of witness tampering under 18 U.S.C. § 1512(b). The 5th Circuit upheld the conviction, despite Andersen's claims that prosecution did not enter evidence about the numerous documents Andersen did not destroy, that the judge allowed improper evidence of past SEC investigations of Andersen, and that the judge misrepresented the offense in the jury instructions with regards to actual knowledge that certain actions constituted a crime under the circumstances and timing of the commission of the actions. Andersen again challenges the conviction, this time before the U.S. Supreme Court.

[Question(s) presented] | [Summary] | [Analysis]

Question(s) presented
Whether Arthur Andersen LLP's conviction for witness tampering under 18 U.S.C. § 1512(b) must be reversed because the jury instructions upheld by the Fifth Circuit misinterpreted the elements of the offense, in conflict with decisions of the Supreme Court and the Courts of Appeals for the First, Third, and D.C. Circuits.

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Summary
In June of 2002, Arthur Andersen LLP ("Andersen") was convicted in a jury trial in the U.S. District Court in Houston, Texas, of "corruptly persuading" employees to destroy Enron-related documents in anticipation of an SEC investigation (see indictment for details of the charges and 18 U.S.C. § 1512(b) for the applicable law). The judge ordered Andersen to pay $500,000 and serve an up-to-five year probation period.

Two years later, before the Fifth Circuit Court of Appeals, Andersen argued that the prosecution had, among other things, failed to include as evidence the large number of documents that the Andersen employees did not destroy. United States v. Andersen, 374 F.3d 281, 287 (5th Cir. 2004). The Fifth Circuit opinion noted that the district court had already observed that Andersen employees had not destroyed everything relevant to the Enron investigation and still found them guilty. See id. at 288.

Andersen also objected to the introduction in the district court case of information about previous SEC investigations of Andersen. See id. The Fifth Circuit decided the evidence was relevant to show that Andersen knew or should have known the SEC would open an investigation into Enron's accounting discrepancies. See id. at 291.

Most importantly for the purpose of the current appeal, Andersen also claimed that the district court judge's jury instructions misrepresented the elements of the offense and that Andersen would have been found not guilty given the correct jury instructions. See id. at 292. The district court judge told the jury that Andersen did not have to knowingly act illegally to be found guilty. See id. at 293–94. Andersen argued that corrupt behavior required evidence of an improper purpose. See id. Andersen contended that it was simply cleaning up Enron files and lacked the requisite improper purpose. See id. The Fifth Circuit, however, viewed the sudden enforcement of a lax document-retention policy in the face of an imminent investigation as an improper purpose. See id. at 295–96.

Andersen then pointed out that the document destruction primarily took place in October 2001, and that Andersen did not know of the investigation until November 8, 2001. See id. at 285–86. The district court judge instructed the jury that an official investigation did not have to be ongoing at the time of the offense. See id. at n.32, 298. The jury based their conviction on evidence that senior Andersen employees told coworkers to expect an SEC investigation. See id. at 298. Andersen argues that the correct instruction would indicate that concern about possible future proceedings is not enough, and that it did not know of the SEC investigation when the destruction took place. See id. The Fifth Circuit stated that "ignorance of the law is no defense," and concluded that Congress would have specified if a narrower standard were to apply in obstruction of justice crimes. See id. at 299.

The Fifth Circuit unanimously affirmed the conviction, rejecting Andersen's arguments and characterizing the firm as a member of Enron's "supporting cast," which fell in the wake of Enron's collapse "[l]ike a falling giant redwood." See id. at 284.

On Jan. 7, 2005, the U.S. Supreme Court granted Andersen's writ to review the case. (For more information see Carrie Johnson's article "High Court Will Hear Andersen Appeal" that appeared in the Washington Post on January 8, 2005.)

Discussion

Although the issues of the Andersen case are fairly narrow, the Supreme Court's decision will have far-reaching effects on international, multi-disciplinary (MDP) firms, and potentially on secondary actors who rely on MDP firms. If the Court were to affirm the trial judge's jury instruction, accounting firms would be "chilled" into retaining and maintaining millions of pages of business records. The costs of document repository are almost always passed on to the clients of such firms, and would create new business for vendors.

On the other hand, if the Court agreed with Andersen's reading of the statute, such a ruling would not restore investor and insurer confidence to the level once held by this former member of the "Big Five" accounting firms. The now thinly staffed Andersen would continue its legal battles against shareholder litigants and its search for insurance coverage. The "chilling" effect of the Enron-Andersen debacle on international accounting firms would remain given the discretion of a trial judge to craft a jury instruction that falls within the meaning of the statute.

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Analysis
The issues in this case are classic questions of statutory interpretation with respect to § 1512(b). The statute reads:

[w]hoever knowingly uses intimidation, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to . . . cause or induce any person to (A) . . . withhold a record, document, or other object, from an official proceeding ; [or] (B) alter, destroy, mutilate, or conceal an object with intent to impair the object's integrity or availability for use in an official proceeding
is guilty of witness tampering. Id. The first issue is whether the term "knowingly . . . corruptly persuades" means "an intent to subvert, undermine, or impede the fact-finding ability of an official proceeding," as the trial judge instructed the jury, See Andersen, 374 F.3d at 297, or whether it requires unlawful means or inducements to violate the law, as Andersen argues. See Brief for Petitioner at 17, Arthur Andersen, LLP v. United States, U.S. (No. 04-368). The second issue is whether an informal SEC proceeding constitutes an "official proceeding." See Andersen, 374 F.3d at 299-98. If the Court sides with Andersen on either of these issues, it must decide whether the trial court's instructions sufficiently prejudice Andersen to warrant reversal. Pet'r Brief at 19.

With respect to the "knowingly . . . corruptly persuading" prong, Andersen first argues that there is nothing inherently "'corrupt' or wrongful about an intent to impede future government fact-finding within the bounds of the law." Pet'r Brief at 17. Petitioner claims that this is an inherent feature of the adversarial legal system, and that "Americans regularly engage in a wide range of conduct designed in part to influence or limit the information that reaches government proceedings." Id. Petitioner argues that impeding government fact-finding is in many ways an essential function of the lawyer. See id.

