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As in most cautionary tales, the retribution that concluded the Arthur Andersen saga was swift and violent. Six years later the effects still echo through the justice system as prosecutors try to calibrate penalties that appropriately punish corporate misdeeds without putting companies out of business. It’s a work in progress.

“We all saw what happened when a company goes to trial and loses. The damage is done. The company’s gone. The employees are scattered,” says Todd Jones, a partner at Robins, Kaplan, Miller & Ciresi, and a former U.S. Attorney.

The initial Andersen verdict was a de facto corporate death penalty. The fact that the case was overturned on appeal was irrelevant to the company’s fate, and that sent a chilling message about the consequences for corporate defendants in criminal cases.

Ever since, the DOJ has sought to balance an aggressive stance on corporate crime with the potential for significant collateral damage. Along the way, that struggle has become tangled with the Bush administration’s political machinations at the department and congressional frustration with its culture of stonewalling.

When Sens. Arlen Specter and Patrick Leahy squared off with Attorney General Michael Mukasey over aspects of the controversial McNulty Memo in early July, the message was clear: The battle is not over. Although substantive legislative action would be extraordinary this late in a lame-duck year, it’s a distinct possibility. At the very least the stage is set for yet another significant revision of the ways companies are prosecuted after the presidential election.

Memo Mahem
In addition to Sarbanes-Oxley, the wave of scandals that rocked corporate America in the first years of this decade gave us the Thompson Memo. Drafted in 2003 by then-U.S. Deputy Attorney General Larry Thompson, the memo outlined for federal prosecutors new, more stringent guidelines on when and how to criminally charge corporations.

Under the Thompson Memo, the degree to which a company cooperated with an investigation was a deciding factor in whether to indict. To gauge that cooperation, prosecutors were allowed to consider, among other things, whether the company agreed to waive attorney-client privilege and whether it was paying its employees’ legal fees.

Bar and civil liberties groups were outraged and saw the memo as an attack on the Bill of Rights. Corporations and defense lawyers mumbled objections, but the climate at the time was not one for dissent.

“You had years and years of corporate scandal. People in a position to affect policy reacted, and rightfully so,” says Ted Chung, a partner at Perkins Coie and a former Assistant U.S. Attorney. “It’s just that in the implementation and enforcement of it, there was an overreaction.”

Since Andersen’s demise, the DOJ had made two significant course corrections: It reduced the death-blow risk inherent in criminal indictments by relying to much greater extent on deferred prosecution agreements (DPAs) when dealing with companies, and it significantly increased the criminal prosecution of individual executives.

“Individuals are much more likely to get prosecuted than companies these days,” says Todd Harrison, a partner at Patton Boggs and a former federal prosecutor. “There’s much more awareness about the consequences of prosecuting companies, but individuals are seen as fair game. They’re the ones who engaged in wrongdoing.”

The Thompson Memo, with its inducements to waive privilege, was engineered to facilitate this strategy. But the zeal with which prosecutors applied it was troubling.

Pressure to Roll
Then came the KPMG case. Accused of marketing illegal tax shelters, the firm agreed in 2005 to the terms of a DPA and paid $456 million. But when it came to the trial of several former partners, U.S. District Judge Lewis A. Kaplan held hearings that revealed prosecutors had coerced KPMG to withhold legal fees from the defendants that it normally would have paid.

That interference, Kaplan wrote in a stinging 2006 opinion, put the Thompson Memo at odds with due process, the right to an attorney and the practical need for a company to defend its employees. For the first time since Enron, the pendulum started to swing back.

“What was interesting with the KPMG case is that you started to see some push-back, more assertiveness on the part of defendants and their counsel,” explains Chung.

A groundswell of criticism that the Thompson Memo tactics had gone too far resulted in the McNulty Memo, a December 2006 revision penned by Thompson’s successor, Paul J. McNulty. Ostensibly a softening of Thompson’s most controversial aspects, the McNulty Memo didn’t really change that much in practice, experts insist.

“McNulty still leaves the prosecutors a huge amount of discretion,” Chung says. “Some defense lawyers feel they have no choice, practically, to waive the privilege to be deemed cooperative.”

The strong presumption remained that a corporation under investigation had to roll over on attorney-client privilege, identify employees that may have information and essentially assist the prosecution to avoid indictment. Frustrated lawyers and companies turned to Congress and found sympathetic ears.

Strange Bedfellows

Congressional irritation with the DOJ has mounted over the course of the Bush administration, coming to a head with the U.S. attorney firing debacle. When Mukasey was finally sworn in last year, he inherited a testy Senate Judiciary Committee, already steamed by a laundry list of grievances, including the McNulty Memo’s lingering privilege and attorneys’ fees issues.

In June, the tension boiled over as 33 former U.S. attorneys implored Sen. Leahy in a letter to hold a vote on
the Attorney Client Privilege Protection Act of 2007. Mukasey responded by revealing in oversight hearings in early July that Deputy Attorney General Mark Filip was working on a memo that would succeed McNulty’s.

Both legislation and a new memo would be unusual developments this late in a presidential term, but as things stand it seems that at least one, and conceivably both, will come to pass.

“It’s an interesting confluence,” observes Harrison. “You can’t look at it in the traditional conservative/Republican vs. liberal/Democrat context because there’s a lot of crossover. Say you’re a
liberal Democrat–traditionally not very helpful to corporate interests. But in this case, liberals’ interest in protecting the individual merges with Republicans’ instinct to protect the corporation.”

In other words, it’s the rare civil liberties case for that strange creature, the corporate person. Eight years ago, at the height of an economic boom, everyone assumed the Bush administration would be among the most business-friendly in history. That corporate prosecution has swung so far in the opposite direction on its watch speaks to the sheer magnitude of Enron and the other scandals. But as the administration winds down, a rare convergence offers a chance to balance the scales.

“That this is coming so late in an administration indicates to me that Mukasey and the administration really do want to get something done,” Harrison says. “It makes sense on all sides.”

Passing the privilege legislation may be trickier before the election, but afterwards it could be all but inevitable.
“If the Democrats take control, it’s likely to be even more pro-defense, at least on the privilege issue,” Chung concludes. “We’re approaching a state of equilibrium.”