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Entries in Attorney-Client Privilege (34)


SFO Gives Self-Reporting Guidance

This is a guest post from D.C. lawyers Drew Harker and Keith Korenchuk.


Dear FCPA Blog,

The director of the U.K.'s Serious Fraud Office, Richard Alderman, recently clarified some of the SFO's positions on its new approach to overseas corruption in a December 7, 2009 open letter to our partner, Marcus Asner. A full copy of the letter can be downloaded here. Here's a summary:

Mr. Alderman’s letter answered five questions about the SFO’s enforcement policy.

1. What criteria will the SFO apply when deciding whether to treat a self-reported matter criminally or civilly?

  • The seriousness of the wrongdoing;
  • Whether the matter is an isolated incident or whether the company has uncovered other examples of this type of misconduct;
  • Whether the wrongdoing is systematic and part of the company’s established practice;
  • Whether the affected group within the company was warned that its processes were inadequate;
  • Whether the company reported the matter to the SFO within a reasonable time of discovering the incident; and
  • Whether the report provided to the SFO is detailed and complete.

2. What scope of investigation will satisfy the SFO and avoid the need for additional, SFO-directed investigation?

The SFO’s strong preference is that all investigative work on the facts surrounding the wrongdoing be carried out by the company’s professional advisors and not by the SFO itself. The SFO expects self-reporting companies to present the SFO with reports that allow the SFO (1) to determine whether the company has fully investigated the issues; and (2) to discuss remediation measures with the company. Mr. Alderman recognized that the cost of investigations can become unwieldy and suggested a rule of reason will apply, noting: “we are anxious not to put disproportionate cost on the corporates.”

3. Under what circumstances would monitors be appointed?

The SFO is taking a nuanced approach to monitoring. Mr. Alderman stated that the SFO’s goal with monitorships will be to balance assuring the public that the company is genuinely committed to anti-corruption measures while not imposing disproportionate burdens on the company. Specifically, Mr. Alderman noted the SFO will not appoint a monitor in cases where a company’s board proves that it is committed to enforcing an anti-corruption corporate culture.

In cases involving more serious violations of anti-corruption laws, the SFO will implement some “light touch,” on-going monitoring. In those cases, the SFO will expect a company to propose monitors in the first instance. Mr. Alderman further stated that the SFO will not impose a specific monitor against the wishes of a company’s board. Finally, the SFO will work with its international counterparts in assigning monitors in cases where the conduct at issue involves other jurisdictions.

4. What position will the SFO take on attorney-client privilege?

Mr. Alderman acknowledged that the concept of the waiver of attorney client privilege differs under U.K. and U.S. law. The SFO will not expect companies to provide documents reflecting legal advice the company received on how to conduct the investigation, the types of remediation to be discussed with the SFO or issues relating to conducting negotiations with the SFO. However, the SFO does expect to be provided a full factual report on the investigation, including any relevant interview notes from the investigation. Mr. Alderman stated that the SFO expects companies to waive any privilege with respect to these materials. The SFO is primarily interested in factual reports and suggests that legal advisors seeking to protect the companies’ privileges could separate the fact issues from legal advice when preparing the materials to share with the SFO.

As has been discussed following the issuance of the U.S. Justice Department's Filip Memo, even a requirement that lawyer-discovered facts be disclosed raises genuine concerns about preservation of the attorney-client privilege. The SFO appears to go even a step further, suggesting it will require the production of actual interview notes.

5. Will the SFO ever close a voluntary disclosure case without any actions?

In limited cases, the SFO could terminate its involvement in a matter (1) if special circumstances apply and the company offers to pay suitable remediation; or (2) if after the company self-reported to the SFO at an early stage of the investigation, the ultimate report on the investigation provided to the SFO does not support the initial suspicions of corruption. Mr. Alderman stated that due to the strong public interest in publicly announcing these settlements, it expects that these instances will be comparatively rare. Mr. Alderman did not explain what special circumstances would lead to SFO’s terminating its investigation, but he noted that the SFO has done this in “a few cases at present.”



Goodbye To Waivers? Not So Fast . . .

