Erosion of Attorney-Client and Work Product Privileges M a risse l - - PDF document

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 1

Erosion of Attorney-Client and Work Product Privileges

M a risse l De sc a lzo Ca rlt on Fie lds M ia m i, Florida

I. Introduction Over the past few years, the U.S. Department of Justice (“DOJ”) has eroded the attorney-client privilege by routinely forcing corporations to waive attorney-client and work product protections to secure cooperation credit. The DOJ has vigorously defended its policies in this regard, claiming that its ability to influence corporate behavior is an important tool in furtherance of white-collar

• investigations. Recently, the DOJ has tried to correct its mistakes with the issuance of the Filip

Memo, which appears to discourage prosecutors from forcing corporations to waive their attorney- client privilege. II. Privilege Waivers and Cooperation a. Holder Memorandum The first iteration of DOJ waiver policy was set forth in a 1999 memorandum issued by then-Deputy Attorney General Eric Holder (“Holder Memo”). The Holder Memo set forth factors that prosecutors

• ught to consider in evaluating whether to charge a corporation with a criminal offense.1 Prosecutors

were instructed to look at eight factors in determining whether to charge a corporation, including the corporation’s “cooperation and voluntary disclosure.”2 Prosecutors were also instructed that they could consider, in “assessing the adequacy of a corporation’s cooperation … the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections, both with respect to its internal investigation and with respect to communications between specific officers, directors, and employees and counsel.”3 The Holder Memo went on to explain that such waivers “permit the government to obtain statements of possible witnesses, subjects, and targets, without having to negotiate individual cooperation or immunity agreements … [and] are often critical in enabling the government to evaluate the completeness of a corporation’s voluntary disclosure and cooperation.”4 However, the Holder Memo did state that such waivers were only one consideration and were not an absolute requirement.5

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 2

b. Thompson Memorandum The Holder Memo was updated in 2003 by then Deputy Attorney General Larry Thompson (“Thompson Memo”). The Thompson Memo required prosecutors to consider nine factors in deciding whether to charge a corporation, including the corporation’s willingness to cooperate.6 Specifically, the Thompson Memo state’s that a “corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation are relevant factors in determining whether to charge the corporation.”7 The Thompson Memo further states that “[i]n gauging the extent of the corporation’s cooperation, the prosecutor may consider the corporation’s willingness to identify the culprits within the corporation, including senior executives; to make witnesses available; to disclose the complete results of its internal investigation; and to waive attorney-client and work product protection.”8 In essence, the Thompson Memo expanded and made mandatory the factors in the Holder Memo. As a result, it suffered from withering criticism from a range of organizations and individuals in the legal community, including the American Bar Association, the U.S. Chamber of Commerce, the American Civil Liberties Union, former senior DOJ officials and U.S. Attorneys, academics and practitioners.9 c. McNulty Memorandum The harsh criticism of the Thompson Memo and industry pressure forced the DOJ to adopt a revised policy, which was reflected in a memorandum authored by then Deputy Attorney General Paul McNulty in 2006 (“McNulty Memo”).10 The McNulty memorandum is regarded by some as a small step in the right direction away from the Thompson memorandum and toward preserving the attorney client and work product protections. Others believe the McNulty memorandum further confuses the issue of privilege waivers and employee rights, because it also instructs prosecutors to take into account “whether the corporation appears to be protecting its culpable employees and agents.”11 The McNulty Memo sets forth the following nine factors that prosecutors should consider when deciding whether to charge a corporation with a criminal violation: “1) the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime; (2) the pervasiveness of wrongdoing within the corporation, including the complicity in, or condonation of, the wrongdoing by corporate management; (3) the corporation’s history of similar conduct, including prior criminal, civil, and regulatory enforcement actions against it; (4) the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents; (5) the existence and adequacy of the corporation’s pre-existing compliance program; (6) the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies; (7) collateral consequences, including disproportionate harm to shareholders, pension holders and employees not proven personally culpable and impact on the public arising from the prosecution; (8) the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance; and (9) the adequacy of remedies such as civil or regulatory enforcement actions.”12 The McNulty memorandum emphasizes cooperation between “responsible corporate leaders” and the Department of Justice and the need for prosecutors to maintain “professionalism and civility” in order

