Nov. 17 (Bloomberg) -- The U.S. Justice Department plans to make it harder for prosecutors to force companies to waive their legal rights in plea negotiations to avoid indictment, people familiar with the plan said.

The proposed changes address concerns that companies are being asked unfairly to reveal confidential talks with their lawyers and cut off legal support for employees under investigation, the people said. Businesses, lawmakers and a judge in New York overseeing the trial of former KPMG LLP executives have complained that the rules adopted in the wake of accounting scandals erode the rights of companies or their employees.

``This is a policy issue that needs to be addressed and there has been a lot of criticism from a lot of different directions,'' said former Justice Department official George Terwilliger, a partner at the White & Case law firm in Washington. ``There is also a recognition that we need to be careful how we tinker with the engine of commerce.''

Deputy Attorney General Paul McNulty is likely to announce the revised policy in a speech early next month, the people said. They stressed that the changes won't be dramatic and are still being debated within the department.

McNulty, who also heads President George W. Bush's corporate fraud task force, hasn't signed off on the proposed changes, the people said. He was traveling and unavailable for comment.

``We want to get it right,'' McNulty told a Senate Judiciary Committee hearing in September. ``We don't want to do something that is inappropriate or unreasonable.''

Protecting the Public

Brian Roehrkasse, a Justice Department spokesman, said the rules are under review and any changes would be in accord with ``safeguarding the integrity of our financial institutions'' and ``the public interest.''

The policy in question -- originally outlined in a 2003 memo by then-Deputy Attorney General Larry Thompson -- offers leniency to companies that cooperate with prosecutors. It suggests that companies can benefit by waiving attorney-client privilege and by not paying the legal bills of ``culpable employees.''

Several federal judges have questioned the provision on employees' legal fees. U.S. District Judge Lewis Kaplan in New York ruled in June that the Justice Department violated the rights of 16 former KPMG executives accused of selling illegal tax shelters by pressuring the accounting firm to stop paying their legal fees. On Nov. 14, the judge postponed the executives' trial indefinitely until the dispute is resolved.

Often Fatal

Because an indictment is often fatal for a company, corporate lawyers are under pressure to meet almost any government demand to avoid charges. That has made the memo a rallying point for companies who say the policy amounts to coercion to settle with the government.

Arthur Andersen LLP, one of the so-called Big Five accounting firms with 85,000 employees, collapsed after it was indicted for destroying documents related to its work for Enron. The U.S. Supreme Court in 2005 overturned the conviction, too late to save the firm.

Senator Arlen Specter, a Pennsylvania Republican who will give up his Judiciary Committee chairmanship in January, plans to introduce legislation that would compel the Justice Department to overhaul the Thompson memo. A coalition that includes the Washington-based U.S. Chamber of Commerce, the Chicago-based American Bar Association and the New York-based American Civil Liberties Union has spearheaded the attack on the memo.

The incoming chairman of the Judiciary Committee, Vermont Democrat Patrick Leahy, has also expressed support for changing the guidelines.

Former Attorneys General

The Justice Department's proposed revisions to the Thompson memo are intended to address its critics, who include three former attorneys general, the people familiar with the matter said.

One of the changes, they said, would require prosecutors to get approval from the attorney general or his top deputy before seeking a waiver of attorney-client privilege.

Each of the 93 U.S. attorneys' offices across the country has its own policy now on asking for the waivers, leading companies to complain there is no uniformity and giving prosecutors a free hand in demanding confidential material.

``Taking the step of requiring approval in Washington would be a significant step,'' said Michael Horowitz, a former chief of staff in the Justice Department's criminal division and now a partner with the Cadwalader, Wickersham & Taft law firm in Washington. It would force prosecutors to justify their actions to their superiors, he said.

Confidential Talks

Another proposed revision would say companies won't be penalized for refusing to reveal confidential talks with their attorneys, the people said. They could still waive the privilege and get credit for cooperation, the people said.

The Justice Department also is considering deleting the language referring to legal fees for ``culpable employees,'' they said. In the KPMG case, the government has appealed Kaplan's order.

Some critics of the current guidelines want a more drastic overhaul.

``We've built a heck of a lot of momentum, and we don't want this problem to resurface,'' said Susan Hackett, senior vice president of the Association of Corporate Counsel, a Washington- based group. The Justice Department is ``trying to throw a train off the tracks'' by proposing only minor changes, she said.

The Justice Department says the guidelines are vital to speed investigations and help protect investors. The agency also maintains that companies often take the initiative in waiving attorney-client privilege and cutting off support for employees.

``Most corporations want out from the dark clouds of criminal wrongdoing as quickly as possible,'' McNulty told the Senate Judiciary Committee in September.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Last Updated: November 17, 2006 09:54 EST