Companies facing criminal indictment for violating the Foreign Corrupt Practices Act and other federal laws have a sure-fire way to help themselves. They can cooperate. Those found to have “fully cooperated” under the Federal Sentencing Guidelines are entitled to reduced penalties; most of them escape with a deferred or non-prosecution agreement. How does the government measure cooperation? One way has been to look at whether the target agreed to spill the beans on employees by waiving the attorney-client privilege.

The Justice Department claims it has never forcibly stripped an organization of the privilege. That's technically true. As a matter of law only the holder of the privilege can give it up. But it's also true that organizations have routinely waived the privilege because of various inducements. Translation: the DOJ made them offers they couldn't refuse.

Cindy A. Schipani, above, a professor from the University of Michigan's business school (B.A. Michigan State, J.D. University of Chicago) has written an excellent paper (scholarly but readable) on the topic. It's called "The Future of the Attorney-Client Privilege in Corporate Criminal Investigations" (available from SSRN here). Ellen Podgor cited it on the White Collar Crime Prof Blog here.

Prof Schipani traces the history of the waiver as a measure of organizational cooperation. She starts from the Holder Memorandum in 1999 by then-Deputy Attorney General (now AG) Eric Holder, followed by the Thompson Memorandum (2003), the McCallum Memorandum (2005) and the McNulty Memorandum (2006). Each encouraged waiver of the privilege by linking it to some extent to reduced penalties and deferred or non-prosecution agreements. And under the various DOJ guidelines, refusing to waive the privilege became implicitly linked with the threat of indictment, maximum penalties, and corporate ruin.

How serious that threat was became clear, Prof Schipani says, in May 2002. Arthur Andersen LLP was charged with obstruction of justice for shredding documents related to its audit of Enron. The jury convicted Andersen and the Fifth Circuit affirmed. Prof Schipani says,

The indictment and subsequent conviction . . . devastated the firm’s reputation. Moreover, because the SEC does not allow convicted felons to audit public companies, the firm agreed to surrender its Certified Public Accounting licenses and its right to practice before the SEC, which effectively put what was once a “big five” accounting firm out of the business. Numerous Andersen clients deserted the firm, as did many partners and personnel, and Andersen was obliged to sell off profitable components of its business. In the aftermath, nearly 28,000 U.S. Andersen employees lost their jobs.
Although the Supreme Court reversed Andersen’s conviction in 2005 -- holding that the trial court’s jury instruction was faulty -- the firm was already gone.

By 2006, Prof Schipani says, most in-house and outside counsel were convinced that a "culture of waiver" permeated the DOJ and SEC. And they were right. "Nearly 80% of the [deferred or non-prosecution agreements] entered into before June, 2006 reportedly include waiver of privilege," she says. "One would imagine the percentage to be significantly lower if corporations believed waiver to be optional and inconsequential."

In August 2008, under heavy flak, the DOJ issued the so-called 2008 Guidelines. They purported to restore the privilege by removing consideration of a waiver from the evaluation of an organization's cooperation. Did anything change?

Prof Schipani says it's still too early to tell. But, she warns,

The 2008 Guidelines remain ambiguous regarding whether disclosure of internal investigation reports or interview memoranda prepared by attorneys may be required in order for a firm to receive credit for cooperation. If a corporation is deemed to have failed to timely disclose the relevant facts “for whatever reasons,” the guidelines instruct prosecutors not to give cooperation credit.
Her conclusion: Even if the DOJ does not make official demands for waivers, "corporations under governmental investigations may still feel pressure to voluntarily waive the privilege, particularly relating to factual work product."

View the "2008 Guidelines" in the U.S. Attorney’s Manual 9-28.000 / Principles of Federal Prosecution of Business Organizations here and USAM 9-28.710 on attorney-client and work-product protections here.

Download the McNulty Memo here and the Thompson Memo here.

Read prior posts about the attorney-client privilege here.


