Limits on Government's Ability to Pressure Defendants Could Affect Fraud Cases

Congress is considering legislation that would limit the power of federal prosecutors and government agencies when pursuing cases of corporate fraud. In particular, the proposed legislation would include a provision prohibiting the government from requiring companies to reveal information under attorney-client privilege in exchange for lenient plea deals. It would also prohibit government agencies from ordering companies to fire employees under investigation and/or stop paying legal fees for employees being investigated.

It's no secret that federal agencies have used some of the above tactics to get information critical to prosecutions. But anti-fraud advocates are worried that cutting back on these tactics may mean that companies or executives escape prosecution. In cases such as Enron and WorldCom, information obtained by applying pressure to key players was critical to assembling a strong case against executives.

The policies and procedures in question came about when the Justice Department and SEC were looking for ways to encourage cooperation in prosecuting large, complex fraud cases. The underlying premise was to offer leniency in exchange for cooperation.

One such way the feds get companies to cooperate is through leniency for self-reporting. Companies report their own bad conduct, investigate the matter on their own dime, waive attorney-client privilege, and report all findings to the federal authorities. But it is feared that if this legislation passes, there will be limits on waiving the attorney-client privilege, and therefore the incidence of self-reporting violations of law will decrease.

A judge in New York has already had his say on this issue. U.S. District Judge Lewis Kaplan threw out the charges against 13 KPMG LLP executives. The government pressured the firm to stop paying the legal fees of the employees, and the judge says that violated the rights of the employees.

But the flip side of the issue is the case of WorldCom. The waiver of attorney-client privilege in that matter is believed to help secure the conviction of former CEO Bernie Ebbers. The same goes for cases such as Enron and Adelphia. The government believes that these tactics were instrumental in securing convictions of former executives, and these convictions were important to send the public a message about fraud.

The proposed legislation on this issue passed the House Judiciary Committee, and is now awaiting action by the full House of Representatives. A similar piece of legislation is also pending in the Senate. The Justice Department is opposed to the legislation, naturally, because it would limit the department's powers.

Both sides of this issue are very involved. Those against it argue that the investing public needs protection and this legislation would make successful prosecution much more difficult. They say that leniency is offered all the time in the criminal justice system when defendants cooperate, and white collar criminals should not be denied that opportunity.

Those on the other side say that it's important to protect basic rights like the attorney-client privilege from potential abuse by prosecutors. Defendants need to be able to speak freely with their attorneys, without fear that privilege will later be waived. They also argue that the current tactics used by the Justice Department might amount to coercion. The Justice Department denies this allegation and says not even one case has been identified as one in which a defendant was improperly coerced.

It appears there is a fine line on this issue. Prosecutors need to be able to offer something (leniency) in exchange for exceptional cooperation from defendants. It helps the government get important evidence needed to prove cases of fraud. However, it is equally important to make sure that prosecutors and the Justice Department aren't overreaching in an attempt to secure this cooperation.