Feds adjust rules on corporate probes

Janet Babin Aug 28, 2008

Feds adjust rules on corporate probes

Janet Babin Aug 28, 2008


KAI RYSSDAL: A federal appeals court gave the Justice Department a slap on the wrist today. The court dismissed tax fraud charges against former exectives at the accounting firm KPMG. The judges ruled the government improperly tried to pressure the firm into not paying those executives’ lawyers bills.

In the first couple of years after Enron, there was a crackdown on corporate misbehavior, like tax fraud. But after much complaining by businesses, and some unintended consequences, today the government agreed to change how it goes after companies in trouble. Marketplace’s Janet Babin reports from North Carolina Public Radio.

Janet Babin: If you’re a company under federal investigation, working with prosecutors can keep you from getting indicted.

But under the old Justice Department guidelines cooperating often meant dissing your employees.

Companies, like KPMG, were penalized for paying workers’ legal fees. The practice was unfair, says Columbia Law Professor John Coffee:

John Coffee: That was a way of trying to force the defendant into a plea of guilty, because he couldn’t personally pay his own counsel.

Under the new rules, prosecutors can’t consider whether a company is paying for their employee’s legal fees when deciding whether it’s cooperating.

And the Justice Department is forbidden from asking corporations to spill the beans on attorney-client discussions.

UC Berkeley law professor Eric Talley says the new rules could lead to more corporate fraud convictions, because workers will feel the company’s got their back.

Eric Talley: They may be more willing to cooperate and more willing to speak freely with federal investigators.

But the new rules could open the door to abuse.

Professor James Cox at Duke University says companies could prepare an internal report that documents their innocence. Then, when the Justice Department wants to see it?

James Cox: The response by the corporation is to say, “Oh no, I’m sorry, that’s protected by the attorney-client privilege and we can’t show that to you. So you don’t know whether the report is, one, legitimate or, two, just a highly-paid-for whitewash.

But business doesn’t think the guidelines go far enough. It wants a law that lays out the rules.

The new guidelines from the Justice Department may be an attempt to head off that legislation.

I’m Janet Babin for Marketplace.

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