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Just when defense counsel in corporate and securities-related matters thought things couldn’t get much worse, Congress passed the Prosecutorial Remedies and Other Tools to end the Exploitation of Children Today Act of 2003, otherwise known as the PROTECT Act. In general, this legislation (Pub.L.No. 108-21, 117 Stat. 650) strengthens the penalties for child exploitation and provides funding for state kidnapping-alert systems, such as the so-called “Amber Alert.” But the measure also contains an amendment by Rep. Tom Feeney, R-Florida, which effectively restricts federal judges from exercising their discretion with respect to all federal sentencing matters beyond just those involving child abduction or exploitation. In particular, the Feeney Amendment requires the Judicial Commission and U.S. Attorneys’ offices to report to the Department of Justice all “downward departures” from sentencing guidelines on a judge-by-judge basis. This potential blacklisting of judges who are deemed too lenient because of their willingness to depart downward from sentencing guidelines can result in a chilling effect on judicial discretion. Although the Feeney Amendment has been constitutionally upheld ( U.S. v. Borden, 300 F. Supp. 2d 1288), opposition to it has been widespread and not limited to individual judges and defense counsel. The opposition includes the U.S. Judicial Conference, the U.S. Sentencing Commission and the American Bar Association. This loss of discretion has also led to the resignation of some federal district judges. When I wrote on this subject about a year ago (for a publication from the Northern California Association of Business Trial Lawyers), the U.S. Supreme Court had just issued its opinion in Blakely v. Washington, which struck down the use of sentencing guidelines in the state of Washington. Now that the Supreme Court, in January’s ruling in U.S. v. Booker (125 S. Ct. 738), has declared that federal sentencing guidelines are unconstitutional and are merely “advisory,” defense counsel and their clients are presented with the new challenge of figuring out precisely what this all means. In the months since the Booker decision, it appears that the change from mandatory to advisory guidelines has not had a dramatic effect on federal sentencing. According to the best estimates currently available, about 94 percent of sentences handed down since Booker fall within the guidelines. The remaining sentences are about evenly split between those that exceed and those that fall below the range of the guidelines. Given the outrage expressed by judges over the reporting of downward departures under the Feeney Amendment, it may seem surprising that more sentencing outside the guidelines has not occurred since Booker. Many assumed that judges would no longer feel constrained from departing downward in cases where the guidelines produced particularly harsh results. For example, Jamie Olis, a mid-level executive who did not cooperate with the government’s prosecution of the Dynegy case, received a 24-year sentence in 2003 federal proceedings in Texas ( United States v. Olis, No. 03-CR-217). Had Olis been convicted four years earlier, he would have received approximately six years under the sentencing guidelines in effect at that time. This is not to suggest that long sentences are inappropriate in all cases. However, the current guidelines, even though only advisory, can still dictate draconian sentences based on variables that may have little to do with the heinousness — or lack thereof — of the defendant’s conduct. The primary variable leading to harsher sentences in securities-related prosecutions is the dollar loss involved. Lack of cooperation and a variety of other complex factors can also result in unfairly long sentences compared to other types of crimes. The most obvious reason for harsh sentencing guidelines and the reluctance of judges to grant (or prosecutors to support) downward departures, lies in the rush of legislators in the post-Enron climate to show they are tough on corporate and investment-related crime. While the principle here may be noble, the application would seem to be lacking, at least in certain instances. The threat of “corrective” legislation that would require the application of the guidelines has been reported in the media and reflected in recently proposed legislation applying to other areas of crime. A mix of variables has combined in recent years to create the strange phenomenon of defense counsel becoming aids to the prosecution. The background for this evolution traces not only to the extraordinary corporate misconduct reflected in Enron, WorldCom, Global Crossing and other extreme cases, but from the creation of a process that effectively limits certain traditional practices aimed at enabling attorneys to defend their clients. This evolution formally started in October 2001 with the SEC’s release of a report on “cooperation,” commonly known as the “Seaboard Guidelines.” In those guidelines, the SEC sets forth what a potential target entity must do in order to be deemed to have cooperated with the commission. This normally includes turning over to the SEC notes from interviews conducted with other prospective targets, distancing itself from the prospective targets (usually by terminating or placing on administrative leave employees who are under