Furthermore, § 1512(b)'s mens rea element should lead "knowingly . . . corruptly persuading" to be interpreted to require that the prosecution prove that a defendant knows its conduct is wrongful -- especially if the provision is not interpreted to require that the acts themselves actually be unlawful. Id. at 28. The Court issued a similar holding in Ratzlaf v. United States, where it found that a federal statute that criminalizes behavior that is "not inevitably nefarious," should be interpreted to require either knowledge of the law, or knowledge of facts sufficient to render the conduct blameworthy. See Ratzlaf v. United States, 510 U.S. 135, 144 (1994). Ratzlaf was accused of violating the Money Laundering Control Act of 1986, which prohibited willfully structuring a financial transaction with one or more financial institutions in order to avoid federal cash transaction reporting requirements. See id. at 139. Noting several examples where tax payers "structure" transactions for the sole purpose of avoiding taxes -- examples that were not illegal -- the Court held that the willfulness requirement was not satisfied unless the defendant had knowledge of the illegality of the structuring. See id. at 145-46. Anderson bolsters this argument by reference to the structure of the statute: The term "corruptly persuading" is included with a list of actions that otherwise includes "killing, coercing, harassing, or intimidating witnesses." Pet'r Brief at 18. Andersen argues that because any of these other actions include an unlawful means or inducement, it does not make sense to interpret "corruptly persuading" not to include a similar unlawful means. See id.

With respect to the "official proceeding" prong, Petitioner argues that the district court went too far when it defined the prong to mean "all of the steps and stages in the agency's performance of its governmental functions, . . . extend[ing] to administrative as well as investigative functions both formal and informal." Andersen, 374 F.3d at 297. Petitioner argues that neither "interference with the fact-finding ability of law-enforcement or preliminary investigations" nor "an abstract desire not to retain documents because they might be relevant to some future proceeding" is enough; instead, there must be a nexus between the defendant's conduct and a particular official proceeding. Pet'r Brief at 18. Otherwise, Petitioner argues, the difference between an "official proceeding and impending possible proceedings simply collapses. Id. at 42.

Finally, Petitioner argues that the rule of lenity compels that both terms be interpreted in its favor. Id. at 37. The rule of lenity states that "a court, in construing an ambiguous criminal statute . . . should resolve the ambiguity in favor of the more lenient punishment." Blacks Law Dictionary 1359 (8th ed. 2004). Petitioner states that the lower court's interpretation of § 1512(b) would render illegal "the document retention policies in place at almost every American corporation or professional firm of any size." Pet'r Brief at 19. Moreover, Petitioner argues that the doctrine of constitutional doubt forbids an interpretation that would "criminalize a broad range of innocent conduct, including constitutionally protected free speech, without fair warning." Id.

The government responds, on the other hand, that "corruptly persuading" does not require an unlawful means. Brief for Respondent at 14, Arthur Andersen, LLP v. United States, U.S. (No. 04-368). It claims that the lower court's interpretation of the statute is consistent with the definition given the identical term in the statute that preceded § 1512(b), in other obstruction of justice statutes, and in other federal criminal statutes. Id. at 14. Respondent notes that the "corruptly persuades" provision was added to § 1512(b) by Congress after the statute's initial enactment to ensure "the same protection of witnesses from non-coercive influence that was found in 18 U.S.C. § 1503." See 124 Cong. Rec. S17, 369 (statement of Sen. Biden).

Furthermore, the Respondent maintains that acting with an improper purpose does not require that the defendant knowingly act impermissibly. Resp't Brief at 35. As a general rule, ignorance of the law is no defense. See id. at 35-36, citing Ratzlaf, 510 U.S. at 149. Respondent contends that "[i]ntentional actions to obstruct justice through persuading others to destroy documents are not undertaken innocently," Brief for Respondent at 14, United States v. Andersen, 374 F.3d 281, 287 (5th Cir. 2004), so there is no fear of criminal conviction under this statute for conduct innocently undertaken even with this interpretation.

With respect to the "official proceeding" prong, the Court of Appeals for the Fifth Circuit found no reversible error because the statutory language "does not require a defendant to know that the proceeding is pending or about to be initiated." Andersen, 374 F.3d at 298. It further found (in dicta) that Andersen's argument that this interpretation would render illegal the document retention policies of many large corporations was offset by the "corruptly persuading" requirement. See id.

Respondent argues that the proceeding in question for Anderson was the SEC's Enron Investigation. Resp't Brief at 16. Respondent claims that Andersen lost the ability to argue that this does not constitute an official proceeding when it failed to preserve the issue before the Fifth Circuit. See id. Respondent further notes that the "statute authorizing the SEC to conduct investigations treats all investigations as proceedings, and courts have consistently considered agency investigations, even preliminary ones, to be 'proceedings' for purposes of a companion statute, 18 U.S.C. § 1505." Id.

Respondent argues that the rule of lenity -- or any doctrine of constitutional interpretation -- is inapplicable here because the term "corruptly" is unambiguous. Id. at 39. It argues that this term has long been defined in other obstruction of justice statutes, and that Petitioner, therefore, had ample notice that it could be prosecuted for its conduct. See id. at 40.

While it is unclear with which interpretation of "corruptly persuading" or "official proceeding" the Court will side, if the Court sides with Petitioner on either issue, it would be forced to overturn the verdict. As Petitioner points out, and Respondent does not seem to dispute, if the Court adopts Petitioner's construction of the statute, none of these "errors" would be harmless. Pet'r Brief at 19.

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ARTHUR ANDERSEN LLP v. UNITED STATES

certiorari to the united states court of appeals for the fifth circuit

No. 04-368.Argued April 27, 2005--Decided May 31, 2005

As Enron Corporation's financial difficulties became public, petitioner, Enron's auditor, instructed its employees to destroy documents pursuant to its document retention policy. Petitioner was indicted under 18 U. S. C. §§1512(b)(2)(A) and (B), which make it a crime to "knowingly ... corruptly persuad[e] another person ... with intent to ... cause" that person to "withhold" documents from, or "alter" documents for use in, an "official proceeding." The jury returned a guilty verdict, and the Fifth Circuit affirmed, holding that the District Court's jury instructions properly conveyed the meaning of "corruptly persuades" and "official proceeding" in §1512(b); that the jury need not find any consciousness of wrongdoing in order to convict; and that there was no reversible error.

Held: The jury instructions failed to convey properly the elements of a "corrup[t] persuas[ion]" conviction under §1512(b). Pp. 6-12.

