New Jersey White Collar Defense Lawyer & Attorney : Fox Rothschild Law Firm : Criminal Defense, Insider Trading, RICO, Consumer Fraud : New Jersey, New York City

On August 28, 2008, the Department of Justice announced revisions to its controversial Principles of Federal Prosecution of Business Organizations.

Initially cast as the "Thompson Memo" and then revised as the "McNulty Memo," these principles had been wielded by federal prosecutors as a cudgel, used to bludgeon corporations into waiving the attorney-client privilege and work product protections associated with the fruits of internal investigations and to compel the turnover of those materials in order to qualify the corporation for lenient treatment or no prosecution at all. Corporations who would not comply with these demands could, and would, be charged. Prosecutors had gone even further; the earlier formulations of these Principles had implicitly authorized them to take severe measures against corporations which advanced the legal fees of indicted officers or which had joined in common defense arrangements with such officers.

Spurred by Judge Lewis Kaplan's excoriation of the government for such heavy-handed tactics and his dismissal of an indictment in the KPMG prosecution in the Southern District of New York (United States v. Stein, et al), the DOJ finally surrendered. Yesterday, the DOJ adopted changes to the Principles which now provide explicitly that corporate cooperation will not be judged by a willingness to waive the privilege or work product protection associated with employee interviews and other investigative efforts, but will turn only on a willingness to disclose relevant facts. Prosecutors are now prohibited from seeking disclosure of privileged communications or opinion work product.

Moreover, prosecutors may no longer consider in assessing a corporation's eligibility for leniency whether the corporation is advancing legal fees for employees, or whether the entity has or has not fired or disciplined culpable employees. No longer will corporate participation in a joint defense agreement render the entity ineligible for favorable treatment.

These changes have been a long time in coming. Punishing corporations which act to protect the Sixth Amendment rights of their employees and which take the ameliorative step of internally investigating allegations of misconduct in an appropriate and confidential manner was not right and it was not consistent with the Constitution. And now it is also prohibited.
 

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Determined to halt efforts by DOJ attorneys to improperly demand the fruits of internal investigations as a price for achieving a DPA or a non-prosecution agreement,  32 former federal prosecutors recently issued a letter expressing their support for legislation that would preclude federal attorneys and agents from seeking waivers of attorney-client privilege or attorney work product protection in conducting civil or criminal investigations of business organizations (http://www.nytimes.com/2008/06/23/business/23law.html?ref=business&pagewanted=print).

The legislation, entitled the Attorney-Client Privilege Protection Act of 2007, is authored by Pennsylvania Senator Arlen Specter. A corresponding bill passed in the House of Representatives in November 2007 (http://www.foxrothschild.com/Newsstand/News.aspx?id=5666). The Senate Judiciary Committee held hearings on the legislation in September 2007, receiving testimony from such witnesses as former Attorney General Dick Thornburgh (http://www.foxrothschild.com/Newsstand/News.aspx?id=5328). Senator Specter introduced a revised bill on June 26, 2008, modified to tighten language regarding organizations eligible to benefit from the organization and other language that the Department of Justice had criticized as ambiguous (http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?position=all&page=S6294&dbname=2008_record). As Senator Specter, a former prosecutor, noted, “The prosecutor has enough power without the coercive tools of the privilege waiver" (http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?position=all&page=S6295&dbname=2008_record). 

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A corporation which desires to cooperate either with a civil investigative agency, such as the Securities Exchange Commission, or a prosecutive authority, such as the local U.S. Attorney’s Office, is often asked by the government to turn over the results of any internal investigation as a demonstration of its cooperative spirit and as a badge of good corporate citizenship.

Much ink has been spilled, electronically speaking, on the propriety of governmental demands for the fruits of internal investigations, demands which reached their height in the Justice Department under corporate prosecution guidelines issued in 2003 and known as the Thompson Memorandum (http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm), and which continue to a lesser extent under the superseding 2006 McNulty Memorandum (http://www.justice.gov/dag/speeches/2006/mcnulty_memo.pdf).  The SEC has sought similar materials under the coercive pressure of the so-called "Seaboard Report" (Exchange Act Release No. 449969, Oct. 23, 2001).  Defenders of the attorney-client privilege have rightly argued that exacting the production to the government of the results of internal investigations as a price for non-prosecution severely undermines the privilege and exemplifies overreaching by the government. Another, corollary consequence of the compelled production of such materials has been less widely discussed: production to the government may effect a general waiver of the work product protection attaching to documents such as interview memoranda and attorney-opinion analyses, leaving them subject to discovery in related civil litigation.

Most circuit courts of appeal have been hostile to corporations seeking to preserve opinion work product in the face of disclosure to the government, holding that a disclosure – even in furtherance of cooperation or under compulsion of a subpoena – amounts to a general waiver. E.g.,  In re Quest Communications, Int’l, 450 F.3d 1179 (10th Cir. 2006); United States v. Mass. Inst. of Technology, 129 F.3d 681(1st Cir. 1997); Westinghouse Electric Corp. v. Republic of the Philippines, 951, F.2d 1414 (3d Cir. 1991); Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981).

Only the Eighth Circuit, in Diversified Indus. v. Meredith, 572 F.2d 596 (8th Cir. 1977), has applied a selective waiver approach, holding that a company’s production of internal memoranda to the SEC under compulsion of a subpoena causes the documents to retain their work product protection. The rationale of the Diversified Indus. court was that protecting such materials even after their disclosure to the government would encourage corporations to retain outside counsel to investigate corporate wrongdoing and would facilitate the disclosure of such evidence to the government.

The Second Circuit in In re Steinhardt Partners, 9 F.3d 230 (2nd Cir. 1993) stopped short of Diversified Indus., and held that no work product protection remained for documents which were voluntarily disclosed to the SEC. The Second Circuit, however, left the door to a selective waiver argument open a crack by suggesting that work product protection could be retained where the disclosing party and the government had a “common interest in developing legal theories and analyzing information” or where the SEC had explicitly agreed to maintain the confidentiality of the documents. Id. at 236.

Recently, however, that door was further closed by the district court in In re Initial Public Offering Sec. Litig., 2008 WL 400933 (S.D.N.Y., Feb. 14, 2008). There, Credit Suisse had produced to the SEC and U.S. Attorney’s Office interview summaries created as part of an internal investigation into alleged IPO allocation misconduct. But Credit Suisse only did so after securing confidentiality agreements from both agencies, expecting that by doing so it would enjoy a safe harbor under the Steinhardt analysis.

Stopping just short of rejecting entirely the selective waiver doctrine, since Steinhardt had in theory recognized the possible application of the doctrine to some hypothetical state of facts, the IPO district court concluded that “selective waiver is not in the long-term best interests of the government, the adversarial system, or litigants.” *6. The court held that a “strong presumption” existed against a finding of selective waiver, and that it should not be permitted “absent special circumstances,” id., which were not identified.

Since the Credit Suisse attorneys believed they had followed the prescription of Steinhardt, yet still found that their disclosure to the government had effected a complete waiver of work product protection, the more prudent course of action in the Second Circuit – at least until the court of appeals speaks again to the selective waiver doctrine - - is to assume that disclosure to the government constitutes a waiver as to the rest of the world.

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