Deferred Prosecution Agreements and Privileged Documents

KPMG LLP signed a DPA in August 2005, after months of meetings with the U.S. Attorney's Office during its investigation of alleged abusive tax shelters. The DPA included standard language requiring KPMG to provide documents the government requested and to waive privilege with respect to them (except for a handful of specific carve-outs). The DPA expressly stated that the parties did not intend to waive KPMG's privilege as to third parties. (The KPMG DPA is available at: www.usdoj.gov/usao/nys/pressreleases/August05/kpmgdpagmt.pdf.)

Several former partners of KPMG were eventually charged with tax evasion and conspiracy to defraud the IRS. Prior to trial and pursuant to Rule 17 of the Federal Rules of Criminal Procedure, they asked the court to issue a subpoena to KPMG for certain documents, several of which were arguably privileged. The list included, for example, KPMG attorney notes of meetings with the government as well as attorney drafts of the proposed statement of facts to be incorporated in the DPA. Under the seminal case of U.S. v. Nixon, 418 U.S. 683 (1974), in order for such a pre-trial subpoena to issue, the defendants had to establish that the documents were relevant, admissible and specific, were requested in good faith, and could not be obtained before trial by some other avenue. The defendants also had to establish that they needed the documents to prepare for trial. The KPMG defendants may have had trouble meeting this tough standard.

Judge Kaplan, therefore, suggested an alternative route: the defendants could seek the documents under Rule 16, which requires the government to produce before trial any documents 'within the government's possession, custody or control' that are material to the defense or are to be used by the government at trial during its case-in-chief or were obtained from or belong to the defendant. This would be an easier standard for the KPMG defendants to meet than that under Rule 17. The only problem was that the documents requested by the defendants were not in the physical custody and control of the government, nor did the government appear to have any interest in obtaining them. Furthermore, KPMG claimed attorney-client privilege and/or work product immunity for many of them.

To overcome these problems, Judge Kaplan noted that the phrase 'possession, custody or control' in criminal Rule 16 is the same as in the rule of civil procedure governing subpoenas (Rule 45) and that the language in the two rules should be given a uniform construction. Because 'control' under Rule 45 includes 'the legal right to obtain ' documents requested upon demand,' he held that the government's right under the DPA to obtain from KPMG the requested documents meant that the defendants could obtain these same documents from the government via Rule 16. Because KPMG was already before the Court and had an opportunity to be heard, Judge Kaplan simply ordered KPMG to provide the documents directly to the individual defendants without going through the pretense of providing them first to the government under the DPA.

Waiver or Not: The Unanswered Question

KPMG moved to quash a subpoena for the same documents served on it by the individual defendants on the grounds (inter alia) that the documents were privileged. Did KPMG's putting documents under the 'control' of the government through the DPA waive attorney-client privilege and work product protection? Judge Kaplan ultimately did not need to decide because he found that KPMG 'failed to carry its burden of demonstrating that the materials in question [were] protected.' This unanswered question may haunt companies agreeing to enter into DPAs.

Dicta from at least one federal appeals court suggests that there is no waiver where the disclosing party and the government share a common interest in 'developing legal theories and analyzing information' and also enter into an explicit written confidentiality agreement. See, e.g., In re Steinhardt Partners L.P., 9 F.3d 230, 236 (2d Cir. 1993). Several lower court opinions have employed this rationale in finding that parties who disclosed information to the government pursuant to a confidentiality agreement had not waived privilege. See, e.g., Maruzen Company, Ltd. v. HSBC USA, Inc., No. 00 CIV. 1079, 2002 WL 1628782 at *2 (S.D.N.Y. July 23, 2002). Parties who enter into DPAs with the government and promise to produce privileged information are therefore well advised to attempt to include a confidentiality agreement in their DPAs. Since it has become increasingly common for a monitor to be appointed as part of a DPA, any such agreement should also include the monitor in its common interest ambit.

Employing a confidentiality agreement and common interest agreement to protect against waiver does not, however, make a DPA impervious to assertions of waiver. Notwithstanding the line of cases described above, most circuits have held that a voluntary disclosure of information to the government waives the privilege against third parties. None of these circuits have had the opportunity to address the issue of whether the existence of a written confidentiality agreement would change the result.

Other Protective Measures

In addition to a confidentiality agreement, other approaches may help safeguard against waiving attorney-client privilege or work product immunity as part of a DPA. Companies can try to negotiate a provision more common in non-prosecution agreements, that would specifically exclude privileged information from the promise to produce. See, e.g., March 27, 2007 Deferred Prosecution Agreement with Pharmacia & Upjohn Company LLC (providing that Pharmacia agreed to provide 'all non-privileged information' about subject matter of allegations in DPA). See also Jan. 20, 2006 Hitachi, Ltd. Cooperation and Non-Prosecution Agreement (available at: www.usdoj.gov/atr/cases/220400/220477b.htm) (providing that cooperation obligations include producing 'all non-privileged documents'). There are some indications that the Department of Justice may be more receptive to including such provisions in DPAs than it has over the last few years. In December 2006, then- Deputy Attorney General Paul McNulty issued a memorandum that requires federal prosecutors to follow more rigorous protocols and ultimately obtain written approval before requesting that a corporation waive attorney-client privilege or work product protection. Also, Sen. Arlen Specter (R-PA) is promoting a bill that would prevent prosecutors from requiring corporations to disclose information protected by attorney-client privilege or work product doctrine.

