Daily Archives: January 7, 2005

SCOTUS grants cert in Arthur Andersen appeal

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The U.S. Supreme Court granted certiorari on Friday on Arthur Andersen’s appeal of its conviction of felony criminal charges in connection with allegedly destroying and altering Enron Corp.-related documents.
The Supreme Court will review this Fifth Circuit Court of Appeals ruling that upheld the former Big Five accounting firm’s June 2002 conviction by a jury in a Houston federal court. The key issue in the case will be whether the jury instructions that U.S. District Judge Melinda Harmon approved during the trial were too vague and broad for jurors to determine whether Andersen’s actions constituted obstruction of justice. The specific issue to be addressed is this: “Must Arthur Andersen’s conviction for witness tampering under 18 U.S.C. 1512(b) be reversed because the jury instructions misinterpreted the ‘corrupt persuasion’ and ‘official proceeding’ elements of the offense?”
The Justice Departent charged Andersen with obstruction of justice for its mass destruction of Enron-related documents in late 2001 as the Securities and Exchange Commission and Congressional Committees began investigating Enron’s complicated financial structure. As we all know, Enron catapulted into bankruptcy in early December 2001 amid revelations of accounting schemes to mask debt and inflate profits.
As Enron’s auditor, Andersen contended that it was only implementing its document-retention policy that called for destroying unneeded documentation to streamline files. Andersen argued during trial that employees who shredded thousands of documents simply followed the policy and had no intent to undermine any investigation of Enron.
Although an Andersen victory at the Supreme Court would be a Pyrrhic victory for the now defunct firm, this is a positive development for the Enron case in general. The Justice Department’s heavy-handed prosecution of Andersen reflected an egregious lack of prosecutorial discretion — the prosecution of Andersen ultimately caused the loss of thousands of jobs, most of which never had anything to do with Enron. Moreover, as noted here awhile back, the accounting industry has still not recovered from the Andersen fallout, and big business is finding it difficult to find enough auditors to fulfill the new Enron-era regulatory obligations.
Thus, a Supreme Court reversal will not help Andersen much, but it just might send the right message to a Justice Department that increasingly appears oblivious to the negative economic impact that results from criminalizing merely questionable business practices.

Attempting to cure the PBGC blues

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This earlier post noted the growing concern in the business community that the Pension Benefit Guaranty Corporation — the quasi-governmental insurer of private company pensions — is facing a string of large company bankruptcies and pension defaults that could lead to another multibillion-dollar taxpayer bailout similar to the Savings and Loan bailout of the late 1980’s.
Now it appears that the growing private pension problem is being noticed at the highest levels of government. This article from today’s NY Times reports that officials in the Bush administration are close to unveiling a rescue plan for the PBGC.
The PBGC is a government-owned insurance company that Congress created in 1974 after a string of corporate bankruptcies left retirees without pensions. The PBGC’s mission is to provide a limited guarantee of private defined-pension plans, which are pensions that provide retired workers with a set amount each month based on wages and years worked. If a pension plan terminates without adequate resources to meet its obligations to its retired workers, then the PBGC guarantees up to $45,614 annually for employees who retire at age 65.
To finance its activities, the PBGC collects annual premiums from employers with defined-benefit plans that are required to participate in the program. Last year, the premiums totaled about a billion dollars. The PGBC also receives funds from terminated pension plans that it is forced to take over.
With five U.S. airlines already wallowing in bankruptcy court, the PGBC is under an incredible load of financial pressure. Yesterday, the US Airways Group, Inc. bankruptcy court approved the turnover of three employee pension plans to the PBGC at a cost of a cool $2.3 billion. Likewise, last week, the PBGC took over the UAL Corp. (the parent of United Airlines) pilots’ pension plan in UAL’s pending chapter 11 case. The takeover is likely to cost the PBGC at least another $1.25 billion. With these kinds of growing liabilities, a taxpayer-funded bailout of the agency is inevitable unless an overhaul of the pension-insurance system is approved quickly.
The Bush administration will probably propose to prop up the pension guaranty fund with increased premiums for all participating companies, including higher fees for businesses that are on the brink of bankruptcy. However, that latter proposal shows how misguided this type of “reform” can be. Charging higher premiums to companies that are already at heightened risk of bankruptcy will actually make it harder for the companies to avoid bankruptcy. Thus, that proposal could well place PGBC fund at higher risk rather than making it more secure.
Moreover, passing any reform through Congress will not be a cakewalk. Business groups and labor unions — recognizing that a federal bailout is likely under the currently broken system — are already raising concerns about how far the changes should go. Employee groups and unions contend that imposing higher premiums or stiffer rules could prompt some companies to freeze or eliminate the lucrative but uneconomic current pension plans. Labor unions simply prefer an immediate government bailout, as they see the writing on the wall. Last year, the PGBC had a deficit of $23.3 billion, which was double the prior year’s decifit. So, we are clearly dealing with an agency here that is is bleeding badly.
And the projections are not rosy, either. The Center on Federal Financial Institutions (a Washington think tank) estimates that the PBGC will run out of cash and rack up a $78 billion deficit within the next 16 years.
As with Social Security, there will be political voices who contend that the PGBC’s current problems are not all that bad and that the reforms are just part of the Bush Administration’s pro-business and anti-labor bias. However, you can take this to the bank — the first loss on a problem such as this is the least expensive one. If we put off dealing with the problem, the cost of the bailout will increase substantially.

Hammering the Hammer

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Earlier this week, House Republicans reversed course and rejected dubious Ethics rules changes that were proposed late last year that would have allowed members indicted by state grand juries to remain in a leadership post. Earlier posts on the rules changes are here and here.
The rule changes were transparently proposed to benefit Houston congressman and House Majority “Leader” Tom DeLay in the event a Travis County grand jury indicts him in connection with an investigation of campaign financing that has already resulted in the indictment of three of his political political associates.
In today’s Washington Post, David Ignatius provides this interesting profile of the Colorado representative — Joel Hefley — who decided to take on Mr. DeLay over the change in the ethics rule and, in so doing, pulled out an unlikely victory for Congressional ethics. Read the entire informative piece, which concludes with an astute observation about Mr. Hefley and Congress:

He will pay the price, but he doesn’t seem to mind. He knows he did the right thing. May his number increase.