Originally published August 29, 2008
Keywords: Department of Justice, McNulty Memo, United States Attorneys' Manual, federal prosecutors, attorney-client privilege, corporate charging guidelines, US v. Stein, Thompson memo
As expected, on August 28, 2008, the Department of Justice (DOJ) modified its policy regarding the prosecution of corporations in response to criticism from Congress and the legal and business communities. On the same day, a panel of the Second Circuit Court of Appeals unanimously rejected prosecutorial practices consistent with pre-existing DOJ policy, finding that they violated the defendants' constitutional rights. United States v. Stein, No. 07-3042-cr (2d Cir. Aug. 28, 2008).
Revision to the United States Attorneys' Manual
Deputy Attorney General Mark R. Filip announced the revision to DOJ policy on the floor of the New York Stock Exchange. Instead of revising the " McNulty Memo," which provided informal guidance to the Department's attorneys, Filip revealed that the new policy was set forth in a section of the United States Attorneys' Manual (USAM), and would be "binding on all federal prosecutors within the Department of Justice, effective immediately."
The DOJ's new policy reflects a shift in several major ways. First, recognizing that its position on "attorney-client privilege and work product protection waivers has promoted an environment in which those protections are being unfairly eroded to the detriment of all," prosecutors are now explicitly prohibited from conditioning cooperation credit on waiver of attorney-client privilege or work product protection. Instead, cooperation will be measured by the "timely disclos[ure of] the relevant facts about the putative misconduct," including those facts gathered during an internal investigation.
Second, prosecutors are no longer allowed to request the disclosure of non-factual attorney-client communications and attorney work product (referred to as "Category II information" in the McNulty Memo). The only two exceptions to this prohibition are when a corporation or one of its employees asserts an "advice-of-counsel" defense based on communications that surrounded the alleged criminal conduct, or when the communications claimed to be privileged were made in furtherance of a crime or fraud.
Third, prosecutors are forbidden from considering "whether a corporation is advancing or reimbursing attorneys' fees or providing counsel to employees, officers, or directors under investigation or indictment," or requesting that a corporation refrain from doing so, unless such conduct would rise to the level of obstruction of justice. This practice, which was allowed under prior DOJ guidelines, was the subject of the Second Circuit's opinion in Stein, discussed below.
Fourth, the new policy no longer allows prosecutors to consider whether a corporation has entered into a joint defense agreement or whether a corporation has disciplined or terminated its employees in evaluating whether to give cooperation credit. The government may only consider, in the context of evaluating the corporation's compliance program and remedial measures for purposes of making a charging decision, whether the corporation took appropriate disciplinary action against employees found to have engaged in past misconduct.
Finally, because most requests for certain categories of information detailed in the McNulty Memo are forbidden under the new policy, the guidelines set forth in the USAM remove the process by which prosecutors had to seek approval for such requests from supervisors. Instead, counsel who believe that prosecutors are violating the new policy "are encouraged to raise their concerns with supervisors, including the appropriate United States Attorney or Assistant Attorney General," and "such allegations are subject to potential investigation through established mechanisms."
Even though Filip stated that he has engaged in "thoughtful and extended discussions with members of Congress," the changes to the USAM may not be enough to forestall legislative action. The Attorney-Client Privilege Protection Act of 2008 (S. 3217, 110th Cong.) is still pending in the Senate after passing the House of Representatives last year. The bill's main sponsor, Senator Arlen Specter, called the changes "a step in the right direction," but noted that "they leave many problems unresolved so that legislation will still be necessary." Specter noted that unlike the new policy, the proposed legislation would be binding and not subject to DOJ revision, and would apply to all federal agencies with enforcement authority, such as the Securities and Exchange Commission and the Internal Revenue Service.
Rejection of Prior DOJ Practices in United States v. Stein
In a related development on the same day, a three-judge panel of the Second Circuit Court of Appeals repudiated a practice allowed by prior DOJ policy by unanimously affirming the dismissal of an indictment of former partners and employees of the accounting firm KPMG.
In 2005, after a lengthy investigation into the creation and marketing of allegedly illegal tax shelters, the DOJ entered into a deferred prosecution agreement with KPMG, who ultimately admitted wrongdoing and paid a hefty fine. Concurrently, the government indicted 16 former KPMG partners and employees. Pursuant to the DOJ policy then in place (the "Thompson Memo"), the government had conditioned cooperation credit for KPMG, and the resulting avoidance of criminal charges, in part on KPMG's agreement not to advance attorneys' fees to the indicted employees. In 2006, the individual defendants moved to dismiss the indictment on grounds that the government's interference with KPMG's advancement of fees violated their constitutional rights. US District Judge Lewis Kaplan found that KPMG would have paid the fees if not for the DOJ's policy and actions. Therefore, he ruled that the government deprived the defendants of their right to counsel under the Sixth Amendment and their right to due process under the Fifth Amendment.
In affirming Judge Kaplan's ruling, the Second Circuit held that the government "unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment, and that the government did not cure the violation." The court affirmed the dismissal of the indictment because no other remedy could return the defendants to the status quo.
The DOJ had appeared to embrace the lower court decision in Stein when it issued the McNulty Memo in late 2006, which stated that "[p]rosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment." However, the memo allowed prosecutors to continue the practice of considering whether a company retains such employees without sanction and whether it joins them in a joint defense agreement in evaluating the extent of a corporation's cooperation. With the new policy now adopted in the revised USAM, the government appears to be abandoning this practice as well.
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