The McNulty Memorandum

If the company provides a detailed roadmap of corporate misconduct, the government can save thousands of investigation hours and huge travel and witness expenses. Waiver and timely corporate cooperation can also promote employee cooperation and testimony, assure comprehensive document retention, and reduce statute of limitations risks in complicated business crimes. From the corporation's short- or mid-term perspective, cooperation can reduce the disruption caused by voluminous document and employee grand jury subpoenas, unannounced interviews of employees at home, search warrants, and negative publicity. In contrast, a heavily contentious and lengthy grand jury investigation can cause enormous distraction of senior management.

In the long run, however, a wholly cooperative corporation can still face devastating criminal charges that affect thousands of innocent constituents, including shareholders, employees, creditors and suppliers. Providing critical evidence, identifying the true culprits including senior executives, and taking strong remedial actions bring no guarantee against indictment. In the case of Arthur Andersen, criminal charges filed in 2002 led to the collapse of a major accounting firm and loss of over 28,000 jobs for the misconduct of a few.

Clarification

The McNulty Memorandum, recognizing that the attorney-client privilege is 'one of the oldest and most sacrosanct privileges under U.S. law,' now makes clear that waiver of most attorney-client communications 'should only be sought in rare circumstances.' The revised DOJ policy states that prosecutors may request a corporate waiver only when they have a 'legitimate need for the privileged information to fulfill their law enforcement obligations.' Mere inconvenience or desirability is not enough. Legitimate need depends on the likelihood and degree to which the privileged information will benefit the government's investigation, whether the information can be obtained in a timely and complete fashion by using means that do not require waiver, the completeness of the voluntary disclosure already provided, and the collateral consequences to a corporation of a waiver.

Category I

The McNulty Memorandum divides information sought from the company into 'Category I' and 'Category II.' Category I is factual information relating to the underlying misconduct, including non-privileged materials such as business documents and protected work product such as witness statements and 'purely factual interview memoranda.' Before re-questing privileged information in Category I, the line prosecutor must obtain written authorization from the U.S. Attorney, who in turn must 'consult with' the Criminal Division in Washington before granting or denying the request. The request 'must particularize law enforcement's legitimate need for the particular information and identify the scope of the waiver sought.'

Category II

Category II is core privileged material ' attorney-client communications and 'non-factual attorney work product,' which obviously includes legal analysis of potential charges and defenses and counsel's mental impressions about facts and witnesses. The McNulty Memorandum says that Category II should be sought only in those 'rare circumstances' where Category I information 'provides an incomplete basis for conducting a thorough investigation.' Before prosecutors may seek Category II disclosures, they must obtain the written authorization of the Deputy Attorney General. Such authorization, however, is not required when prosecutors seek disclosure of legal advice that is the basis of an advice-of-counsel defense or lawyer-client communications made in furtherance of a crime or fraud.

The McNulty Memorandum makes clear that a corporation's response to a request for disclosure of privileged information in Category I may be considered in determining whether a corporation has cooperated in the government's investigation. Not so for Category II: if a corporation de-clines to provide Category II information, prosecutors may not consider the refusal in making a charging decision. Conversely though, prosecutors may always favorably consider a corporation's acquiescence to the government's waiver request in determining whether a corporation has cooperated.

Cooperation

Cooperation can take a wide variety of forms besides waiver of privilege, such as making witnesses available for interviews at convenient locations and working with investigators to understand complex accounting matters. Exchanges of information and assistance often follow subtle discussions with company counsel where prosecutors evoke the importance of cooperation in their charging decision. Although the McNulty Memorandum provides that voluntary offers of privileged information do not require authorization by the U. S. Attorney or Main Justice, it wisely requires that voluntary waivers be reported to the U. S. Attorney or Assistant Attorney General in the Division where the case originated. The Department should collect and evaluate voluntary waiver data annually to make sure that there is accurate reporting of corporate waivers from the 94 U.S. Attorney's offices, especially in light of the widespread perception in the defense bar that Main Justice does not fully appreciate how much prosecutors in the field have focused on the fourth Thompson factor ' voluntary disclosure and cooperation ' when dealing with corporate defense counsel.

