US easing its rules on corporate prosecution
WASHINGTON - The Justice Department today will roll back a controversial set of rules that penalized companies if they insisted on paying employees' legal fees or protecting their confidential communications with corporate lawyers. The long-awaited guidelines, officials said, will no longer allow federal prosecutors to seek to indict a company that takes such measures.
Deputy Attorney General Mark Filip is scheduled to announce the new policy at the New York Stock Exchange, a site of strong symbolic importance: Wall Street firms and their lawyers attacked the old restrictions as onerous and unconstitutional.
"Penalizing a company for paying the legal fees of its employees is simply outrageous," said Mercer Bullard, a securities law professor at the University of Mississippi Law School. "In cases where they say 'We are going to bring down your company unless you waive attorney-client privilege,' that has to stop."
The Justice Department imposed the tough corporate fraud guidelines in 2003, after the collapse of Enron and a subsequent wave of corporate fraud scandals. Justice Department officials maintained at the time that the aggressive tactics were meant to encourage executives to cooperate in investigations into possible wrongdoing rather than risk seeing their companies indicted - often a death knell for a corporation.
A company's willingness to cooperate is one factor prosecutors weigh in deciding whether the company itself should be indicted.
But the measures quickly drew fire not only from Wall Street lawyers but from politicians and judges.
Judge Lewis A. Kaplan of US District Court in Manhattan dismissed criminal charges in 2006 against 13 of the defendants in a major tax-shelter prosecution against KPMG, saying prosecutors had violated their constitutional rights by pressuring KPMG to cut off their legal fees.
The judge wrote that KPMG had refused to pay the defendants' legal expenses "because the government held the proverbial gun to its head," and he said the government had "let its zeal get in the way of its judgment."
The Justice Department eased the rules in 2006, issuing new guidelines that said prosecutors could seek to have a company waive the attorney-client privilege only when there was a "legitimate need."
But the changes did not go far enough in the view of many corporate lawyers and their clients. Leading lawmakers took up the cause as well, proposing legislation to curb the tactics.
A bill to strengthen a company's right to safeguard attorney communications has been approved by the House, and a similar measure proposed by Senator Arlen Specter, Republican of Pennsylvania, is pending in the Senate. It appears to have support from both Democrats and Republicans.
The new guidelines are partly an effort to head off action by Congress. Filip acknowledged as much in a letter last month to Specter and Senator Patrick J. Leahy, Democrat of Vermont, when he asked them to give the Justice Department time to enact new guidelines and review their effect before taking up proposed legislation. 