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White-collar prosecutions, more so than other kinds of cases, ebb and flow in response to changes in economic fortunes, political advantage and public mood. The wave of prosecutions that began to take shape after the collapse of Enron at the end of 2001 has now subsided, and by the most obvious measure, convictions in high-profile cases, it has been highly successful. The government has won convictions of significant defendants in almost all these cases (Enron, WorldCom, Tyco International, Martha Stewart and Qwest Communications among them), while to date losing a relative handful of trials and appeals. But these appearances are deceiving. Beginning in May 2005, with the U.S. Supreme Court’s reversal of the Arthur Andersen conviction, federal white-collar prosecutors have experienced an erosion of at least two significant powers: the power to bring cases based on expansive readings of key federal criminal statutes, including the wire fraud statute; and the power to extract maximum cooperation from corporations seeking to avoid indictment. As a result of these developments, white-collar prosecutors, despite their many visible triumphs, have fewer weapons at their disposal today than before the implosion of Enron. The March 2002 indictment of Arthur Andersen, on a single count of violating a federal witness-tampering statute, 18 U.S.C. 1512(b), was the government’s opening salvo against post-Enron corporate corruption. The firm had been Enron’s auditor, and the case turned on the jury’s interpretation of an in-house lawyer’s advice, during the U.S. Securities and Exchange Commission (SEC) investigation of the client, to other Arthur Andersen employees regarding the firm’s document-retention policies. Ultimately, in Arthur Andersen LLP v. U.S., 544 U.S. 696 (2005), the Supreme Court reversed the firm’s conviction through a narrowing of � 1512(b) in two important respects: It linked the statutory terms “knowingly” and “corruptly” (which are separated in the text), thereby obligating the government to prove that the defendant acted dishonestly, with consciousness of wrongdoing; and it held that the defendant also must act in contemplation of some official proceeding, actual or anticipated. In March 2006, relying in part on Arthur Andersen, the 2d U.S. Circuit Court of Appeals reversed the obstruction and witness-tampering conviction of Frank Quattrone, a prominent Silicon Valley investment banker. U.S. v. Quattrone, 441 F.3d 153 (2d Cir. 2006). Quattrone was charged and convicted not only under � 1512(b), but also under �� 1503 and 1505, which address document destruction. As in the earlier case, the nub of the matter was the defendant’s ambiguous instructions as to document retention during an official investigation. The 2d Circuit reversed on all counts, finding the jury instructions defective under Arthur Andersen or analogous reasoning. In both of these obstruction cases, although the evidence of criminal intent was thin, the narrowing of criminal liability flowed naturally enough from common sense or controlling authority. By contrast, in U.S. v. Brown, 459 F.3d 509 (5th Cir. 2006), a wire fraud prosecution, the 5th Circuit achieved a like result in the face of its own precedent. Brown involved four Merrill Lynch bankers who allegedly had contrived with Enron to create a sham $12 million transaction solely for the benefit of the latter’s year-end earnings report. Following their conviction in 2004 for wire fraud and conspiracy to commit wire fraud, the bankers appealed, arguing that there was no wire fraud (and therefore no conspiracy) because they could not have aided and abetted Enron employees’ scheme to deprive Enron of its “intangible right” to the employees’ “honest services.” The appellants reasoned that, since the only benefits the employees received as a result of the scheme were bonuses tied to corporate earnings, their personal interests were not so clearly in conflict with the legitimate interests of Enron to constitute a criminal breach of their duty to the company. The 5th Circuit adopted this exceedingly fine parsing of conflict of interest, even though in an earlier decision, U.S. v. Gray, 96 F.3d 769 (5th Cir. 1996), it rejected an analogous claim by college basketball coaches convicted of fraudulently documenting the academic eligibility of certain players. The coaches argued, in vain, that they had not breached their duty to their employers because the intent and effect of their actions was to benefit the schools by improving their teams’ performance. Be that as it may, Brown has jeopardized what is probably the high-water mark in the government’s campaign against corporate fraud, the May 2006 conviction of former Enron Chief Executive Officer Jeffrey Skilling. In ruling on his application for bail pending appeal this past December, the 5th Circuit remarked on “serious frailties” in Skilling’s conviction for conspiracy, securities fraud and insider trading (the bulk of the crimes of which he was convicted) in the wake of Brown. U.S. v. Skilling, No. 06-20885, slip op. at 2 (5th Cir. Dec. 12, 2006). Reining in government demands One reason for the federal government’s successes in white-collar prosecutions is the enormous leverage it has acquired over businesses, particularly public companies, by virtue of the threat of indictment. By aggressively wielding this sanction � which is usually tantamount to a death penalty for businesses, as Arthur Andersen discovered � prosecutors are able to press companies under investigation