Attorney-Client Privilege

The McNulty Memorandum brings welcome step-by-step procedures for federal prosecutors to follow to ensure that the oldest privilege at common law remains intact and respected and that corporations are not charged because they have failed a waiver litmus test. In addition to courts and Congress, preeminent legal organizations, including the American Bar Association, the American College of Trial Lawyers and the Association of Corporate Counsel, have spoken out recently on the potential erosion of the attorney-client privilege in the corporate investigation context. Those organizations along with the legislative and judicial branches should remain vigilant, monitor the government's need to invade the sacrosanct privilege and, more broadly, assess corporate plea-bargaining imbalances that can affect many innocent constituents.

Advancement of Legal Fees

Judge Kaplan's lengthy opinion in United States v. Stein focused on the Thompson Memorandum's provision regarding the advancement of legal fees by companies under investigation and the tension it created with an employee's right to counsel. After holding an evidentiary hearing that included testimony by prosecutors and KMPG counsel, Judge Kaplan held that the provision as applied violated the Fifth and Sixth Amendment rights of KPMG's employees by pressuring the firm to refuse to advance legal fees. The McNulty Memor-andum now provides that prosecutors 'generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment.' Although it expresses concern over whether corporations appear to be protecting culpable employees and agents, it notes that only in extremely rare cases will the advancement of attorneys' fees be taken into account, e.g., where the totality of the circumstances demonstrate an intent to impede a criminal investigation. A corporation's compliance with state law and contractual obligations requiring indemnification cannot be considered a failure to cooperate. The McNulty Memoran-dum, however, leaves intact the government's opposition to a corporation's 'providing information to the employees about the government's investigation pursuant to a joint defense agreement.'

The new policy will likely temper the view of some federal prosecutors that payment of an employee's legal fees or failing to fire an employee who asserts the Fifth Amendment in a criminal investigation is tantamount to corporate obstruction of justice. Although the McNulty Memoran-dum's provisions on fees offer much less guidance to prosecutors than its discussion of corporate waiver, they do require the approval of the Deputy Attorney General before a company's advancing employees' legal fees can be considered in the charging decision.

Conclusion

The McNulty Memorandum is clearly a response to the growing criticism of DOJ's recent practices. Congress, the judiciary, and the American bar have spoken out, and the DOJ has listened ' classic democracy in action. The McNulty Memorandum's clarifications and reforms will hopefully lead to increased discourse over the ultimate issue ' the questionable wisdom of charging major corporations for the misconduct of a few. Recent sentences of senior executives such as Bernard Ebbers and Jeffrey Skilling have sent an unmistakable message through corporate suites that punishment of individuals convicted of business crimes will be severe. Where a corporation has fully cooperated in the wake of wrongdoing and 'done the right thing,' there is no need for a corporate indictment that often punishes thousands of innocent shareholders and employees.

Robert W. Tarun ([email protected]), a member of this newsletter's Board of Editors, is a partner at Latham & Watkins LLP in Chicago and a former federal prosecutor.

The Department of Justice (DOJ), in the wake of increasing criticism of its policies on waiver of privileges by corporations and their advancement of legal fees to employees under investigation, issued a 21-page memorandum on Dec. 12, 2006, revising the 'Principles of Federal Prosecution of Business Corporations,' alias the Thompson Memorandum. The revised policy, embodied in a memorandum by Deputy Attorney General Paul D. McNulty, comes close on the heels of two influential attacks on the Thompson Memorandum: a bill sponsored by Sen. Arlen Specter (R-PA) that would prohibit prosecutors from pressing companies to waive privileges or cut off legal fees, and an opinion by Manhattan U. S. District Judge Lewis A. Kaplan, holding that prosecutors had violated the constitutional rights of former KPMG partners when they pressured KPMG to stop paying the ex-partners' lawyers. United States v. Stein , 435 F. Supp. 2d 330 (S.D.N.Y. 2006).