(a) This Court's traditional restraint in assessing federal criminal statutes' reach, see, e.g., United States v. Aguilar, 515 U. S. 593, 600, is particularly appropriate here, where the act underlying the conviction--"persua[sion]"--is by itself innocuous. Even "persuad[ing]" a person "with intent to ... cause" that person to "withhold" testimony or documents from the Government is not inherently malign. Under ordinary circumstances, it is not wrongful for a manager to instruct his employees to comply with a valid document retention policy, even though the policy, in part, is created to keep certain information from others, including the Government. Thus, §1512(b)'s "knowingly ... corruptly persuades" phrase is key to what may or may not lawfully be done in the situation presented here. The Government suggests that "knowingly" does not modify "corruptly persuades," but that is not how the statute most naturally reads. "[K]nowledge" and "knowingly" are normally associated with awareness, understanding, or consciousness, and "corrupt" and "corruptly" with wrongful, immoral, depraved, or evil. Joining these meanings together makes sense both linguistically and in the statutory scheme. Only persons conscious of wrongdoing can be said to "knowingly ... corruptly persuad[e]." And limiting criminality to persuaders conscious of their wrongdoing sensibly allows §1512(b) to reach only those with the level of culpability usually required to impose criminal liability. See Aguilar, supra, at 602. Pp. 6-9.

(b) The jury instructions failed to convey the requisite consciousness of wrongdoing. Indeed, it is striking how little culpability the instructions required. For example, the jury was told that, even if petitioner honestly and sincerely believed its conduct was lawful, the jury could convict. The instructions also diluted the meaning of "corruptly" such that it covered innocent conduct. The District Court based its instruction on the Fifth Circuit Pattern Jury Instruction for §1503, which defined "corruptly" as "knowingly and dishonestly, with the specific intent to subvert or undermine the integrity" of a proceeding. However, the court agreed with the Government's insistence on excluding "dishonestly" and adding the term "impede" to the phrase "subvert or undermine," so the jury was told to convict if it found petitioner intended to "subvert, undermine, or impede" governmental factfinding by suggesting to its employees that they enforce the document retention policy. These changes were significant. "[D]ishonest[y]" was no longer necessary to a finding of guilt, and it was enough for petitioner to have simply "impede[d]" the Government's factfinding ability. "Impede" has broader connotations than "subvert" or even "undermine," and many of these connotations do not incorporate any "corrupt[ness]" at all. Under the dictionary definition of "impede," anyone who innocently persuades another to withhold information from the Government "get[s] in the way of the progress of" the Government. With regard to such innocent conduct, the "corruptly" instructions did no limiting work whatsoever. The instructions also led the jury to believe that it did not have to find any nexus between the "persua[sion]" to destroy documents and any particular proceeding. In resisting any nexus element, the Government relies on §1512(e)(1), which states that an official proceeding "need not be pending or about to be instituted at the time of the offense." It is, however, quite another thing to say a proceeding need not even be foreseen. A "knowingly ... corrup[t] persaude[r]" cannot be someone who persuades others to shred documents under a document retention policy when he does not have in contemplation any particular official proceeding in which those documents might be material. Cf. Aguilar, supra, at 599-600. Pp. 9-12.

374 F. 3d 281, reversed and remanded.

Rehnquist, C. J., delivered the opinion for a unanimous Court.



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ARTHUR ANDERSEN LLP, PETITIONER v. UNITED
STATES

on writ of certiorari to the united states court of appeals for the fifth circuit

[May 31, 2005]



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Chief Justice Rehnquist delivered the opinion of the Court.

As Enron Corporation's financial difficulties became public in 2001, petitioner Arthur Andersen LLP, Enron's auditor, instructed its employees to destroy documents pursuant to its document retention policy. A jury found that this action made petitioner guilty of violating 18 U. S. C. §§1512(b)(2)(A) and (B). These sections make it a crime to "knowingly us[e] intimidation or physical force, threate[n], or corruptly persuad[e] another person ... with intent to ... cause" that person to "withhold" documents from, or "alter" documents for use in, an "official proceeding."1 The Court of Appeals for the Fifth Circuit affirmed. We hold that the jury instructions failed to convey properly the elements of a "corrup[t] persuas[ion]" conviction under §1512(b), and therefore reverse.

Enron Corporation, during the 1990's, switched its business from operation of natural gas pipelines to an energy conglomerate, a move that was accompanied by aggressive accounting practices and rapid growth. Petitioner audited Enron's publicly filed financial statements and provided internal audit and consulting services to it. Petitioner's "engagement team" for Enron was headed by David Duncan. Beginning in 2000, Enron's financial performance began to suffer, and, as 2001 wore on, worsened.2 On August 14, 2001, Jeffrey Skilling, Enron's Chief Executive Officer (CEO), unexpectedly resigned. Within days, Sherron Watkins, a senior accountant at Enron, warned Kenneth Lay, Enron's newly reappointed CEO, that Enron could "implode in a wave of accounting scandals." Brief for United States 2. She likewise informed Duncan and Michael Odom, one of petitioner's partners who had supervisory responsibility over Duncan, of the looming problems.

On August 28, an article in the Wall Street Journal suggested improprieties at Enron, and the SEC opened an informal investigation. By early September, petitioner had formed an Enron "crisis-response" team, which included Nancy Temple, an in-house counsel.3 On October 8, petitioner retained outside counsel to represent it in any litigation that might arise from the Enron matter. The next day, Temple discussed Enron with other in-house counsel. Her notes from that meeting reflect that "some SEC investigation" is "highly probable." Id., at 3.

On October 10, Odom spoke at a general training meeting attended by 89 employees, including 10 from the Enron engagement team. Odom urged everyone to comply with the firm's document retention policy.4 He added: " '[I]f it's destroyed in the course of [the] normal policy and litigation is filed the next day, that's great... . [W]e've followed our own policy, and whatever there was that might have been of interest to somebody is gone and irretrievable.' " 374 F. 3d 281, 286 (CA5 2004). On October 12, Temple entered the Enron matter into her computer, designating the "Type of Potential Claim" as "Professional Practice--Government/Regulatory Inv[estigation]." App. JA-127. Temple also e-mailed Odom, suggesting that he " 'remin[d] the engagement team of our documentation and retention policy.' " Brief for United States 6.

On October 16, Enron announced its third quarter results. That release disclosed a $1.01 billion charge to earnings.5 The following day, the SEC notified Enron by letter that it had opened an investigation in August and requested certain information and documents. On October 19, Enron forwarded a copy of that letter to petitioner.

On the same day, Temple also sent an e-mail to a member of petitioner's internal team of accounting experts and attached a copy of the document policy. On October 20, the Enron crisis-response team held a conference call, during which Temple instructed everyone to "[m]ake sure to follow the [document] policy." Brief for United States 7 (brackets in original). On October 23, Enron CEO Lay declined to answer questions during a call with analysts because of "potential lawsuits, as well as the SEC inquiry." Ibid. After the call, Duncan met with other Andersen partners on the Enron engagement team and told them that they should ensure team members were complying with the document policy. Another meeting for all team members followed, during which Duncan distributed the policy and told everyone to comply. These, and other smaller meetings, were followed by substantial destruction of paper and electronic documents.

