New DOJ Guidelines on Prosecuting Businesses

The new DOJ guidelines did not come about without a fight. The DOJ's two most recent attempts to address corporate investigation procedures, the 2003 Thompson Memo and the 2006 McNulty Memo, came under scrutiny from the day they were issued. Under the Thompson Memo, prosecutors were freely permitted to press corporations to waive privilege across the board and cut off the payment of legal fees for employees. After adverse court decisions and the threat of contrary legislation, the DOJ softened its guidelines, which had come to create what commentators termed a “culture of waiver.” The McNulty Memo attempted to resolve the privilege issue by requiring prosecutors to seek prior approval from their DOJ superiors before pursuing such privilege waivers.

Under McNulty, the DOJ divided the body of privileged information sought into two categories. Category I consisted of “purely factual information, which may or may not be privileged, relating to the underlying conduct.” Prosecutors were directed to seek this lower-level privileged information first and were required to obtain written authorization from the U.S. Attorney (who was required to “consult” with the Assistant Attorney General for the Criminal Division) before seeking the waiver from a company. As for Category II privileged information, which included “attorney-client communications or non-factual attorney work product,” prosecutors were allowed to seek a waiver from a corporation only after the U.S. Attorney obtained written authorization from the Deputy
Attorney General. These procedural protections soon proved to have little effect in real life.

Within weeks of the McNulty Memo, Sen. Arlen Specter (R-PA) introduced the Attorney-Client Privilege Protection Act of 2007, which would bar prosecutors from requesting privilege waivers or basing the granting of cooperation credit on such a waiver. By July 2007, former Attorneys General Richard Thornburgh and Edwin Meese and Solicitors General Ted Olson, Ken Starr and Seth Waxman sent a letter to Congress urging legislative action to cure the “erosion of the attorney-client privilege, the work-product doctrine, and employee rights caused by the policies of the Department of Justice and other federal agencies regarding evaluation of a business entity's 'cooperation' with a government investigation in order to avoid indictment.” Additional letters on the issue were sent to the DOJ by a coalition of former U.S. Attorneys.

Do the New DOJ Standards Represent Change?

In late August, the Second Circuit ruled that portions of the McNulty Memo violated the Constitution. Later that day, the DOJ released yet another version. If one reads only the DOJ press release announcing the new standards, it would be easy to believe that the dispute is over. After all, DAG Filip himself announced that the guidelines were crafted with the purpose of “safeguarding the attorney-client privilege, which is so central to our criminal justice system.” There is, however, little substantive change.

First, under the new guidelines, it remains a corporation's obligation to provide “evidence” against employees. This includes providing “relevant factual information” acquired through employee interviews. Prosecutors are freely permitted to ask for this evidence. The only real change in the new rule is that prosecutors are no longer permitted to ask for the lawyers' notes of those interviews.

Second, whenever there is an “advice of counsel” defense, prosecutors may still ask for a waiver. Few complex organizations operate these days without routine consultations with the legal department. If any implicated member of management raises an advice-of-counsel defense, it appears that it would still be the corporation's obligation to waive. This is an enormous exception. Confidentiality exists to encourage employees to consult forthrightly with lawyers, and the confidentiality must be reliable to have that effect. Under the new guidelines, there is no reliability at all. Thus, again, the new guidelines do little to effect any practical change, and counsel and employees must continue to presume that their communications may be laid bare to the government.

A third revision trumpeted by the government is that it will no longer demand that corporations stop paying legal fees for its employees. This, though, is simply the DOJ taking credit for a change that was ordered by the courts. As a result of Judge Kaplan's decision in the Stein case (and the Second Circuit's recent affirmation of that decision), the government's policy of compelling corporations to cut off the payment of attorney's fees for employees had already come to an abrupt end. (See article by Urgenson and Hernandez discussing Stein on page 4.) So there is, indeed, true change on this front, but it was change effected through litigation, not DOJ policymaking.

Fourth, the new guidelines claim to lift prior restrictions on the use of joint defense agreements (JDAs) between employees and corporations, but it is unclear whether this is a genuine shift in position. While JDAs are not prohibited, the guidelines still provide that corporations should avoid such agreements if they impede the corporation's ability to provide relevant facts to the government. If a corporation cannot provide relevant facts due to a JDA, it still risks losing cooperation credit.

