Wednesday, December 13, 2006

U.S. Moves to Restrain Prosecutors

The New York Times
U.S. Moves to Restrain Prosecutors

The Justice Department placed new restraints on federal prosecutors conducting corporate investigations yesterday, easing tactics adopted in the wake of the Enron collapse.

The changes were outlined in a memorandum written by Paul J. McNulty, the deputy attorney general. Under the revisions, federal prosecutors will no longer have blanket authority to ask routinely that a company under investigation waive the confidentiality of its legal communications or risk being indicted. Instead, they will need written approval for waivers from the deputy attorney general, and can make such requests only rarely.

The new guidelines will help companies defend themselves by “making it easier for corporations to say no, and not having to worry about that decision being held against them,” said Andrew Weissmann, who headed the Justice Department’s Enron task force and is now in private practice.

Another substantial change introduced yesterday prohibits prosecutors from considering, when weighing whether to seek the indictment of a company, whether it is paying the legal fees of an employee caught up in the inquiry.

The revised guidelines follow criticism from legal and business associations and from federal judges, senators and former top Justice Department officials that the tactics used in recent years against companies like the drug maker Bristol-Myers Squibb and the accounting firm KPMG were coercive and unconstitutional.

“I don’t know if there are going to be more or less prosecutions,” said Stephen J. Bronis, executive director of the white-collar crime committee of the American Bar Association, “but there are hopefully going to be less abusive ones.”

Frederick P. Hafetz, a criminal defense lawyer, said yesterday that the courts were unlikely to view the new guidelines as a basis for appeal by individuals or companies convicted under the old ones.

Mr. McNulty, the deputy attorney general, said in a brief interview that the revisions “do not create any legal rights.”

Still, they are being made at a time when companies are seeking — and receiving — greater protection from criminal and regulatory scrutiny.

Last month, the Committee on Capital Markets Regulation, an independent group formed with the blessing of Treasury Secretary Henry M. Paulson Jr., called for a sweeping overhaul of securities market rules, including greater protection of companies, their directors and employees, and their outside auditors from regulators, investigators and civil suits.

At the same time, there are growing calls to scale back the Sarbanes-Oxley Act of 2002, the legislation aimed at increasing corporate accountability in the aftermath of the Enron collapse.

Mr. McNulty’s document substantially revises and places curbs on guidelines that were written in January 2003 amid a wave of corporate scandals at companies including WorldCom and Adelphia Communications. The Justice Department had argued that the guidelines adopted then, in a document known as the Thompson memorandum, were essential in helping it grapple with the surge in corporate wrongdoing.

In recent years, federal prosecutors have won more than 1,100 convictions in cases of corporate fraud.

The 2003 memorandum, written by Larry D. Thompson, then the deputy attorney general and now general counsel of PepsiCo, laid out nine guidelines that prosecutors must follow in considering whether to seek corporate indictments. The guidelines were intended to reward companies and employees that cooperated with investigators and penalize those that did not.

Those standards instructed federal prosecutors to reward companies or employees who turned over confidential legal communications, and to issue black marks against those who refused. The black mark could then be used as a basis to seek an indictment.

Critics of the Thompson memorandum complained that such waivers were uniformly being requested by prosecutors, with corporate officials deciding that even if their companies were not guilty, they had no choice to comply, given the possibility of indictment. An indictment can put a company out of business, as it did the accounting firm Arthur Andersen in 2002.

Calling legal confidentiality, or attorney-client privilege, “one of the oldest and most sacrosanct privileges under U.S. law,” the McNulty memorandum says that prosecutors may now request waivers only “when there is a legitimate need for the privileged information to fulfill their law enforcement obligations.”

The prosecutors should first try to obtain less sensitive factual information before requesting privileged material, the new memorandum says.

In a conference call yesterday, a senior Justice Department official said the original guidelines had been misunderstood by critics to mean that prosecutors could and should routinely ask for the disclosure of legal secrets. The official added later, though, that the guidelines had been revised because “perception is reality.”

Criminal defense lawyers and former attorneys general had argued that the Justice Department was out of touch with how frequently United States attorneys across 94 districts sought waivers. The official said the department undertook the changes because critics told it that companies were limiting their legal communications with lawyers out of fear that they might later be coerced by prosecutors.

Such limitations were inhibiting companies from rooting out wrongdoing, the official said.

But despite this tightening of the letter of the rules, companies under scrutiny may decide that the spirit of the new guidelines still tacitly encourages cooperation with prosecutors.

“The way the world really works is you have a prosecutor who says ‘I can’t ask you to waive privilege or not pay fees,’ ” said Robert S. Bennett, a prominent white-collar defense lawyer in New York who represented KPMG. “But the message to you, the company, might be ‘Well, if we do that, we might just score some brownie points.’ ”

It was the criminal investigation of former employees of KPMG over questionable tax shelters that focused attention on the Thompson memorandum, and, in particular, the guideline urging companies to cut off legal fees to employees caught up in investigations.

The judge overseeing that KPMG case, Lewis A. Kaplan, of Federal District Court in Manhattan, ruled this summer that prosecutors violated the constitutional rights of the former employees when they pressed KPMG to cut off the fees as the firm itself faced potential indictment.

KPMG did cut off the fees, and later narrowly averted indictment by reaching a $456 million deferred-prosecution agreement with the Justice Department. The department, which is still appealing Judge Kaplan’s ruling, declined yesterday to talk about the KPMG case.

Among critics of the old prosecutorial guidelines, not all were excited about the new ones.

Stephanie Martz, director of the White Collar Crime Project at the National Association of Criminal Defense Lawyers, said yesterday that her group would still seek the passage of legislation barring all disclosure of confidential communications and any prosecutorial credit to companies that did disclose. (Senator Arlen Specter, Republican of Pennsylvania, the outgoing Judiciary Committee chairman, said last week that he would reintroduce legislation in January that prohibited prosecutors from seeking or requesting waivers or the cutting off of legal fees.)

Ms. Martz said: “You should get credit for fully disclosing whatever is fully relevant, but you shouldn’t get bonus points for disclosing privileged stuff. Now we’re at the point where waiver requests are routine, and the only way we can try to put that genie back in the bottle is by not allowing corporations to get credit for granting it.”