The Government's Evolving Position on Privilege

In October 2001, the SEC issued a report pursuant to ' 21(a) of the Securities Exchange Act of 1934 in connection with the Enforcement Division's decision not to recommend an enforcement action against the Seaboard Corporation for financial accounting fraud. The Report indicated that privilege waiver is one of the six factors the Division considers in determining how much credit to give a corporation for its self-policing efforts. Although the Seaboard Report does not state the circumstances under which waiver will be sought, the implication was that waiver may be necessary in order to avoid an SEC enforcement action. Experience in dealing with the SEC after the Seaboard Report led company lawyers to fear that waiver might be a prerequisite to receiving any type of leniency from the agency.

Two years later, in January 2003, Lawrence Thompson, the DOJ's then-Deputy Attorney General, issued a memorandum reaffirming that a corporation's decision to assert the privileges might be viewed as a lack of cooperation and could lead to prosecution. The Thompson Memo, which revised and replaced the Holder Memo, noted that when assessing a corporation's cooperation, prosecutors may look to, among other factors, “the waiver of the corporate attorney-client privilege and work-product protection.” While the memo indicated that the waiver of the privilege is only necessary in “appropriate circumstances,” it did not provide any guidance on what those might be. The decision of when to seek waiver was left to the unbridled discretion of individual prosecutors.

Requests for Confidentiality

Recognizing potential objections to their policy of demanding waivers, prosecutors and regulators have often accepted company requests for a confidentiality agreement. By entering into these agreements, a corporation hopes it will be viewed as only selectively waiving the privilege, and regulators have supported this position. For example, in its amicus curiae brief to the Ninth Circuit on behalf of the McKesson Corporation in 2004, the SEC argued: “Allowing persons to provide work product to the Commission without waiving work-product protection serves the public interest by enhancing the Commission's ability to conduct effective and expeditious investigations but does not harm private parties.” While the Ninth Circuit declined to take a clear position on selective waiver, the majority of courts have rejected it. In fact, outside the Eighth Circuit, which recognized selective waiver in Diversified v. Meredith Industries, 572 F.2d 596, 611 (8th Cir.1978), and the handful of other jurisdictions where courts have followed the Eighth Circuit, it is unlikely that a corporation's selective waiver argument will stand up to a challenge by plaintiffs in civil litigation or defendants in related criminal cases. Thus, while these agreements are helpful, corporations and their counsel should not regard them as guaranteeing that a waiver of the attorney-client privilege or work product protection will not have occurred.

In the last year, however, statements by senior officials within both the SEC Enforcement Division and the DOJ indicate that the tide may be changing. In June 2005, Peter Bresnan, who is currently Deputy Director of the SEC's Enforcement Division, stated at a conference sponsored by the Practicing Law Institute (PLI) in New York, where he was a panel speaker, that there are ways for a company to cooperate with investigators without waiving privileges, such as by providing oral recitations, factual summaries, or access to witnesses. Timothy Coleman, who was also on this PLI panel and is the senior counsel to the Deputy Attorney General, indicated that DOJ investigators will often accept notes, memos, and oral presentations in lieu of demanding waiver of the privileges.

The McCallum Memo

On Oct. 21, 2005, Acting Deputy Attorney General Robert McCallum Jr. issued a memo affirming the DOJ's policy of seeking privilege waiver under certain circumstances, but emphasized that prosecutors should exercise appropriate prosecutorial discretion in deciding whether to seek a waiver. To that end, the McCallum Memo directed all U.S. Attorneys to establish written processes requiring prosecutors to receive supervisory approval from their U.S. Attorney or component head before seeking a corporation's waiver of the attorney-client privilege and work product protection. In lieu of establishing one uniform waiver review process, the memo required the U.S. Attorneys to develop written processes for their respective districts or components. While the McCallum Memo provided some assurance that the DOJ wants to curtail the use, or abuse, of the privilege waiver and impose a heightened level of prosecutorial discretion, it failed — like the Holder and Thompson Memos — to state the circumstances under which waivers should be sought.

In November, at a luncheon program on enforcement matters sponsored by the District of Columbia Bar Association, Linda Chatman Thomsen, the Director of the SEC's Enforcement Division, stated: “I don't think, as a matter of course we are asking people to waive the attorney-client privilege … We don't ask for a waiver willy-nilly.” She added that the SEC enforcement staff first considers alternatives to seeking waiver. Her comments, together with those of Messrs. Bresnan and Coleman, suggest that the SEC and DOJ are more cognizant of the importance to a company of protecting its attorney-client privilege and work product protection.

