Justice Dept. Reining In Prosecutors
New Guidelines Issued for Corporate Fraud Cases

By Robert Schmidt
Friday, August 29, 2008

The U.S. Justice Department issued new guidelines yesterday to rein in prosecutors pursuing corporate fraud cases, bowing to pressure from Congress.

The changes bar the government from demanding that companies turn over confidential legal materials to win leniency in plea deals. The revisions, announced by Deputy Attorney General Mark Filip at the New York Stock Exchange, also prevent prosecutors from penalizing companies that pay attorney fees for employees under investigation.

The shift is a victory for the U.S. Chamber of Commerce, the American Bar Association and other groups that have spent more than three years arguing that the Justice Department tactics violated employees' constitutional rights and gave prosecutors unfair leverage to force settlements with companies.

"It's a dramatic improvement, and we're overjoyed," said Stephanie Martz, a senior director at the National Association of Criminal Defense Lawyers in Washington, who has helped lead the campaign.

The new rules are the latest departure for a department that once said tough tactics were vital to combat corporate fraud after the collapse of Enron and WorldCom. The agency previously eased its business fraud guidelines in December 2006.

The guidelines were released the same day that a federal appeals court in New York upheld the dismissal of tax fraud charges against 13 former KPMG executives who claimed that the government violated their constitutional right to legal counsel.

The appeals court said the government "unjustifiably interfered" with the defendants' relationship with their attorneys and hampered their ability to mount a defense by demanding that the accounting firm stop paying legal fees for its executives.

Filip, the No. 2 Justice Department official, said prosecutors now will assess how cooperative a company is by the facts it discloses to the government, not whether it waives attorney-client privilege. Companies also won't be punished for refusing to fire workers the government has identified as "culpable," he said.

It is often in a company's interest to cooperate to avoid an indictment, which can be a death sentence for the corporation.

The guidelines will stress that corporations aren't obligated to aid a government investigation, Filip said. "If a business decides not to cooperate, that does not in itself support or require the filing of criminal charges in any way," he said.

Filip declined to comment on the KPMG decision. He also said that he hopes the new policy, effective immediately, will stave off congressional action.

Congress has been considering legislation to force the Justice Department to curb prosecutors. The bill would prohibit the government from demanding that companies provide information protected by attorney-client privilege.

The measure passed the House last year and a similar plan is awaiting action in the Senate. The business and legal groups said they will still press for its passage.

Pete Lawson, director of congressional and public affairs at the Chamber of Commerce, said legislation is still needed to "comprehensively fix the problem, both at the Justice Department and other agencies," including the Securities and Exchange Commission.

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