Changes in Federal Policy on Prosecuting Corporations
By: DULCE J. FOSTER
Few people want to think about what might happen if their employers fell under the shadow of a federal criminal investigation. Corporate prosecutions are becoming commonplace, however, and in the era of heightened regulation certain to be ushered in by the world economic crisis, the use of criminal law as a regulatory tool is sure to increase. Officers, directors, corporate counsel and compliance officers of business organizations in all fields are well-served by understanding the guidelines federal prosecutors follow in deciding whether to indict a business under investigation, or whether to treat alleged regulatory infractions as civil or administrative issues instead. This article summarizes key changes to the Department of Justice (DOJ) corporate prosecution guidelines introduced in August 2008, discusses new Securities & Exchange Commission (SEC) guidelines on privilege waiver published in October 2008, and explains how these changes might aid the compliance efforts companies are introducing today.
The Holder and Thompson Memoranda
The DOJ first introduced formal guidelines for federal prosecutors on bringing criminal charges against corporations in 1999, in a document authored, by then Deputy Attorney General Eric Holder, known as the “Holder Memorandum.” The Holder Memorandum outlined eight factors for prosecutors to consider in deciding whether to hold corporations criminally accountable for the acts of their employees:
- The nature and seriousness of the offense;
- The pervasiveness of wrongdoing within the corporation, including complicity by corporate management;
- The corporation’s history of similar conduct;
- The corporation’s voluntary disclosure of the conduct and willingness to cooperate with investigators, including waiver of the attorney-client and work product privileges, whether the corporation advanced attorneys’ fees for culpable employees, and whether the corporation cooperated in a joint defense with other defense lawyers;
- The adequacy of the corporation’s compliance program;
- Any remedial actions taken;
- Collateral consequences, including disproportionate harm to innocent shareholders or employees; and
- The adequacy of civil or administrative enforcement actions.
The DOJ restated these factors in a memorandum issued in January 2003 by then Deputy Attorney General Larry Thompson, known as the “Thompson Memorandum.” The Thompson Memorandum placed special emphasis on corporate cooperation with investigators, and reiterated the position that prosecutors should take into account privilege waivers and advancement of attorneys’ fees to employees in deciding whether to prosecute.
The inclusion of these factors in the charging guidelines has engendered much controversy. Critics point out that without assurances of confidentiality in communications with lawyers, companies, and their employees may be reluctant to seek the legal advice necessary to stop regulatory infractions from occurring in the first place. The American Bar Association passed a formal resolution in 2005 opposing the practice of seeking privilege waivers, and in 2006 a federal judge held that by causing an accounting firm to cease payment of legal fees for its employees, the federal government had interfered with their Sixth Amendment constitutional rights. The Second Circuit Court of Appeals upheld the judge’s ruling on August 28, 2008.
Recent DOJ Policy Changes
On December 12, 2006, the DOJ began to backtrack from its draconian policies by issuing a new memorandum. The “McNulty Memorandum” limited the types of information for which prosecutors could ask a privilege waiver, and further stated that a company’s advancement of legal fees to employees could be considered only in limited circumstances.
Many in the legal community felt the McNulty Memorandum did not go far enough. In light of the continuing concerns, legislation that would prohibit prosecutors from considering these factors was introduced in Congress.
On August 28, under pressure from Congress and the courts, Deputy Attorney General Mark Filip announced “voluntary” changes to the DOJ’s corporate prosecution policies. The new guidelines state that a prosecutor cannot ask a company to waive the attorney-client and work product privileges, with limited exceptions that are widely recognized under existing law. Prosecutors also are forbidden from factoring the production of privileged information into the decision whether to prosecute. Instead, cooperation is to be judged solely on whether a company has disclosed all relevant facts.
The new guidelines also promote better relationships between companies and their employees. Under the new guidelines, prosecutors may not consider whether a company is participating in a joint defense with other defendants, or whether it has advanced attorneys’ fees to employees under investigation. They are also forbidden from evaluating a company’s cooperation based on whether it has terminated or disciplined a particular employee.
Finally, the new policies make clear that, although cooperation with investigators may factor in a company’s favor, a company is never obligated to cooperate with investigators. Whether these semantics reflect any real change must await the passage of time. Many in the legal community have applauded these changes, but some fear that without formal legislation binding it, the DOJ may again revert to the policies of the past.
New SEC Guidelines
DOJ policies often influence the enforcement policies adopted by other federal agencies. Such appears to be the case here. On October 6, 2008, the SEC released its enforcement manual to the public for the first time. The manual specifically directs SEC staff that they “should not ask a party to waive the attorney-client or work product privileges and is directed not to do so.” The manual further states that the SEC’s central concern is whether a party seeking credit for cooperation “has disclosed all relevant facts within the party’s knowledge that are responsive to the staff’s information requests.” Hopefully the enforcement arms of other federal agencies will begin to follow the DOJ’s lead.
It is too soon to predict how the DOJ policy changes will be applied, how widely they will be adopted by other agencies, or how long they will remain in place. For the time being, however, the new policies make it easier for companies to seek advice from legal counsel without fear that their attorney-client communications might be exposed and used against them in a future criminal proceeding, and create latitude for companies under investigation to defend themselves fairly without the risk of retribution.