On October 26, one of petitioner's senior partners circulated a New York Times article discussing the SEC's response to Enron. His e-mail commented that "the problems are just beginning and we will be in the cross hairs. The marketplace is going to keep the pressure on this and is going to force the SEC to be tough." Id., at 8. On October 30, the SEC opened a formal investigation and sent Enron a letter that requested accounting documents.

Throughout this time period, the document destruction continued, despite reservations by some of petitioner's managers.6 On November 8, Enron announced that it would issue a comprehensive restatement of its earnings and assets. Also on November 8, the SEC served Enron and petitioner with subpoenas for records. On November 9, Duncan's secretary sent an e-mail that stated: "Per Dave--No more shredding... . We have been officially served for our documents." Id., at 10. Enron filed for bankruptcy less than a month later. Duncan was fired and later pleaded guilty to witness tampering.

In March 2002, petitioner was indicted in the Southern District of Texas on one count of violating §§1512(b)(2)(A) and (B). The indictment alleged that, between October 10 and November 9, 2001, petitioner "did knowingly, intentionally and corruptly persuade . . . other persons, to wit: [petitioner's] employees, with intent to cause" them to withhold documents from, and alter documents for use in, "official proceedings, namely: regulatory and criminal proceedings and investigations." App. JA-139. A jury trial followed. When the case went to the jury, that body deliberated for seven days and then declared that it was deadlocked. The District Court delivered an "Allen charge," Allen v. United States, 164 U. S. 492 (1896), and, after three more days of deliberation, the jury returned a guilty verdict. The District Court denied petitioner's motion for a judgment of acquittal.

The Court of Appeals for the Fifth Circuit affirmed. 374 F. 3d, at 284. It held that the jury instructions properly conveyed the meaning of "corruptly persuades" and "official proceeding"; that the jury need not find any consciousness of wrongdoing; and that there was no reversible error. Because of a split of authority regarding the meaning of §1512(b), we granted certiorari.7 543 U. S. -- (2005).

Chapter 73 of Title 18 of the United States Code provides criminal sanctions for those who obstruct justice. Sections 1512(b)(2)(A) and (B), part of the witness tampering provisions, provide in relevant part:

"Whoever knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to ... cause or induce any person to ... withhold testimony, or withhold a record, document, or other object, from an official proceeding [or] alter, destroy, mutilate, or conceal an object with intent to impair the object's integrity or availability for use in an official proceeding ... shall be fined under this title or imprisoned not more than ten years, or both."

In this case, our attention is focused on what it means
to "knowingly ... corruptly persuad[e]" another person "with intent to ... cause" that person to "withhold" documents from, or "alter" documents for use in, an "official proceeding."

"We have traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress, Dowling v. United States, 473 U. S. 207 (1985), and out of concern that 'a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed,' McBoyle v. United States, 283 U. S. 25, 27 (1931)." United States v. Aguilar, 515 U. S. 593, 600 (1995).

Such restraint is particularly appropriate here, where the act underlying the conviction--"persua[sion]"--is by itself innocuous. Indeed, "persuad[ing]" a person "with intent to ... cause" that person to "withhold" testimony or documents from a Government proceeding or Government official is not inherently malign.8 Consider, for instance, a mother who suggests to her son that he invoke his right against compelled self-incrimination, see U. S. Const., Amdt. 5, or a wife who persuades her husband not to disclose marital confidences, see Trammel v. United States, 445 U. S. 40 (1980).

Nor is it necessarily corrupt for an attorney to "persuad[e]" a client "with intent to ... cause" that client to "withhold" documents from the Government. In Upjohn Co. v. United States, 449 U. S. 383 (1981), for example, we held that Upjohn was justified in withholding documents that were covered by the attorney-client privilege from the Internal Revenue Service (IRS). See id., at 395. No one would suggest that an attorney who "persuade[d]" Upjohn to take that step acted wrongfully, even though he surely intended that his client keep those documents out of the IRS' hands.

"Document retention policies," which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business. See generally Chase, To Shred or Not to Shred: Document Retention Policies and Federal Obstruction of Justice Statutes, 8 Ford. J. Corp. & Fin. L. 721 (2003). It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.

Acknowledging this point, the parties have largely focused their attention on the word "corruptly" as the key to what may or may not lawfully be done in the situation presented here. Section 1512(b) punishes not just "corruptly persuad[ing]" another, but "knowingly ... corruptly persuad[ing]" another. (Emphasis added.) The Government suggests that "knowingly" does not modify "corruptly persuades," but that is not how the statute most naturally reads. It provides the mens rea--"knowingly"--and then a list of acts--"uses intimidation or physical force, threatens, or corruptly persuades." We have recognized with regard to similar statutory language that the mens rea at least applies to the acts that immediately follow, if not to other elements down the statutory chain. See United States v. X-Citement Video, Inc., 513 U. S. 64, 68 (1994) (recognizing that the "most natural grammatical reading" of 18 U. S. C. §§2252(a)(1) and (2) "suggests that the term 'knowingly' modifies only the surrounding verbs: transports, ships, receives, distributes, or reproduces"); see also Liparota v. United States, 471 U. S. 419 (1985). The Government suggests that it is "questionable whether Congress would employ such an inelegant formulation as 'knowingly ... corruptly persuades.' " Brief for United States 35, n. 18. Long experience has not taught us to share the Government's doubts on this score, and we must simply interpret the statute as written.

The parties have not pointed us to another interpretation of "knowingly ... corruptly" to guide us here.9 In any event, the natural meaning of these terms provides a clear answer. See Bailey v. United States, 516 U. S. 137, 144-145 (1995). "[K]nowledge" and "knowingly" are normally associated with awareness, understanding, or consciousness. See Black's Law Dictionary 888 (8th ed. 2004) (hereinafter Black's); Webster's Third New International Dictionary 1252-1253 (1993) (hereinafter Webster's 3d); American Heritage Dictionary of the English Language 725 (1981) (hereinafter Am. Hert.). "Corrupt" and "corruptly" are normally associated with wrongful, immoral, depraved, or evil. See Black's 371; Webster's 3d 512; Am. Hert. 299-300. Joining these meanings together here makes sense both linguistically and in the statutory scheme. Only persons conscious of wrongdoing can be said to "knowingly ... corruptly persuad[e]." And limiting criminality to persuaders conscious of their wrongdoing sensibly allows §1512(b) to reach only those with the level of "culpability ... we usually require in order to impose criminal liability." United States v. Aguilar, 515 U. S., at 602; see also Liparota v. United States, supra, at 426.