As a third approach, a company should try to limit the subject matter on which it agrees to disclose information on request. Several recent DPAs have limitations on the subject matter about which the government can request documents. KPMG's DPA lacked this limitation, obligating KPMG to provide 'in responsive and prompt fashion, and, upon request, expedited fashion, all documents, records, information, and other evidence in KPMG's possession, custody, or control as may be requested' by prosecutors or the IRS.

A preferable agreement would be the DPA entered into by The Bank of New York (BONY) in 2005, where the bank promised to produce, at the government's request, documents 'concerning Any Bank Secrecy Act matters, including, but not limited to, the conduct described' in specific exhibits to the DPA. It also included a separate 'Confidentiality and Limited Waiver Agreement' that imposed obligations on the U.S. Attorney's Office to maintain confidentiality for certain documents. Finally, it limited the waiver to documents created within specified dates and involving a specific customer of the bank. By following this template, a company entering into a DPA can limit the theoretical risk of waiver to a smaller universe of documents.

Conclusion

Whether or not these suggested safeguards are implemented, there remains some risk that a court will grant third parties access to a company's otherwise privileged documents because the company promised in the DPA to produce them at the government's request.

Jacqueline C. Wolff ([email protected]), a member of this newsletter's Board of Editors, is a former federal prosecutor and of counsel to Covington & Burling in New York City. Ethan I. Jacobs is a litigation associate at the firm.

XYZ Inc. settles a federal criminal investigation by signing a deferred prosecution agreement (DPA). Now its attorneys think the company and its privileged documents are safe so long as XYZ stays out of trouble. But have they closed the barn door after the horse has run away? A little-noticed holding by Judge Lewis A. Kaplan in the KPMG tax shelter case suggests that a DPA may open privileged documents to defendants in criminal trials and even to civil litigants. United States v. Stein , 488 F. Supp. 2d 350, 360-68 (S.D.N.Y. 2007).

Companies expect to secure peace, and not just a temporary reprieve, by signing a DPA. Typically, they admit to details of wrongful conduct, promise not to repeat it, and agree to future cooperation. As part of that cooperation, the company may promise to provide documents at the government's request, including some protected by attorney-client privilege or work product protection. Companies know, however, that the government won't ask for documents unless it suspects that the company is involved with additional wrongdoing, and that the government's right to documents will end when the DPA expires.

The Stein Opinion

KPMG LLP signed a DPA in August 2005, after months of meetings with the U.S. Attorney's Office during its investigation of alleged abusive tax shelters. The DPA included standard language requiring KPMG to provide documents the government requested and to waive privilege with respect to them (except for a handful of specific carve-outs). The DPA expressly stated that the parties did not intend to waive KPMG's privilege as to third parties. (The KPMG DPA is available at: www.usdoj.gov/usao/nys/pressreleases/August05/kpmgdpagmt.pdf.)

Several former partners of KPMG were eventually charged with tax evasion and conspiracy to defraud the IRS. Prior to trial and pursuant to Rule 17 of the Federal Rules of Criminal Procedure, they asked the court to issue a subpoena to KPMG for certain documents, several of which were arguably privileged. The list included, for example, KPMG attorney notes of meetings with the government as well as attorney drafts of the proposed statement of facts to be incorporated in the DPA. Under the seminal case of U.S. v. Nixon , 418 U.S. 683 (1974), in order for such a pre-trial subpoena to issue, the defendants had to establish that the documents were relevant, admissible and specific, were requested in good faith, and could not be obtained before trial by some other avenue. The defendants also had to establish that they needed the documents to prepare for trial. The KPMG defendants may have had trouble meeting this tough standard.

Judge Kaplan, therefore, suggested an alternative route: the defendants could seek the documents under Rule 16, which requires the government to produce before trial any documents 'within the government's possession, custody or control' that are material to the defense or are to be used by the government at trial during its case-in-chief or were obtained from or belong to the defendant. This would be an easier standard for the KPMG defendants to meet than that under Rule 17. The only problem was that the documents requested by the defendants were not in the physical custody and control of the government, nor did the government appear to have any interest in obtaining them. Furthermore, KPMG claimed attorney-client privilege and/or work product immunity for many of them.