into service as auxiliary law enforcement agents, to investigate wrongdoing within their ranks, report all findings to the government and even reward and sanction employees depending on their cooperation in these efforts. The government’s ability to turn companies against their own officers and employees, regardless of rank, and to command their often invaluable knowledge and resources in the investigation of criminal conduct, helps explain how prosecutors were able to get to the bottom of hugely complex financial transactions so effectively in the Enron-related cases, among others. Recently, however, federal prosecutors have learned that there are serious limits to the cooperation they can extract from businesses under investigation. Under a Justice Department policy first articulated in 1999, known as the Holder Memorandum, prosecutors, in determining whether to bring charges against a company, were allowed to consider (among many other factors) the company’s willingness to waive attorney-client privilege and work-product protection as to company documents and internal discussions, as well as to avoid supporting “culpable employees” through such actions as the advancement of legal fees. As the corporate scandals heated up, the government took an increasingly hard line in interpreting these factors. In June 2006, U.S. District Judge Lewis Kaplan of the Southern District of New York held that the latter tactic, when used against a criminal defendant, violated his Fifth and Sixth Amendment rights to a fair trial and effective assistance of counsel. U.S. v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006). Stein is a criminal tax prosecution (not yet tried) of former partners and employees of KPMG who allegedly were involved in marketing fraudulent tax shelters. Kaplan, following an extensive pretrial hearing, found that prosecutors, after entering into a deferred prosecution agreement with KPMG, pressured the firm to terminate payment of the legal fees and expenses of certain defendants. Recently, he dismissed the indictment as to 13 defendants in the case. No. 05 CR 0888, slip op. at 63 (S.D.N.Y. July 16, 2007). Both the scope and future of Kaplan’s rulings are unclear. Arguably, in view of the judge’s reliance on the law of tortious interference, the holding is limited to the provision of legal fees, to which the Stein defendants could make a contractual or quasi-contractual claim, and does not cast a shadow over other government negotiating tactics that may affect indicted corporate employees. On the other hand, Kaplan’s declaration that due process bars the government from taking “extrajudicial action” that intentionally “tilts the playing field against a criminal defendant” suggests a much broader application. Since the government has already filed a notice of appeal in the dismissal of the indictments, the 2d Circuit will decide the meaning of Stein. Earlier, on a related issue in the case, the 2d Circuit pointedly criticized Kaplan’s handling of the issue. U.S. v. Stein, No 06-4358-CV (2d Cir. May 23, 2007) (Winter, C.J.) To some extent, however, these uncertainties are academic. In December 2006, the Justice Department announced major changes to its policy on charging corporations, known as the McNulty Memorandum. Now federal prosecutors cannot consider a company’s advancement of legal fees to employees when making a charging decision, except on the “extremely rare” occasions that fees are being paid “to impede the government’s investigation.” Similarly, prosecutors must demonstrate a “legitimate need” for privileged information, which should be sought “only in rare circumstances,” before asking companies to waive attorney-client privilege and work-product protection. These policy changes are undoubtedly a response to recent criticism and represent a major retreat from prior practice. The decisions summarized above may be random events, part of the give-and-take between law enforcement and the judiciary, or they may be parallel reactions to a perceived issue of justice. The latter supposition is certainly plausible, if only because of the problematic aspects of white-collar prosecutions in the current environment. First, financial fraud sentences under the Federal Sentencing Guidelines have been criticized as severe, especially in cases involving large public companies and therefore millions of shareholders whose aggregate losses are used to calculate the sentence level. Second, white-collar cases usually turn on slippery questions of intent that can be difficult for a jury to assess, particularly when the facts are complex. Finally, public opinion has been hostile to the defense, which could threaten jury impartiality. So it would not be surprising if judges, faced with thin evidence of criminality or indications of prosecutorial overreaching, took steps in these cases to mitigate some of the consequences of the government’s awesome power. It would be more surprising if they did not. Kevin J. O’Brien is a partner in the litigation department, and the New York office, of Dechert. He practices in several areas, including white-collar criminal defense and related corporate counseling, U.S. Securities and Exchange Commission enforcement and civil litigation. Before entering private practice, he served as an assistant U.S. attorney in the Eastern District of New York, as chief counsel to the New York State Commission on Government Integrity and as associate independent counsel in the Office of Independent Counsel in Washington.

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