The outer limits of this element need not be explored here because the jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing. Indeed, it is striking how little culpability the instructions required. For example, the jury was told that, "even if [petitioner] honestly and sincerely believed that its conduct was lawful, you may find [petitioner] guilty." App. JA-213. The instructions also diluted the meaning of "corruptly" so that it covered innocent conduct. Id., at JA-212.

The parties vigorously disputed how the jury would be instructed on "corruptly." The District Court based its instruction on the definition of that term found in the Fifth Circuit Pattern Jury Instruction for §1503. This pattern instruction defined "corruptly" as " 'knowingly and dishonestly, with the specific intent to subvert or undermine the integrity' " of a proceeding. Brief for Petitioner 3, n. 3 (emphasis deleted). The Government, however, insisted on excluding "dishonestly" and adding the term "impede" to the phrase "subvert or undermine." Ibid. (internal quotation marks omitted). The District Court agreed over petitioner's objections, and the jury was told to convict if it found petitioner intended to "subvert, undermine, or impede" governmental factfinding by suggesting to its employees that they enforce the document retention policy. App. JA-212.

These changes were significant. No longer was any type of "dishonest[y]" necessary to a finding of guilt, and it was enough for petitioner to have simply "impede[d]" the Government's factfinding ability. As the Government conceded at oral argument, " 'impede' " has broader connotations than " 'subvert' " or even " 'undermine,' " see Tr. of Oral Arg. 38, and many of these connotations do not incorporate any "corrupt[ness]" at all. The dictionary defines "impede" as "to interfere with or get in the way of the progress of" or "hold up" or "detract from." Webster's 3d 1132. By definition, anyone who innocently persuades another to withhold information from the Government "get[s] in the way of the progress of" the Government. With regard to such innocent conduct, the "corruptly" instructions did no limiting work whatsoever.

The instructions also were infirm for another reason. They led the jury to believe that it did not have to find any nexus between the "persua[sion]" to destroy documents and any particular proceeding.10 In resisting any type of nexus element, the Government relies heavily on §1512(e)(1), which states that an official proceeding "need not be pending or about to be instituted at the time of the offense." It is, however, one thing to say that a proceeding "need not be pending or about to be instituted at the time of the offense," and quite another to say a proceeding need not even be foreseen. A "knowingly ... corrup[t] persaude[r]" cannot be someone who persuades others to shred documents under a document retention policy when he does not have in contemplation any particular official proceeding in which those documents might be material.

We faced a similar situation in Aguilar, supra. Respondent Aguilar lied to a Federal Bureau of Investigation agent in the course of an investigation and was convicted of " 'corruptly endeavor[ing] to influence, obstruct, and impede [a] ... grand jury investigation' " under §1503. 515 U. S., at 599. All the Government had shown was that Aguilar had uttered false statements to an investigating agent "who might or might not testify before a grand jury." Id., at 600. We held that §1503 required something more--specifically, a "nexus" between the obstructive act and the proceeding. Id., at 599-600. "[I]f the defendant lacks knowledge that his actions are likely to affect the judicial proceeding," we explained, "he lacks the requisite intent to obstruct." Id., at 599.

For these reasons, the jury instructions here were flawed in important respects. The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.



--------------------------------------------------------------------------------


FOOTNOTES

Footnote 1

We refer to the 2000 version of the statute, which has since been amended by Congress.


Footnote 2

During this time, petitioner faced problems of its own. In June 2001, petitioner entered into a settlement agreement with the Securities and Exchange Commission (SEC) related to its audit work of Waste Management, Inc. As part of the settlement, petitioner paid a massive fine. It also was censured and enjoined from committing further violations of the securities laws. In July 2001, the SEC filed an amended complaint alleging improprieties by Sunbeam Corporation, and petitioner's lead partner on the Sunbeam audit was named.


Footnote 3

A key accounting problem involved Enron's use of "Raptors," which were special purpose entities used to engage in "off-balance-sheet" activities. Petitioner's engagement team had allowed Enron to "aggregate" the Raptors for accounting purposes so that they reflected a positive return. This was, in the words of petitioner's experts, a "black-and-white" violation of Generally Accepted Accounting Principles. Brief for United States 2.


Footnote 4

The firm's policy called for a single central engagement file, which "should contain only that information which is relevant to supporting our work." App. JA-45. The policy stated that, "in cases of threatened litigation, ... no related information will be destroyed." Id., at JA-44. It also separately provided that, if petitioner is "advised of litigation or subpoenas regarding a particular engagement, the related information should not be destroyed. See Policy Statement No. 780--Notification of Litigation." Id., at JA-65 (emphasis deleted). Policy Statement No. 780 set forth "notification" procedures for whenever "professional practice litigation against [petitioner] or any of its personnel has been commenced, has been threatened or is judged likely to occur, or when governmental or professional investigations that may involve [petitioner] or any of its personnel have been commenced or are judged likely." Id., at JA-29 to JA-30.


Footnote 5

The release characterized the charge to earnings as "non-recurring." Brief for United States 6, n. 4. Petitioner had expressed doubts about this characterization to Enron, but Enron refused to alter the release. Temple wrote an e-mail to Duncan that "suggested deleting some language that might suggest we have concluded the release is misleading." App. JA-95.


Footnote 6

For example, on October 26, John Riley, another partner with petitioner, saw Duncan shredding documents and told him "this wouldn't be the best time in the world for you guys to be shredding a bunch of stuff." Brief for United States 9. On October 31, David Stulb, a forensics investigator for petitioner, met with Duncan. During the meeting, Duncan picked up a document with the words "smoking gun" written on it and began to destroy it, adding "we don't need this." Ibid. Stulb cautioned Duncan on the need to maintain documents and later informed Temple that Duncan needed advice on the document retention policy.


Footnote 7

Compare, e.g., United States v. Shotts, 145 F. 3d 1289, 1301 (CA11 1998), with United States v. Farrell, 126 F. 3d 484, 489-490 (CA3 1997).


Footnote 8

Section 1512(b)(2) addresses testimony, as well as documents. Section 1512(b)(1) also addresses testimony. Section 1512(b)(3) addresses "persuade[rs]" who intend to prevent "the communication to a law enforcement officer or judge of the United States of information" relating to a federal crime.