To overcome these problems, Judge Kaplan noted that the phrase 'possession, custody or control' in criminal Rule 16 is the same as in the rule of civil procedure governing subpoenas (Rule 45) and that the language in the two rules should be given a uniform construction. Because 'control' under Rule 45 includes 'the legal right to obtain ' documents requested upon demand,' he held that the government's right under the DPA to obtain from KPMG the requested documents meant that the defendants could obtain these same documents from the government via Rule 16. Because KPMG was already before the Court and had an opportunity to be heard, Judge Kaplan simply ordered KPMG to provide the documents directly to the individual defendants without going through the pretense of providing them first to the government under the DPA.

Waiver or Not: The Unanswered Question

KPMG moved to quash a subpoena for the same documents served on it by the individual defendants on the grounds (inter alia) that the documents were privileged. Did KPMG's putting documents under the 'control' of the government through the DPA waive attorney-client privilege and work product protection? Judge Kaplan ultimately did not need to decide because he found that KPMG 'failed to carry its burden of demonstrating that the materials in question [were] protected.' This unanswered question may haunt companies agreeing to enter into DPAs.

Dicta from at least one federal appeals court suggests that there is no waiver where the disclosing party and the government share a common interest in 'developing legal theories and analyzing information' and also enter into an explicit written confidentiality agreement. See, e.g., In re Steinhardt Partners L.P., 9 F.3d 230, 236 (2d Cir. 1993). Several lower court opinions have employed this rationale in finding that parties who disclosed information to the government pursuant to a confidentiality agreement had not waived privilege. See, e.g., Maruzen Company, Ltd. v. HSBC USA, Inc., No. 00 CIV. 1079, 2002 WL 1628782 at *2 (S.D.N.Y. July 23, 2002). Parties who enter into DPAs with the government and promise to produce privileged information are therefore well advised to attempt to include a confidentiality agreement in their DPAs. Since it has become increasingly common for a monitor to be appointed as part of a DPA, any such agreement should also include the monitor in its common interest ambit.

Employing a confidentiality agreement and common interest agreement to protect against waiver does not, however, make a DPA impervious to assertions of waiver. Notwithstanding the line of cases described above, most circuits have held that a voluntary disclosure of information to the government waives the privilege against third parties. None of these circuits have had the opportunity to address the issue of whether the existence of a written confidentiality agreement would change the result.

Other Protective Measures

In addition to a confidentiality agreement, other approaches may help safeguard against waiving attorney-client privilege or work product immunity as part of a DPA. Companies can try to negotiate a provision more common in non-prosecution agreements, that would specifically exclude privileged information from the promise to produce. See, e.g., March 27, 2007 Deferred Prosecution Agreement with Pharmacia & Upjohn Company LLC (providing that Pharmacia agreed to provide 'all non-privileged information' about subject matter of allegations in DPA). See also Jan. 20, 2006 Hitachi, Ltd. Cooperation and Non-Prosecution Agreement (available at: www.usdoj.gov/atr/cases/220400/220477b.htm) (providing that cooperation obligations include producing 'all non-privileged documents'). There are some indications that the Department of Justice may be more receptive to including such provisions in DPAs than it has over the last few years. In December 2006, then- Deputy Attorney General Paul McNulty issued a memorandum that requires federal prosecutors to follow more rigorous protocols and ultimately obtain written approval before requesting that a corporation waive attorney-client privilege or work product protection. Also, Sen. Arlen Specter (R-PA) is promoting a bill that would prevent prosecutors from requiring corporations to disclose information protected by attorney-client privilege or work product doctrine.

As a third approach, a company should try to limit the subject matter on which it agrees to disclose information on request. Several recent DPAs have limitations on the subject matter about which the government can request documents. KPMG's DPA lacked this limitation, obligating KPMG to provide 'in responsive and prompt fashion, and, upon request, expedited fashion, all documents, records, information, and other evidence in KPMG's possession, custody, or control as may be requested' by prosecutors or the IRS.

A preferable agreement would be the DPA entered into by The Bank of New York (BONY) in 2005, where the bank promised to produce, at the government's request, documents 'concerning Any Bank Secrecy Act matters, including, but not limited to, the conduct described' in specific exhibits to the DPA. It also included a separate 'Confidentiality and Limited Waiver Agreement' that imposed obligations on the U.S. Attorney's Office to maintain confidentiality for certain documents. Finally, it limited the waiver to documents created within specified dates and involving a specific customer of the bank. By following this template, a company entering into a DPA can limit the theoretical risk of waiver to a smaller universe of documents.

Conclusion

Whether or not these suggested safeguards are implemented, there remains some risk that a court will grant third parties access to a company's otherwise privileged documents because the company promised in the DPA to produce them at the government's request.

Jacqueline C. Wolff ([email protected]), a member of this newsletter's Board of Editors, is a former federal prosecutor and of counsel to Covington & Burling in New York City. Ethan I. Jacobs is a litigation associate at the firm.