Analysis

Although the McCallum Memo was a step in the right direction, it was disappointing in that it provided no guidance on the appropriate use of prosecutorial discretion concerning waiver requests. While the waiver review processes called for by the McCallum Memo will provide an additional check on the means by which waiver requests are made, it did not go far enough in protecting the privileges. The DOJ and SEC are trying to assure corporations that the government takes corporate privileges seriously and does not demand waiver lightly, yet practitioners are still being asked at the beginning of investigations whether the company will waive the privileges. For the recent statements by the SEC and DOJ to be more than mere rhetoric, they need to provide some substantive guidance on when waivers will be deemed necessary. Furthermore, it is imperative that the agencies take proactive steps to ensure that individual prosecutors and regulators are exercising appropriate prosecutorial discretion with respect to their waiver demands.

For now, clients should be advised to do everything possible to cooperate with a government investigation short of waiving the attorney-client privilege or work product protection. Both the DOJ and the SEC have recently indicated that corporations may be able to avoid waiving the privileges by being forthcoming in the provision of non-privileged information. For example, when representing a corporation in an SEC or DOJ investigation, the practitioner should respond to the privilege waiver request by offering alternatives, such as making key witnesses readily available and, when possible, providing the government with the underlying non-privileged substantive information contained within the sought-after privileged materials. If the pendulum continues to swing back in favor of the privileges, government demands for waiver may become rare. Meanwhile, it is up to defense counsel to convince investigators that waiver is not a prerequisite for cooperation status and to be creative in finding ways of providing the government with information without waiving the attorney-client privilege and work product protection.

As recently as 6 months ago, many commentators were proclaiming the demise of the attorney-client privilege and work product protection in the context of corporate internal investigations. It now appears that these predictions were premature. Law enforcement officials are becoming more sensitive to the legitimate reasons for protecting a corporation's ability to assert these privileges. Although, from the viewpoint of business, there's still a long way to go, companies have reason to be hopeful.

Background

A corporation's legal right to invoke the attorney-client privilege and work product protection in the context of corporate internal investigations has been well settled for decades. In the last 6 years, however, corporate privileges have come under attack by both the SEC and the Department of Justice (DOJ). In June 1999, Eric Holder, the DOJ's then-Deputy Attorney General, issued a memorandum that contained guidelines for the federal prosecution of corporations. Striking the first blow on a corporation's ability to assert the privileges, the Holder Memo identified a “corporation's willingness … to waive the attorney-client and work product privileges” as one factor to be considered in “gauging the extent of the corporation's cooperation.” While the memo did not make waiver a prerequisite for being treated as a cooperator, it clearly provided prosecutors with leverage to seek such waivers.

In October 2001, the SEC issued a report pursuant to ' 21(a) of the Securities Exchange Act of 1934 in connection with the Enforcement Division's decision not to recommend an enforcement action against the Seaboard Corporation for financial accounting fraud. The Report indicated that privilege waiver is one of the six factors the Division considers in determining how much credit to give a corporation for its self-policing efforts. Although the Seaboard Report does not state the circumstances under which waiver will be sought, the implication was that waiver may be necessary in order to avoid an SEC enforcement action. Experience in dealing with the SEC after the Seaboard Report led company lawyers to fear that waiver might be a prerequisite to receiving any type of leniency from the agency.

Two years later, in January 2003, Lawrence Thompson, the DOJ's then-Deputy Attorney General, issued a memorandum reaffirming that a corporation's decision to assert the privileges might be viewed as a lack of cooperation and could lead to prosecution. The Thompson Memo, which revised and replaced the Holder Memo, noted that when assessing a corporation's cooperation, prosecutors may look to, among other factors, “the waiver of the corporate attorney-client privilege and work-product protection.” While the memo indicated that the waiver of the privilege is only necessary in “appropriate circumstances,” it did not provide any guidance on what those might be. The decision of when to seek waiver was left to the unbridled discretion of individual prosecutors.

