The Department of Justice (DOJ) recently implemented new policies on evaluating corporate cooperation with federal investigations, directing prosecutors not to ask corporate defendants to waive attorney-client privilege or limit assistance to employees under investigation. Meanwhile, the Second Circuit affirmed the dismissal of charges against former KPMG executives whose right to counsel, the court said, had been infringed by the activities of federal prosecutors. These two developments will give greater leeway to corporations as they respond to Government investigations. While a welcome change for corporate defendants, the effect of the DOJ's new policy has limits. Since the policy change was self-imposed, it remains subject to change and is not binding on other departments with investigative powers. The Second Circuit's opinion, however, may be more far-reaching.
The revision to the Principles of Federal Prosecution of Business Organizations, announced by Deputy Attorney General Mark R. Filip on August 28, was the first major change to the policy since the controversial "McNulty Memo" in 2006. The new policy makes clear that the "eligibility for cooperation credit is not predicated upon the waiver of attorney-client privilege or work product protection." Prosecutors "should not ask for such waivers and are directed not to do so." Rather, the "critical factor" in evaluating cooperation is whether the corporation has timely disclosed the relevant facts about the misconduct under investigation. Two exceptions remain, however: prosecutors may request privileged communications and work product if (1) a defendant asserts an advice-of-counsel defense, or (2) the communications are in furtherance of a crime or fraud.
The new policy also removes from consideration whether a corporation is advancing or reimbursing attorneys' fees or providing counsel to employees or directors under investigation or indictment. Prosecutors are no longer allowed to request that a corporation refrain from such support, and paying for officers' and directors' attorneys cannot be considered an impediment to the Government's investigation.
Additionally, the DOJ's new policy removes from consideration two factors that prosecutors used to weigh when evaluating cooperation. First, prosecutors may not consider whether the corporation has entered into a joint defense agreement, although corporations are still expected to refrain disclosing to third parties confidential information shared by the Government. Second, prosecutors may no longer consider whether a corporation disciplined or terminated employees as a measure of cooperation. Rather, prosecutors may only consider such action in evaluating the corporation's remedial measures or compliance program.
While non-prosecution and deferred prosecution agreements have always been available to prosecutors, the new policies explicitly recognize that these options "occupy an important middle ground between declining prosecution and obtaining the conviction of a corporation." Unlike the McNulty Memo and its predecessors, the new revisions are included in the United States Attorneys' Manual.
On the same day the DOJ announced its new policies, the Second Circuit hammered the Government for its "overwhelming influence" in convincing KPMG to cut off financial support for executives under investigation. In United States v. Stein (No. 07-3042), the court upheld the district court's ruling that the Government had violated the KPMG executives' Sixth Amendment right to counsel by conditioning—and ultimately cutting off—the company's advancement of legal fees. The court ruled that the only remedy for the Government's misconduct was to dismiss the charges.
The Stein decision arose from the Government's investigation of KPMG's possible involvement with fraudulent tax shelters. The company made great efforts to cooperate with the DOJ's investigation, but under the DOJ's policy at the time, advancement of attorneys' fees to culpable employees could be considered an attempt to impede the investigation. When the DOJ expressed "disappointment" regarding KPMG's policy of advancing attorneys' fees to its employees, KPMG sharply limited it. When the defendants in Stein, former executives and employees of KMPG were indicted, the company promptly stopped advancing fees to those whose fees had not already been cut off. The Court of Appeals confirmed the lower court's holding that but for the DOJ's policy and the prosecutors' conduct, KPMG would have advanced the indicted defendants' legal fees. KPMG's decision was understandable in light of its belief that its survival was at stake, and under the influence of the Government, that it had become a state actor. Accordingly, the conduct amounted to a deprivation of the constitutional right to counsel, and the appropriate remedy in this case was the dismissal of the charges.
The new policy should give corporations and their counsel greater comfort that traditional attorney-client communications and protected work product will not reach the Government. Corporations need not surrender the conclusions and advice provided by corporate counsel to obtain favorable treatment from a prosecutor, nor will a corporation have to choose between currying favor with a prosecutor and complying with its corporate bylaws—and in some locations, with state law—by advancing attorneys' fees to officers and directors. Unlike the DOJ's revised policy, the Stein decision will restrict the activities of all Government agencies. That opinion, however, focused on the issue of attorneys' fees, and did not reach the issue of waiver.
Even with the revised DOJ policy and the Stein decision, a more permanent safeguard remains a possibility. Congress is still considering the Attorney-Client Privilege Protection Act, which would codify protections of privileged communications and work product and apply to all Government agencies. The House passed a version last year, but the Senate has yet to make a similar move. Sen. Arlen Specter (R-PA) introduced the bill this summer after an earlier attempt in 2007, but no movement on the bill is likely this year, as Congress will be adjourning shortly.