Attorney-Client and Work Product Privilege Waivers

The 2003 Thompson Memorandum listed nine criteria for federal prosecutors to consider in determining whether to charge corporations. Foremost in the minds of many prosecutors in the 94 districts across the country has been the fourth Thompson factor ' 'Cooperation and Voluntary Disclosure' ' which explicitly addressed waiver of privileges. Often the first topic raised by prosecutors with company counsel in white-collar criminal investigations is a call for the company to cooperate by handing over a privileged internal investigation report, memoranda of interviews, chronologies, and hot documents.

If the company provides a detailed roadmap of corporate misconduct, the government can save thousands of investigation hours and huge travel and witness expenses. Waiver and timely corporate cooperation can also promote employee cooperation and testimony, assure comprehensive document retention, and reduce statute of limitations risks in complicated business crimes. From the corporation's short- or mid-term perspective, cooperation can reduce the disruption caused by voluminous document and employee grand jury subpoenas, unannounced interviews of employees at home, search warrants, and negative publicity. In contrast, a heavily contentious and lengthy grand jury investigation can cause enormous distraction of senior management.

In the long run, however, a wholly cooperative corporation can still face devastating criminal charges that affect thousands of innocent constituents, including shareholders, employees, creditors and suppliers. Providing critical evidence, identifying the true culprits including senior executives, and taking strong remedial actions bring no guarantee against indictment. In the case of Arthur Andersen, criminal charges filed in 2002 led to the collapse of a major accounting firm and loss of over 28,000 jobs for the misconduct of a few.

Clarification

The McNulty Memorandum, recognizing that the attorney-client privilege is 'one of the oldest and most sacrosanct privileges under U.S. law,' now makes clear that waiver of most attorney-client communications 'should only be sought in rare circumstances.' The revised DOJ policy states that prosecutors may request a corporate waiver only when they have a 'legitimate need for the privileged information to fulfill their law enforcement obligations.' Mere inconvenience or desirability is not enough. Legitimate need depends on the likelihood and degree to which the privileged information will benefit the government's investigation, whether the information can be obtained in a timely and complete fashion by using means that do not require waiver, the completeness of the voluntary disclosure already provided, and the collateral consequences to a corporation of a waiver.

Category I

The McNulty Memorandum divides information sought from the company into 'Category I' and 'Category II.' Category I is factual information relating to the underlying misconduct, including non-privileged materials such as business documents and protected work product such as witness statements and 'purely factual interview memoranda.' Before re-questing privileged information in Category I, the line prosecutor must obtain written authorization from the U.S. Attorney, who in turn must 'consult with' the Criminal Division in Washington before granting or denying the request. The request 'must particularize law enforcement's legitimate need for the particular information and identify the scope of the waiver sought.'

Category II

Category II is core privileged material ' attorney-client communications and 'non-factual attorney work product,' which obviously includes legal analysis of potential charges and defenses and counsel's mental impressions about facts and witnesses. The McNulty Memorandum says that Category II should be sought only in those 'rare circumstances' where Category I information 'provides an incomplete basis for conducting a thorough investigation.' Before prosecutors may seek Category II disclosures, they must obtain the written authorization of the Deputy Attorney General. Such authorization, however, is not required when prosecutors seek disclosure of legal advice that is the basis of an advice-of-counsel defense or lawyer-client communications made in furtherance of a crime or fraud.

The McNulty Memorandum makes clear that a corporation's response to a request for disclosure of privileged information in Category I may be considered in determining whether a corporation has cooperated in the government's investigation. Not so for Category II: if a corporation de-clines to provide Category II information, prosecutors may not consider the refusal in making a charging decision. Conversely though, prosecutors may always favorably consider a corporation's acquiescence to the government's waiver request in determining whether a corporation has cooperated.

