Prosecutors fear they'll be handcuffed on corporate fraud

U.S. businesses, with the help of civil libertarians, are on the verge of outmaneuvering federal prosecutors and persuading Congress to limit the government's power to pursue corporate fraud.

Lawmakers are considering a measure that would, among other things, bar the government from demanding that companies reveal confidential talks with their lawyers to win leniency in plea deals.

It would also prohibit federal agencies, including the Securities and Exchange Commission, from demanding companies fire or cut off legal support for employees under investigation.

Such tools were crucial in helping prosecutors pry loose information in hard-to-prove cases against WorldCom and Enron. Curtailing them may mean fewer such investigations, putting investors more at risk.

"Pre-Enron, U.S. attorneys never brought these cases, and after this bill is passed, they will quit bringing them again," says Lynn Turner, a former SEC accounting chief. "This is a very clear message from Congress: Don't touch white-collar criminals."

The Justice Department's guidelines for corporate cases were crafted as it and the SEC sought to cope with the explosion of financial scandals early this decade by offering companies leniency in exchange for cooperation.

That typically means a company reports potential illegality, conducts its own internal probe and waives the attorney-client privilege. Prosecutors say they need such confidential information to guard against cover-ups and, if necessary, help them freeze assets that might otherwise be hidden or squandered.

"It's no secret that cooperation from defendants of all types is a very effective tool we need to use in getting the bad guys," says Karin Immergut, U.S. attorney in Oregon and head of a Justice Department white-collar crime committee.

Immergut says the waiving of attorney-client privilege played a vital role in the prosecution of former Chief Executive Bernard Ebbers for the $11 billion WorldCom fraud and helped the government locate and seize $80 million in cash from financier Martin Armstrong, who pleaded guilty in an investor fraud.

Company documents aided accounting probes at Enron and Adelphia Communications and helped convict 11 former executives in a $67 million fraud at online real-estate seller Homestore, the Justice Department says.

Waivers aren't mandatory, but companies say their only alternative is often to risk an indictment that could destroy their business. "That's not how the prosecutorial system is supposed to work," says Susan Hackett of the Association of Corporate Counsel, which represents company attorneys.

Help from judge

The effort to limit such investigative tactics got a boost last year from U.S. District Judge Lewis Kaplan of New York. He ruled that prosecutors violated the rights of indicted former KPMG executives by pressuring the accounting firm to stop paying their legal fees.

As a result, he threw out charges against 13 employees, a decision the government has appealed.

Emboldened by the victory, business groups including the U.S. Chamber of Commerce, the Business Roundtable and Hackett's group launched a drive in Congress to force the Justice Department to scale back its tactics. They've been aided by the American Bar Association and the American Civil Liberties Union, which sees the issue as one of preserving the rights of accused individuals.

The alliance has helped win over such key Democrats as House Judiciary Committee Chairman John Conyers of Michigan, whose panel approved legislation without opposition in August.

That bill awaits action by the full House.

Meanwhile, the sponsor in the Senate, Republican Arlen Specter of Pennsylvania, is pushing for a vote by year- end.

While the Bush administration's Justice Department opposes the legislation, it has been sidetracked by the scandal over last year's firings of nine federal prosecutors and the resignation of Attorney General Alberto Gonzales.

Question for Mukasey

An exodus of top officials has left few in position to make a forceful case against the congressional proposals. Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat, has said he will ask Michael Mukasey, Bush's nominee to succeed Gonzales, about the issue at confirmation hearings this month.

In the absence of an all-out defense by the department, prosecutors on the front lines are mobilizing to fight the legislation. "This bill would certainly make it harder for prosecutors to protect victims and the investing public," says Immergut.

Pointing out that drug defendants are routinely asked to waive their rights if they want leniency, she asks why executives deserve special treatment. "I frankly find it kind of baffling that people are proposing legislation that protects corporations and corporate officers like CEOs more than other individuals," she says.

SEC spokesman John Nester says his agency hasn't taken a position. At least one commissioner, Republican Paul Atkins, supports proposed changes: He says internal company investigations are jeopardized now "because people are afraid to come clean" without assurances that attorney-client talks will remain confidential.

Meanwhile, proponents of the legislation have lined up support from former Attorneys General Griffin Bell, a Democrat, and Richard Thornburgh, a Republican, as well as Andrew Weissmann, former head of the department's Enron prosecution team.

They have also submitted a report charging that abuses are continuing even after the department moved to tighten its guidelines following the Kaplan ruling.

Pete Lawson, director of congressional and public affairs for the Chamber of Commerce, says opponents of the pending legislation are exaggerating its impact.

The Justice Department "hasn't been able to identify one case" that couldn't have been prosecuted without waiver of the attorney-client privilege, he says. "And there is nothing in this bill that redefines who they can pursue, prosecute or indict."

The argument isn't convincing, say opponents. "Federal agencies have stepped up to the plate over the last few years in a way that was entirely appropriate," says former Massachusetts Attorney General Scott Harshbarger.

"They were doing the job Congress asked them to. And the reward they're getting is that they're being punished for success."