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When the Securities and Exchange Commission first floated its “noisy withdrawal” proposal late last year as part of a package of Sarbanes-Oxley reforms, the corporate bar nearly had collective heart failure. The bar claimed the proposal, which would have required a lawyer to withdraw from representing a company that failed to cure securities violations, and to notify the agency of the withdrawal, would turn lawyers into policemen. The minute the SEC received notice of the withdrawal, the bar argued, it would be pressuring the lawyer for information. Yet the proposal, which itself was noisily withdrawn late last month after a barrage of lobbying, may turn out to have been the least of the bar’s problems. While lawyers were battling it out with the SEC, another agency just down the street was quietly forging its own inroads that could put just as much, if not more, pressure on lawyers and their corporate clients. On Jan. 20, right around the time the SEC was backing off, the U.S. Department of Justice released a set of prosecutorial guidelines for business organizations. The guidelines made it clear that the agency has every intention of going after corporate America — and its lawyers — with everything it has got. “The Justice Department has gotten very heavy-handed,” said Robert J. Anello, a partner at Morvillo Abramowitz Grand Iason & Silberberg, a white-collar criminal defense firm in New York. “Corporations have been asked in many different ways to become the government’s investigator.” “They’ll greet you with a wink and a handshake,” he said, “and say, ‘I’d love to know the results of your investigation.’” Anello said the first thing to go is the attorney-client privilege. And in fact, the guidelines openly acknowledge that waiver of the attorney-client privilege, as well as other factors, will help a corporation avoid federal prosecution. “In determining whether to charge a corporation,” the guidelines read, “the prosecutor may consider the corporation’s willingness to identify the culprits within the corporation, including senior executives; to make witnesses available; to disclose the complete results of its internal investigation; and to waive attorney-client and work-product protection.” “It’s phrased as a carrot,” Anello said, “but it’s really a stick.” The January memo is a revision of an earlier set of guidelines that came out about four years ago, known as the Holder memorandum after its author, then-Deputy Attorney General Eric Holder. The principles outlined in the Holder memorandum were heavily influenced by the U.S. Attorney’s Office for the Southern District of New York, which pioneered the practice of requesting waiver of the attorney-client privilege in the late 1980s. For years, the only offices that would ask for the waiver were Manhattan, Chicago and Los Angeles, said Stanley A. Twardy, a partner in the Stamford, Conn., office of Day, Berry & Howard who served as U.S. Attorney for the District of Connecticut from 1985 to 1991. “I don’t think we looked to waive the privilege once while I was there,” Twardy said, speaking of his tenure as Connecticut’s U.S. Attorney. But the Holder memorandum helped spread the practice nationwide, to the point where “now it’s de rigueur with all the offices,” he said. He added that, post-Enron, the Justice Department has gotten even more aggressive: “In the past, they’d criminalize conduct only if actual fraud [in which revenues were simply made up] took place. Now, they are criminalizing bookkeeping fraud [where revenue is moved around] as well.” Twardy added that the latest pronouncement from the Justice Department underscores its intention to push even harder. “This is the Ashcroft administration validating the Reno administration,” he said. Because the Securities and Exchange Commission frequently looks to the Justice Department for guidance, Twardy said corporations are getting the same harsh treatment from that agency as well. Not only did the agency file a record number of enforcement actions last year — nearly 600 — but the tenor of its actions has changed. “The SEC is being a lot more bullish,” Twardy said. “They’re criminalizing conduct that before would have been civil. And they don’t really care what your defenses are. They figure that, in light of Enron, juries are on their side and if you don’t cooperate, they can just go to trial.” In the January memo, the Justice Department cites limited resources for its tactics, frankly admitting that it is seeking to shift some of the burden of the investigation onto the corporation being investigated. But Twardy said it goes even beyond that. “Our investigations are so much more attractive to them, because the corporation can fire employees who don’t cooperate,” he said. “With the government, they can simply plead the Fifth [Amendment].” To make matters even worse for corporations, last November, the Justice Department raised its sentencing guidelines for corporate crimes. The agency did so purportedly to comport with Sarbanes-Oxley and the USA Patriot Act, but “went way over the top,” said Steven Kimelman, a white-collar criminal defense lawyer at Arent Fox in New York. “For the type of fraud involving a public corporation like Enron or Worldcom, they are now talking about a guideline of 30 years in prison, where it used to be 4 or 5 years,” Kimelman said. “That would be the equivalent of a life sentence for some people,” he said. The new sentencing guidelines also strongly suggest that corporations that wish to be viewed favorably should waive the privilege, said Susan Hackett, general counsel of the American Corporate Counsel Association in Washington, D.C. “Ever get the feeling that you are being attacked from all sides?” she said. Members of the defense bar said that routine requests to waive the privilege and hand over the results of internal investigations have already had a number of detrimental effects. Most significantly, they said, corporate executives and employees are getting more and more reluctant to talk to their lawyers. Day Berry’s Twardy said that going into an investigation many defense lawyers already routinely counsel employees that they are the lawyers for the company, not the employee; that the company has an attorney-client privilege but it could waive it; and that if the government asks, the employee has to assume that any information will be turned over. He said he calls the recitation “Adnarim,” or the reverse spelling of Miranda, the warning that police officers give to arrestees. Not surprisingly, “Adnarim” has a chilling effect. “No one invites a policeman to the meeting,” Hackett said. Lawyers said that the government’s tougher approach also limits their ability to conduct internal investigations. In the old days, Kimelman said, lawyers would put work product in their notes, in part to keep the privilege intact. Now, with the assumption that the notes will end up in the hands of the government, they try to stick straight to the facts, he said. Lawyers will also forego a written report of their findings. For the government, such a report is “a road map with a red bow,” he said. Corporate defense lawyers also point out that once a company waives the privilege, anyone can gain access to the unprotected documents, including class action plaintiffs’ lawyers. The giant drug wholesaler McKesson Corp. is a case in point. It is fighting to keep confidential an internal report on financial fraud stemming from a 1999 acquisition that it turned over to federal prosecutors and the SEC. The company, which faces more than 50 shareholder suits arising out of that same acquisition, settled one such suit after a court ruled it should release the report to the plaintiffs’ lawyer. Yet companies anxious to avoid prosecution are hard-pressed to resist requests from the government, whether they be for privilege waivers, internal reports or anything else, Kimelman said. The accounting firm Arthur Andersen was one such exception, taking its case to trial rather than simply roll over. “And look what happened to them,” Kimelman said.

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