Two recent policy changes by the U.S. Department of Justice and the Securities and Exchange Commission are important to corporations and other business organizations involved in internal investigations and government enforcement actions.
Over the past few years, the DOJ has made a series of revisions to its rules of engagement for pursuing suspected corporate crime. The focus has centered on the extent to which prosecutors may withhold credit for cooperating from a corporation based on its conduct during an investigation. In August, the DOJ revised its cooperation-credit policies again after Congress ratcheted up threats to enact legislation protecting, for example, corporations' rights to refuse to waive attorney-client or work product privileges without being penalized.
The SEC also recently clarified certain cooperation policies by publicly releasing its enforcement manual, called "The Red Book," for the first time. Both developments should impact practices by companies conducting internal investigations into possible misconduct and defending against DOJ and/or SEC investigations.
Understanding the new DOJ guidelines requires some background. In 2003, then-Deputy Attorney General Larry Thompson issued a memorandum to guide prosecutors in how they investigate, charge and prosecute corporate crimes. With some adjustments geared toward the post-Enron Corp. environment, Thompson mostly repeated the principles issued a few years earlier by his predecessor, then-Deputy Attorney General and now U.S. Attorney General nominee Eric Holder, as a review of both sets of guidelines shows.
Thompson's memo listed nine non-exclusive factors for prosecutors to consider when reaching a corporate charging decision, which included the corporation under scrutiny's willingness to cooperate. Thompson also included factors prosecutors could consider when determining whether to award cooperation credit to a corporation, including whether it failed upon request to waive the attorney-client or work product privileges, indemnified potentially culpable employees, or entered into a joint defense agreement with or disciplined such employees.
Each factor received much criticism. For example, in United States v. Stein, et al. , U.S. District Judge Lewis A. Kaplan of the Southern District of New York in June 2006 found the indemnification factor of the test unconstitutional. Later that year, U.S. Sen. Arlen Specter, R-Pa., then-chairman of the Senate Judiciary Committee , introduced the Attorney-Client Privilege Protection Act (ACPPA), which prohibits federal agencies from considering any of the Thompson cooperation factors.
Reacting to the criticism, then-Deputy Attorney General Paul McNulty issued a revised DOJ corporate charging memorandum in November 2006. McNulty kept most of the Thompson memo in place, except for the following two revisions regarding cooperation: First, McNulty directed prosecutors "generally" not to consider whether a corporation was indemnifying an employee under investigation. Second, McNulty allowed prosecutors to seek privilege waivers only if a legitimate law enforcement need existed and they obtained certain DOJ approval; the type of approval depended on whether the protected information was factual or legal in nature.
While prosecutors sought fewer privilege waivers following the McNulty memo, critics claimed it did not go far enough to limit privilege waiver and the other cooperation factors. As a result, in June 2007, U.S. Rep. Robert Scott, D-Va., a member of the House Judiciary Committee, introduced the ACPPA of 2007 in the House. It passed the House in November 2007, but the Senate stopped short of a vote; instead, it put pressure on the DOJ to revise its cooperation policies again.
In August 2008, the DOJ re-issued its corporate charging policies. The DOJ incorporated the new principles into the "U.S. Attorney's Manual," as opposed to issuing a memorandum from the sitting deputy attorney general. The principles include most of the language from the Thompson and McNulty memos, except for the following revised cooperation principles:
• Prosecutors should measure cooperation by the extent to which a corporation discloses relevant facts, not its waiver of privileges.
• Prosecutors may not request — or even consider the failure to provide — nonfactual privileged information, such as legal advice, in assessing a corporation's level of cooperation.
• Prosecutors cannot consider whether the corporation has indemnified its employees, entered into a joint defense agreement with or terminated them in assessing cooperation.
Importantly, the principles acknowledge that corporations obtain facts differently than individuals. In conducting an internal investigation, for example, a corporation's most common method of obtaining facts is through interviews of corporate personnel conducted by counsel. The notes or memos generated by counsel from such interviews could arguably be both attorney-client and work product privileged. For this reason, under the Thompson and McNulty memos, in-house and outside attorneys representing corporations in internal investigations and government enforcement cases were careful about what information they included in their notes or memos — and about whether to generate notes or memos at all — knowing that the government might request privilege waiver for cooperation credit.