Requests for Confidentiality

Recognizing potential objections to their policy of demanding waivers, prosecutors and regulators have often accepted company requests for a confidentiality agreement. By entering into these agreements, a corporation hopes it will be viewed as only selectively waiving the privilege, and regulators have supported this position. For example, in its amicus curiae brief to the Ninth Circuit on behalf of the McKesson Corporation in 2004, the SEC argued: “Allowing persons to provide work product to the Commission without waiving work-product protection serves the public interest by enhancing the Commission's ability to conduct effective and expeditious investigations but does not harm private parties.” While the Ninth Circuit declined to take a clear position on selective waiver, the majority of courts have rejected it. In fact, outside the Eighth Circuit, which recognized selective waiver in Diversified v. Meredith Industries , 572 F.2d 596, 611 (8th Cir.1978), and the handful of other jurisdictions where courts have followed the Eighth Circuit, it is unlikely that a corporation's selective waiver argument will stand up to a challenge by plaintiffs in civil litigation or defendants in related criminal cases. Thus, while these agreements are helpful, corporations and their counsel should not regard them as guaranteeing that a waiver of the attorney-client privilege or work product protection will not have occurred.

In the last year, however, statements by senior officials within both the SEC Enforcement Division and the DOJ indicate that the tide may be changing. In June 2005, Peter Bresnan, who is currently Deputy Director of the SEC's Enforcement Division, stated at a conference sponsored by the Practicing Law Institute (PLI) in New York, where he was a panel speaker, that there are ways for a company to cooperate with investigators without waiving privileges, such as by providing oral recitations, factual summaries, or access to witnesses. Timothy Coleman, who was also on this PLI panel and is the senior counsel to the Deputy Attorney General, indicated that DOJ investigators will often accept notes, memos, and oral presentations in lieu of demanding waiver of the privileges.

The McCallum Memo

On Oct. 21, 2005, Acting Deputy Attorney General Robert McCallum Jr. issued a memo affirming the DOJ's policy of seeking privilege waiver under certain circumstances, but emphasized that prosecutors should exercise appropriate prosecutorial discretion in deciding whether to seek a waiver. To that end, the McCallum Memo directed all U.S. Attorneys to establish written processes requiring prosecutors to receive supervisory approval from their U.S. Attorney or component head before seeking a corporation's waiver of the attorney-client privilege and work product protection. In lieu of establishing one uniform waiver review process, the memo required the U.S. Attorneys to develop written processes for their respective districts or components. While the McCallum Memo provided some assurance that the DOJ wants to curtail the use, or abuse, of the privilege waiver and impose a heightened level of prosecutorial discretion, it failed — like the Holder and Thompson Memos — to state the circumstances under which waivers should be sought.

In November, at a luncheon program on enforcement matters sponsored by the District of Columbia Bar Association, Linda Chatman Thomsen, the Director of the SEC's Enforcement Division, stated: “I don't think, as a matter of course we are asking people to waive the attorney-client privilege … We don't ask for a waiver willy-nilly.” She added that the SEC enforcement staff first considers alternatives to seeking waiver. Her comments, together with those of Messrs. Bresnan and Coleman, suggest that the SEC and DOJ are more cognizant of the importance to a company of protecting its attorney-client privilege and work product protection.

Analysis

Although the McCallum Memo was a step in the right direction, it was disappointing in that it provided no guidance on the appropriate use of prosecutorial discretion concerning waiver requests. While the waiver review processes called for by the McCallum Memo will provide an additional check on the means by which waiver requests are made, it did not go far enough in protecting the privileges. The DOJ and SEC are trying to assure corporations that the government takes corporate privileges seriously and does not demand waiver lightly, yet practitioners are still being asked at the beginning of investigations whether the company will waive the privileges. For the recent statements by the SEC and DOJ to be more than mere rhetoric, they need to provide some substantive guidance on when waivers will be deemed necessary. Furthermore, it is imperative that the agencies take proactive steps to ensure that individual prosecutors and regulators are exercising appropriate prosecutorial discretion with respect to their waiver demands.

For now, clients should be advised to do everything possible to cooperate with a government investigation short of waiving the attorney-client privilege or work product protection. Both the DOJ and the SEC have recently indicated that corporations may be able to avoid waiving the privileges by being forthcoming in the provision of non-privileged information. For example, when representing a corporation in an SEC or DOJ investigation, the practitioner should respond to the privilege waiver request by offering alternatives, such as making key witnesses readily available and, when possible, providing the government with the underlying non-privileged substantive information contained within the sought-after privileged materials. If the pendulum continues to swing back in favor of the privileges, government demands for waiver may become rare. Meanwhile, it is up to defense counsel to convince investigators that waiver is not a prerequisite for cooperation status and to be creative in finding ways of providing the government with information without waiving the attorney-client privilege and work product protection.