The perception that a “culture of waiver” has permeated the ranks of federal prosecutors has triggered a full-scale push back, prompting proposed federal legislation that would block the Department of Justice from routinely seeking materials protected by attorney-client privilege or work product doctrines.
A bill introduced by Sen. Arlen Specter in December 2006 and re-filed earlier this month, would also prohibit sanctions against corporations that advance attorneys’ fees to their employees, or enter into joint defense or information-sharing agreements with other defendants.
And in the face of the rising political heat, Deputy Attorney General Paul J. McNulty last month announced a new DOJ policy that could lessen routine requests for waiver as a condition of “cooperation” in an investigation.
But the policy was widely panned as not going far enough. Bar leaders and trade associations will continue to push for legislation in 2007.
The Specter measure is aimed at prosecutorial tactics that have drawn the ire of corporate counsel, who have been caught in the crossfire between the DOJ and more than 1,100 white-collar defendants convicted since 2002.
Some prosecutors have “rolled” lawyers by putting them at risk of indictment for non-disclosure of privileged information, observed Susan Hackett, general counsel at the Association of Corporate Counsel.
“This is a much bigger problem than we thought,” said Hackett, pointing to results of a recent ACC survey of in-house counsel. The ACC was flooded with a record number of responses to the survey on this issue, according to Hackett.
“A number of responses made it clear that the government had threatened to add lawyers to the defendant line [in the complaint] for obstruction if [privileged] information was not provided,” she said.
It’s also an ethical conundrum for general counsel, according to Massachusetts attorney James S. Bolan. “In the absence of this legislation, in-house lawyers have exposure to indictment for non-disclosure, while [at the same time] they also face disciplinary rules for disclosure,” said Bolan, a partner at Brecher, Wyner, Simons, Fox & Bolan.
“Lawyer obligations of confidentiality are [generally] broader than privilege under ethical rules,” he added.
Specter’s office declined comment on whether his legislation would be re-introduced, citing the need to review a reformulation of DOJ policy announced by Deputy Attorney General Paul J. McNulty just five days after introduction of the bill in December.
The McNulty memorandum – which replaces the controversial Thompson memorandum – states that “prosecutors generally should not take into account whether a corporation is advancing attorneys’ fees” in assessing a target’s cooperation.
The memo also states McNulty would personally approve the pursuit of attorney-client communications or work product only when enumerated standards of “legitimate need” are met. The memo mandates that prosecutors should first consider “alternative means” for gathering privileged information.
However, the McNulty memo cautions that “corporate counsels play a quasi-public role, not because they are an arm of the prosecutor, but because they are acting on behalf of [public] investors.”
Lawyers expressed concern that McNulty has left open too many exceptions for seeking privileged materials.
“An uncertain privilege is no privilege at all because it leaves a chill on employees and senior management working with counsel,” said R. William Ide III of Atlanta-based McKenna Long & Aldridge, who headed an American Bar Association task force studying privilege-related problems.
William D. Johnston of Delaware’s Young Conaway Stargatt & Taylor agreed.
“My concern in looking at the fine print is whether one hand has given what the other has taken away,” he said. “I anticipate a strong push for legislation in 2007 that will remove all carve-outs to the rights of privilege and payment for legal counsel.”
The Specter bill, a bibliography of relevant materials and information about the ACC survey, can be found at www.acc.com. The McNulty memo and official comments can be found at www.usdoj.gov.
The evolution of infringement
While recent events have shined a spotlight on current tactics used by the DOJ, corporate defendants have faced a cloud of complex threats that have mushroomed over the years. (See sidebar “Changing Times – Growing Perils” below.)
“Prosecutors have been going after privileged information and work product for many years, but the pressure tactics have increased over time,” said Thomas Cranmer of Michigan-based Miller Canfield and past president of the Michigan State Bar.
Johnston agreed, adding that the pressure was turned up by a growing trend of “statutory and regulatory criminalization of corporate behaviors” with benefits for the inducement of self-policing and self-reporting that could compromise individual rights.