investigation), denying other prospective targets access to witnesses and documents that might be used to prepare a defense to eventual allegations and actively assisting SEC staff in an investigation. The commission prefers, but does not require, the cooperating entity to waive the attorney-client privilege. While there is nothing wrong with asking an entity and its counsel to assist in stopping and discouraging illegal acts, the (hopefully) unintended consequence of turning a company and its counsel into investigators for the government presents serious issues for defense counsel, perhaps rising to a constitutional issue in extreme circumstances. When the SEC’s Seaboard guidelines are combined with the guidelines contained in former Deputy Attorney General Larry Thompson’s January 2003 memo on Principles of Federal Prosecutions of Business Organizations, the effect of the civil-criminal joint enforcement effort appears in bold relief. A key segment of the Thompson memo highlights the issue: “The Department does not, however, consider waiver of a corporation’s attorney-client and work product protection an absolute requirement, and prosecutors should consider the willingness of a corporation to waive such protection when necessary to provide timely and complete information as one factor in evaluating the corporation’s cooperation. “Thus, while cases will differ depending on the circumstances, a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, retaining the employees without sanction for their misconduct or providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.” The risk to the individual, perhaps including the entity’s counsel, may even extend to counsel’s repeating statements of individuals to the government. For example, in the criminal prosecution of former executives of Computer Associates, guilty pleas were obtained based on the executives having lied to lawyers hired by the company to conduct an internal investigation after the company lawyers passed those lies on to the prosecutors. While this may discourage lying to investigative counsel, counsel and clients should be concerned about where the line is drawn on liability for such statements and repetitions of them. In at least some instances, attorneys serving as entity counsel in internal investigations were called as witnesses by the defense, which asserted that they were essentially acting as government agents. The risk to counsel is more than theoretical. Although not always related to joint proceedings, the increasing tendency to pursue third parties, including lawyers, has become evident in recent years as reflected in the many cases brought by the SEC against attorneys in the post-Enron era. While criminal prosecution of securities fraud usually requires egregious conduct reflecting intentional wrongdoing, the complexities that have arisen in recent cases underscore just how blurred the line between potential civil and criminal liability has become. Since intent is often difficult to prove, it is perhaps not surprising that legislators and prosecutors have combined to reach into areas that might not normally be considered criminal or fraudulent conduct. This is not to highlight the know-or-should-have-known interpretation of scienter, but rather goes beyond this to the circumstances reflected in the Sarbanes-Oxley legislation. Under the Sarbanes-Oxley Act, CEOs and CFOs of public companies are required to certify that certain reports filed with the SEC accurately present the company’s financial condition. One may ask whether it is realistic to think that traditional concepts of criminal intent are present where such an officer is relying on large numbers of individuals and business segments of which he or she may not have much knowledge. In requiring a CEO and CFO to attest to the accuracy and honesty of work done by a great number of people with whom they have little contact, the lack-of-knowledge defense is lost in favor of creating a standard of conduct that may be unrealistic. Similarly, in cases involving illegal earnings management or revenue recognition practices, finding criminal intent on the part of executives or others not directly involved may require stretching the definition of criminal intent. The combination of successive frauds involving corporations, mutual fund complexes, the brokerage community and, more recently, the insurance industry, have slowed what might have been expected to be a more pronounced post- Booker relaxation of the pressures on defense counsel and clients. As long as legislators feel compelled to police the judicial and prosecutorial process, we can expect a continuation of the circumstances that have made it increasingly difficult to obtain the information necessary to put on a defense, coupled with a widening rift between entity defendants and the individuals working with or for them. While this situation helps the prosecution — and may well result in a decrease in fraudulent conduct — it is perhaps too early to measure the net effect of these developments on the defense. That said, we should all remain watchful and concerned. Robert Charles Friese is a founding partner of San Francisco’s Sharstis Friese. He specializes in business litigation, including matters that involve securities, real estate, unfair competition, officer and director liability, fraud and breach of contract.

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