In 1996 Arena attracted public condemnation after suggesting that the Wood Royal Commission should investigate Supreme Court judge David Yeldham and former MP Frank Arkell as alleged paedophiles.
Her relationship with her party became increasingly strained as the fallout from her 1996 comments mounted, and she resigned in November 1997, continuing to serve on the Legislative Council as an Independent.
As the commission continued, its scope expanded to include paedophilia and the failure of the NSW Police to adequately investigate accusations of sexual abuse.
Frustrated with what she saw as the commission's unwillingness to investigate prominent people, Arena promised to name at least two Sydney men in a speech to the Legislative Council.
The remarks caused uproar in both Parliament and the press, and Arena was regularly accused of abusing Parliamentary privilege to shield herself from potential defamation suits.
As a result of the publicity Arena's suggestion attracted, Yeldham was discovered to be living a double life as a homosexual, and committed suicide on 4 November 1996.
When the Commission published its findings, it cleared Yeldham and Arkell of any wrongdoing, and found that Arena's claims of a high-level cover-up of paedophilic activity were "false in all respects".
Journalist Trudy Harris, writing in The Australian, described some of her claims, including one that an unnamed NSW judge was a Satanic murderer, as "bizarre".
With support within her own party already waning as a result of the incident and her refusal to back down, in 1997 Arena pushed things further, crossing the floor to vote with the Liberal Opposition in favour of widening the Wood Commission's jurisdiction to include all paedophilia-related activity.
In November 1997, the Labor Government attempted to pass the Drug Misuse and Trafficking Amendment Bill, which would have reduced the fine for small-scale marijuana use from $2200 to $500, and removed the possibility of gaol time.
As Arena's eight-year term drew to a close, the Legislative Council voted to suspend her indefinitely unless she apologised for her comments about a criminal conspiracy of politicians to cover-up paedophilia.
She read a "statement of regret"[13] to the Council instead, a compromise that angered the Government but attracted enough support from Independents and individual Coalition MPs to avoid suspension.