Footnote 9

The parties have pointed us to two other obstruction provisions, 18 U. S. C. §§1503 and 1505, which contain the word "corruptly." But these provisions lack the modifier "knowingly," making any analogy inexact.


Footnote 10

We disagree with the Government's suggestion that petitioner's "nexus" argument is not preserved or that it is only subject to plain-error review for failure to comply with Federal Rule of Criminal Procedure 30(d). Petitioner plainly argued for, and objected to the instructions' lack of, a nexus requirement. See, e.g., Record 425 (arguing for a "nexus" and explaining that "it is insufficient for the government to show the defendant intended to affect some hypothetical future federal proceeding"); Record 931-932, 938; Tr. 4339-4345 (May 25, 2002). In so doing, it reasonably relied on language in United States v. Shively, 927 F. 2d 804, 812-813 (CA5 1991). Although the instruction petitioner proposed, based on Shively, does not mirror the nexus requirement it now proposes, its actions were sufficient to satisfy Rule 30(d). This argument also was preserved in the Court of Appeals, which recognized that petitioner was challenging "the concreteness of the defendant's expectations of a proceeding." 374 F. 3d 281, 298 (CA5 2004); see United States v. Williams, 504 U. S. 36, 41-42 (1992). However, the Court of Appeals did not address, and petitioner did not preserve, its argument that informal inquiries are not covered by the statute. See ibid.

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ARTHUR ANDERSEN LLP v. UNITED STATES

certiorari to the united states court of appeals for the fifth circuit

No. 04-368.Argued April 27, 2005--Decided May 31, 2005

As Enron Corporation's financial difficulties became public, petitioner, Enron's auditor, instructed its employees to destroy documents pursuant to its document retention policy. Petitioner was indicted under 18 U. S. C. §§1512(b)(2)(A) and (B), which make it a crime to "knowingly ... corruptly persuad[e] another person ... with intent to ... cause" that person to "withhold" documents from, or "alter" documents for use in, an "official proceeding." The jury returned a guilty verdict, and the Fifth Circuit affirmed, holding that the District Court's jury instructions properly conveyed the meaning of "corruptly persuades" and "official proceeding" in §1512(b); that the jury need not find any consciousness of wrongdoing in order to convict; and that there was no reversible error.

Held: The jury instructions failed to convey properly the elements of a "corrup[t] persuas[ion]" convictio

Supreme Court Overturns Arthur Andersen Conviction - New York TimesBy THE ASSOCIATED PRESS

WASHINGTON -- The Supreme Court on Tuesday overturned the conviction of the Arthur Andersen accounting firm for destroying Enron Corp.-related documents before the energy giant's collapse.

In a unanimous opinion, justices said the former Big Five accounting firm's June 2002 obstruction-of-justice conviction -- which virtually destroyed Andersen -- was improper. The decision said jury instructions at trial were too vague and broad for jurors to determine correctly whether Andersen obstructed justice.

"The jury instructions here were flawed in important respects," Chief Justice William H. Rehnquist wrote for the court.

The ruling is a setback for the Bush administration, which made prosecution of white-collar criminals a high priority following accounting scandals at major corporations. After Enron's 2001 collapse, the Justice Department went after Andersen first.

Acting assistant Attorney General John C. Richter said the Justice Department was disappointed with the decision and was considering whether to re-try the case with a proper jury instruction.

"The Justice Department's decision to charge Arthur Andersen was based at the time on the determination that the substantial destruction of documents in anticipation of an investigation by the Securities and Exchange Commission violated the law," he said. "We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law."

Enron crashed in December 2001, putting more than 5,000 employees out of work, just six weeks after the energy company revealed massive losses and writedowns.

Subsequently, as the Securities and Exchange Commission began looking into Enron's convoluted finances, Andersen put in practice a policy calling for destroying unneeded documentation.

Government attorneys argued that Andersen should be held responsible for instructing its employees to "undertake an unprecedented campaign of document destruction." It said Andersen was guilty under an obstruction law that makes it a crime to "corruptly persuade" others to destroy documents.

But in his opinion, Rehnquist noted that it is not necessarily wrong for companies to instruct employees to destroy documents, even if the intent is in part to keep information from the government.

Like a mother who advises a son to invoke his right against compelled self-incrimination out of fear he might be convicted, "persuading" an employee to withhold information is not "inherently malign," Rehnquist wrote.

"The instructions also diluted the meaning of 'corruptly' so that it covered innocent conduct," Rehnquist said.

At trial, Andersen argued that employees who shredded tons of documents followed the policy and there was no intent to thwart the SEC investigation.

The probe into Andersen led to just one guilty plea, from the firm's former top Enron auditor, David Duncan. But the conviction of the Chicago firm forced it to surrender its accounting license and stop conducting public audits. Some 28,000 workers had to find other jobs, and the company was left a shell of its former self.

A ruling against Andersen could have had onerous consequences for businesses, whose discarding of files is an everyday occurrence. Experts say companies would have had to keep all files for fear that any disposal, however innocent, could subject them to potential prosecution.

According to Andersen attorneys, notes and drafts of documents were thrown away under the firm's document-retention policy in part because they were preliminary and could have been misconstrued.

Andersen's appeal was backed by the National Association of Criminal Defense Lawyers. It argued in a friend-of-the-court filing that broad characterization of "obstruction" used in the jury instructions would also unfairly punish criminal attorneys who advise their clients to withhold evidence in legal ways.

Such a broad reading could open defense lawyers and others to prosecution if they merely advise clients of their rights to assert legal privileges or review document retention policies, the criminal defense group said.

Is It a Savings Crisis or a Math Error? - New York Times

WHEN it comes to consuming, Americans are the equivalent of the New York Yankees - perennial contenders and frequent champions. When it comes to saving, however, they are more like the Chicago Cubs - a storied franchise whose history is riddled with futility and disappointment.

In 2004, according to the Bureau of Economic Analysis at the Commerce Department, personal savings - which is computed by subtracting consumption from disposable personal income - were $102 billion. That's less than 1 percent of gross domestic product, and far lower than it was in the late 1990's.

Virtually all economists argue that Americans could stand to consume less and save more. But some say that a flaw may exist not in our national character but in the way the government calculates savings: because the bureau's method of tallying income and consumption doesn't take into account structural changes in the finances of Americans, it may systematically understate income and overstate consumption.

For example, income includes wages and salaries, interest on bonds, and stock dividends. But it doesn't include capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans. Nearly 70 percent of families own homes, nearly half of all households own stocks and mutual funds, and an increasing number of baby boomers are turning to 401(k)'s for income. Those trends, some say, can make a big difference. "The structure of the household portfolio has changed over time," said David Malpass, chief economist at Bear Stearns.