Finally, the new guidelines do nothing to address the government's increased use of deferred prosecution agreements (DPAs) to compel corporations to agree to a government-approved “statement of facts.” As in the Stein case, these DPA provisions, which have been guided by the Thompson and McNulty Memos, force companies to adopt the government's version of the “facts” and agree that its employees will never contradict those “facts.” The impact on individual defendants of these mandatory “statements of facts” is greater than if a co-defendant had pleaded guilty to charges in the indictment. When a cooperating individual pleads guilty, he or she must confirm the charges under oath in open court and is subject to vigorous cross-examination at the trial of other defendants to expose inconsistencies or lies. It is an entirely different matter when a corporation ' that may consist of thousands of employees ' agrees to a set of “facts” that no real person is permitted to contradict. Sealing the mouths of potential defense witnesses through this tactic raises stark constitutional issues: It eliminates an employee's access to any witness who would provide exculpatory testimony but for the fear that a truthful statement might be a violation of their employer's DPA that could result in the corporation's indictment, the loss of jobs, or other government sanction. Just imagine the accusations that would fly if a defendant required subordinates to recount a designated version of the “facts” and imposed penalties for deviating from them.

The Blessing of the Adversarial System

The DOJ clearly intends to retain the ability of its prosecutors to obtain waivers of the majority of privileged information. The many exceptions swallow the rules. It is safe to predict that under the new rules, as under the old, few companies will hesitate to waive when prosecutors ask for privileged information, and many will still “volunteer” to provide such information. It remains a corporation's obligation under the
DOJ rules to provide “evidence” against their own employees, including facts gathered during employee interviews.

The real lesson here is that true change comes through our robust adversarial system and an independent judiciary. The single significant change in the new rules is the ban on pressuring corporations to cut off employees' attorneys' fees. And that change was won only through litigation. The moral of the story is that fierce advocacy can be effective, even against the seemingly all-powerful DOJ.

Stanley S. Arkin ([email protected]), a member of this newsletter's Board of Editors, is senior partner at New York's Arkin Kaplan Rice LLP. He is the lead author of 'Business Crime' and 'The Prevention and Prosecution of Computer and Technology Crime,' and a fellow of the American College of Trial Lawyers. Peter B. Pope is counsel to Arkin Kaplan Rice and was Chief of the New York State Attorney General's Criminal Division from 2000 to 2006. Barrett N. Prinz is an associate at the firm. Arkin Kaplan Rice currently represents one of the individuals whose indictment was dismissed in the Stein case.

In the post-Enron era of aggressive criminal investigations of corporate malfeasance, the Department of Justice (DOJ) issued a series of Memos on the prosecution of business organizations. Known by the name of the Deputy Attorneys General who authored them, the Holder, Thompson and McNulty Memos soon struck fear in the hearts of business entities. They essentially required businesses to adhere to a strict list of requirements to avoid being indicted by the government. Companies came to assume that prosecutors would expect complete acquiescence to the guidelines, including waiving attorney-client and work product privileges, cutting off legal fees for employees under investigation, and terminating uncooperative employees.

After much pressure from the defense bar, the judiciary and Congress, the DOJ issued new guidelines on Aug. 28, 2008. In announcing them, Deputy Attorney General Mark R. Filip assured the public that cooperation credit will no longer depend on a corporation's waiver of privilege, prosecutors will no longer be allowed to request disclosure of non-factual privileged information, and no consideration will be given to a corporation's advancement of attorney's fees for its employees. A close look at the fine print, however, shows that not much has changed.

Prior Efforts by the DOJ

The new DOJ guidelines did not come about without a fight. The DOJ's two most recent attempts to address corporate investigation procedures, the 2003 Thompson Memo and the 2006 McNulty Memo, came under scrutiny from the day they were issued. Under the Thompson Memo, prosecutors were freely permitted to press corporations to waive privilege across the board and cut off the payment of legal fees for employees. After adverse court decisions and the threat of contrary legislation, the DOJ softened its guidelines, which had come to create what commentators termed a “culture of waiver.” The McNulty Memo attempted to resolve the privilege issue by requiring prosecutors to seek prior approval from their DOJ superiors before pursuing such privilege waivers.

Under McNulty, the DOJ divided the body of privileged information sought into two categories. Category I consisted of “purely factual information, which may or may not be privileged, relating to the underlying conduct.” Prosecutors were directed to seek this lower-level privileged information first and were required to obtain written authorization from the U.S. Attorney (who was required to “consult” with the Assistant Attorney General for the Criminal Division) before seeking the waiver from a company. As for Category II privileged information, which included “attorney-client communications or non-factual attorney work product,” prosecutors were allowed to seek a waiver from a corporation only after the U.S. Attorney obtained written authorization from the Deputy
Attorney General. These procedural protections soon proved to have little effect in real life.

Within weeks of the McNulty Memo, Sen. Arlen Specter (R-PA) introduced the Attorney-Client Privilege Protection Act of 2007, which would bar prosecutors from requesting privilege waivers or basing the granting of cooperation credit on such a waiver. By July 2007, former Attorneys General Richard Thornburgh and Edwin Meese and Solicitors General Ted Olson, Ken Starr and Seth Waxman sent a letter to Congress urging legislative action to cure the “erosion of the attorney-client privilege, the work-product doctrine, and employee rights caused by the policies of the Department of Justice and other federal agencies regarding evaluation of a business entity's 'cooperation' with a government investigation in order to avoid indictment.” Additional letters on the issue were sent to the DOJ by a coalition of former U.S. Attorneys.