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 3

to gain public and corporate confidence in the department and its tactics.13 Although under the McNulty Memorandum, “[p]rosecutors generally should not take into account whether a corporation is advancing attorneys’ fees to employees or agents under investigation or indictment,” the document indicates that in certain cases, a prosecutor can take a corporation’s advancement of fees into account where there is evidence that the corporation’s intent is to “impede a criminal investigation.”14 The McNulty Memo continues to encourage routine waiver by granting companies credit if they “voluntarily” waive privileges without being asked.15 Further, the McNulty Memo punished companies who choose to assist their employees. Specifically, the McNulty Memo indicates that “a corporation’s promise of support to culpable employees and agents, e.g., through retaining the employees without sanction for their misconduct or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.”16 d. Filip Memorandum After continued lobbying from different entities, Deputy Attorney General Mark Filip issued a revision of the Department of Justice’s existing guidelines for the investigation and prosecution of corporate fraud (“Filip Memo”).17 On August 28, 2008, the DOJ adopted all the proposed revisions and for the first time, the guidelines governing cooperation and waiver were added to the United States Attorneys’ Manual and were “binding on all federal prosecutors.”18 The Filip Memo retained the basic structural framework set forth in the McNulty Memo, continuing to identify the same nine factors that prosecutors should consider when deciding whether to charge a corporation with a criminal violation. The majority of the Filip Memo’s revisions focus on the “value

• f cooperation” factor. Specifically, the revisions were:

First, cooperation credit no longer depends on the waiver of the attorney-client and work product protections, rather prosecutors must focus on the willingness and sufficiency of a corporation’s disclosure of facts that would aid the government’s investigation.19 This is the most substantial revision to the McNulty Memo. Recognizing that DOJ policies “have been used, either wittingly or unwittingly to coerce business entities into waiving attorney-client privilege and work product protection,” the Filip Memo requires the disclosure of facts for cooperation credit, not necessarily the disclosure of privileged facts.20 In theory, this revision means that federal prosecutors could give cooperation credit for disclosure of fact whether the facts are privileged or not. Second, prosecutors are now prohibited from requesting that companies provide attorney-client communications or non-factual attorney work product.21 This rule is subject to two exceptions: 1) where the company or its agents assert an advice of counsel defense; or (2) where the communications between a corporation and counsel are made in furtherance of a crime or fraud.22 Third, federal prosecutors will not consider whether the corporation has advanced attorneys’ fees to its employees, including directors or officers, in evaluating the corporation’s cooperation.23 Likewise, prosecutors may not request that a corporation refrain from taking such action.24 This reflects the commonplace practice of most corporations of advancing legal fees as part of a benefits package. Presumably, this also reflects the ideology announced in United States v. Stein, infra.

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 4

Fourth, participation in a joint defense agreement will not preclude a company from receiving cooperation credit.25 Further prosecutors are prohibited from requesting that a corporation not enter into a joint defense agreement.26 However, prosecutors may request that if a company wishes to receive credit for cooperation, the corporation must refrain from disclosing information provided by the government to third parties.27 The problem with this revision is that the Filip Memo does not specifically state “prosecutors will not consider” whether a company entered into a joint defense

• agreement. As such, the possibility remains that federal prosecutors could consider joint defense
• agreements. On the other hand, the revision is a step in the right direction because it recognizes the

