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In the past decade, the operative rules of corporate criminal liability have undergone a profound change-a change derived from the U.S. Department of Justice (DOJ)’s approach toward the prosecution of corporate crime. This approach has been articulated in three successive policy memoranda by deputy attorneys general: Eric Holder (1999), Larry Thompson (2003) and, most recently, Paul McNulty (Dec. 12, 2006). While these memoranda have received considerable publicity and criticism, a second, less visible, yet important, DOJ development occurred. Since 2002, the year of the conviction and disintegration of Arthur Andersen, every major federal case of corporate misconduct was resolved without filing an indictment against the corporation. DOJ now routinely disposes of charges of corporate misconduct by entering into deferred-prosecution or nonprosecution agreements with putative corporate defendants. Between 2003 and 2006, DOJ resolved 45 criminal cases by either a deferred-prosecution or nonprosecution agreement. Nearly 80% of these deferred-prosecution agreements contain a waiver of the attorney-client privilege. The waiver issue sparked sustained criticism and was the basis for the McNulty revision of the Thompson memorandum. Under the Thompson criteria, DOJ’s central focus when deciding whether or not to prosecute a corporation was an appraisal of the extent of the corporation’s cooperation with the government. The Thompson memorandum explicitly declared that “in gauging the extent of the corporation’s cooperation, the prosecutor may consider the corporation’s willingness…to waive attorney-client and work product protection.” The issue of waiver of attorney-client privilege came to a head in the recent KPMG cases. The cases also raised a related problem-advancement of attorney fees. To avoid indictment, KPMG entered into a comprehensive deferred-prosecution agreement and agreed to cooperate with the government. In June 2006, responding to motions by 18 indicted former KPMG employees, Judge Lewis Kaplan concluded that the Thompson memorandum and the government’s conduct “threatened to take into account, in deciding whether to indict KPMG, whether KPMG would advance attorneys’ fees to present or former employees in the event they were indicted for activities undertaken in the course of their employment.” This, Kaplan concluded, “interfered with the rights of such employees to a fair trial and to the effective assistance of counsel and therefore violated the Fifth and Sixth Amendments to the Constitution.” Moreover, at a Senate Judiciary Committee hearing this past September, a broad coalition of business and legal organizations argued that the Thompson memo created a “culture of waiver,” in which “federal prosecutors now routinely demand waiver of attorney-client and work-product protections even where there are less intrusive means of getting information.” During the hearings, Senator Arlen Specter, R-Pa., asked McNulty to “reconsider” the Thompson policy on waiver and advancement of fees. He also introduced legislation that would have required that result. On Dec. 12, McNulty responded by issuing a new policy directive that clearly circumscribes the exercise of power of U.S. attorneys on the issues of waiver and advancement of fees. The McNulty policy declares that waiver “is not a prerequisite to a finding that a company has cooperated,” and that “prosecutors may only request waiver…where there is a legitimate need for the privileged information.” Requests for waiver must be cleared in advance with DOJ. The new policy also makes clear that prosecutors “should not take into account whether a corporation is advancing attorneys’ fees to employees or agents under investigation or indictment.” The underlying problem remains But while explicit DOJ demands for waiver and nonadvancement of fees are now circumscribed by the McNulty policy, the underlying problem has not been eliminated. As Robert S. Bennett, the attorney who represented KPMG in its negotiations with DOJ, observed, “The way the world really works is you have a prosecutor who says ‘I can’t ask you to waive privilege or not pay fees.’ But the message to you, the company, might well be, ‘Well, if we do that, we might just score some brownie points.’ “ Moreover, it would be a mistake to conclude that the new policy eliminates all concerns about the way DOJ deals with corporations under criminal investigation. A remaining and larger problem stems from the disparity in bargaining power between a putative corporate defendant and DOJ. That disparity derives from the quite harsh federal rules of vicarious corporate criminal liability. Rarely has a corporation successfully defended itself if the underlying criminal responsibility of the executive has been established. U.S. courts have rejected defense claims that the corporation is not responsible because the executive conduct was not authorized or was undertaken in violation of corporate policy. Absent the ability to mount a defense, and faced with the stark reality that corporate indictment could mean corporate death, corporations now routinely capitulate, enter into deferred-prosecution and nonprosecution agreements and cooperate with DOJ in the prosecution of former high-ranking executives. The McNulty policy will not change this reality, and while the attorney-client privilege may receive incremental protection, the vulnerability of the corporation to the threat of indictment remains unchanged. Leonard Orland, a professor of law at the University of Connecticut School of Law, is the author of Corporate Criminal Liability: Regulation and Compliance (Aspen 2004) and, most recently, “The Transformation of Corporate Criminal Law,” 1 Brooklyn Journal of Corporate, Financial and Commercial Law 45 (2006).

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