Convinced that Americans aren't frittering away all their income, Mr. Malpass plumbed the Federal Reserve's Flow of Funds data, a trove of information on Americans' spending and saving habits. In 2004, he found that the net worth of all households - their assets minus their liabilities - stood at $48.525 trillion, up 9.6 percent from 2003. Sure, rising home prices helped. "But even if you take out houses completely, it still shows huge savings," he said.

Last year, financial assets rose to $36.8 trillion from $34.1 trillion. Time deposits and savings accounts - money sitting in the bank - rose 10.6 percent in 2004, to $4.29 trillion. Because asset building has grown faster than debt, the improvement in households' balance sheets has been substantial in the last few years.

A big chunk of the rise in assets since 2002 can be ascribed to the stock market's performance in 2003 and the booming housing market. Mr. Malpass laments that given the way the Bureau of Economic Analysis calculates savings, the changing asset values haven't affected the national savings rate. But James Poterba, an economist at the Massachusetts Institute of Technology, said, "It's not clear that they should."

Why? Rising prices of assets held by lots of people means that things become more expensive for everybody. Consider a typical homeowner in the New York region. The price of the home may have doubled since 1999. But if the homeowner sells and buys an equivalent house in the region, whose price has also doubled, the homeowner won't have added materially to savings. If the homeowner is planning to take the gain and move to where homes are cheaper, like Mexico or Indiana, he or she will realize a big gain in savings. But households, in aggregate, don't have the ability to sell their assets and move en masse to lower-cost locales.

What's more, adds Peter Orszag, senior fellow at the Brookings Institution, based in Washington, rising asset prices - in the form of houses or stocks - can be double-edged swords. Sure, they represent gains to owners. But those wishing to acquire those assets have to use more of their savings to do so. "If increases in home prices and stocks are regarded as capital gains for owners, should they also be regarded as capital losses for potential buyers?" he asks.

On the subject of the personal finances of American consumers - call it the Money magazine approach - it's clearly useful to understand the impact of changing asset prices on savings. But from a global macroeconomic perspective - the Economist approach - it may be less so.

The national savings figure, as tallied by the bureau, is designed to measure whether the United States, as a nation, is stowing away enough cash to prepare for the aging of the baby boomers and to ensure that there will be sufficient capital to fuel future economic growth. But households represent only one part of the national savings story. Corporations and the government can also add or subtract from national savings.

WHILE the revived corporate sector has been adding to national savings by increasing profits, the government has been a drain on savings by running huge deficits. And the rise in asset prices has done nothing to dampen a mammoth deficit in the current account, which is the amount of imported capital the country needs to make up for chronic savings shortfalls.

Finally, American consumers shouldn't congratulate themselves too much on bolstering their collective net worth. As stock investors know from bitter experience, asset values can change rather quickly. And as Mr. Malpass notes, "just because the savings rate may be better than we think, it doesn't mean people are prepared for retirement."

Daniel Gross writes the "Moneybox" column for Slate.com.

And to My Dog, I Leave a $10,000 Trust Fund - New York Times

IF you're like many pet owners, you want the best for your dog or cat. You give it premium food, good veterinary care and bring it with you on vacation.

But what happens to your pet if you die or become incapacitated?

Unless specific provisions have been made, your pet could wind up in a shelter and be put to death. If you plan ahead, though, your pet can be well cared for. In addition to arrangements with friends and family, there is, increasingly, a formal option.

Laws in 27 states - including Arizona, Colorado, Florida, New Jersey and New York - now allow owners to establish trusts for pets. These arrangements set aside money for the care of one or more animals in the event of an owner's disability or death.

Leaving money to a pet became legally possible in 1990, when a section validating trusts for domestic animals was added to the Uniform Probate Code. More states may soon allow it. Pet trust legislation is pending in Connecticut, Hawaii, Massachusetts, Oregon, Pennsylvania, Rhode Island and Texas.

Setting up a trust for your pet is, in many ways, similar to creating one for a child.

A trustee and caregiver are named. The trustee is in charge of the money and pays the caregiver a set amount each month for expenses, like food, grooming and veterinary care. At any point, if the caregiver is not doing a good job, the trustee can find a replacement.

These new statutes "allow people without lots of money, without detailed consultations with lawyers, to create a simple provision to take care of their pet," said Gerry W. Beyer, a law professor at St. Mary's University in San Antonio.

Creating a trust can cost as little as $100 if you draw up a will for yourself at the same time or up to a few thousand dollars.

Most people, though, don't make formal arrangements, assuming they'll outlive their pet, or that friends and family will take care of it. Consequently, more than 500,000 pets are killed in shelters and veterinary offices each year after their owners die, according to 2nd Chance 4 Pets, a nonprofit organization in Los Gatos, Calif., that raises awareness of this problem.

While volunteering at Tri-Valley Animal Rescue in Pleasanton, Calif., Amy Shever frequently saw dogs and cats whose owners had died. She noticed many of the pets never adjusted to living in a shelter and became fearful or defensive. Consequently, nobody wanted to adopt them. "I personally witnessed a lot of these animals getting euthanized," said Ms. Shever, who is the director of 2nd Chance 4 Pets.

Last year, she started PetGuardian, a company in Los Gatos that creates pet trusts for birds, horses, dogs and cats. For $500, her company enrolls its customers in a program that includes a comprehensive pet trust document, a cost analysis to determine how much money to set aside for the pet's care and emergency identification cards for owners to post at home and carry in their wallets.

As part of the program, she said, the Best Friends Animal Society, a large no-kill shelter in Utah, finds homes for pets, no matter where they reside, if the caregivers named in the trust are no longer available.

A detailed instructional sheet is also created so animals continue to receive care in the manner they're accustomed to. One of Ms. Shever's clients, for example, stipulated that her dog be fed barbeque chicken in the morning and grilled ribs at night. Others want their pets to sleep only on beds of a certain density and to receive special squeaky toys.

So far, 500 clients have either started or completed the program, she said, and owners typically leave between $8,000 and $15,000. The largest sum a client left was $200,000 for the care of two African birds that can live 90 years or more.

If clients have a hard time setting aside money for the trust, Ms. Shever recommends they talk to their insurance agent. "One really great way to fund these trusts is to have the beneficiary of your life insurance policy use the money to cover the pet trust," she said.

If money is no object, the trust can act like an endowment, experts say, with the interest generated covering expenses. Then, when the pet dies, the remaining balance can go to a charity or family member.