AGCO Resolves Iraq Bribe Charges

Agricultural equipment-maker AGCO Corporation will pay nearly $20 million in criminal and civil penalties to resolve charges related to kickbacks it paid under the U.N. oil for food program. Under its plea deal with the Justice Department, the Duluth, Ga.-based firm will pay a criminal penalty of $1.6 million and enter into a three-year deferred prosecution agreement. The DOJ charged its U.K. subsidiary, AGCO Limited, in a one- count criminal information with conspiracy (18 U.S.C. § 371) to commit wire fraud (18 U.S.C. § 1343) and to violate the books and records provisions of the Foreign Corrupt Practices Act by falsifying accounts of parent AGCO Corporation, an issuer ( 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff(a)).

In settling civil charges brought by the Securities and Exchange Commission, AGCO Corporation will disgorge $13,907,393 in profits and $2 million in pre-judgment interest. It will also pay a civil penalty of $2.4 million. The SEC charged the company with failing to maintain an adequate system of internal controls to detect and prevent the corrupt payments and failing to properly record the payments (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934).

AGCO is also paying a fine of $630,000 to the Danish State Prosecutor for Serious Economic Crimes to resolve criminal charges against its Danish subsidiary.

From 2000 through 2003, wholly-owned subsidiaries in Denmark, the U.K. and France paid about $5.9 million in kickbacks to the Iraqi regime and officials there in connection with sales of equipment under the oil for food program. The illegal payments were made through an agent and falsely recorded as “after sales service fees.” The U.K. subsidiary maintained and used a second set of accounts to track the payments. The SEC said,

The [second] accrual account was created by AGCO Ltd.’s marketing staff with virtually no oversight from AGCO Ltd.’s finance department. No one questioned the existence of the dual accounts. No one questioned why the Ministry Accrual account contained approximately ten percent of the contract value despite the fact that there was no contract in place requiring that such ten percent be paid to the ministry or anyone else. Unlike other payments to the agent, the Ministry Accrual payments were made by bank guarantee and in French francs or Euros instead of U.S. dollars. Marketing and finance employees in the U.K., Denmark, and France were all instrumental in the scheme. . . .
AGCO's cooperation with U.S. authorities was evident. Among other things, in its deferred prosecution agreement it undertook to give the DOJ and other agencies all information it has about the illegal conduct and individuals involved, including the material from its internal investigations. The company didn't reserve the right to assert any claims of attorney-client or work-product privilege. In return, the DOJ didn't charge the U.S. parent company but only its U.K. subsidiary, and didn't bring substantive criminal FCPA or wire fraud charges, but instead used only the federal conspiracy statute. That should preserve AGCO Corporation's eligibility to do business with the U.S. government and bid for World Bank and IMF-funded projects.

AGCO operates worldwide and has annual revenues of about $8 billion. It manufacturers and sells tractors, combines, hay tools, sprayers, and forage and tillage equipment through its Challenger, Fendt, Massey Ferguson and Valtra brands.

AGCO Corporation trades on the New York Stock Exchange under the symbol AGCO.

Download the DOJ's September 30, 2009 release here.

Download the criminal information in U.S. v. AGCO Limited here.

Download AGCO Corporation's September 29, 2009 plea agreement with the Justice Department here.

View the SEC's Litigation Release No. 21229 dated September 30, 2009 in Securities & Exchange Commission v. AGCO Corporation, Civil Action No. 1:09-CV-01865 (D.D.C.)(RMU) here.

Download the SEC's civil complaint against AGCO Corporation here.


A Whistleblower Blow-Up

Last month we reported a settlement in a suit by General Electric's former in-house counsel, Adriana Koeck. She claimed she was fired in retaliation for whistleblower activity protected by Section 806 of the Sarbanes-Oxley Act (18 U.S.C. § 1514A) and state law after she warned her superiors about possible FCPA violations in Brazil. She leaked information to the press about GE's alleged conduct, and GE sued her for breaching her duty of confidentiality. The terms of the settlement that ended all of the litigation weren't disclosed.

We don't have any views about the merits of the case. But we have concerns about what it might mean for company lawyers and compliance.

When lawyers allege they were fired for raising compliance concerns, they typically disclose privileged information to support their claims. They're in a tough spot -- they can only prove they were fired for retaliation by revealing the company's underlying behavior that they complained about. But by disclosing it, they'll probably breach their professional obligations of confidentiality.

