November 13, 2014
James C. Sherwood, a partner at Schlam Stone & Dolan, was quoted in Corporate Secretary on recent changes by the Department of Justice to corporate criminal investigations.
Bringing Privilege Back
By Mary Beth Kissane
Investigations into corporate behavior have become much more aggressive over the past several years. The long-established principle of attorney-client privilege, according to most in-house legal experts, has been almost completely eroded, and companies are constantly confronted with demands for waiving privilege from government investigators.
The erosion of privilege is generating serious concerns in the corporate community, and several campaigns have been launched to redress the balance. A spate of hefty fines and long sentences for corporate executives have led to a culture of fear that is being exploited by zealous government prosecutors. A company under investigation can go a long way toward avoiding punishment if it is viewed as cooperating with prosecutors.
While companies often do not want to waive privilege, they are rushing to be seen as cooperative – and the stakes are high. Traditionally a company involved in an investigation would cover reasonable legal expenses for its employees. In the current environment, prosecutors claim this is a sign of being uncooperative and have pressured companies to 'cut their employees loose.'
All this may be coming to an end, however. After considerable pushback from companies and employee advocate groups, new recommendations for prosecutorial conduct have been issued in the form of the McNulty memorandum. While the move has been widely welcomed within the corporate community, there are many who feel the changes are ambiguously worded and may have little positive effect.
How we got here
During the 1990s, the US Attorney's Office for the Southern District of New York was increasingly successful in seeking waivers of privilege and confidentiality during prosecutions. At decade's end, the Department of Justice for the first time issued corporate criminality guidelines for prosecutors in the Holder memo of 1999.
The Justice Department then updated Holder with the Thompson memorandum of 2003, which was criticized for creating a 'culture of waiver' as prosecutors more frequently viewed corporations as uncooperative for paying the defense costs of employees or refusing to waive privilege, and used those behaviors as factors favoring corporate indictments.
On December 12, 2006, deputy attorney general Paul McNulty issued a memo to replace Thompson. Several factors motivated the update, including recent elections, proposed legislation to strengthen privilege and judge Lewis Kaplan's finding in KPMG litigation that the practices of pressuring corporations to cut employees' defense and legal costs was unconstitutional.
Punishment versus reward
Under the McNulty memorandum, as under Thompson, prosecutors may look favorably at a company's voluntary decision to waive privilege. Under McNulty's changes to Thompson, all voluntary waivers must be reported to the relevant attorney general or assistant attorney general.
Prosecutors also may look at whether a company has refused to provide Category 1 information (see sidebar, 'What McNulty says'). While they can't consider refusals to provide Category 2 information in their charging decisions, they can give a company credit for cooperating. Of course, many commentators find the distinction between penalizing someone and not giving them credit to be nonsense.
McNulty also attempts to split privileged and non-privileged (or protected and non-protected) communications into two rather messy categories and treats the two differently in terms of analysis and procedure. Prosecutors may seek general subject-matter waivers and include materials from both categories.
Douglas Tween, who spent 15 years as a trial attorney in the antitrust division of the Department of Justice and now serves as a partner with Baker & McKenzie, views the issue from both the defense and prosecutorial sides of the fence. 'Application of the McNulty criteria in practice will be affected by the fact that they are being interpreted by an employee of the Department of Justice and not a neutral third party,' he says.
Procedures for getting approvals don't apply when a company volunteers to waive privilege. Not surprisingly, prosecutors are already asking defense attorneys to have their clients volunteer to waive, rather than requesting a waiver from the Department of Justice and triggering procedural requirements. A request to volunteer is another distinction seen by many as nonsense.
George Terwilliger, a partner at White & Case, says the issues predate Thompson and Holder, and are instead the result of a trend by companies over the past 15 or 20 years to cooperate with prosecutors by mounting internal investigations. 'They were left to assess whether to disclose the results of their investigations, with prosecutors increasingly taking for granted that they would,' he says. 'It used to be that there were only so many things companies could get in trouble for. But we've seen the growth of a huge federal and state regulatory regime covering more aspects of corporate operations. As more crimes arose for regulatory transgressions, there was an increase in advice of counsel defenses.'
Terwilliger views McNulty as a large step in the right direction. 'In an adversarial system, prosecutors want every advantage possible,' he says. 'The McNulty memorandum rolls back and restores privilege waiver issues to where they were ten years ago. But we won't go back to the days of corporations telling prosecutors, You investigate us, and then we'll evaluate our potential liabilities and exposures.'
A severe lack of clarity
The McNulty memo purports to prohibit prosecutors, when making charging decisions, from considering whether a corporation is paying its employees' attorney fees. It would permit consideration of corporate attorney fee payments, however, 'where the totality of the circumstances shows it was intended to impede a criminal investigation.'
James C. Sherwood of Schlam Stone & Dolan, a Wall Street firm founded by former federal prosecutors, says almost everything that defense lawyers do (other than counseling clients to cooperate) makes it more difficult for a prosecutor to gather evidence and thus, in some sense, impedes his investigation.
