Higher Hurdles Set in Corporate Crime Cases
Wednesday, December 13, 2006
The Justice Department announced new rules yesterday that will make it harder for prosecutors to bring criminal charges against companies, bending to intense pressure from business groups that claim the government has overreached in its pursuit of financial malfeasance.
In presenting the revised rules, Deputy Attorney General Paul J. McNulty called the changes a substantial and direct response to a lobbying drive by the U.S. Chamber of Commerce, the National Association of Manufacturers and the National Association of Criminal Defense Lawyers, among others.
Since devastating bankruptcies at Enron and WorldCom prompted Congress to pass a stringent corporate accountability law four years ago, business interests increasingly have pushed back on efforts to police their operations, arguing that the government has imposed too many costs on companies with too few benefits for investors.
The new concessions focus on the sensitive issue of when prosecutors can force companies to waive their legal rights to protect e-mail messages and other internal communications, essentially instructing government lawyers that they must jump through additional hoops before winning access to information they desire. Previously, prosecutors could consider the failure to waive those rights in deciding whether to charge a company with a crime.
Under the revisions, prosecutors who seek information about suspected wrongdoing must first win approval from the top official in their home offices before asking a business to waive its attorney-client privilege. Government lawyers who want to review contacts between a company and its attorneys under a privilege waiver must go all the way to the Justice Department in Washington for permission from its second-highest-ranking official.
The issue carries profound implications for businesses that run afoul of the law. Indictments against companies, particularly financial services firms, can be a death knell, as with the obstruction of justice case four years ago against the accounting firm Arthur Andersen. As a result, former prosecutor Andrew Weissmann said, such moves should require formal consent by top Justice Department authorities.
Weissmann said the government follows a similar approach before sentencing individuals to death. "Corporations deserve the same oversight, since a corporate indictment can lead to similar dire consequences," he added.
The new rules also bar prosecutors from directing companies under investigation to stop paying employees' attorneys fees, a strategy that was declared unconstitutional last summer by a federal judge in New York who blasted the government, saying it "let its zeal get in the way of its judgment."
In practice, former government lawyer Timothy J. Coleman said, the changes likely will reduce the number of waiver requests by adding another layer of red tape, taking resources away from the investigation itself and directing often unwanted attention onto a rank-and-file prosecutor.
The revisions come just days after Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) introduced a bill that would force the Justice Department's hand. Lawmakers have held two hearings this year on the issue, spurred by a coalition of trade groups that yesterday assailed the new policy as "a day late and a dollar short," in the words of Frederick J. Krebs, president of the Association of Corporate Counsel.
At the same time, a handful of prosecutors in U.S. attorneys offices around the nation said they viewed the changes as a clear attempt to placate business interests that have been pushing back on rules in recent weeks.
The motivation among industry groups is in no small part a pocketbook issue. Waiving legal privileges to avoid criminal indictment can put scores of sensitive documents into the hands of plaintiff lawyers, driving up the costs of settling related shareholder lawsuits.
Last month, a report by a private committee, financed in part by an executive who is fighting civil charges and with support from Treasury Secretary Henry M. Paulson Jr., proposed indicting companies only as a "last resort" and requiring state officials to get permission from federal authorities in Washington before filing such charges.
In an interview, Deputy Attorney General McNulty rejected the notion that the concessions would cripple ongoing fraud investigations. "Our efforts to prosecute corporate crime will continue vigorously," he said.
In the short term, however, the revisions will buy Justice additional time before Congress takes up more far-reaching legislation proposed by Specter last week. Sen. Patrick J. Leahy (D-Vt.), who will lead the Judiciary panel come January, said the government had curtailed "its most excessive practices" but expressed reservations about how the changes would work over time.
The move carries potent symbolic value in a climate in which business has been emboldened in its efforts to return to a pre-Enron regulatory environment.
"The tide has turned," said Craig Margolis, a defense lawyer for a former executive at the audit firm KPMG, which waived its legal rights last year to help prosecutors build a case against more than a dozen former officials. "It should restore needed balance to the investigation of business entities and their employees."