All company lawyers are privy to the inner workings of their organization. They hear the secret musings about how to sell the company's goods and services. But laymen aren't always expected to know all the implications of what they're talking about; that's why the lawyers are there -- to help everyone stay on the right side of the law. So when those secret deliberations become fodder for a lawsuit, someone's expectation of privacy is violated.

In all companies, lots of different ideas are thrown onto the whiteboard to be vetted and debated, criticized and critiqued. Only a few ever make it into the field. That's how consensus-building works. But if early-stage ideas might be disclosed by the lawyers and cause trouble later on, there'll be less debate of the kind the attorney-client privilege is intended to promote. Companies paying attention to the retaliation suits might change the way they treat their lawyers and compliance professionals -- leaving them out of discussions, or worse, not hiring them to start with.

To be clear, lawyers are entitled to protection against retaliation for blowing the whistle. In fact, lawyers are especially vulnerable. They know the company's secrets and they have a duty to prevent illegal conduct from happening. But whenever lawyers, for whatever reason, go public with protected information, the profession is tarnished and the cause of compliance is hurt.

What's the fix? How about plugging the gap in SOX to make sure whistleblower protections cover lawyers (and all employees) who work at subsidiaries of listed parents? The limited coverage now is forcing claimants into federal court who might not want to be there. Beyond that, perhaps a special tribunal -- under the auspices of the Labor Department and the courts (too bad we don't have a national integrated bar group) -- with an equal measure of protection for company lawyers and for their employers' privileged information.


One-Way Waivers

There was an important post over the weekend on the White Collar Crime Prof Blog. Ellen Podgor flagged a recent case (here) with serious implications for companies with deferred prosecution agreements.

An April 17, 2009 opinion from the DC Court of Appeals in US v. The Williams Companies held that a former Williams employee who's been indicted has a right to discover documents the company produced as part of its cooperation with federal investigators. A copy of the opinion can be downloaded here.

Prof Podgor's wisdom: You may think that your back is against the wall to enter into a deferred prosecution agreement, but before you agree to waive the attorney-client privilege, be aware of the long-term ramifications of this decision.

Here's what happened: Williams' deferred prosecution agreement to resolve trading-related offenses provided that its cooperation with the government would include not asserting the attorney-client privilege or work product protection "as to certain factual documents from the internal investigation." The Justice Department acknowledged that Williams' cooperation was "a factor in the decision to defer criminal prosecution." (Williams also had to pay a $50,000,000 penalty to settle the charges.)

Several employees were eventually indicted, including Scott Thompson, an energy trader. He was charged with conspiracy to commit wire fraud (18 U.S.C. § 371 and § 1343) and to manipulate gas prices in violation of the Commodities Exchange Act (7 U.S.C. § 13(a)(2)). He filed a motion under Brady v. Maryland, 373 U.S. 83 (1963) and Federal Rule of Criminal Procedure 16(a)(1)(E)(i) to compel the United States to produce information material to preparing his defense and provided to the government by Williams. Both the government and Williams opposed the motion.

But the court said Williams “independently and voluntarily chose to participate in a thorough disclosure program, in return for which it received the quid pro quo of lenient punishment for any wrongdoing exposed in the process." Quoting from In re Subpoenas Duces Tecum, 738 F.2d 1367, 1372 (D.C. Cir. 1984) (also known as Tesoro). So allowing Williams "to select according to [its] own self interest to which adversaries [it] will allow access to the materials" would be inconsistent and unfair.

On that basis, the DC Court of Appeals remanded so the trial to court could determine what Thompson is entitled to under Brady. "Because the government’s criminal investigation," the court said, "was far broader than [Williams] and its employees and did not focus on Thompson alone, discovery by Thompson must proceed in a manner that avoids a fishing expedition. . ."

Our thanks to Ellen Podgor for another great post on the White Collar Crime Prof Blog.


That's Not Justice

A former U.S. Attorney told us a few years ago: "The Justice Department has found a way to subcontract out its FCPA investigations. Now the company lawyers are taking the statements and doing the document work. It's great for the government but really bad for the employees."

