Two independent events that occurred on August 28, 2008, will likely dramatically change the way that the United States Department of Justice (DOJ) handles prosecutions of corporations and other entities. First, Deputy Attorney General (DAG) Mark Filip announced a series of changes to the DOJ’s Corporate Charging Guidelines that eliminate waiver of the attorney client privilege and several other key considerations as factors in determining a corporation’s level of cooperation. Second, the United States Court of Appeals for the Second Circuit issued its opinion in United States v. Stein, upholding the dismissal of indictments against 13 former employees of KPMG as a sanction for the government’s attempt to force KPMG to cease paying criminal defense costs to these individuals.

New DOJ Corporate Charging Guidelines

At a press conference last Thursday, DAG Filip announced the DOJ's new corporate charging policy, with special emphasis on what it means for a business organization to "cooperate" with the government in the course of a criminal investigation. As background to these new policies he stated that:

  • The investigation and prosecution of corporations is critical to the public interest, and remains a high priority of the DOJ.
  • The corporation itself is a potential ally in the government's investigation and the DOJ has long had a policy of awarding "credit” to companies that cooperate.
  • The DOJ was aware of the criticism that has been expressed in various quarters about prosecutors' demand for the waiver of privileged materials and/or work product in order for the corporation to receive cooperation credit. The DOJ was also aware that some prosecutors have refused to offer cooperation credit if a company advanced or paid its employees' attorneys' fees, entered into joint defense agreements, or did not discipline or fire certain employees.
  • In formulating the new policy, he had spoken with members of Congress, the criminal defense bar, the civil liberties community, the business community, and former DOJ officials, among others.

The major changes to the Department’s Guidelines which are to be released as revisions to the United States Attorney’s Manual, rather than as a separate policy memo (as in the past), include the following:

  • Disclosure of Facts Only: Credit for cooperation will not depend on whether the company has waived attorney-client privilege or work product protections, or whether it has produced materials that are protected. Instead, the corporation's cooperation credit will depend solely on the disclosure of facts. If the company timely discloses relevant facts, it can receive credit for cooperation, regardless of whether it did so through disclosure of privileged or protected material. Corporations that do not disclose such facts typically will not receive such credit. The stated goal is to try to treat corporations and individuals the same in this context.
  • Non-Factual Communications: Prior DOJ policy allowed prosecutors to request that the corporation disclose non-factual attorney-client communications (Category II information, under the McNulty Memo). DAG Filip observed that these communications lie at the core of the attorney-client privilege and work product protections. The new policy prohibits prosecutors from asking for such information, with two exceptions that are well recognized in legal doctrine: the advice of counsel defense and the crime fraud exception.
  • Payment of Attorneys' Fees: The new policy instructs prosecutors not to consider whether the corporation has paid or advanced attorneys' fees to its employees, directors, officers, and so forth. The earlier guidance allowed prosecutors to reserve the right to consider such payments; this is no longer the case. Such payments will be relevant only in the rare situation where payments, plus other circumstances, rise to the level of obstruction of the investigation.
  • Joint Defense Agreements: Prosecutors may not consider whether the corporation has entered into a joint defense agreement in its determination of the company's cooperation credit. DAG Filip observed that there are legitimate reasons why corporations may or may not enter into such agreements. The government can still ask that counsel not disclose certain information received from the government to third parties.
  • Discipline/Dismissal of Employees: The prior guidance allowed prosecutors, in making their charging decision, to consider whether the corporation fired or disciplined any of its employees. This is now disallowed. Prosecutors can consider whether the corporation fired or disciplined employees only with respect to an evaluation of the effectiveness of the company's compliance program. Of course, this still provides an avenue for prosecutors to exert pressure on companies to discipline or dismiss employees.

In closing, DAG Filip reiterated that no corporation is obliged to cooperate or to seek cooperation credit. He noted that refusal to cooperate, just as it is for individuals, is not evidence of guilt. Refusing to cooperate does not require the filing of criminal charges; it simply means that the corporation will not be entitled to mitigation credit. The company still enjoys the presumption of innocence. DAG Filip also noted that he believes the new guidelines eliminate any need for legislation in an area the Department considers to be a matter of internal policy. He said that while no other investigative agencies, such as the Securities and Exchange Commission, had as of yet adopted these guidelines, there were ongoing discussions to that end and he was hopeful that there would be agreement by the other agencies to adopt similar protections for corporations.

While the new guidelines go a substantial way towards eliminating some of the most onerous components of the McNulty Memo policies, they still leave companies with a potential quandary. The policy requires companies to disclose factual information related to the alleged wrongdoing in order to obtain mitigating credit for its cooperation. Because such facts are typically developed through investigation by in-house or outside counsel and thus protected by work product immunity, cooperation pursuant to the new guidelines still exposes companies to arguments by third parties in civil suits or other investigative agencies that they must be provided the facts as well. Proposed changes to the Federal Rules of Evidence may lessen this danger in the future.

Second Circuit Affirms Dismissal of Indictments in KPMG Case

In one of the cases that fostered the backlash against the Department’s corporate charging policies, the United States Court of Appeals for the Second Circuit issued its opinion in United States v. Stein, Case 07-3042-cr (August 28, 2008), upholding the dismissal of indictments against 13 former partners or employees of KPMG as a sanction for the government’s attempt to force KPMG to stop payments for criminal defense costs to these individuals. Hogan & Hartson submitted a brief in opposition to the DOJ’s position on behalf of amicus curiae consisting of former United States Attorneys, First Assistants, and Criminal Division Chiefs.

This case began with an investigation by the United States Attorney’s Office for the Southern District of New York into the activities of the accounting firm KPMG and certain of its employees. The indicted individuals argued that during the course of the investigation the government had pressured KPMG to reverse its long standing policy of paying costs of defense for employees accused of wrongdoing as a prerequisite to receiving credit for cooperation. The defendants argued this was impermissible government interference in their right to counsel and due process. The district court agreed and initially entertained a civil suit by the defendants against KPMG for payment of fees. When the Second Circuit found that there was no jurisdiction for this suit, the trial court ordered the indictments against the defendants dismissed finding that it was the only appropriate remedy for the government’s interference with the defense efforts of the individual defendants.

The Second Circuit upheld the dismissal of the indictments against the individual defendants. The Court upheld the finding that KPMG’s decision to condition, limit and then ultimately deny payment of legal defense costs was a direct result of the government’s overwhelming influence and interference. Because of the level of influence asserted by the U.S. Attorney’s office, the decisions of KPMG with respect to fee advancement amounted to state action. The Court went on to find that such interference, which deprived the defendants of either their right to counsel of their choice, or their ability to have such counsel mount a complete and thorough defense, constituted a violation of the defendants’ Sixth Amendment right to counsel. Finding that the district court was correct in determining that there was no other possible remedy, the Court of Appeals affirmed the dismissal of the indictments as to all 13 defendants.

Although the new Corporate Charging Guidelines will, if followed, make repetition of this case unlikely, it nevertheless strikes a blow against what the government saw as its unfettered power to exert pressure on corporations to cooperate – where that cooperation was defined solely by the government itself.