The principles might ease these concerns, as the DOJ now bases cooperation credit in part on whether the party has disclosed relevant facts, not waived a privilege. For example, to receive cooperation credit, the corporation no longer must produce, and prosecutors may not request, protected notes, memos or similar information generated in connection with counsel's interviews. However, the corporation must disclose, and prosecutors may request, relevant facts acquired through those interviews to earn cooperation credit. In practice, counsel may approach this in the form of a presentation to prosecutors as opposed to a hand-off of privileged materials generated in an internal investigation.
Furthermore, the principles state that a corporation must not disclose, and prosecutors may not request, nonfactual privileged information, such as legal advice, for cooperation credit. (Prosecutors, however, can always seek communications that are made in furtherance of a crime or that relate to an advice-of-counsel defense.) Under the Thompson and McNulty memos, attorneys for corporations often hesitated to issue written reports to clients containing legal advice or recommendations following an internal investigation to avoid disclosure pursuant to a privilege waiver. The new principles, however, disallow prosecutors from requesting such information for cooperation credit, consistent with the principles' mandate that prosecutors are to judge cooperation by the disclosure of relevant facts, not the disclosure of privileged legal advice rendered in connection with the underlying conduct.
Adhering to Stein , the principles additionally prohibit prosecutors from withholding cooperation credit as a result of corporate indemnification of employees under investigation or indictment. The principles also state that prosecutors may no longer request that a corporation refrain from entering into joint defense agreements; however, prosecutors can request that the corporation refrain from disclosing certain sensitive information to individual participants in a joint defense agreement.
Finally, prosecutors cannot consider whether a corporation disciplined a culpable employee in awarding cooperation credit. This revision may have little practical effect, because the principles state that a corporation's failure to discipline an employee can still bear on whether the company has taken remedial actions — an independent corporate charging factor.
The SEC Red Book
Though the privilege-waiver spotlight has focused on the DOJ, given the high stakes in criminal investigations, the SEC similarly has been pressured to clarify its cooperation credit policies.
The SEC released its cooperation factors in 2001 in the so-called Seaboard Report. Unlike the Thompson and McNulty DOJ memos, the Seaboard Report did not enumerate privilege waiver as a cooperation factor. However, in determining whether to bring an enforcement action, the Seaboard Report states that the SEC will consider, among other things, whether the company being investigated promptly disclosed the results of an internal investigation, including a "probing written report detailing the findings," or voluntarily disclosed information that the SEC would not otherwise have uncovered. As with the Thompson and McNulty memos, critics claimed that the Seaboard Report did not effectively limit the SEC's ability to obtain privileged information.
In October 2008, shortly after DOJ released its new corporate charging principles, the SEC clarified its waiver policies by releasing its enforcement manual, commonly referred to as "The Red Book." According to "The Red Book," a company's failure to waive the privilege will not negatively affect a claim to credit for cooperation; the appropriate inquiry is whether the party has disclosed relevant facts. Nonetheless, the staff can still seek waiver with the appropriate approval from supervisory staff. "The Red Book" does not cover joint defense agreements, indemnification or employee discipline. Stein , however, likely would control the indemnification issue, and the Seaboard Report considers employee discipline as a remedial action/cooperation factor.
While these developments should affect the way in which corporations handle allegations of corporate misconduct, it is not entirely clear how they will play out in practice or whether they will require further modification. Some interested parties warn that DOJ prosecutors and SEC enforcement attorneys might not adhere to the new cooperation principles unless they have the force of federal law. Furthermore, these new principles do not govern investigations by other government enforcement agencies, such as the Commodity Futures Trading Commission or the Internal Revenue Service. For these reasons, among others, the Senate might still proceed with the ACPPA. In the meantime, much ink will likely be spilled by commentators discussing whether the recent changes have finally hit the target.
• Previous Department of Justice policy allowed prosecutors to consider various circumstances in determining corporate cooperation, including whether the company failed upon request to waive privileges, indemnified potentially culpable employees, or entered into a joint defense agreement with or disciplined such employees.
• New DOJ principles generally disallow prosecutors from considering any of the above circumstances; as to privilege waiver, for example, cooperation will now be measured by the company's disclosure of relevant facts, not its waiver of privileges.
• Similar to the DOJ principles, the SEC's recently released enforcement manual says that a company's decision not to waive privileges will not negatively affect its claim to credit for cooperation; the appropriate inquiry is whether the company has disclosed relevant facts.
Greg Saikin is an assistant U.S. attorney for the Southern District of Texas. The views expressed in this article are solely those of the author.