Some experts see the root of current problems in 1990s U.S. Sentencing Commission guidelines, which rewarded companies for waiving privilege as part of a “carrots and sticks” program to encourage compliance. Prosecutors then increasingly pointed to that language in negotiating pre-charge bargaining agreements.
The ACC and other interest groups last year successfully persuaded the Sentencing Commission to repeal the waiver language from the sentencing guidelines.
The waiver of privilege and release of work product have been increasingly sought at the start of a case, noted Hackett of the ACC. “The vast majority of companies settle before any sentencing, but the sentencing guidelines clearly go into the calculus of a settlement,” she said.
And, according to Ide, “Enron brought about a practical change in culture because Larry Thompson was concerned about companies hijacked by rogues who abused claims of privilege to hide criminal conduct.” He asserted that “a culture of waiver” now exists at DOJ, which has caused “an erosion of any privilege in the name of getting bad guys.”
Peter H. Lawson, a lawyer-lobbyist and congressional affairs director for the U.S. Chamber of Commerce, affirmed that the fall of Arthur Andersen after its indictment in the Enron fiasco emboldened prosecutors.
“The threat of indictment became a hammer that prosecutors used to get companies to waive privilege,” said Lawson, a former Arthur Andersen employee.
The threat has topped the radar screens for CEOs and general counsel. “It is amazing how many of them contacted us about this,” said Lawson, noting that “in-house counsel don’t know whether to speak freely with employees in the face of having to turn everything over during an investigation.”
That is not the only negative effect on compliance efforts, according to Ide, who often handles investigations for audit committees and boards.
“People are clamming up during [routine] investigations by the lawyers,” he said.
Hackett said the ACC survey showed that “people want the government out of the waiver business altogether” because of its negative impact on compliance efforts.
The McNulty memo
In remarks made with the introduction of his memorandum, McNulty reminded listeners of “the wild excesses of corporate executives” that took place for years while “employees, lawyers and accountants either sat back and said nothing or saw their concerns swept aside.”
He acknowledged that protection of privilege is essential to encourage self-detection and remedy of wrongdoing, but disputed accusations that the DOJ has followed a practice of demanding blanket waivers as an essential measure of cooperation.
“My policy now makes clear that attorney-client communications should only be sought in rare cases,” McNulty said, pointing to provisions that require submission of a “legitimate need” analysis to top-level prosecutors based in Washington, D.C.
This analysis must address (i) the benefits of getting privileged information; (ii) any alternative means of getting the information, (iii) the completeness of previous disclosures, and (iv) the collateral consequences of a waiver.
The memo also institutes a two-tier approach toward seeking the “least intrusive” work product prior to assessing need for any attorney-client communications, but the failure to disclose “illegal conduct known to the corporation” could constitute obstruction.
The memo did not change the policy of considering joint defense agreements and other defense tactics in assessing “cooperation,” and it notes that charging factors may still include “timely … disclosure of wrongdoing” and “willingness to cooperate in the investigation of its agents.”
As a result, attorneys expressed concern the new DOJ policy isn’t that much different.
“McNulty was a step in the right direction, but it didn’t go far enough,” said Cranmer, who predicted the government would still go after work product of counsel because “the government wants a Reader’s Digest version of the facts that gives them a road map for their case.”
Johnston highlighted the memo’s division of work product and privileged communications into different categories. “It seems like the Category II information [counsel’s impressions and communications] is getting a higher level of protection than purely factual information under Category I [work product],” he said.
Hackett criticized the McNulty memo as “confusing and disturbing, because it looks like they’re moving to a standard where attorney-client privilege gets higher protection than work product. That’s terrible because waiver of work product is potentially more serious.”
Lawson suggested that the “legitimate need” test for seeking waivers would be short-circuited by the implicit pressure that is now there for counsel to “offer up waiver” as a means to avoid indictment.
Centralizing the approval process for seeking privilege waivers may just be “a due process finesse and whitewash,” observed Bolan, who also noted there would be no remedy if the DOJ fails to follow the revised policy.
