On December 12, 2006, after a growing chorus of criticism from the bar, the bench and the business community, and under the threat of legislative intervention, the U.S. Department of Justice (DOJ) revised its guidelines for measuring cooperation from corporations during an investigation and for deciding whether to bring charges against them. While some welcome the revisions as much needed sea-change in DOJ policy, others view it as only a slight shift of the sands. One thing is clear: the revisions have practical implications for corporations and their counsel who find themselves in the crosshairs of a government investigation.
The issue of corporate cooperation has been one of the key issues in white-collar criminal defense and internal investigations over the past two decades. One of the hardest decisions general counsel must make in advising clients is how to assess the costs and benefits of such cooperation. The recent policy shift by the DOJ underscores the need for very careful assessment of these issues.
In 1999, then-U.S. Deputy Attorney General Eric Holder, Jr. issued a memorandum (the Holder Memorandum) to all federal prosecutors suggesting numerous factors to consider in deciding whether to bring charges against a corporation. The underlying purpose of the memorandum was to incentivize corporate cooperation with the government during an investigation and to provide prosecutors with a yardstick by which to measure the extent of cooperation in deciding whether to bring charges.
In 2003, in the midst of Enron and other high-profile corporate prosecutions, the Department of Justice took a decidedly more assertive stance, when then-U.S. Deputy Attorney General Larry D. Thompson issued a memorandum (the Thompson Memorandum) that mandated, rather than permitted, prosecutors to consider the factors initially set forth in the Holder Memorandum when they decide how to proceed against a corporation.
Two of the factors the Thompson Memorandum required prosecutors to consider were whether the corporation under investigation assisted the government’s investigation by waiving attorney-client privilege/work product protections and whether the corporation advanced the attorneys’ fees of culpable employees. It was these two factors that prompted the harshest criticism from all corners of the legal and business communities.
Additional events further highlighted the tension between the Department of Justice and the interested public. In 2006, a federal district court in Manhattan sharply rebuked the government for unduly aggressive tactics in seeking to prevent KPMG International, under investigation for allegedly structuring illegal tax shelters, from advancing attorneys’ fees to witnesses the government deemed uncooperative. Also in 2006, Senator Arlen Specter, then-outgoing chairman of the Senate Judiciary Committee, introduced legislation to prohibit federal prosecutors from considering whether a corporation waived attorney-client privilege and advanced legal fees to employees. The American Bar Association also had been actively expressing its disagreement with DOJ policy.
The McNulty Memorandum
Against this backdrop of widespread disapproval and legislative intervention, on December 12, 2006, Deputy Attorney General Paul McNulty issued a new memorandum (the McNulty Memorandum) curtailing and softening the inflammatory guidance set forth in the prior two memoranda.
New Guidelines on Attorney-client Privilege and Work Product Protections
In terms of its philosophy, the McNulty Memorandum ostensibly seeks to reassure the public that DOJ appreciates the fundamental role of attorney-client privilege in the United States’ legal tradition and its importance for the candid and confidential exchange of communications between corporations and their counsel. It acknowledges that prior DOJ policies may have had the unintended effect of discouraging that practice. Specifically addressing attorney-client privilege and work product doctrine, the memorandum reiterates that it is "one of the oldest and most sacrosanct privileges under U.S. law. . .[the purpose of which] is to encourage full and frank communications between attorneys and their clients . . ." Accordingly, the McNulty Memorandum states that waiver of attorney-client privilege is not a prerequisite to finding that a company has cooperated in a government investigation. Nevertheless, the memorandum does make clear its preference for waiver by positing that it helps expedite a government investigation and provides a mechanism to verify the "completeness and accuracy" of a corporation’s voluntary disclosures.
In terms of its new procedural requirements, the McNulty Memorandum mandates that "prosecutors may only request a waiver of attorney-client privilege or work product protections when there is a legitimate need for privileged information to fulfill their law enforcement obligations. A legitimate need for the information is not established by concluding it is merely desirable or convenient." Whether there is a legitimate need depends on the following factors:
- 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
- The collateral consequences to a corporation of a waiver
The McNulty Memorandum then divides attorney-client privileged material into two categories, which it labels "Category I" and "Category II." Category I material is purely factual and includes "copies of key documents, witness statements, or purely factual interview memoranda regarding the underlying misconduct, organization charts created by company counsel, factual chronologies, factual summaries, or reports (or portions thereof) containing investigative facts documented by counsel." Also included in this category, which may be of particular interest to general counsel, is legal advice contemporaneous to the underlying misconduct when the corporation was relying upon it.