Do the New DOJ Standards Represent Change?

In late August, the Second Circuit ruled that portions of the McNulty Memo violated the Constitution. Later that day, the DOJ released yet another version. If one reads only the DOJ press release announcing the new standards, it would be easy to believe that the dispute is over. After all, DAG Filip himself announced that the guidelines were crafted with the purpose of “safeguarding the attorney-client privilege, which is so central to our criminal justice system.” There is, however, little substantive change.

First, under the new guidelines, it remains a corporation's obligation to provide “evidence” against employees. This includes providing “relevant factual information” acquired through employee interviews. Prosecutors are freely permitted to ask for this evidence. The only real change in the new rule is that prosecutors are no longer permitted to ask for the lawyers' notes of those interviews.

Second, whenever there is an “advice of counsel” defense, prosecutors may still ask for a waiver. Few complex organizations operate these days without routine consultations with the legal department. If any implicated member of management raises an advice-of-counsel defense, it appears that it would still be the corporation's obligation to waive. This is an enormous exception. Confidentiality exists to encourage employees to consult forthrightly with lawyers, and the confidentiality must be reliable to have that effect. Under the new guidelines, there is no reliability at all. Thus, again, the new guidelines do little to effect any practical change, and counsel and employees must continue to presume that their communications may be laid bare to the government.

A third revision trumpeted by the government is that it will no longer demand that corporations stop paying legal fees for its employees. This, though, is simply the DOJ taking credit for a change that was ordered by the courts. As a result of Judge Kaplan's decision in the Stein case (and the Second Circuit's recent affirmation of that decision), the government's policy of compelling corporations to cut off the payment of attorney's fees for employees had already come to an abrupt end. (See article by Urgenson and Hernandez discussing Stein on page 4.) So there is, indeed, true change on this front, but it was change effected through litigation, not DOJ policymaking.

Fourth, the new guidelines claim to lift prior restrictions on the use of joint defense agreements (JDAs) between employees and corporations, but it is unclear whether this is a genuine shift in position. While JDAs are not prohibited, the guidelines still provide that corporations should avoid such agreements if they impede the corporation's ability to provide relevant facts to the government. If a corporation cannot provide relevant facts due to a JDA, it still risks losing cooperation credit.

Finally, the new guidelines do nothing to address the government's increased use of deferred prosecution agreements (DPAs) to compel corporations to agree to a government-approved “statement of facts.” As in the Stein case, these DPA provisions, which have been guided by the Thompson and McNulty Memos, force companies to adopt the government's version of the “facts” and agree that its employees will never contradict those “facts.” The impact on individual defendants of these mandatory “statements of facts” is greater than if a co-defendant had pleaded guilty to charges in the indictment. When a cooperating individual pleads guilty, he or she must confirm the charges under oath in open court and is subject to vigorous cross-examination at the trial of other defendants to expose inconsistencies or lies. It is an entirely different matter when a corporation ' that may consist of thousands of employees ' agrees to a set of “facts” that no real person is permitted to contradict. Sealing the mouths of potential defense witnesses through this tactic raises stark constitutional issues: It eliminates an employee's access to any witness who would provide exculpatory testimony but for the fear that a truthful statement might be a violation of their employer's DPA that could result in the corporation's indictment, the loss of jobs, or other government sanction. Just imagine the accusations that would fly if a defendant required subordinates to recount a designated version of the “facts” and imposed penalties for deviating from them.

The Blessing of the Adversarial System

The DOJ clearly intends to retain the ability of its prosecutors to obtain waivers of the majority of privileged information. The many exceptions swallow the rules. It is safe to predict that under the new rules, as under the old, few companies will hesitate to waive when prosecutors ask for privileged information, and many will still “volunteer” to provide such information. It remains a corporation's obligation under the
DOJ rules to provide “evidence” against their own employees, including facts gathered during employee interviews.

The real lesson here is that true change comes through our robust adversarial system and an independent judiciary. The single significant change in the new rules is the ban on pressuring corporations to cut off employees' attorneys' fees. And that change was won only through litigation. The moral of the story is that fierce advocacy can be effective, even against the seemingly all-powerful DOJ.

Stanley S. Arkin ([email protected]), a member of this newsletter's Board of Editors, is senior partner at New York's Arkin Kaplan Rice LLP. He is the lead author of 'Business Crime' and 'The Prevention and Prosecution of Computer and Technology Crime,' and a fellow of the American College of Trial Lawyers. Peter B. Pope is counsel to Arkin Kaplan Rice and was Chief of the New York State Attorney General's Criminal Division from 2000 to 2006. Barrett N. Prinz is an associate at the firm. Arkin Kaplan Rice currently represents one of the individuals whose indictment was dismissed in the Stein case.