legitimacy and need for joint defense agreements. Finally, prosecutors will no longer consider whether the corporation has retained or sanctioned employees in evaluating cooperation.28 However, prosecutors may consider how and when a company disciplines culpable employees in evaluating the company’s remedial measures or compliance programs.29 This revision will have little if any practical impact because the government is still free to consider such action in the evaluation of a company’s restitution and remediation program.30 The thrust of the Filip Memo is that DOJ simply wants the facts, and is indifferent with respect to whether it obtains privileged material. In many instances, however, the facts are uncovered in an internal investigation by an attorney and are therefore privileged work product.31 e. Practical implications of cooperation after the Filip Memo Recent cases provide examples of the level of “cooperation” required to receive leniency from the government. (1) Fiat and Fiat subsidiaries In early 2000, Fiat S.p.A. (“Fiat”) and its subsidiaries become involved in the Oil-for-Food scandal.32 The Oil-for-Food program was set up by the UN Security Council and permitted a limited exception to the Iraq sanctions regime in that it allowed Iraq to sell its oil.33 The proceeds from oil sales had to be used by the Iraqi government to purchase humanitarian supplies, including but not limited to food, for the Iraqi people.34 According to government allegations, from 2000 through 2003, the Fiat and its subsidiaries, Iveco S.p.A. (“Iveco”), CNH Italia S.p.A. (“CNH Italia”), and CNH France S.A. (“CNH France”) (collectively “Fiat subsidiaries”), paid approximately $4.4 million in kickbacks in connection with the United Nations Oil-for-Food Program (“OFF Program”).35 The kickbacks were characterized in the contracts as “after sales service fees” (“ASSFs”) and the Fiat subsidiaries inflated the contracts by approximately 10%, in order to conceal the kickbacks from the U.N. which, according to the terms of the OFF, approved each contract before it could be funded.36 To fund and conceal the kickbacks, the Fiat subsidiaries secretly inflated their prices in their contracts with Iraqi ministries by approximately 10% before submitting them for U.N. approval, and concealed from the U.N. the fact that the price contained a kickback to the Iraqi government.37 Fiat subsidiaries paid illegal ASSFs through third-party agents and distributors.38 The ASSFs were incorrectly recorded on the company’s books and records as legitimate commissions; cost of goods sold, or service fees for its agents. 39

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 5

On December 22, 2008, Fiat and Fiat subsidiaries entered into a deferred prosecution agreement (“agreement”).40 The cooperation provision of the agreement is telling of what level of cooperation is required by the DOJ in the Filip Memo era. First, the agreement requires Fiat and Fiat subsidiaries to “cooperate fully” with the DOJ, including disclosing all information with respect to the corrupt payments and providing to the DOJ upon their request “any document, record, or other tangible evidence relating to such corrupt payments, books and records, and internal controls about which the Department inquires.”41 Second, Fiat and Fiat subsidiaries must designate knowledgeable employees, agents, or attorneys to provide the DOJ with information upon DOJ’s request.42 Third, Fiat and Fiat subsidiaries “must use their best efforts to make available” for testimony and/or interviews present and former directors, officers, employees, agents and consultants as request by the DOJ.43 Finally, Fiat and Fiat subsidiaries must consent to the disclosure of any information they provide to the DOJ to

• ther government agencies.44

(2) Lloyds TSB Bank It appears that beginning in 1995, Lloyds TSB Bank (“Lloyds”) engaged in violations of the International Emergency Economic Powers Act (“IEEPA”).45 Under the IEEPA, it is a crime to willfully violate, or attempt to violate, any regulation issued under the act, including the Iranian Transactions Regulations, which prohibit exportation of services from the United States to Iran, and the Sudanese Sanctions Regulations, which prohibit exportation of services from the United States to Sudan.46 According to the factual statement submitted to the court, Lloyds, in both the United Kingdom and Dubai, falsified outgoing U.S. wire transfers that involved countries or persons on U.S. sanctions lists.47 This process allowed more than $300 million in transactions to be processed by U.S. correspondent banks used by Lloyds that might have otherwise been blocked or rejected due to sanctions regulations or for internal bank policy reasons.48 On January 9, 2009, Lloyds entered into a deferred prosecution agreement (“agreement”) with the DOJ.49 Like the cooperation provision in the Fiat agreement, supra, the cooperation provision in the Lloyd’s agreement is telling of what level of cooperation is required by the DOJ in the Filip Memo

• era. First, the agreement requires Lloyds to conduct a review of any payment data held by it or its

subsidiaries and affiliates and provide any information related to incoming and outgoing wire transfers to the DOJ.50 The agreement is very specific as to the time period and origin of the wires.51 Further, the agreement requires that the review must be conducted with the assistance of an independent consultant, but the consultant is selected by Lloyds, not the DOJ.52 Lloyds is also required to make available to the DOJ any additional relevant documents, electronic data, or other objects in Lloyds possession that relates to the scope of the government’s allegations.53 However, the agreement specifically states “[n]othing in this Agreement shall be construed to require Lloyds to produce any documents, records or tangible evidence that are protected by the attorney-client privilege or work product doctrine.”54 III. What are the courts doing? Interestingly, the DOJ announced its adoption of the Filip Memo on the same day that the Second Circuit affirmed a lower court decision that dismissed indictments against former employees of

