The Thompson Memorandum: Why You Should Know What It Is and How It May Impact Your Business' Potential Future Criminal Liability

Introduction

In the wake of recent high-profile corporate fraud cases such as Arthur Anderson, Enron, WorldCom and HealthSouth, potential criminal liability for corporations should be a topic of discussion for every business. In light of the current controversy regarding the Department of Justice's Thompson Memorandum, critically assessing compliance programs and policies now may mitigate your business' potential criminal liability in the future.  

What is the Thompson Memorandum?

The Thompson Memorandum was issued in 2003 by then Deputy Attorney General Larry Thompson to provide guidance within the Department of Justice for determining whether to charge a corporation with a crime where misconduct has occurred. The Thompson Memorandum sets forth several factors that federal prosecutors are to consider in making this decision:

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 agent, including, if necessary, the waiver of corporate attorney-client privilege and work product protection;
5. The existence and adequacy of the corporation's 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.  

The Current Controversy Regarding the Thompson Memorandum

In early September 2006, a federal judge found that federal prosecutors' application of the Thompson Memorandum in a criminal case involving KPMG violated the defendants' constitutional rights to counsel and fundamental fairness in a criminal proceeding. See United States v. Stein, 2006 WL 2556076 (S.D.N.Y September 6, 2006). Later that month, the U.S. Senate Committee on the Judiciary held hearings during which prominent lawyers in the field of criminal law, including a former Attorney General, the former head of the Enron Task Force and the President of the American Bar Association, testified that changes should be made to the Thompson Memorandum. In contrast, Deputy Attorney General Paul McNulty testified that the Department of Justice would continue to rely on the Thompson Memorandum as sound guidance for assessing whether a corporation should be charged with a federal crime where misconduct has occurred.  

The provisions of the Thompson Memorandum at the heart of this controversy involve: (i) the indemnification of employees and agents for attorneys' fees; and (ii) the corporation's waiver of attorney-client and work-product privileges regarding facts uncovered through an internal investigation. The controversy focuses on whether, in practice, some federal prosecutors interpret these factors to mean that the Department of Justice will view a corporation as fully cooperating with the government only if it: (i) does not pay attorneys' fees for culpable individual employees and agents of the corporation; and (ii) agrees to completely waive the attorney-client and work-product privileges. 

What Action Should Be Taken?

Corporate compliance, internal investigations and potential corporate criminal liability are complex areas of law that turn on the specific facts presented in every unique case. There are some generally applicable steps that can be taken to minimize potential corporate criminal liability and put a business in a favorable posture to effectively deal with the government in the event of an investigation:

• Conduct a risk assessment in areas such as compliance with applicable laws and regulations; information technology and document retention policies; and corporate governance. Such assessments frequently reveal where vulnerabilities may exist and give insight regarding changes that should be made to deter and reveal misconduct.  
• Develop, revise and implement ethics policies and conduct training on the content of ethics policies. Such steps reinforce a corporate culture of integrity and transform written words to principles in action. 
• Review corporate bylaws for attorneys' fees indemnification provisions. If the business has such a provision, ask the following questions:
  1. Is it current?  
  2. Is it appropriately drafted?  
  3. Would it be viewed favorably by a prosecutor who is looking at the Thompson Memorandum for guidance? 
• If misconduct is suspected or has been discovered, immediately retain legal counsel to identify potential individual and corporate civil and criminal liability, consider appropriate remedial action and chart a course of action for dealing with the government.

Meeting with legal counsel is a thorough way to assess how developments related to the Thompson Memorandum may impact your business' potential exposure to future criminal liability.