Wall Street Wins?

The corporate-reform movement took two body blows last week: the Supreme Court overturned the conviction of accounting firm Arthur Andersen for obstruction of justice, and Securities and Exchange Commission (SEC) chief William Donaldson quit under pressure.

Has Andersen been vindicated? The court decision didn't address whether Andersen obstructed justice when it destroyed documents that could have proved valuable to the federal probe of accounting fraud by its client Enron Corp. The high court simply found fault with the instructions Judge Melinda Harmon gave the jury at the prosecution's request. The jury, it said, should have been clearly told that an intent to conceal wrongdoing was essential to finding Andersen guilty.

What does this mean for future prosecutions? The Sarbanes-Oxley corporate-reform law, passed in 2002, supersedes the one under which Andersen was tried—and it broadens the criteria that determine who may be prosecuted for obstruction of justice. Still, says Todd Jones, a corporate litigator at the Atlanta law firm Powell Goldstein, the SEC and the Justice Department are likely to be more cautious about pursuing such cases now, having been warned against prosecutorial overreach. One prominent white-collar litigant, former financier Frank Quattrone, above left, is appealing his conviction on similar grounds and has argued that he did not mean to commit a crime when he had documents destroyed.

Why did Donaldson resign? The Bush nominee, above right, often clashed with two fellow Republicans on the commission who thought he was too keen to regulate and punish. During his tenure, the SEC levied hefty fines against corporate transgressors and, among other things, established a rule requiring that mutual funds have chairmen independent from the firms they oversee.

How will this affect market regulation? The President has picked Representative Christopher Cox of California, a former corporate lawyer and staunch supporter of business interests, to replace Donaldson. Cox will come under pressure from the business lobby to dilute a measure in Sarbanes-Oxley that requires that firms institute strong internal financial controls and have auditors assess their adequacy. "It has turned into a boondoggle for the accounting industry," contends John Berlau, a fellow at the pro-business Competitive Enterprise Institute, who cites an American Electronics Association study that put the cumulative costs of complying in the first year alone at $35 billion. Such critics may find a more receptive ear at the helm of the SEC. —By Unmesh Kher