The government's practice is now at the center of two securities-related prosecutions. As the Law Blog reported here, Los Angeles federal district court judge Cormac Carney has suppressed most of the government's evidence against the former CFO of Broadcom, William Ruehle. The company waived the privilege and released his statements, even though he thought the lawyers representing Broadcom were also representing him.

In suppressing Ruehle's statements to Irell & Manella, the judge couldn't have been clearer. He said:

The Government now argues that it can use Mr. Ruehle's statements to the Irell lawyers against him at the trial in this criminal case. The Government is mistaken. Mr. Ruehle's statements to the Irell lawyers are privileged attorney-client communications. Mr. Ruehle reasonably believed that the Irell lawyers were meeting with him as his personal lawyers, not just Broadcom's lawyers. Mr. Ruehle had a legitimate expectation that whatever he said to the Irell lawyers would be maintained in confidence. He was never told, nor did he ever contemplate, that his statements to the Irell lawyers would be disclosed to third parties, especially not the Government in connection with criminal charges against him. Irell had no right to disclose Mr. Ruehle's statements, and Irell breached its duty of loyalty when it did so. Accordingly, the Court must suppress all evidence reflecting Mr. Ruehle's statements to the Irell lawyers regarding stock option granting practices at Broadcom.
The judge then went further, saying:
The Court must also ensure the fair administration of justice and promote the public's confidence in the legal profession. By failing to comply with its duties under the Rules of Professional Conduct, Irell compromised these important principles. The Court simply cannot overlook Irell's ethical misconduct in this regard and must refer Irell to the State Bar for appropriate discipline.
The LawBlog said a spokesman for Irell & Manella, Charles Sipkins, called the judge’s ruling an “error” and said all of the law firm’s disclosures were proper. The government, the Law Blog said, is planning to appeal.

A similar issue has surfaced in the government's prosecution for obstruction of justice of Allen Stanford's chief investment officer, Laura Pendergest-Holt. The evidence includes statements she made in sworn testimony to the SEC. During that testimony, a lawyer from Proskauer Rose, Thomas Sjoblom, was present. He said he represented Stanford and officers and directors of his affiliated companies. But Pendergest-Holt says she believed he represented her personally. Now she's suing Sjoblom for malpractice, negligence and breach of fiduciary duty. The Law Blog's report is here. No doubt she'll raise the same issues at her criminal trial.

In a typical FCPA investigation, those giving statements to the company's lawyers probably don't know all the relevant facts -- the investigation is ongoing, after all. They can't possibly understand the implications of their words, have no idea their statements might end up outside the company, don't receive help from lawyers representing them, and probably don't even know they should have their own counsel.

And it gets worse. According to the 33 former U.S. Attorneys who wrote to Senator Patrick Leahy last year, some recent cases show that employees "can be prosecuted for making false statements to the government, even though the statements were made only to company counsel."

When threats of indictment are used to force corporations to become part of the prosecution, individual employees don't stand a chance. This aspect of the government's win-at-all-costs approach to white collar prosecutions isn't justice, and it has nothing to do with corporate compliance.

Download the trial court's April 1, 2009 Order Suppressing Privileged Communications in US v. Henry T. Nicholas III and William J. Ruehle et al here


Protecting The Privilege

Senator Arlen Specter, the ranking Republican member of the Senate Judiciary Committee, has introduced a bill "to provide appropriate protection to attorney-client privileged communications and attorney work product." S.445 is co-sponsored by Senators Carper (D-DE), Cochran (R-MS), Kerry (D-MA), Landrieu (D-LA) and McCaskill (D-MO). The bill's Thomas page at the Library of Congress is here.

We're waiting for the text. But in a post last week, the White Collar Crime Prof Blog (here) said the bill:

Prohibits federal prosecutors and investigators across the executive branch from requesting or conditioning charging decisions on an organization’s reasonable assertion of attorney-client privilege or decision to pay attorneys fees for an employee. This bill emphasizes that the right to counsel is chilled unless the confidential communications between attorneys and their clients are protected by from compelled disclosure. The Department of Justice has changed its rules three times in the past few years, and attorneys and clients need clarity and an unchanging rule.

