U.S. Sentencing Panel Rethinks Waiver Policy

Escalating opposition to government demands that corporations waive the attorney-client privilege or risk being labeled “uncooperative” may be starting to make headway, experts tell Compliance Week.

The Securities and Exchange Commission and the Department of Justice have been roundly criticized by groups as diverse as the U.S. Chamber of Commerce, the criminal defense bar and the Association of Corporate Counsel for creating a “culture of waiver” in which companies believe they are being strong-armed into handing over otherwise-privileged information.

Now, the U.S. Sentencing Commission is considering modifying commentary to the Sentencing Guidelines that makes waiver of the attorney-client privilege and attorney-work product a factor in determining whether a business is cooperative and entitled to leniency. Comments on the proposal to amend the Sentencing Guidelines are due this week.

Bessette

“There’s a growing push-back,” says Paul Bessette, a partner with Akin Gump Strauss Hauer & Field. Amending the Sentencing Guidelines “is a good idea, definitely. It will give companies a little more flexibility—though I don’t know if it will change, necessarily, how the DoJ looks at things.”

Sarah Duggin, a law professor at Catholic University, says “if the Sentencing Commission redefines cooperation, that’s the first step in saying that waiver of the attorney-client privilege will not be a factor in determining corporate cooperation. It sets the stage for a rollback.”

Duggin

Duggin, a former corporate counsel for Amtrak, says the Sentencing Guidelines “have an impact that goes beyond sentencing itself. The Sentencing Commission seems to be taking this issue very seriously and I think there’s a substantial chance there will be a change.”

‘Pipeline To Prosecutors’

The opposition to forced waivers of privileged material is based in part on concerns that corporate lawyers will not be able to do their jobs properly if their actions and advice are going to be scrutinized by the government.

“It’s hard enough to do your job when you’re a lawyer in a company,” Duggin says. “When you’re put in a position of being almost as a double agent—of becoming a pipeline to prosecutors—people are going to be far less willing to talk to you. If that’s the case, how can you counsel them?”

Sullivan

William Sullivan, who worked as a federal prosecutor for more than a decade, says the government’s policy of demanding waivers “puts corporations in an untenable position on a number of fronts.” Companies “will not be in the best position to self-police” if their lawyers are “viewed by employees as adjunct government officials,” says Sullivan, now a partner with Winston & Strawn.

Sullivan testified March 7 before the U.S. House Judiciary Committee concerning the DoJ’s policies regarding corporate waivers of the attorney-client privilege and work-product doctrine. “Across the country there are dozens of corporations scrutinized in internal investigations at any one time, with real consequences for real people,” Sullivan told the Judiciary Committee at the hearing on the Sentencing Guidelines.

One of the consequences that worries corporations is that privileged material will ultimately wind up in the hands of plaintiffs’ lawyers. That’s because most courts have held that, once the privilege is waived with respect to the SEC or DoJ, it is waived with respect to everyone.

Stewart

“There’s a real concern that these plaintiffs lawyers are now going to get you,” says Michael Stewart, a former SEC regional administrator and ex-corporate counsel with Merrill Lynch. Stewart, now of counsel with Winstead Sechrest & Minick, notes that waivers are probably not even necessary to the government investigation in most instances.

“The situations where the SEC or DoJ actually knows that the information would be critical or very important would seem to be very rare,” he says.

Willingness To Listen

In addition to the attempt to revise the Sentencing Guidelines, opponents of the government’s waiver policies are heartened by a willingness from the SEC and DoJ to listen, and respond, to complaints from corporations and lawyers groups.

EXCERPT

Comments On Waiver Use From The U.S. Chamber Of Commerce:

Members of the SEC Enforcement staff repeatedly have stated that a waiver of privilege is not required for a corporation to obtain credit for cooperating, and that failure to waive will not be held against parties. No matter what is being said publicly, corporations feel pressure to waive privilege in SEC and parallel criminal investigations. Concern was expressed that the benefits of the attorney-client privilege are being eroded due to this pressure. For example, in an April 2005 survey by the Association of Corporate Counsel, of 719 respondents, 30 percent of inside counsel respondents and 40 percent of outside counsel respondents said they experienced an erosion of the attorney-client privilege that was “significantly more burdensome than prosecutors and others in government oversight positions have suggested exists.”