While most observers were otherwise pleased with the pronouncement that advancement of attorneys’ fees would be generally permissible, Johnston expressed concern: “Footnote 3 [of the McNulty memo] shows that advancement of fees may be taken into account if used to impede a criminal investigation. We don’t know what that means, and I found it strange that the only explanation is by reference to a brief [filed in U.S. v. Smith and Watson, No. 06-3999 (2d Cir. Nov. 6, 2006)].”
Legislative solution in the offing?
Lawyers agreed that pressure for a legislative solution would likely mount after scrutiny of the McNulty memo.
“McNulty is not a real change … [and] there was unanimous condemnation of the policy regarding waivers by the Senate Judiciary Committee, a body that is rarely unanimous on anything,” Lawson asserted. He also called attention to the fact that McNulty still penalizes joint defense work and information sharing, while Specter’s proposal would protect those tactics as legitimate defense efforts.
“A legislative solution is necessary to make sure that the protection [for work product and privilege] is absolute,” said Hackett, adding it would “regulate all government enforcement and prosecutorial agents, including those in the SEC, DOL, EPA, IRS and others.”
The Specter bill expressly prohibits any agent of the government from demanding or in any way seeking materials protected by work product doctrine or attorney-client privilege. It also bars the government from any consideration of employee terminations or advancement of attorneys’ fees in charging decisions or cooperation measurement.
But the bill also preserves the right of a corporation to make a “voluntary and unsolicited offer” to share protected materials, and that has some observers concerned.
“The pressure will still be there to score points with a voluntary waiver, [and] it is a good open question whether the [legislation] will be enough to change the culture of waiver,” said Cranmer.
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Changing Times – Growing Perils
Corporate advocates point to a number of sources for the growing pressures to surrender privileged information and work product, and to abandon the advancement of attorneys’ fees to individuals. They say legislation is necessary to deflect attacks against privileged information and rights to counsel that have come from multiple angles over the years. Based on feedback from advocates, the time-line of mounting concerns includes:
1990s: The U.S. Sentencing Commission – a group of leading judges, advocates and academics – devised a series of “carrots” and “sticks” to be considered in assessing a corporate defendant’s “culpability score” for sentencing purposes. The theory was that companies could be induced into self-policing, self-reporting and remediation of wrongdoing. Some of these carrots and sticks would later be used by prosecutors to encourage companies to waive their rights or cut off support for alleged “wrongdoers.”
1999: The Holder Memorandum was released by then-U.S. Deputy Attorney General Eric Holder. While the memo was not binding on local U.S. attorneys, it exhorted them to consider a company’s “willingness to cooperate in the investigation of its agents” in deciding how to charge a case. A list of other charging factors included payment of attorneys’ fees to culpable individuals.
2000: In commentary and notes, the Sentencing Commission urged consideration of a corporation’s waiver of attorney-client and work product protections for possible reduction of a corporate defendant’s culpability score.
2001: The Securities Exchange Commission issued the Seaboard Memorandum, which encouraged investigators and prosecutors to consider voluntary waivers in assessing cooperation. The memo also rewarded other factors related to self-policing, self-reporting and self-remediation of legal violations.
2002: In the wake of many Enron-size corporate scandals, Sarbanes-Oxley legislation created a regulatory labyrinth of self-auditing controls and reporting procedures. It also sanctioned certain kinds of “non-cooperation” with government action, and authorized temporary asset freezes that can cripple a company, along with stiff penalties against officers and directors allegedly involved in wrongdoing.
2003: The Thompson Memorandum was released by then-U.S. Deputy Attorney General Larry D. Thompson, essentially making it mandatory for local attorneys to consider the indicia of cooperation recited in Holder as part of their “charging factors.” A growing number of corporate defendants began to complain that they were threatened with “the death penalty” of indictment in order to obtain privileged information or work product that will lessen their culpability scores. They also complained that the government wanted them to throw individual suspects “under the bus” by not paying their legal fees.
2006: U.S. District Court Judge Lewis A. Kaplan of the Southern District of New York held that the government violated the 5th Amendment rights to trial and 6th Amendment rights to counsel of certain KPMG employees in a tax fraud investigation, calling into question the legal propriety of the Thompson Memorandum.