This is the third try for legislation to protect the attorney-client privilege, following unsuccessful attempts in 2007 (S. 186) and 2008 (S. 3217). Last year's Senate bill contained these findings:
(1) Justice is served when all parties to litigation are represented by experienced diligent counsel.

(2) Protecting attorney-client privileged communications from compelled disclosure fosters voluntary compliance with the law.

(3) To serve the purpose of the attorney-client privilege, attorneys and clients must have a degree of confidence that they will not be required to disclose privileged communications.

(4) The ability of an organization to have effective compliance programs and to conduct comprehensive internal investigations is enhanced when there is clarity and consistency regarding the attorney-client privilege.

(5) Prosecutors, investigators, enforcement officials, and other officers or employees of Government agencies have been able to, and can continue to, conduct their work while respecting attorney-client and work product protections and the rights of individuals, including seeking and discovering facts crucial to the investigation and prosecution of organizations.

(6) Congress recognized that law enforcement can effectively investigate without attorney-client privileged information when it banned demands by the Attorney General for privileged materials in the Racketeer Influenced and Corrupt Organizations Act. See section 1968(c)(2) of title 18, United States Code.

(7) Despite the existence of numerous investigative tools that do not impact the attorney-client relationship, the Department of Justice and other agencies have increasingly created and implemented policies that tend to undermine the adversarial system of justice, such as encouraging organizations to waive attorney-client privilege and work product protections to avoid indictment or other sanctions.

(8) An indictment can have devastating consequences on an organization, potentially eliminating the ability of the organization to survive post-indictment or to dispute the charges against it at trial.

(9) Waiver demands and related policies of Government agencies are encroaching on the constitutional rights and other legal protections of employees.

(10) As recognized throughout the common law, and specifically in the crime-fraud exception, the attorney-client privilege, work product doctrine, and payment of counsel fees cannot and shall not be used as devices to conceal wrongdoing or to cloak advice on evading the law.

(b) Purpose- It is the purpose of this Act to place on each agency clear and practical limits designed to preserve the attorney-client privilege and work product protections available to an organization and preserve the constitutional rights and other legal protections available to employees of such an organization.

The 2008 bill was supported by 33 former United States Attorneys. A letter they sent to Senator Patrick Leahy (D.,VT), chair of the Judiciary Committee, said, "The widespread practice of requiring waiver has led to the erosion not only of the privilege itself, but also of the constitutional rights of the employees who are caught up, often tangentially, in business investigations."

Since then, the DOJ (while still under the prior administration) adopted new internal guidance for federal prosecutors covering the attorney-client and attorney work-product privileges. The U.S. Attorney’s Manual at chapter 9-28.710 (here) clarifies that what the government really needs from companies is not a waiver of the privileges but disclosure of relevant facts about their misconduct. But there's no assurance U.S. Attorneys in the field will follow the new guidance, and it's not binding on other government agencies that have adopted the DOJ's practice of requiring waivers.

View our prior posts on attorney-client privilege here.


The DOJ Contra Mundum

Six months ago, without fanfare, the Justice Department scrapped the McNulty Memo. It was replaced by new guidance for federal prosecutors about charging corporate organizations with crimes, including violations of the Foreign Corrupt Practices Act. The new guidance appears in the U.S. Attorney’s Manual (USAM) at chapter 9-28.000. Among its most striking features is new language about the attorney-client and attorney work-product privileges.

Under the 2006 McNulty Memo, and the Thompson Memo before it -- both named for former Deputy Attorney Generals who signed them -- the DOJ gave itself the green light to determine cooperation based in part on a company's willingness to waive the privileges. Refusing to waive could result in a criminal indictment or stepped up charges. Agreeing to waive, however, obligated the company to disclose to prosecutors conversations and documents exchanged between the company's employees and its lawyers, even if the employees thought those communications were confidential and protected from disclosure. At least that's how everyone outside the Justice Department thought it worked.