This pressure to waive privilege is felt with regard not only to the results of an ongoing internal investigation, but also with regard to past attorney-client communications. One result of the pressure to waive privilege on such matters is possibly to increase reluctance on the part of corporate employees to seek advice from company counsel. Such reluctance may in fact lead to a greater incidence of violations. Employees who may be less likely to inquire into the propriety of an act because of the (correctly) perceived non-confidential nature of the inquiry may choose instead to proceed with conduct that otherwise would have been curtailed through prospective advice by company counsel. The ABA Presidential Task Force on Attorney-Client Privilege expressed the same concerns in its recent report and recommendations.

Finally, waivers pursuant to attempts to cooperate with the staff usually give rise to waivers in private litigation, which often accompany SEC investigations. Although some courts have reasoned that providing the SEC or Department of Justice with otherwise privileged information will not necessarily create a waiver as to private litigants, most courts considering the issue have held that a waiver before a government agency constitutes a waiver as to other private parties. Interviewees generally expressed concern over the adverse effects that the pressure to waive has on the course and settlement of private litigation.

Source

Report On Current Enforcement Program Of The SEC (U.S. Chamber of Commerce; March 2006)

“The government itself seems to be moderating more,” says Paul Edwards of law firm McDonald Hopkins. “There’s been some policy improvement by the government agencies.” He notes that the DoJ last fall issued a directive requiring federal prosecutors to create a review process for supervisory approval of requests for companies to waive the attorney-client privilege and work-product protection.

Plotkin

Jeffrey Plotkin, a partner with Pitney Harden and a former attorney with the SEC’s New York office, says the Justice Department has been “really driving the bus” when it comes to demanding corporate waivers. “You see [the issue] coming more out of the U.S. Attorney’s offices than the SEC’s offices,” he says, noting that many cases involve parallel civil and criminal investigations.

Although it would “be very hard for the U.S. attorneys offices and the SEC to give up this rather convenient methodology to shortcut their need to do a thorough investigation,” Plotkin says there has been “some reaction and softening the tone” from the government.

Sullivan says that the SEC, “to its credit,” has supported legislation that would allow companies to waive the attorney-client privilege in a limited fashion, so it could not be used in private securities litigation. The legislation, which Sullivan calls a “best-worst alternative,” has twice died in Congress.

The U.S. Chamber of Commerce has taken a less charitable view of the SEC’s conduct concerning waivers. Earlier this month it issued a 44-page report that scorched the Commission’s enforcement efforts, including its pressuring of companies to waive privileges. SEC Chairman Christopher Cox has not responded formally to the Chamber’s report, but told the Reuters news service that the SEC would review the Chamber’s recommendations. SEC spokesmen also declined further comment for this story.

ABA: Talks ‘Productive’

Hazen

The American Bar Association has been one of the most vocal voices in opposing the government’s efforts to force waivers of the attorney-client privilege and work-product doctrine. Steven Hazen, who serves as an adviser to the ABA Task Force for Attorney-Client Privilege, says talks with the SEC and DoJ “have been productive.”

According to Hazen, who practices with the law firm Davis Wright Tremaine, it’s “well-established that there has been a significant increase in the number of requests for waivers” by the federal government in recent years. “It’s a pretty pervasive issue,” he says.

Hazen says that the ABA Task Force is scheduled to meet again with DoJ officials on March 30 and is preparing to making recommendations. “Our position will be, ‘This is what is wrong and this is what you have to do to fix it’.”

Amending the Sentencing Guidelines would be an important step, Hazen says, but he notes that not punishing companies that don’t waive the attorney-client privilege is only part of the equation. “You need to take care of the flip side as well,” he says. “You cannot give people special credit for having waived the privilege. As long as special credit is given for having to do so, it’s a pretty powerful tool” for the government.

Although changing DoJ policy may not be easy, Hazen says he is hopeful. “I suppose it depends on whether we’re looking at an aircraft carrier or a huge number of small boats that just looks like an aircraft carrier,” Hazen says. “The DOJ looks like an aircraft carrier—and, if so, it’s difficult to get changes in momentum in short order. But the closer you look, the more the DoJ looks like a collection of small boats. If that’s the case, and if you can get the main mast moving in the right direction, you can get the whole thing turning in the right direction.”