'The McNulty memorandum gives little guidance as to what would constitute a totality of circumstances with an intent to impede within the meaning of the memorandum,' he says. 'How many practices that are unquestionably legal and were ordinary and accepted 15 years ago – such as advising a client to remain silent, entering a joint defense agreement, moving to quash an arguably defective subpoena, refusing to produce a confidential investigative report commissioned by the audit committee of the board of directors, declining to fire an indicted employee unless and until his guilt has been proven, pressing for discovery of government witnesses in a related civil case – add up to a totality of the circumstances showing such intent?'
Sherwood adds that Section VII.B.3 of the memorandum identifies 'retaining the employees without sanction for their misconduct' and 'providing information to the employees about the government's investigation pursuant to a joint defense agreement' as factors to be weighed when assessing a company's cooperation. 'So even after the assurances in the McNulty memorandum, the decision whether or not to advance employees' legal fees will remain a tough call,' he says.
'This won't change the situation for defense attorneys in their representation of individual employees,' says James Mitchell, a partner with Stillman, Friedman & Shechtman. 'Under Thompson, as under McNulty, a defense attorney for an individual is generally in the very difficult position of not having access to materials from a corporate internal investigation.'
This can raise questions about other forms of communications as well. 'One of the central issues in our pending appeal for [former Tyco CFO] Mark Swartz is the level of interaction between the investigating law firm and the district attorney, which we contend supported a subject-matter waiver,' adds Mitchell. 'We were unable to obtain materials prepared by [internal investigators] Boies Schiller that we believe would have been helpful to the defense. The McNulty memorandum doesn't look at how to regulate oral communications.'
Positioning by the players
Before the McNulty memo was issued, a coalition that included the Association of Corporate Counsel, the National Association of Criminal Defense Lawyers, the American Civil Liberties Union and the US Chamber of Commerce had called for passage of the Attorney-Client Privilege Protection Act of 2006, which was introduced by Senator Arlen Specter (R-Pa.). His office has not commented on McNulty or their plans to proceed, but incoming chair of the Judiciary Committee, Senator Patrick Leahy (D-Vt.), has indicated that he will be watching to see how McNulty is implemented.
Samuel Damren, a litigator with Dykema Gossett in Detroit, drafted the State Bar of Michigan Task Force recommendations in reaction to Thompson. State bar efforts to shore up privilege protections have been developing in Arkansas, Florida, Illinois, Maryland, Massachusetts, Michigan and New York.
The Association of Corporate Counsel applauds McNulty for its effort but says the Justice Department misses the central premise that privilege and confidentiality belong to the corporation. Thus, prosecutors should not get to decide when waiver is required. In their view, simply adding speed bumps to the process misses this central point.
The American Bar Association, while not part of the coalition, says McNulty falls short of doing what's needed to protect the erosion of attorney-client privilege. The ABA also frets about prosecutors' continued ability to force companies to threaten employees in order to earn credit for cooperating with prosecutors – before guilt has been established.
Terwilliger believes that 'the broader policy issue of whether a limited waiver of privilege is effective against third-party claims of subject-matter waiver can't be resolved by the Department of Justice and may require federal legislation or a Model Act. McNulty does not address this. The ABA and a substantial part of the defense bar don't want routine waivers because it can adversely impact individuals involved in internal investigations. The real concern is from folks who defend individuals. They worry that if their clients talk, results of interviews can go to the government. If their clients don't talk, they can be fired. They are on the horns of a dilemma but don't have the better part of the policy argument.'
The bottom line
Tween believes McNulty heightens the importance of the relationships between defense lawyers and prosecutors, may cause prosecutors and attorneys to find new ways to get important information to prosecutors without waiving privilege and may cause defense attorneys to dig in their heels and begin to fight prosecutors' requests for privilege. 'The defense bar is a small world, and your reputation precedes you,' he says.
Damren expects to see a cascading effect as other regulatory agencies, such as healthcare regulators and the SEC, reign in their waiver expectations. 'It would be very difficult for other regulators to put their heads in the sand and not react to McNulty, especially as privilege waivers have been removed as a factor from the federal sentencing guidelines,' he says.
Most commentators believe McNulty doesn't go far enough. Even so, some believe the most likely next step will be a wait-and-see period during which attorneys and legislators see how McNulty is interpreted and implemented. Damren notes that 'the cottage industry of consultants who are profiting handsomely from these expensive, long-winded, Thompson-style investigations may lose out if boards are able to rightsize investigations without waiving the privilege to better match the legitimate needs of shareholders and directors.'
'Corporate investigations will always be a trap for the unwary,' adds Sherwood. 'McNulty is a substantial tweak but not a cure. The keys will remain to keep apprised of developments, foster a relationship of trust with your prosecutors and always proceed with caution.'
[This article appeared in Corporate Secretary, a Cross Border publication, May 2007. Copyright © 2007 Cross Border LLC.]
Coverage of the case can be found here: