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Bending to pressure from Congress, a federal judge, and a lobbying campaign by business and legal groups, the Justice Department announced a number of immediate changes to its corporate-fraud charging policies Tuesday. Federal prosecutors will be required to seek approval from senior Justice Department officials in Washington, D.C., before requesting that a company turn over the results of an internal investigation or the strategic advice of the company’s lawyers. In addition, with rare exception, prosecutors will no longer be allowed to pressure companies to cut off legal fees to executives or employees under scrutiny in fraud investigations. Previously, companies could earn “cooperation credit” with the government in certain cases by cutting off those fees. Such credit was an important factor for companies seeking to avoid a potentially crippling criminal indictment. The changes, announced in a Dec. 12 speech by Deputy Attorney General Paul McNulty at a legal conference in New York, are a step back from the government’s aggressive anti-fraud prosecution tactics outlined in the so-called Thompson memo, named for former Deputy Attorney General Larry Thompson, in 2003. In the speech, McNulty said the new guidelines were designed to address the “perception, well founded � or not,” that the Justice Department’s policies were “chilling attorney-client communications” and hurting the effectiveness of corporate lawyers in conducting internal investigations into fraud and other wrongdoing. Critics of the government’s waiver practices have said they discourage corporate executives and employees from speaking honestly with company lawyers during internal fraud investigations for fear their conversations could one day be handed over to the government and disclosed in court. That disclosure, in turn, could lead to shareholder class actions. Publicly, the Justice Department has been vague about exactly what led McNulty and other officials to change course. In June a federal judge in Manhattan issued a strongly worded opinion criticizing the conduct of prosecutors in the Justice Department’s investigation of KPMG and the accounting firm’s marketing of abusive tax shelters. In his opinion, Judge Lewis Kaplan found that federal prosecutors, who pressured the accounting giant to immediately stop paying the legal fees of potentially culpable partners and employees, had violated the defendant’s Fifth Amendment right against self-incrimination and Sixth Amendment right to counsel. “The tide has turned for the Thompson memo,” said Craig Margolis, a former federal prosecutor who represents one of the former KPMG partners under indictment, in a statement. “DOJ essentially was compelled to make these changes in the face of judicial and Congressional scrutiny.” Still, some say that McNulty’s tinkering didn’t go far enough. “We’re pleased that they’re making an effort,” says Fred Krebs, president of the Association of Corporate Counsel. “But overall, it’s a day late and a dollar short.” Krebs’ group and others, including the U.S. Chamber of Commerce, the American Civil Liberties Union, and the National Association of Criminal Defense Attorneys, had sought to bar the Justice Department from using a company’s waiver decision as a factor in deciding whether to indict the corporation for fraud. The apex of that lobbying campaign came in September, when McNulty appeared before the Senate Judiciary Committee and received a heavy dose of bipartisan criticism from former Justice Department officials and senators. On Tuesday, a senior Justice Department official, speaking on condition of anonymity, said that although the DOJ had been considering revisions to its policy for more than a year, the Judiciary Committee hearing “allowed [McNulty] to begin focusing his thinking on this issue and gave us the opportunity to hear in a more focused way from folks who were concerned about this.” A final nudge came last week from Sen. Arlen Specter (R-Pa.), the outgoing chairman of the Judiciary Committee, who introduced a bill that would strictly limit a prosecutor’s ability to request attorney-client-privileged information. On Tuesday a spokeswoman for Specter said that the senator was studying the Justice Department’s changes and couldn’t comment on them. Incoming Judiciary Committee Chairman Patrick Leahy (D-Vt.), who had shared many of Specter’s concerns, applauded the changes in a statement released Tuesday. “I am pleased the Department has heeded bipartisan criticism of its policy,” said Leahy’s statement. The new guidelines, which the department has dubbed the “McNulty memo,” say that “prosecutors generally should not take into account whether a corporation is advancing attorneys’ fees to employees or agents under investigation and indictment.” The only exception, according to a footnote in the memo, is in “extremely rare” cases where the “totality of circumstances” show advancing fees to culpable employees was done with the intention to “impede a criminal investigation.” With respect to obtaining privileged information, federal prosecutors will have to go through a more rigorous approval process, similar to the process required of prosecutors seeking electronic wiretaps or subpoenas for reporters. For certain types of sensitive attorney-client information, such as the advice a defense attorney gave to the management of a corporation facing a fraud investigation, prosecutors are now required to obtain the approval of the Justice Department’s No. 2 official in Washington � currently McNulty. For privileged factual material a company has obtained through an internal investigation into an alleged fraud, such as transcripts of interviews with culpable employees, prosecutors will need to obtain the approval of the local U.S. attorney in their district, who can only sign off on such a request with the approval of the head of the DOJ’s Criminal Division in Washington, currently Alice Fisher. Previously, prosecutors had wide latitude to issue such requests on their own, though how often they’ve formally made those requests is a matter of some debate between the Justice Department and the defense bar. The new policy will still grant companies cooperation credit for “voluntarily” waiving their privilege over internal legal material. That still leaves defense attorneys with a strong incentive to waive the privilege, as a company’s level of cooperation with criminal investigators is key to warding off a criminal indictment of the company as a whole. “In close cases, maybe some corporations will decide that since prosecutors have to get approval for [waivers] they think they’ll tough it out,” says James Robinson, the former chief of the DOJ’s Criminal Division. “But that’s a game of chicken.” Jason McLure can be contacted at [email protected]

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