Estate planners warn, though, not to put excessively large amounts of cash or property in the trust because it may encourage heirs to contest the arrangement. Courts have the power to reduce the amount if deemed unreasonable.

Another concern is that a dishonest caregiver could fraudulently extend the life of the trust by replacing an animal when it dies with a look-alike in order to continue receiving the funds.

The best way to prevent fraud, trust experts say, is to get a DNA sample from the animal. Then, if the trustee becomes suspicious, a comparison can be made.

INSTEAD of a trust, owners can include a provision for pet care in their will. But William A. Reppy Jr., a professor at Duke Law School in Durham, N.C., said there were some drawbacks to that approach. A will takes effect only upon your death, not if you become ill or incapacitated. And it must go through probate, which can temporarily freeze funds for your pet's care and delay determining the rightful new owner.

"Most people need to realize that instructions in the will for the care of the dog are not enough because it may take time to find the will," Mr. Reppy said. "It would be best if neighbors had instructions on what to do" in case of an owner's death.

After an accident or death, pets are often overlooked during the confusion and grief that follows.

To prevent this, estate planners suggest that owners find at least two people to act as emergency caregivers. Provide them with keys to your home, feeding and care instructions, and information about the permanent care provisions you've made.

Robert Blizard, director of donor marketing and outreach for the Humane Society of the United States, says people often rely on verbal arrangements with friends and family members. Instead, he said, a solid plan for a pet's continuing care is needed.

"By owners thinking about these sorts of things ahead of time, putting them in writing and reviewing this information periodically, it puts their pets on the road for receiving the right care," he said.

That's what Beverly Eagan did. In December, her husband, Larry Tuteur, and she hired a lawyer to create a $10,000 trust for each animal owned at the time of their death.

The couple now owns three large cats - Dusty, Devin and Merlin - and a tiny Yorkshire terrier named Mouse.

"You never know what the future is going to bring," said Mrs. Eagan, 58, of Santa Rosa, Calif. "I wanted to make these decisions when we were healthy and well."

U.S. Cautions Bank on Fees Intended to Steer Retiree Accounts - New York Times

The Labor Department has issued an advisory opinion that banks, brokerage firms and investment firms cannot accept payments from mutual fund companies in exchange for steering retirement account customers into those funds. The opinion may help eliminate some of the troubling conflicts of interest that exist in many individuals' retirement accounts.

Financial institutions receive fees for providing administrative and other services to participants in individual retirement accounts and 401(k) plans. But many of these institutions also receive payments from investment companies whose funds are included in the menus of retirement plans that brokerage firms or banks offer to their clients.

These payments are not always evident to investors and create the potential for a conflict of interest because a poorly performing fund may appear on a menu of choices largely because of the fees it has paid to the institution offering it. The payments are often in the form of so-called 12b-1 fees, and can total as much as 1 percent of assets in a fund.

The Labor Department's views on these payments came in a letter to Country Trust Bank, an Illinois savings institution. A fiduciary like Country Trust, the Labor Department said in the letter, issued on May 11 and made public yesterday, may not cause a plan to engage in a transaction that will generate "consideration from a third party in connection with such transaction." If it does, the fiduciary must reduce other fees charged to plan participants by the amount it received from the third party, the letter said.

"I think this is intended to be a shot across the bow," said Norman Stein, a law professor at the University of Alabama. "They're warning people that this is something they're going to be watching."

While such opinions are specific answers to inquiries made by one institution, they are watched closely by firms acting as fiduciaries under the Employee Retirement Income Security Act of 1974, which governs the operations of private pension and retirement plans.

Country Trust asked for the opinion more than three years ago, its lawyer said, to ensure that one of its retirement account programs, which charged an additional asset allocation fee that was offset with reductions in other charges, did not run afoul of the act, known as Erisa.

Sandra Parks Faulkner, a lawyer with Baker & Hostetler in Columbus, Ohio, which represented Country Trust, called the opinion significant. "The value in the whole process," she said, "is that the plan participant will pay only the designated amount of fees and doesn't have to be concerned that the recommendations will be stocked with the most fee-rich products."

The Country Trust opinion involved a retirement account that allocates assets to different types of securities based on customers' risk profiles and market performance. The bank does not accept 12b-1 fees from companies whose funds it recommends.

The fees came about in 1980, when the Securities and Exchange Commission allowed funds to recoup some of the costs of attracting new investors each year. They were seen as a way for small, lesser-known funds to compete with giant fund companies like Fidelity and Vanguard.

Country Trust charges 1.25 percent to 1.75 percent of assets under management for allocation services, depending upon the total invested in the program. Fund management fees are additional. Country Trust manages $9.5 billion in assets.

Asset allocation vehicles are a big and growing part of the financial advisory business. An estimated $186 billion is invested in mutual funds that use some sort of asset allocation device, said Avi Nachmany, director of research at Strategic Insight, a mutual fund research firm in New York.

"Last year," Mr. Nachmany said, "two-thirds of stock and bond fund inflows by our estimate was captured in the mutual fund industry in some form of asset allocation, and this is a dramatic increase from where it used to be."

While the opinion to Country Trust related specifically to an account with an asset allocation element, it also reiterated a stance taken by the Labor Department in 1997. The department said then that fiduciaries offering 401(k)'s and I.R.A.'s could not accept 12b-1 fees from funds they offered to clients without offsetting those charges.

Those fees have become embedded at most fund companies, large and small, and are now commonly paid to brokers and others who sell funds. As such, they have become a big cost to investors.

For example, Max Rottersman, president of FundForensics.com, a Web site that conducts independent research on mutual funds, said that 12b-1 fees levied by funds totaled $11.6 billion last year.

Even though the Labor Department has said that these fees should not be accepted by fiduciaries without reducing other expenses by the same amount, some pension specialists suspect that such fees are still being levied improperly by some firms.

"These are conflicts that have been going on for years," said Edward A. H. Siedle, president of Benchmark Financial Services in Ocean Ridge, Fla., a company that investigates wrongdoing in pension funds. "But now regulators from all sides," notably the S.E.C. and the Labor Department, "are weighing in, saying that conflicts involving fiduciaries will not be tolerated anymore."

The Labor Department has said that it is ramping up its investigation of fiduciaries trying to determine whether plan participants have lost money as a result of conflicts of interest. If a fiduciary breaches its duty to plan participants by accepting fees from a third party, for example, the department could demand restitution. Individuals can also sue on behalf of an Erisa plan to try to recover losses that have resulted from conflicts of interest.