McNulty Memo at One Year: Not Much Progress

One year after the Justice Department pledged to curb what many perceived as strong-arm tactics to push companies to cooperate with government investigations, the practices that spawned the policy change remain alive and well, legal observers say.

It was December 2006 when the department released the so-called McNulty Memo, which now requires federal prosecutors to secure high-level approval in Washington before asking a company to waive attorney-client and work-product privilege while the company is under investigation. The memo replaced its much-maligned predecessor from 2003, the Thompson Memo, which gave rise to complaints of a “culture of waiver” among U.S. attorneys and other federal prosecutors.

The McNulty Memo, named for former Deputy Attorney General Paul McNulty, also directs prosecutors not to hold a company’s refusal to waive privilege against it as prosecutors weigh whether to charge the company with some infraction. Nor can prosecutors consider the advancement of legal fees to employees in making a charging decision, except in extraordinary circumstances where the move is intended to impede an investigation.

Still, despite good intentions, most members of the defense bar who spoke to Compliance Week say not much has changed since the McNulty Memo was published.

Rosen

“If you represent a company, post-McNulty you’re facing the same death knell threat that you faced before,” says Jonathan Rosen, a lawyer with the law firm Mintz, Levin, and a former assistant U.S. attorney. Formal requests for waiver may have dropped, he says, but, “The question isn’t how they get the waiver, it’s whether the government should ever ask.”

The McNulty Memo followed a widely hailed June 2006 federal court decision, U.S. v. Stein, which scorched the Thompson Memo and said prosecutors violated the rights of former KPMG employees under investigation in a tax-shelter scheme. The employees argued that the Justice Department pressured KPMG to stop paying their legal bills, to curry favor with prosecutors lest the firm be charged as well. The judge in the case, Lewis Kaplan, agreed and dismissed charges against 13 KPMG defendants last July.

That decision is under review by the Second Circuit Court of Appeals. Observers say the Second Circuit’s ruling and Congressional efforts to change Justice Department practices via legislation are likely to have much more effect than the McNulty memo has had.

If Kaplan’s ruling is overturned, that may blunt the incentive for prosecutors to adhere to the McNulty Memo, says Andrew Weissmann, a partner at the law firm Jenner & Block and former director of the Justice Department’s Enron task force. “All eyes are on [the Second Circuit’s decision] this year,” he says. Kaplan’s decision is “a strong policy argument, but a difficult legal argument.”

Meanwhile, members of Congress, with support from the legal community, have pressured the Justice Department to do more to curb prosecutorial abuses. In November, the House approved H.R. 3013, The Attorney-Client Privilege Protection Act, which would bar government officials from considering waivers in investigations or enforcement matters when a company asserts a valid attorney-client or work-product protection. A companion bill introduced by Sen. Arlen Specter, ranking Republican member of the Judiciary Committee, is pending in the Senate.

Supporters of the Specter bill say the McNulty Memo doesn’t go far enough to protect attorney-client privilege because it doesn’t eliminate a Justice Department practice of requiring companies to waive privilege in return for cooperation credit. Moreover, the memo only applies to formal waiver requests; critics say prosecutors still have many ways to telegraph their wish that a company “voluntarily” waive privilege.

Hackett

“We still see a continuing problem,” says Susan Hackett, general counsel of the Association of Corporate Counsel, which is part of a coalition pressing for the reforms sought in the House legislation. Hackett says she has heard multiple reports from ACC members that some prosecutors “still push the Thompson Memo across table and say, ‘Here’s the check list if you wish to be considered cooperative.’”

EXCERPT

Below are portions of the executive summary of the McNulty Memo, regarding attorney-client privilege and advancing employees’ legal fees.

Requests for Waiver of Attorney Client Privilege

The new guidance adopts a tiered approach on when prosecutors may request that a corporation provide protected materials. When prosecutors wish to seek privileged attorney-client communications, legal advice or non-fact attorney work product – those materials generally considered to be the most sensitive of all protected materials – the United States Attorney must now obtain written approval directly from the Deputy Attorney General before making the request.

The request for approval must set forth law enforcement’s legitimate need for the information and identify the scope of the waiver sought. To establish a legitimate need for the information, federal prosecutors must address:

the likelihood and degree to which the privileged information will benefit the government’s investigation;

whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver;

the completeness of the voluntary disclosure already provided; and

collateral consequences to a corporation of a waiver.

Such a requirement represents a substantial test. It addresses criticisms, which the Department has disputed, that prosecutors routinely ask companies to provide such information, thereby chilling the offering of legal advice. While the Department does not agree that blanket or unrestricted waivers were routinely sought in the past, this new approval requirements will insure that Department prosecutors only request a waiver of the most sensitive materials after such a request has received approval from the Justice Department’s second-highest ranking official. The guidance cautions prosecutors that attorney-client communications should be sought only in rare circumstances. Because prosecutors are required to establish a legitimate need before seeking the information, they are expected take preliminary investigative steps to determine whether a corporation and its employees have engaged in criminal activity before seeking such materials.

