03/15/2013 12:29 pm ET Updated May 14, 2013

Eric Holder, "Too Big to Jail," and the Ghost of Arthur Andersen

There's a dangerous bit of revisionist history being promulgated lately by those looking to let Eric Holder and the Obama Administration off the hook for failing to bring a single criminal charge against any major Wall Street bank for having crashed the economy. (Never mind that they have also failed to indict or fine a single major executive as well.)

The notion is that DOJ's reluctance to make criminal indictments is the result of having seen Arthur Andersen collapse in the wake of the Enron scandal. Andersen's conviction for obstruction of justice was subsequently overturned by the U.S. Supreme Court, but not before the firm had gone bust. The moral of this version of the story? Overzealous and careless prosecution caused an upstanding firm to go under and cost 28,000 mostly innocent U.S. employees their jobs as collateral damage. And for some, the whole idea of criminal prosecutions of corporations now seems suspect.

It's one thing to hear this kind of hogwash from the likes of Peter Wallison, an anti-regulatory ideologue intent on blaming the housing crisis on poor people, who literally aspires to put himself in the same category as climate change deniers. But this conceit is also being championed both by the Justice Department itself and now by leading financial writers at mainstream papers like The New York Times.

First, let's be clear about what Arthur Andersen did; it's been amply documented in the two most highly acclaimed books on the Enron scandal, Bethany McLean and Peter Elkind's The Smartest Guys in the Room and Kurt Eichenwald's Conspiracy of Fools. Arthur Andersen was an exceptionally important enabler of Andy Fastow's fraud schemes. The firm assisted Enron in structuring numerous crooked accounting strategies, concealing the true nature of its many "special purpose entities" and cooking Enron's books to mislead investors. And when Arthur Andersen got wind of a pending SEC investigation, they began shredding evidence literally by the ton.

The shredding is what they were indicted for and convicted of, and that's the conviction that was overturned by the Supreme Court. The SCOTUS decision, however, contrary to the way it's often described, rested not on the facts of the case but on the flaws in the judge's instructions to the jury. There is no doubt whatsoever that Andersen was not a bit player but a central actor in the criminal enterprise that was Enron.

As McLean and Elkind lay out, the relationship between the firms was very, very close. Enron was one of Andersen's top four clients, bringing in over $50 million dollars for the firm in 2000 alone. Andersen partners expected that the lucre might rise to $100 million. And just like the situation of the ratings agencies in relation to the mortgage backed securities fraud that crashed the economy in 2008, there was a deep and inherent conflict of interest in the relationship that fundamentally compromised Andersen's role as Enron's auditor: it also served as a top consultant for Enron.

This type of conflict was deep and systemic, and the source of a wide array of accounting scandals that erupted in the late '90s - so much so that by 2002 Forbes set up a "Corporate Scandal Sheet" just to track the accounting crime spree. The major firms like Arthur Andersen were an integral part of the frauds, inventing the barest of fig leaves for the likes of Enron to hide behind, and then lending their seal of approval.

Eichenwald describes how Enron's Andy Fastow responded to the fig-leaf rules laid down by Andersen to ensure that the shady "special purpose entities" he was setting up were to remain supposedly independent of Enron control - requiring, for example, that outside investors put up at least 3% of the funding (yes, that's no typo: 3%, not 30%): "The three percent rule struck him as hilarious. 'Who comes up with these ridiculous rules?' he laughed. 'This is such bullshit! Your gardener could hold the three percent! I could get my brother to do it!'" (Instead he roped in his wife, who went to prison as a result.)

The firms were deeply intertwined at the personnel level as well. Enron's top accountant came out of Arthur Andersen, where he had worked for eight years, mainly on the Enron account. It was also a primary training ground for Enron. As McLean and Elkind note, "Over the years, Enron hired at least 86 Andersen accountants."

And Enron wasn't the only firm whose books Andersen cooked, thereby defrauding many, many more innocent victims. By the fall of 1998, as Eichenwald describes, "Corporate America was out of control, relying too much on gimmicks and games to keep the music going. The evidence was everywhere. In the past nine months, scores of corporations--including investor favorites like Waste Management and Sunbeam--had restated previous financial filings, revealing that profits from prior periods had relied on bad accounting."

Before Andersen's ultimate demise they had already been sanctioned for fraud in major scandals involving Waste Management and Sunbeam. Then there was the Baptist Foundation of Arizona, which went down in a blaze of financial and accounting fraud for which Arthur Andersen eventually paid over $200 million in fines. Here's how Arizona's attorney general and Corporation Commission spoke of Andersen in a lawsuit they filed against the firm: "While Arthur Andersen's audits were seriously flawed in 1991 through 1994, beginning in 1995 the facts lead to the conclusion that Arthur Andersen not only aided and abetted the securities fraud being perpetrated on investors but in fact may have directly or indirectly participated in that fraud."

And the biggest fraud was yet to come: WorldCom, which at the time was the largest bankruptcy in U.S. history. So while Andersen may indeed have had an illustrious history, by the time of its collapse it had become corrupt to the core. Prosecution and conviction may have been a proximate cause of its collapse, but the real reason was that it had become a cesspool of market deception and manipulation, lending its reputation to mass-scale deception and in the process shredding that reputation.

Here's how a sympathetic editorial marking the 10th anniversary of the indictment put it:

Over time, greed corrupted Andersen. Its leaders became more devoted to collecting hefty fees than keeping books straight. Clients paid a fortune for Andersen's consulting services, making its basic function of auditing into little more than an afterthought. The firm's most experienced accounting technicians, the sticklers who maintained its principles, saw their status plunge in the partnership's hierarchy. As Enron ran wild, Andersen's Professional Standards Group proved too weak to intervene. Money had trumped honest services.

Enron's executives were able to lie about their business performance and prospects because Andersen went along. When the lies caught up with its client, instead of admitting its failure to safeguard the public trust, Andersen engaged in a cover-up. Its employees shredded not just a few Enron-related documents, but box after box, day after day, for a period of weeks.

So let's not hold Arthur Andersen up as example of anything other than an enterprise brought down by corruption that started at the top and consumed a once honest firm. Alongside its thousands of honest and innocent workers who lost their jobs, let's also keep in mind the millions of employees, investors, and, yes, rate paying grandmothers in California whom Enron and WorldCom defrauded with Andersen's support.