The Justice Department is poised to revise its policies about corporate investigations yet again, its latest effort to quell chronic complaints that prosecutors strong-arm companies into waiving attorney-client privilege in exchange for avoiding indictment or other punishments.

Filip

Earlier this month, Deputy Attorney General Mark Filip sent a letter to Congress summarizing pending changes to the department’s Principles of Federal Prosecution. A full text of the new guidelines is expected “in the next few weeks,” Filip wrote.

Filip’s letter, sent July 9, is also a peace-making gesture to avoid more draconian changes Congress might impose on itself. Corporate America has long criticized the Justice Department’s investigation tactics, and the department has powerful enemies in Congress, particularly on the Senate Judiciary Committee. Sen. Arlen Specter, ranking Republican on the committee, is mulling legislation that would ban all requests to waive legal privilege at the Justice Department and all other federal agencies.

“The department believes that its new guidance will both protect the attorney-client privilege and preserve our ability to effectively and appropriately investigate and prosecute corporate crime,” Peter Carr, a department spokesperson, tells Compliance Week.

The changes outlined in the letter include:

Cooperation will be measured by “the extent to which a corporation discloses relevant facts and evidence, not its waiver of privileges.”

Federal prosecutors will not demand the disclosure of so-called Category II information as a condition for cooperation credit. Current Justice Department rules define Category II information as “non-factual attorney work-product and core attorney-client privileged communications,” excluding those made in furtherance of a crime or fraud or those that relate to an advice-of-counsel defense.

Federal prosecutors, in evaluating cooperation, won’t consider whether a company has advanced attorneys’ fees to it employees, entered into a joint defense agreement, or retained or sanctioned employees.

Legal observers say Filip’s changes are welcome, especially those relating to advancing legal fees to employees under investigation and to joint defense agreements. Opinions still differ, however, on whether his proposals go far enough to address the fundamental problem.

BACK AND FORTH

Below are Deputy Attorney General Mark Filip’s proposals to amend the McNulty Memo, and a response from Sen. Arlen Specter, ranking minority member of the Judiciary Committee, and his response.

Cooperation will be measured by the extent to which a corporation discloses relevant facts and evidence, not its waiver of privileges. The government’s key measure of cooperation will be the same for a corporation as for an individual: to what extent has the corporation timely disclosed the relevant facts about the misconduct? That will be the operative question—not whether the corporation waived attorney-client privilege or work product protection in making its disclosures.

Federal prosecutors will not demand the disclosure of “Category II” information as a condition for cooperation credit. To be eligible for cooperation credit, a corporation need not disclose, and the government may not demand, what the McNulty Memo defines as “Category II information”—namely, non-factual attorney work product and core attorney-client privileged communications. (Of course, attorney-client communications that were made in furtherance of a crime or fraud, or that relate to an advice-of-counsel defense, are excluded from the protection of the privilege by well-settled case law and will therefore continue to fall outside these principles.)

Federal prosecutors will not consider whether the corporation has advanced attorneys’ fees to its employees in evaluation cooperation. The advancement of attorneys’ fees or provision of counsel by a corporation to its employees will not be taken into account for the purpose of evaluation cooperation.

Federal prosecutors will not consider whether the corporation has entered into a joint defense agreement in evaluation cooperation. The mere participation in a joint defense, common interest, or similar agreement by a corporation will not be taken into account for the purpose of evaluation cooperation. The government may, of course, request that a corporation refrain from disclosing to others sensitive information about the investigation that the government provides in confidence to the corporation, and may consider whether the corporation has abided by that request.

Federal prosecutors will not consider whether the corporation has retained or sanctioned employees in evaluation cooperation. How and whether a corporation disciplines culpable employees may bear on the quality of its remedial measures or its compliance program; it will not be taken into account for the purpose of evaluating cooperation.

—Mark Filip

Deputy Attorney General

Source:

Deputy Attorney General Letter (July 9, 2008).

I am concerned about the delay in enacting legislation while the Department of Justice is continuing to act under the McNulty Memorandum with individuals incurring enormous attorneys’ fees including appellate litigation. The Committee’s first hearing on this issue was held on September 12, 2006 and my legislation, now S.3217, was introduced on December 8, 2006. Thereafter, there was a revision of the Thompson memorandum with the McNulty memorandum on December 12, 2006 and another hearing was held on September 18, 2007. Then on October 17, 2007, this issue was raised at the confirmation hearings of Attorney General Mukasey. As you note in the opening line of your letter, last year you committed to review the issue during your confirmation hearings which were held on December 19, 2007. When you and I discussed this matter on June 26, 2008, I pressed as to when we would have something in writing and you responded that you expected it sometime later this summer.