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 6

KPMG on grounds that the DOJ’s policy of discouraging corporations from advancing legal fees to employees violated the employees’ Fifth and Sixth Amendment rights.55 In 2004, KPMG was being investigated by the United States Attorney’s Office, so KPMG approached them to determine what it could do to cooperate. The government made clear that KPMG’s payment

• f legal fees for employees could count against KPMG in any charging decision, notwithstanding

KPMG’s long-standing voluntary practice of paying legal fees for employees.56 In fact, the named defendant, Jeffrey Stein left KPMG under a severance contract that included advancement of legal fees.57 Under pressure from the government, KPMG acquiesced and made clear to employees that it would provide only limited legal fees, and only while the employee cooperated with the government.58 KPMG eventually received a non-prosecution agreement, but thirteen of its former employees were indicted.59 In January 2006, all thirteen moved to dismiss the indictment based on the government’s interference with KPMG’s advancement of fees.60 The district court determined that the government deprived the employees of their right to fair criminal proceedings.61 Specifically, the district court concluded that the government violated the employees’ Fifth Amendment right to substantive due process because the defendants had a fundamental right to use available resources free of government coercion.62 The court further stated that the government violated the employees’ Sixth Amendment right to a lawyer of one’s choice because the government improperly interfered with the employees’ expectation of receiving advancement of legal fees.63 Then, the judge dismissed the indictment.64 The Second Circuit affirmed the district court's decision, holding: "In a nutshell, the Sixth Amendment protects against unjustified governmental interference with the right to defend oneself using whatever assets one has or might reasonably and lawfully obtain."65 The Court of Appeals also noted pointedly that "if it is in the government’s interest that every defendant receives the best possible representation, it cannot also be in the government’s interest to leave defendants naked to their enemies."66 The deadline for the Justice Department to file a petition for writ of certiorari to the Supreme Court passed in late November with no action taken.67 IV. Where are we now? The hope is that the impact of both Stein and the Filip Memo will be a restoration of the ability of corporations to engage in the traditional defense activities that follow from an enforcement investigation and risk of prosecution. However, it may be that the Stein decision is limited to a situation in which the government actually coerced an organization, and the organization’s employees had a legitimate property interest in the item withheld, i.e., the advancement of legal fees. Similarly, federal prosecutors may interpret the Filip Memo to their advantage and continue to impede on a corporation’s ability to defend itself. Further, while the Filip Memo and Stein are a step in the right direction, the impact on criminal investigations and corporate liability remain to be seen. We will have to wait and see how federal prosecutors interpret the guidelines.

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 7

ABOUT THE PRESENTER(S)

Marissel Descalzo

• Ms. Descalzo is an associate at Carlton Fields, resident in the firm’s Miami office. She is co-

chair of the Internal Investigations/Corporate Prosecution subcommittee of the ABA Criminal Litigation Section. She is part of the Carlton Fields’ White Collar Crime Practice Group and focus on the defense of white collar grand jury investigations and prosecutions involving Antitrust, Foreign Corrupt Practices Act, Securities and Federal Election law, labor and union disputes, health care regulatory issues, environmental matters, Department of Defense and other government contracts, public corruption, banking transactions, and tax controversies.

1

Memorandum from Eric H. Holder, Deputy Attorney General, U.S. Dep’t of Justice to All Component Heads and United States Attorneys on Bringing Criminal Charges Against Corporations (June 16, 1999), available at http://www.usdoj/criminal/fraud/docs.reports/1999/chargingcorps.html.

2

Id.

3

Id.

4

Id.

5

Id.

6

Memorandum from Larry D. Thompson , Deputy Attorney General, U.S. Dep’t of justice, to Heads of Department Components and U.S. Attorneys on Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003) available at http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm

7

Id.

8

Id.

9

See Mark J. Stein and Joshua A. Levine, The Filip Memorandum: Does It Go Far Enough?, 240 N.Y.L.J. Col. 4 (2008)

10

Memorandum from Paul J. McNulty, Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Department Components and U.S. Attorneys, Principles of Federal Prosecution of Business Organizations (Dec. 12, 2006) available at http://www.usdoj.gov/dag/speech/2006/mcnulty_memo.pdf.

11

• Id. at 11.

12

• Id. at 4.

13

• Id. at 1-2.

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 8

14

• Id. at 11-12.