For a prosecutor to request that the corporation waive privilege as to Category I material, the prosecutor first "must obtain written authorization from the United States Attorney, who must provide a copy of the request to, and consult with, the Assistant Attorney General for the Criminal Division before granting or denying the request." Importantly, if the request is authorized, the corporation’s response to the request may be considered in determining whether a corporation has cooperated in the government’s investigation.
Category II material includes attorney-client communications and non-factual work product, including legal advice given to the corporation before, during and after the misconduct occurred. This category of material may include "the production of attorney notes, memoranda or reports (or portions thereof) containing counsel’s mental impressions and conclusions, legal determinations reached as a result of an internal investigation, or legal advice given to the corporation."
The standards for requesting Category II materials are much higher: it can be requested only if the production of Category I material "provides an incomplete basis to conduct a thorough investigation," "only in rare circumstances" and only after the U.S. Attorney has obtained written authorization from the Deputy Attorney General, the second highest ranking official within DOJ. Significantly, if a corporation declines to provide Category II material, a prosecutor must not consider that declination in making a charging decision. However, a prosecutor may favorably consider a corporation’s acquiescence to the government’s request.
New Guidelines on Advancing Attorneys’ Fees to Employees
Whether a corporation is shielding its culpable employees in a way that impedes the government’s investigation remains as relevant and available a consideration for prosecutors today as ever. However, under the McNulty Memorandum, merely advancing attorneys’ fees to culpable employees will not be construed as such a shield. Now, prosecutors are advised that they "generally should not take into account" whether a corporation is advancing attorneys’ fees. Accordingly, whereas corporate general counsel and outside counsel previously were often concerned with whether the law of the state of incorporation, the law of the jurisdiction in which the corporation operated, or the company’s bylaws and employment contracts justified (or required) the advancement of attorneys’ fees, this is generally no longer necessary. In extremely rare cases, prosecutors still may consider advancement of attorneys’ fees, but only when the totality of the corporation’s conduct otherwise indicates an attempt to impede the government’s investigation. Prosecutors may still inquire about attorneys’ fee arrangements to assess other relevant legal issues, such as conflict-of-interest.
Moving Forward under the McNulty Memorandum
The long-term effect of the McNulty Memorandum will depend on both the Department of Justice’s subsequent interpretation and implementation of the memorandum as well as the behavior of corporations and their counsel under investigation. On the DOJ side of the equation, it remains an open question how the department will determine when a prosecutor has set forth a legitimate need for a privilege waiver. It will depend also on the readiness of U.S. Attorneys to spend political capital at the department asking for approval. On the other side of the equation, how corporations and their counsel act in the aggregate may also shape the impact of the memorandum. For instance, if corporations are consistently quick to voluntarily waive privileges and withhold attorneys’ fees in an effort to distinguish themselves from their peers, such behavior may produce a paradox where ultimately the only corporations that do distinguish themselves do so negatively by maintaining privilege and advancing attorneys’ fees. Accordingly, one of most important things that attorneys and their clients can do is to pay attention to the emerging trends. The bar and business community should continue to encourage the exchange of information and report on trends in these areas.
In the short term, corporations should anticipate continuing government requests for privilege waivers, though perhaps to a lesser degree, and be mindful that acquiescence to such requests will continue to be viewed favorably. However, at least with respect to Category II material, the corporation can take a slightly less risk-adverse view of its cost-benefit analysis when determining whether to acquiesce to a government request for waiver because the government may not negatively view the corporation’s refusal to do so.
Further, corporations conducting internal investigations should also be mindful of the department’s new multi-tiered view of privileged material—Category I and Category II—and should be tactical in carrying out their investigations. A corporation’s cooperation by producing one category of material while still maintaining privilege over the other category may prove significant. The manner in which the internal investigation is conducted may enable counsel to make a more persuasive and defendable case to the prosecutor about what category of material is implicated by a request for waiver, thus giving the corporation more flexibility and control over its waiver.
The least ambiguous shift from the old memoranda to the McNulty Memorandum is with respect to advancement of attorneys’ fees to employees. Here, it is evident that in most cases corporations may advance attorneys’ fees to their employees without fear of retribution (although joint defense agreements with culpable employees and other obstructive behavior remains problematic). Only in extremely rare circumstances will the mere advancement of attorneys’ fees pose a risk to the corporation.
While the rules appear to have changed, the overall game remains the same. The McNulty Memorandum is not a retreat from DOJ’s desire to obtain full and valuable cooperation from corporations under investigation. This remains a primary objective of DOJ in these matters, and it will continue to use the revised factors discussed here, as well as the numerous factors not affected by the new memorandum, in making its charging decisions.
Successfully guiding a corporation through a government investigation remains a delicate and complex undertaking. Intelligent advice from informed counsel and clients’ awareness of the implications of their decisions will continue to minimize the threat from a government investigation and allow a corporation to get back to the business of its business.