I note illustratively the high legal fees which have been incurred by individuals as cited in the opinion of Judge Kaplan, in United States v. Stein, 495 F.Supp.2d 390 (SDNY 2007), who said that the litigation costs among the individual defendants had already averaged $1.7 million. One defendant was cited as being “insolvent.” The costs cited by Judge Kaplan were all before trial and appellate costs, which will be much higher. The Department of Justice conceded to Judge Kaplan that $3.3 million would be “a very conservative estimate” of the average defense costs going forward, and the defendants’ lawyers cited an average expected cost of $13 million. This squares with the New York Law Journal’s report last year, which said, "[r]ecent court decisions have revealed the cost of an individual’s defense can reach as high as $20 million to $40 million.” I would be interested to know what is happening in the other cases, besides KPMG, which involve this issue and what kind of expenditures have been required of individuals who have been subjected to the implementation of the Thompson/ McNulty memoranda.

In the context of these lengthy delays and the potential prejudice which is involved in these matters, I think it is too much to ask for the legislative process to await a written revision of McNulty and then await a review of the implementation of a new memorandum for a “reasonable amount of time” which could be very long.

—Arlen Specter

United States Senate

Source:

Arlen Specter’s Response (July 9, 2008).

Mateja

“There’s no doubt the letter is a way to try to push off any legislation,” says Bill Mateja, a partner at the law firm of Fish & Richardson and a former senior counsel to deputy attorneys general Larry Thompson and James Comey. “Having said that, there are some significant proposals on the table.”

Susan Hackett, general counsel for the Association of Corporate Counsel, says she’s “impressed by the progress Deputy Attorney General Filip has made in relatively short time.” Hackett says she will withhold final judgment until she sees the full details, but “in many ways, they’ve addressed a lot of what we were asking them to. It’s very heartening.”

Mateja says the concessions on sanctions and joint defense agreements are “a huge victory for the defense bar … There has been a belief among defense lawyers that JDAs are being held against clients.” Moreover, he says, taking sanctions off the table in considering cooperation “will make big difference in the way employees cooperate with company lawyers.”

The chief complaint about the policy changes is that they only apply to the Justice Department. Most other federal agencies—particularly the Securities and Exchange Commission and the Internal Revenue Service—have the same strong-arm tactics at their disposal as the Justice Department does now; unless they change their ways too, other agencies could still wring cooperation out of a company and then share information with Justice Department prosecutors.

Hackett

“It doesn’t address the issue at any other agencies that have copycatted the department’s approach and practice on privilege,” Hackett says. Even if the Justice Department reforms its ways, she says, “one can argue that DOJ hasn’t really lost anything.”

Others worry about how long Filip’s reforms will last; the Justice Department has amended its policies for investigating corporations several times in the last few years, and a future attorney general may well reverse course again. Plus, the department has never been clear about exactly how it would enforce such policies when individual prosecutors violate it.

Absent clear legislation, Hackett says, companies that feel they are being coerced into waiving privilege can only report their prosecutor up the Justice Department’s chain of command—“just what anybody being prosecuted wants to do when that prosecutor is determining whether they’re being cooperative,” she quips.

A Need for Legislation?

Specter’s bill, the Attorney-Client Privilege Protection Act, has been rolling around Congress for two years. Support for it has been building since the Justice Department last revised its policies on corporate prosecutions in December 2006 by issuing the McNulty Memo, which is currently in force. It replaced the much-maligned Thompson Memo of 2003, often blamed as the main culprit for a “culture of waiver” among U.S. attorneys and other federal prosecutors.

Among other things, the McNulty Memo requires federal prosecutors to secure high-level approval before asking a company under investigation to waive attorney-client and work-product privilege. Filip’s letter maintains that the DoJ has been “judicious in its limited requests for waivers” and notes that in the 18 months since the principles were amended, the department has not approved any requests by prosecutors to obtain from companies attorney-client communications or non-factual attorney work products.

Despite those good intentions, however, many corporate defense lawyers say the McNulty Memo changes can’t stop prosecutors from implying that such waivers are expected without actually asking for them.

“There are a number of offices where there’s not a problem and prosecutors have never asked for privilege waivers,” Hackett says. “The problem is those folks who—whether we have a Thompson or McCallum or McNulty or Filip memo—have been their own authority.”

Another sticking point is what is not mentioned in the planned policy changes: Category I information, which includes factual information obtained by lawyers in course of an investigation, such as significant witness statements, interview memoranda, organization charts, and summaries of facts and other reports.

While Filip’s letter specifies that prosecutors won’t demand Category II information as a condition for cooperation credit, “It appears to leave alone the right to demand Category I information,” says David Furbush, head of the securities litigation practice at the law firm Pillsbury Winthrop.

Frey

That’s a problem for Jeremy Frey of the law firm Pepper Hamilton; he says those facts and their disclosure often have privilege implications. “The department’s insistence that they can avoid privilege issues by having people ‘just turn over the facts’ is way too simple and doesn’t get us there,” he says. Frey says legislation would be a better solution.

Mateja, however, maintains that Category I information shouldn’t be open to discussion. “If you want the benefit of cooperation, then you have to give something: the facts,” he says. “That’s the price you pay to get the benefit of cooperation.” Mateja says defense lawyers “need to stop whining.”

Hackett, however, says that ultimately, even in revising its policy, “The DOJ is still saying it is the arbiter of deciding when corporate attorney-client privilege rights attach or not. That’s just wrong.”

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