But the new U.S. Attorney’s Manual says everyone was wrong. It says the DOJ never required corporations to give up their rights. It argues, with a straight face, that since the privilege belongs to the company, only the company can choose to give it up. So every waiver is therefore voluntary. Getting back to business, the DOJ pays tribute to the privileges, saying they're old and sacrosanct; they serve the public interests by allowing full and frank discussions between attorneys and clients; and they're essential in today's world of complex rules and regulations imposed by governments at all levels. "For these reasons," the DOJ concludes, "waiving the attorney-client and work product protections has never been a prerequisite under the Department's prosecution guidelines for a corporation to be viewed as cooperative."

Never a prerequisite? That's not what 33 former U.S. Attorneys think. They sent a letter last June to Senator Patrick Leahy (D.,VT), chair of the Judiciary Committee. In the letter, they asked him to support a proposed bill intended to stop the Justice Department's practice of pressuring companies to waive the attorney-client privilege. The bill hasn't gone anywhere but the message from the 33 ex-federal prosecutors was loud and clear.

Under the McNulty Memo, they said, prosecutors could "demand that a business waive the privilege with regard to a host of communications with its counsel in exchange for more lenient treatment. . . . The widespread practice of requiring waiver has led to the erosion not only of the privilege itself, but also of the constitutional rights of the employees who are caught up, often tangentially, in business investigations."

The former prosecutors told Senator Leahy that federal legislation is the only way to fix things. The McNulty Memo, they wrote, supposedly set up a review process whenever waivers were sought, but the oversight didn't work. They cited a report by E. Norman Veasey, the former Chief Justice of Delaware. He found that prosecutors in the field still requested or demanded privilege waivers without the supervision required by the McNulty Memo. And, the ex-prosecutors warned, the McNulty Memo never covered other federal agencies, including the SEC, HUD, the FCC, and the EPA, among others, "all of which have issued copy-cat policies requiring waiver in exchange for cooperation."

USAM 9-28.000 didn't really change anything. It's the latest version of the DOJ's internal guidance, and that's all. It clarifies that what the government really needs from companies is not a waiver of the privileges but disclosure of relevant facts about their misconduct. But will U.S. Attorneys in the field follow the new guidance? Who can say? The track record under the McNulty Memo isn't encouraging. And the new guidance doesn't apply to other federal agencies. No matter what the DOJ does or doesn't do, other parts of the federal government can go on demanding waivers in exchange for cooperation. It's up to them.

View the U.S. Attorney’s Manual 9-28.000 / Principles of Federal Prosecution of Business Organizations here and USAM 9-28.710 on attorney-client and work-product protections here.

Download the June 20, 2008 letter to Senator Leahy regarding the Attorney Client Privilege Protection Act here.

Download the McNulty Memo here (large pdf file) and the Thompson Memo here.

Listen to the podcast here.


Dealing With The DOJ

The Justice Department resolves corporate FCPA enforcement actions these days by using deferred and non-prosecution agreements. And the go-to guys for information about them are Ryan McConnell, an Assistant United States Attorney in Houston, and Larry Finder, a partner in Houston with Haynes and Boone. They've identified, cataloged, analyzed and published findings about every "corporate pre-trial agreement" (their term) used from 1993 to 2008 -- all 112 of them.

They were joined for their latest study by Scott Mitchell, the head of the high-profile Open Compliance & Ethics Group, a nonprofit organization that helps member companies improve their culture by "integrating governance, risk management, and compliance processes."

In 2008, the authors say, there were just 16 deferred and non-prosecution agreements, down 60% from the record-setting 40 agreements in 2007. (From 2003-2006, there were 47 agreements; before 2003, there were just 9.) Seven of the 16 agreements last year related to Foreign Corrupt Practices Act settlements, compared with about a third in 2007. Last year's pre-trial agreements involved Sigue Corp., Jackson Country Club, WABTEC, Flowserve, AB Volvo, Willbros Group, AGA Medical, Faro Technologies, ESI, Milberg Weiss, Lawson Products, Republic Services, American Italian Pasta Co, Penn Traffic, IFCO and Fiat.

We asked Larry Finder a couple of questions about the 2008 study. Here's what he had to say:

The FCPA Blog: Why were the DPA / NPA numbers down so much last year?