The memorandum also provides new requirements when federal prosecutors are

requesting a waiver of privilege to receive materials that disclose the facts a company has uncovered in a company’s internal investigation of corporate misconduct. Before making a request for such materials, federal prosecutors must seek the approval of their United States Attorney, who must consult with the Assistant Attorney General of the Criminal Division before approving such a request. Examples of factual information of this type might include copies of key documents, witness statements, or purely factual interview memoranda regarding the underlying misconduct

The new approval requirements involving United States Attorney approval also apply to requests for (1) legal advice given contemporaneous to the misconduct being investigated, if the company is relying upon an advice-of-counsel defense to justify the conduct; and (2) legal advice or communications in furtherance of a crime or fraud, coming within the crime-fraud exception to the attorney-client privilege.

The memorandum indicates that federal prosecutors are not required to obtain authorization if the corporation voluntarily offers privileged documents without a request by the government …

Advancement of Attorneys’ Fees

The new guidance also instructs prosecutors that they generally cannot consider a corporation’s advancement of attorneys’ fees to employees when making a decision whether to charge the corporation. A rare exception is created for those extraordinary instances where the advancement of fees, combined with other significant facts, shows that such a step was intended to impede the government’s investigation. In those limited circumstances, fee advancement may be considered only if authorized by the Deputy Attorney General. When seeking this approval, federal prosecutors must follow the same authorization process established for seeking approval to request waiver of attorney-client communications from the Deputy Attorney General.

Source

Department of Justice (Dec. 12, 2006).

Observers say any changes that have occurred are more probably the result of heightened scrutiny of prosecutors’ tactics in corporate investigations and of the threat of Congressional action, rather than of the McNulty Memo itself.

“I do think generally speaking there have been fewer waiver demands,” Weissmann says. “But I’m not sure if that’s the product of the McNulty Memo” or the deterrent effect of the bad publicity surrounding federal prosecutors in the Stein case. Weissmann says he’s still seen waiver demands in “complete contravention” of the McNulty Memo.

The Root of It All

Hackett and other critics say the McNulty Memo doesn’t address a number of underlying issues. For example, Hackett says, the reforms still don’t recognize attorney-client and work-product privilege as the company’s right to claim. “We’re not trying to suggest DOJ hasn’t been looking carefully at the issue, but they haven’t resolved the problem,” she says.

Thornburgh

Dick Thornburgh, attorney general under George Bush Sr. and now of counsel with the law firm K&L Gates, also stresses that the culture of waiver extends to numerous agencies beyond the Justice Department. The McNulty Memo applies only to the Justice Department, although the Specter bill would encompass all government enforcement officials.

Weissmann cites another sore point: Under the McNulty Memo, prosecutors can still punish a company that takes no action against employees who assert their Fifth Amendment right and refuse to cooperate with the government, by deeming the company uncooperative as well. The Specter bill would bar government enforcement officials from considering an employee’s assertion of the Fifth Amendment in deciding whether to charge the company.

The only answer, Thornburgh says, is “to scrub the board clean of … an ill attempt to ease the burden on government prosecutors in these cases.”

Corporate lawyers also complain about the judgment standard for corporate criminal liability, which they claim is overly broad. Criminal indictment is disastrous for a company, and often means a swift corporate death. In the wake of Enron, an indictment against the company’s auditor, Arthur Andersen, caused the legendary auditing firm to unravel within months—even when much of the indictment was later dismissed.

“There’s a hair-trigger for when liability can attach” to a corporation, Weissmann says. “It gives too much weight to prosecutors.” Likewise, Rosen calls the standard for vicarious liability, under which the criminal acts of one employee can be imputed to a corporation, antiquated. “Until that gets addressed, lawyers still have the fear of the Andersen case coming on [their] watch,” he says.

Weissmann and Hackett also say adherence to the McNulty Memo varies widely among the many offices of the Justice Department. Hackett’s group wants to start a dialogue with enforcement officials in the coming months about training and educational efforts to help prosecutors “better understand how corporate internal investigations work.”

Even some who say they’ve seen change after the McNulty Memo still contend that the Specter legislation is necessary. John Savarese, a former U.S. attorney and now with the law firm Wachtell, Lipton, Rosen & Katz, says in his experience, prosecutors have been “more cautious and circumspect about asking for waivers and just as importantly, about implying a waiver would be welcome.”

That said, he adds, the Specter bill “is the only way to ensure that whatever changes are occurring will become permanent.”