15

See “Examining Approaches to Corporate Fraud Prosecutions and the Attorney-Client Privilege under the McNulty Memorandum Before the Comm. on the Judiciary, 110th Cong. 38 (2007) (statement of the American Bar Association).”

16

McNulty Memo at 11.

17

The “Filip Memo” is a misnomer because the principles were included for the first time in the United States Attorneys’ Manual. The “Filip Memo” was actually a letter penned by Deputy Attorney General Mark Filip and sent to Senator Patrick Leahy, Chairman of the Judiciary Committee, which

• utlined five revisions to the DOJ’s policies that the DOJ expected to make in the next few weeks.

Letter from Mark Filip, Deputy Attorney General to the Honorable Patrick J. Leahy, Chairman, and The Honorable Arlen Specter, Ranking Member, Senate Committee on the Judiciary, July 9, 2008.

18

The Dep’t of Justice, Justice Department Revises Charging Guidelines for Prosecuting Corporate Fraud (August 28, 20087) available at http://www.usdoj.gov/opa/pr/2008/August/08-odag- 757.html.

19

Filip Memo at 9-10.

20

Peter B. Ladig and Stephen B. Braverman, McNulty Revisited How the Filip Memorandum Changes the DOJ’s Approach to Corporate Investigations and Prosecutions, Corporate Counseller 23 (December 2008).

21

Filip Memo at 11.

22

• Id. at 12.

23

• Id. at 13.

24

• Id. at 13.

25

Id.

26

Id.

27

Id.

28

Compare The Dep’t Justice, Principles of Federal Prosecution of Business Organizations, at 7-14 with McNulty Memo, at 7-12.

29

• Id. at 15.

30

Ladig and Braverman, supra, at 3.

31

See Stein and Levine, supra.

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 9

32

Letter from Steven A. Tyrrell, Chief, Fraud Section, U.S. Dep’t of Justice and Lori A. Weinstein, Trial Attorney, Fraud Section, U.S. Dep’t of Justice to John L. Hardiman, Counsel for Fiat S.p.A., December 22, 2008 available at http://www.usdoj.gov/opa/documents/fiat-dpa.pdf.

33

• Id. at Appendix “A,” p. 1-3

34

Id.

35

• Id. at Appendix “A,” p. 12-14, 20.

36

• Id. at Appendix “A,” p. 3-4.

37

• Id. at Appendix “A,” p. 3, 6, 15.

38

• Id. at Appendix “A,” p. 4.

39

Id.

40

• Id. at 1.

41

• Id. at 3.

42

Id.

43

Id.

44

• Id. at 4.

45

Joint Motion for Approval of Deferred Prosecution Agreement and Exclusion of Time under the Speedy Trial Act at Exhibit “A,” p.1, United States v. Lloyds TSB Bank PLC, No. CR-09-007 (D.C.

• Jan. 9, 2009),

46

• Id. at Exhibit “A,” p. 4-5.

47

• Id. at Exhibit “A,” p. 1

48

• Id. at Exhibit “A,’ p. 10-11.

49

Id.

50

• Id. at Exhibit “1,” p. 4.

51

• Id. at Exhibit “1,” p. 4-5.

52

• Id. at Exhibit “1,” p. 5.

53

Id at Exhibit “1,” p. 5-6.

54

• Id. at Exhibit “1,” p. 6.

55

United States v. Stein, 435 F. Supp. 2d 330, 336 (S.D.N.Y. 2006), aff’d, 541 F.3d 130 (2d Cir. 2008).

ABA Section of Litigation Annual Conference, April 29 – May 2, 2009: The Role of Privilege in Investigations and Prosecutions of Corporations 10

56

• Id. at 340-42.

57

• Id. at 339.

58

• Id. at 345-346.

59

• Id. at 345-346 and 350.

60

Id.

61

• Id. at 382.

62

• Id. at 361-366.

63

• Id. at 367-370.

64

• Id. at 382.

65

United States v. Stein, 541 F.3d 130, 156 (2d Cir. 2008).

66

• Id. at 157.

67

A much more limited version of the case is still underway before Judge Kaplan. At this time,

• nly three former KPMG executives, who were not adversely affected by the Government's

misconduct and one ex-partner at Sidley Austin are facing charges based on the allegedly fraudulent tax shelters.