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The recent wave of criminal investigations and prosecutions involving a range of corporate crimes demonstrates an emerging trend in the prosecution and defense of corporate crime: Cooperating with the government — not by choice — is often the only road to survival for both corporations and their executives. Over the past months, we have witnessed significant prosecutions, and in some cases guilty pleas, involving HealthSouth, WorldCom, Adelphia, HomeStore, Safety-Kleen, Tyco and others. One defendant, however, has been missing from each of these cases — the corporation itself. In each case, the government has pursued high-level executives but has not charged the company. The government has always relied upon individuals cooperating with the government against other individuals in exchange for leniency. In the past, companies often negotiated resolutions with the government that spared individual employees from prosecution. In addition, companies consistently protected attorney work-product and privileged communications. However, greatly increased penalties for corporate crimes, and far greater prosecutorial zeal to pursue such crimes, have turned up the heat on corporations and their executives. As the threat of significant jail time, debarment from federal programs and the possible collapse of the corporation itself increase, so do the incentives to cooperate and to waive previously sacrosanct privileges. Corporations can be charged, of course, with crimes based upon the acts of their executives, and, if convicted, receive hefty fines and be placed on probation or even under direct court supervision. The stigma of a conviction can undermine the corporate brand to such an extent that the viability of the company itself is jeopardized. (Arthur Andersen is a recent example of the consequences of indictment and criminal conviction.) More so than ever before, corporations faced with significant criminal investigations are cooperating with the government by collecting and analyzing documents relating to the suspected criminal activity, interviewing employees, conducting costly and time-consuming internal investigations and forensic audits, and turning over the results of this work to the government. In addition, the company is refusing to support employees or officers who are believed to be the architects of the underlying improper conduct. To take a recent example, press reports suggest that KPMG, which is under scrutiny for tax products about which it advised clients, is cooperating with the government and refusing to assist partners and employees whom the government deems as uncooperative. KPMG refused to pay the legal fees of its partners and employees unless they agreed to cooperate with the prosecutors, refused to enter joint defense agreements with its partners, agreed to tell prosecutors which documents the employees and partners are requesting, and fired or threatened to fire those employees whom the government indicates are not cooperating. CIVIL RESOLUTIONS ARE RARER This kind of corporate response is a far cry from the government contracts, foreign bribery, antitrust and health care investigations of the 1980s and early 1990s, in which corporations often negotiated a civil resolution in return for an agreement not to prosecute those employees and others who may have been involved in the suspected activity. The conventional approach for companies was to circle the wagons around their employees and officers, pay legal fees for those individuals who needed their own counsel, establish joint-defense agreements with attorneys representing those employees and share the results of internal investigations with those lawyers to keep abreast of the government investigation. This approach often had the benefit of the company learning about the full nature and extent of the conduct under investigation and correcting it. Some prosecutors, however, viewed this approach as conspiratorial and obstructive, and as the high-flying late 1990s gave way to the stock market downturn and bankruptcies, the resulting public outcry was heard by prosecutors and legislators. A new era was born,and key company officials, rather than the company itself, are now the primary targets. Now, no matter how high up the ladder the corporate officials involved in the wrongdoing are, companies are avoiding criminal charges and severe Securities and Exchange Commission (SEC) sanctions by cooperating against those corporate officers and waiving the attorney-client privilege. Several recent cases illustrate the perils of not cooperating with the government. Earlier this year, Reliant Energy Services was indicted along with several of its senior executives. The company was charged because, according to federal prosecutors, it not only criminally manipulated the California energy market, but also failed to cooperate with the government’s investigation. And the wrath of the government for those who do not cooperate is not limited to the criminal arena. This year, the SEC announced two record-setting settlements with large corporations for failure to cooperate with the SEC in a timely fashion. Bank of America paid $10 million for “repeatedly fail[ing] to promptly furnish documents requested by the staff, provid[ing] misinformation concerning the availability and production status of such documents, and engag[ing] in dilatory tactics that delayed the investigation.” SEC Release 2004-29, March 10, 2004. Lucent Technologies paid $25 million for its lack of cooperation with the SEC. Regarding the Lucent case, the SEC stated, “Companies whose actions delay, hinder or undermine SEC investigations will not succeed. Stiff sanctions and exposure of their conduct will serve as a reminder to companies that only genuine cooperation serves the best interests of investors.” SEC Release 2004-67, May 17, 2004. In contrast, the pitfalls of fighting charges on an individual level were vividly illustrated at the sentencing of Dynegy’s midlevel executive, James Olis. While Olis’ boss and others pleaded guilty and faced a maximum of five years in jail, Olis fought the charges and was convicted by a jury. The judge sentenced him to more than 24 years’ incarceration, almost five times the maximum faced by others who were convicted of the same crime. NEW CRIMES, STIFFER PENALTIES Of course, it is not just prosecutorial