Federal prosecutors are backing away from some of the aggressive tactics they have employed against corporate crime amid growing criticism that their methods have trampled on the rights of white-collar defendants.
Prosecutors will largely refrain from demanding that companies refuse to pay for the legal defense of executives who are under investigation, and significantly limit their demands for privileged attorney-client communications, the Justice Department said Tuesday.
The new policy softens guidelines that the Justice Department put into place in 2003 as government attorneys prosecuted fraud at Enron Corp., WorldCom Inc. and other firms. Although the government has been largely successful in its crackdown on corporate crime, its tactics drew rebukes across the political spectrum.
Deputy Atty. Gen. Paul J. McNulty, who announced the new guidelines during a speech in New York, said that the Justice Department "supports the sanctity" of attorney-client privilege, and that in the future he would personally approve any requests for such communications.
The new guidelines will revise several tactics spelled out in a memo by former Deputy Atty. Gen. Larry Thompson. That memo called for easing sanctions against companies that met government requests to hand over their internal communications with their attorneys -- documents that in the past had been considered off-limits to prosecutors.
The Thompson memo also said government lawyers could promise to go easier on companies that agreed not to pay the legal defense of their executives.
The policy became widely known in the high-profile prosecution of former partners of KPMG, the national accounting firm that was accused of promoting fraudulent tax shelters to its wealthy clients.
KPMG settled charges with the Justice Department by paying a $456-million fine and agreeing to cooperate with the prosecution. But the government still brought criminal charges against 16 former partners. KPMG -- in a departure from long-standing policy -- said it would not fully pay their legal bills.
The indicted former partners claimed that they were denied a viable defense because they couldn't afford to fight the government alone, and the government had made it impossible for their former employer to support them.
In a sharply written opinion June 27, U.S. District Judge Lewis Kaplan agreed with the KPMG defendants, saying the government "let its zeal get in the way of its judgment" and "violated the Constitution it is sworn to defend."
Since then the policy has drawn an array of high-profile critics, including former Atty. Gen. Edwin Meese and the American Civil Liberties Union. Last week, Sen. Arlen Specter (R-Pa.) introduced legislation that would impose an outright ban on rewarding firms that waive attorney-client privilege.
The guidelines announced Tuesday were probably an attempt to head off measures that could be even more restrictive, said John Hueston, a former federal prosecutor.
"From my point of view, the intent is to head off potentially sweeping legislation," said Hueston, who prosecuted former Enron executives and is now in private practice at Irell & Manella in Newport Beach. "The Thompson memo has been key to these prosecutions. And the Justice Department does not want to lose this key tool in the corporate fraud arena."
The Justice Department's move stops short of an about-face, but it puts significant checks on individual prosecutors, said Robert Weisberg, professor of law and director of the criminal justice center at Stanford University
Under the new guidelines, the Justice Department will not penalize firms for paying attorney's fees for their workers or for refusing to hand over confidential attorney-client information. Firms that voluntarily provide these documents, however, could still get favorable treatment for cooperating.
Prosecutors also will need to get approval from high-ranking Justice officials before demanding results of internal investigations or a company's confidential communications with its attorneys.
Weisberg said the new rules might slow prosecutors but would not hobble them.
"They may not be able to proceed with the same spirited aggression that they did in the past," he said. "But the government has so many weapons in their arsenal. This won't stop them. It will just slow things down a bit."
White-collar defense attorneys praised the new guidelines, saying they would guarantee fair treatment of companies and employees without imperiling major corporate-crime investigations.
"This is a significant change and a welcome change," said James Sanders, a white-collar criminal defense partner at McDermott Will & Emery in Los Angeles.
Even with the new guidelines, many companies will continue to cooperate with the government, Sanders said. "Corporations will still realize there's a benefit [to cooperation] in certain circumstances," he said. "This is not going to eliminate cooperation."
But others said the new guidelines still left too much room for government coercion.
"They are but a modest improvement," American Bar Assn. President Karen J. Mathis said in a statement. By leaving the door open for requests of attorney-client communications, the new guidelines "threaten to erode the ability of corporate leaders to see and obtain the legal guidance they need to effectively comply with the law."
Frederick J. Krebs, president of the Assn. of Corporate Counsel, a trade group for corporate lawyers, derided the new policy as "a day late and a dollar short." The new guidelines will neither end the "culture of waiver" inside the Justice Department nor stop improper pressure from the government on companies to turn over privileged material, he said.
Peterson reported from Washington and Kristof from Los Angeles. Times staff writers Richard B. Schmitt, Walter Hamilton and E. Scott Reckard contributed to this report.