New DOJ Guidelines for Federal Prosecution of Corporations

A NY Times report about changes in the DOJ practice of pressing companies to share secrets with prosecutors and not pay the legal fees of employees accused of crimes is worth reading. On August 28, Deputy Attorney General Mark R. Filip issued a press release announcing new DOJ guidelines for federal prosecutors in commencing prosecution of corporations. Those guidelines, Principles of Federal Prosecution of Business Organizations (the “Principles”) are designed to curb misconduct by prosecutors seeking privileged information from companies during corporate investigations. The Principles were embodied in the Thompson Memo named after then US Deputy Attorney General Larry D. Thomson. Based on a 1999 document called Federal Prosecution of Corporations (the Holder Memo), the Thompson Memo contained standard factors governing decisions to prosecute and identified nine factors which would be credited to a corporation in its efforts to avoid prosecution, including a company’s “timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.” Prosecutors were directed to inquire into whether corporations were protecting their employees “through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct” as a factor in weighing the value of a corporation’s cooperation.

Advancing defense costs to individuals facing indictment or investigation for matters relating to their employment has become standard practice. It ensures employees that they that they can pay for an adequate defense. In the much-publicized KPMG prosecution, seventeen of the partners from the global accounting firm were prosecuted for creation of illegal tax shelters. The pre-trial defense costs for each individual defendant averaged $1.7million. The DOJ in its negotiations with KPMG to avoid prosecution used the Thompson Memo to pressure KPMG to consider departing from its long-standing policy of paying legal fees and expenses of its personnel in all cases and investigations. The employees of KPMG were subsequently indicted and moved for dismissal, claiming federal prosecutors in Manhattan threatened to indict the accounting firm if it didn’t assist the government in its probe of employees caught up in a tax evasion investigation. Castigating the government for applying pressure on the firm to cut off reimbursement of attorney fees after the employees were indicted, Judge Kaplan on June 26, 2006 wrote a blistering opinion in U.S. v. Stein, 435 F.Supp.2d 330 (S.D.N.Y.2006), agreeing with the defendants that the Thompson Memo, and the manner in which the prosecutors used it, violated the defendants’ Fifth Amendment substantive due process rights and their Sixth Amendment right to counsel. In December 2006, the Thompson Memo was replaced with the McNulty Memo which allowed prosecutors to consider a company’s fee advancement policy only where the circumstances indicate that it is “intended to impede a criminal investigation”.
On the same day the new guidelines in the the Filip Memo were announced, the Second Circuit Court of Appeals affirmed the dismissal of the indictment against most of the defendants in the KPMG case. Whether the KPMG case motivated the new guidelines or the pending Attorney-Client Privilege Protection Act of 2008 that would forbid federal prosecutors and civil enforcement lawyers from requesting any communications protected by the attorney-client privilege or work product doctrine, the DOJ has decided to revise the Principles which have been criticized for encroaching on the attorney-client privilege and work product doctrine.

The new policy identifies the following changes:

• Cooperation will be measured by the extent to which a corporation discloses relevant facts and evidence, not its waiver of attorney-client privilege or work product;
• Federal prosecutors will not demand the disclosure of non-factual attorney work product or core attorney-client communications as a condition for cooperation credit;
• Federal prosecutors will not take into consideration in evaluating cooperation whether a corporation has (i) advanced attorneys’ fees to its employees; (ii) entered into a joint defense or common-interest agreement;
or (iii) retained or sanctioned employees involved in alleged wrongdoing.

There are at least two significant limitations to addressing the problem of government interference with the attorney-client privilege or work product doctrine through a revision of DOJ’s Principles. First, unlike the proposed Attorney-Client Privilege Protection Act, the Principles do not apply to the SEC or other federal regulators. Second, the Principles do not have the force of law, but would require corporations to rely on self-policing by DOJ.

An editorial in today’s Los Angeles Times urges passage of the legislation to insure that future administrations cannot easily overturn the new guidelines and to preserve the attorney-client privilege to “any federal investigation or criminal or civil enforcement matter.”

For material on the attorney-client privilege, consult SARA, the library catalog, for items such as Internal Corporate Investigations, Barry F. McNeil and Brad D. Brian, editors (Call No. KF1416 .I58 2007) and volume 3 of The In-house Counsel’s Essential Toolkit, ABA Committee on Corporate Counsel (Call No. KF1425 .I64 2007)