Lary Finder: Your guess is as good as mine. It's possible that the DOJ was distracted with Congressional hearings and the possibility of federal legislation on the monitor issue, but I truly can't divine the reasons. It is equally as possible that in the post-9/11 environment, more investigatory resources, e.g., FBI and U.S. Attorney, have been concentrated on terrorism-related matters rather than fraud cases. I just don't know.

The FCPA Blog: Your 2008 study talks about the Justice Department's recent clarification [at United States Attorneys Manual 9-28.710] that it won't require waivers of attorney-client or attorney work-product privileges when determining corporate "cooperation." You also talk about the DOJ's new internal rules on the appointment of monitors and the ban on "extraordinary restitution" payments by corporate targets. Do the DOJ's internal rules have the force of law?

LF: As I recall, the DOJ often states (in its published monographs, for example) that its policies are generally not enforceable against the government. The federal case the Department often cites as authority for that proposition is United States v. Caceres, a Supreme Court case from the late 1970s. That being said, our analysis suggests that the Department has been abiding by its own waiver policy. We saw that the privilege waiver language in DPAs was the exception (statistics from 2007 showed only 3 waivers, while in 2008 we found but two) . Further, the Department has every incentive to avoid the perception of violating its own policies on privilege and monitors, lest the organized white collar bar again lobby for curative federal legislation. We'll have to wait and see.

* * *
Ellen Podgor at the White Collar Crime Prof Blog has already said, "This piece should be a must-read for in-house counsel and all attorneys working with companies on compliance programs." She's right. We don't know of any other way to get a clearer picture of what's going on with the DOJ's compliance agreements. This is practical information and a welcome bit of accountability.

The article can be downloaded now from SSRN here. It will appear in the May 2009 Corp. Counsel Rev. - Published by S. Tex. College Of Law, Volume XXVIII, No. 1.


Coercive, Abusive and Unconstitutional --- For Starters

The rule of law in the United States got some badly needed help last week from an unlikely source -- 33 former United States Attorneys. A letter they sent to Senator Patrick Leahy (D.,VT), chair of the Judiciary Committee, asked him to support the proposed Attorney-Client Privilege Protection Act known as S. 186. The bill's purpose is to stop the Justice Department's practice of pressuring companies to waive the attorney-client privilege.

Forcibly stripping legal entities of constitutional rights by threatening indictment or harsher punishment is a brutal practice. But it's the companies' flesh-and-blood employees who suffer most. Once an organization on its way to a plea deal or deferred-prosecution agreement waives the privilege, statements taken by the company's counsel during the internal investigation are handed over to prosecutors. That's done without the employees' consent, yet they face criminal prosecution and potential jail time for what they've said.

When they gave their statements, the employees didn't know all the relevant facts, couldn't possibly understand the implications of their words, had no idea the interviews would ever end up outside the company, never had help from lawyers and never even suspected they might need their own counsel. But according to the former USAs, several recent cases show that the employees "can be prosecuted for making false statements to the government, even though the statements were made only to company counsel."

A lesser but still important consequence of the DOJ's tactics is the undermining of compliance, the ex-prosecutors say. Employees who learn not to trust the attorney-client privilege will say less to company lawyers. Without a steady internal flow of honest and open dialogue, how can companies ever develop an effective compliance program? And when companies operate under deferred-prosecution agreements, the privilege is gone for two or three years. During that time everything said to in-house lawyers is open to the DOJ or SEC. So of course the lawyers aren't useful to employees as a compliance resource.

The New York Times reported that before the former U.S. Attorneys took up the cause, the DOJ's pressure tactics had come under "withering attack from lawyers, senior former Justice Department officials and federal judges, who criticized them as coercive, abusive and unconstitutional." There's more alarm today as the DOJ's modus operandi is adopted by more of the federal government -- now including the SEC, the Federal Communications Commission, and the Department of Housing and Urban Development, among others.

We close with thanks to the 33 former U.S. Attorneys. They must know better than most how the DOJ's current tactics are harming our companies, our citizens and our ideals. S. 186 would put a stop to it throughout the government. Let's hope Senator Leahy and his colleagues are listening.

The June 20, 2008 letter from the 33 former United States Attorneys to Senator Leahy can be found here courtesy of the Blog of the Legal Times.


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