attitudes and public sentiment that have changed in the past few years. Congress has created new crimes and increased penalties for existing crimes that are frequently charged in corporate white-collar cases. For example, the penalties for two of the most commonly charged offenses — mail fraud and wire fraud — were increased from a maximum of five years in jail to a maximum of 20 years in jail. In most cases, federal sentences are governed by the Federal Sentencing Guidelines, and the maximum penalty provided for in the statute plays no role in the ultimate sentence imposed unless the guidelines’ sentence exceeds the statutory maximum, in which case the maximum controls and trumps the guidelines’ calculation. Although the Supreme Court’s recent decision in Blakely v. Washington, 2004 WL 1402697, likely will require an overhaul of the guidelines, stiff guidelines penalties and statutory penalties are likely to remain. By increasing statutory maximums, Congress has effectively reduced one of the few remaining dampeners on lengthy guideline sentences. Additionally, the U.S. Sentencing Commission has amended the guidelines to increase the penalties for offenses for which Congress has increased the statutory maximum. In addition, the Federal Sentencing Guidelines for Organizations have been amended to “provide expanded guidance … regarding the criteria for an effective program to prevent and detect criminal conduct.” See “Revised Proposed Amendment: Effective Compliance and Ethics Programs in Chapter 8,” synopsis of Proposed Amendment. Barring unlikely intervention by Congress, the proposed amendments will become part of the Federal Sentencing Guidelines effective November 2004. The preamble to the new guidelines language states that “[t]he two factors that mitigate the ultimate punishment of an organization are the existence of an effective compliance and ethics program and either self-reporting, cooperation, or acceptance of responsibility.” � 8B2.1(a) further provides that having an effective compliance and ethics program requires that a company “(1) exercise due diligence to prevent and detect criminal conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” Section 8B2.1(b) of the proposed amendment includes seven “minimal” requirements for a compliance program. These “minimal” requirements are similar in substance to the existing organizational guidelines, but the application notes provide more texture than in the original. For example, while recognizing that, depending on their size, companies may have differing standards of what constitutes an acceptable degree of commitment to ethics and compliance, the notes also suggest that “a large organization should encourage small organizations, especially those that have, or seek to have, a business relationship with a large organization, to implement effective compliance and ethics programs.” Proposed � 8B21(b), Application Note 2(C)(ii). Thus, this would suggest that companies, particularly large multinationals, not only need to modify the behavior of their own employees, but also the behavior of vendors, customers, suppliers and co-venturers. The guidelines are consistent with the January 2003 “Thompson Memorandum,” which states U.S. Department of Justice policy regarding cooperation and other issues. Federal Prosecutions of Business Organizations, Memorandum from Deputy Attorney General Larry Thompson to the U.S. attorneys’ offices (Jan. 20, 2003), www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00162.htm. One of the most troubling aspects of that memorandum provides consideration should be given to “the waiver of the corporate attorney client and work product protection.” While such a waiver is not required by the Thompson Memorandum and is only one of a number of indicia of cooperation, it has quickly become a litmus test that many federal prosecutors demand. WAIVERS OF PRIVILEGE The new guidelines language provides: “Waiver of attorney client privilege and work product protections is not a prerequisite to a reduction in culpability score … unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.” See “Proposed Amendments to Sentencing Guidelines,” Chapter 8, � 8C2.5(g), Application Note 12. Prosecutors have seized upon the new guidelines language and the Thompson Memorandum’s discussion of privilege waiver and now regularly take the position that the only way for a company to avoid indictment is to cooperate, which requires waiving the privilege and not assisting or protecting employees who are targets. In a clear sign that a cooperating company becomes an arm of the government, a few months ago federal prosecutors in the Eastern District of New York charged corporate executives of Computer Associates International Inc. with obstruction of justice for false statements they made to the company’s outside counsel during an internal investigation; they pleaded guilty. Recognizing that this month’s new requirement for cooperation becomes next month’s baseline, are there costs to the company or the government in this new era of involuntary cooperation? The DOJ and SEC maintain that self-reporting and complete cooperation by companies address corporate fraud more efficiently and, in essence, deputize the company to get to the bottom of the misconduct and eliminate it. The forced waiver of privileges, denial of indemnification and accelerated job terminations may, however, make it more difficult for corporations to conduct the very types of internal investigations that the DOJ wants turned over to them. Some corporate executives have stopped fully cooperating in internal reviews, realizing that the company is simply gathering evidence for the government to use against those employees. If employees are unwilling to cooperate, companies may learn less about what is going on in their midst and the government will not obtain the road map it wants. If that happens, both the government and companies may well consider the old adage, “Be careful what you ask for.” E. Lawrence Barcella Jr., Kirby D. Behre and James D. Wareham are partners in the corporate compliance, government investigations and white-collar corporate defense group at the Washington office of Los Angeles’ Paul, Hastings, Janofsky & Walker. Candice S. Shepherd, an associate at the firm, assisted in the preparation of this article.

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