Cooperation

Cooperation can take a wide variety of forms besides waiver of privilege, such as making witnesses available for interviews at convenient locations and working with investigators to understand complex accounting matters. Exchanges of information and assistance often follow subtle discussions with company counsel where prosecutors evoke the importance of cooperation in their charging decision. Although the McNulty Memorandum provides that voluntary offers of privileged information do not require authorization by the U. S. Attorney or Main Justice, it wisely requires that voluntary waivers be reported to the U. S. Attorney or Assistant Attorney General in the Division where the case originated. The Department should collect and evaluate voluntary waiver data annually to make sure that there is accurate reporting of corporate waivers from the 94 U.S. Attorney's offices, especially in light of the widespread perception in the defense bar that Main Justice does not fully appreciate how much prosecutors in the field have focused on the fourth Thompson factor ' voluntary disclosure and cooperation ' when dealing with corporate defense counsel.

Attorney-Client Privilege

The McNulty Memorandum brings welcome step-by-step procedures for federal prosecutors to follow to ensure that the oldest privilege at common law remains intact and respected and that corporations are not charged because they have failed a waiver litmus test. In addition to courts and Congress, preeminent legal organizations, including the American Bar Association, the American College of Trial Lawyers and the Association of Corporate Counsel, have spoken out recently on the potential erosion of the attorney-client privilege in the corporate investigation context. Those organizations along with the legislative and judicial branches should remain vigilant, monitor the government's need to invade the sacrosanct privilege and, more broadly, assess corporate plea-bargaining imbalances that can affect many innocent constituents.

Advancement of Legal Fees

Judge Kaplan's lengthy opinion in United States v. Stein focused on the Thompson Memorandum's provision regarding the advancement of legal fees by companies under investigation and the tension it created with an employee's right to counsel. After holding an evidentiary hearing that included testimony by prosecutors and KMPG counsel, Judge Kaplan held that the provision as applied violated the Fifth and Sixth Amendment rights of KPMG's employees by pressuring the firm to refuse to advance legal fees. The McNulty Memor-andum now provides that prosecutors 'generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment.' Although it expresses concern over whether corporations appear to be protecting culpable employees and agents, it notes that only in extremely rare cases will the advancement of attorneys' fees be taken into account, e.g., where the totality of the circumstances demonstrate an intent to impede a criminal investigation. A corporation's compliance with state law and contractual obligations requiring indemnification cannot be considered a failure to cooperate. The McNulty Memoran-dum, however, leaves intact the government's opposition to a corporation's 'providing information to the employees about the government's investigation pursuant to a joint defense agreement.'

The new policy will likely temper the view of some federal prosecutors that payment of an employee's legal fees or failing to fire an employee who asserts the Fifth Amendment in a criminal investigation is tantamount to corporate obstruction of justice. Although the McNulty Memoran-dum's provisions on fees offer much less guidance to prosecutors than its discussion of corporate waiver, they do require the approval of the Deputy Attorney General before a company's advancing employees' legal fees can be considered in the charging decision.

Conclusion

The McNulty Memorandum is clearly a response to the growing criticism of DOJ's recent practices. Congress, the judiciary, and the American bar have spoken out, and the DOJ has listened ' classic democracy in action. The McNulty Memorandum's clarifications and reforms will hopefully lead to increased discourse over the ultimate issue ' the questionable wisdom of charging major corporations for the misconduct of a few. Recent sentences of senior executives such as Bernard Ebbers and Jeffrey Skilling have sent an unmistakable message through corporate suites that punishment of individuals convicted of business crimes will be severe. Where a corporation has fully cooperated in the wake of wrongdoing and 'done the right thing,' there is no need for a corporate indictment that often punishes thousands of innocent shareholders and employees.

Robert W. Tarun ([email protected]), a member of this newsletter's Board of Editors, is a partner at Latham & Watkins LLP in Chicago and a former federal prosecutor.