The Department of Justice Revises the Principles it Considers in the Federal Prosecution of Business Organization

On December 12, 2006, the Department of Justice (DOJ) revised the principles that federal prosecutors across the country are to consider in prosecuting corporations. The two major revisions to these principles relate to a prosecutor's ability to request that a corporation waive its attorney-client privilege and work product protections and consider the advancement of attorneys' fees to and indemnification of directors, officers, and employees in his or her determination of a corporation's cooperation.

The revised guidelines, referred to as the McNulty Memo (after its author, current Deputy Attorney General Paul McNulty), state there are nine factors that a prosecutor must consider in reaching a decision as to the proper treatment of a corporate target in conducting an investigation, determining whether to bring charges and negotiating plea agreements:

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 crimes;


2. the pervasiveness of wrongdoing within the corporation, including the complicity in, or condemnation 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.

The major changes relate to the fourth factor – the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents. The McNulty Memo expressly states, "waiver of attorney-client privilege and work product protections is not a prerequisite to a finding that a company has cooperated in the government's investigation." At the same time, it also states that "prosecutors may always favorably consider a corporation's acquiescence to the government's waiver request in determining whether a corporation has cooperated in the government's investigations." Thus, it appears that while a corporation is not required to waive the attorney-client privilege
and work production protections, any actual waiver will be viewed favorably by the government in making its charging decision.

The McNulty Memo promulgates detailed procedures for a prosecutor's request for a waiver of a corporation's attorney-client privilege or work product protections. First, a prosecutor can only seek a waiver of the attorney-client privilege or work production
protections "when there is a legitimate need for the privileged information to fulfill their law enforcement functions." The fact that it may be "desirable or convenient" to obtain privileged information is not sufficient. Instead, whether there is a legitimate need depends upon: 1) the likelihood and degree to which the privileged information will benefit the government's investigation; 2) whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver; 3) the
completeness of voluntary disclosure already provided; and 4) the collateral consequences to a corporation of a waiver.

If a legitimate need exists, prosecutors should first request only Category I Information – purely factual information, which may or may not be privileged, relating to the underlying misconduct. Examples of Category I Information include documents, witness statements, factual interview memoranda, and factual chronologies. Before requesting that a corporation waive the attorney-client privilege or work product protections for Category I Information, a prosecutor must obtain written authorization from the United States Attorney, who in turn must provide a copy of the request to, and consult with, the Assistant Attorney General for the Criminal Division before granting or denying the request. If the request is authorized, the United States Attorney must communicate the request in writing to the corporation. "A corporation's response to the government's request for waiver of privilege for Category I Information may be considered in determining whether a corporation has cooperated in the government's investigation."

A prosecutor can request the next level of privileged information, Category II Information, from a corporation, "only if purely factual information provides an incomplete basis to conduct a thorough investigation." Category II Information is attorney-client communications or non-factual attorney work product, including legal advice given to the corporation before, during and after the underlying misconduct occurred. Prosecutors should only seek Category II Information in "rare circumstances."

Before asking a corporation to waive the attorney-client privilege or work product protections for Category II Information, the United States Attorney must obtain written authorization from the Deputy Attorney General. If the request is authorized, the United States Attorney must communicate the request in writing to the corporation. If a corporation refuses to waive the attorney-client privilege or work product protections with respect to a request for Category II Information, a prosecutor "must not consider this declination against the corporation in making a charging decision."

In addition to these waiver issues, the McNulty Memo also addresses a corporation's advancement of attorneys' fees and indemnification of employees and directors in the context of corporate cooperation. The McNulty Memo notes that many state indemnification statutes grant corporations the power to advance legal fees to officers prior to a formal determination of guilt, and that many corporations enter into contractual obligations to advance attorneys' fees through provisions contained in their corporate charters, bylaws, or employment agreements. As a result, "prosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation or indictment." But in a footnote, the McNulty Memo says, that "in extremely rare cases, the advancement of attorneys' fees may be taken into account when the
totality of the circumstances show that it was intended to impede a criminal investigation."

Prior to the McNulty Memo, each United States Attorney had the prosecutorial discretion whether, and under what circumstances, to seek a waiver of the attorney-client privilege and work product protections when assessing corporate cooperation in charging decisions. Many felt this policy did not respect the attorney-client privilege and resulted in corporations being required to waive the attorney-client privilege and work product protections in order to be viewed as cooperating with a government investigation.

While the McNulty Memo was an attempt to address these critics, many groups have expressed strong concern with the memo. For example, the United States Chamber of Commerce expressed concern about the McNulty Memo, saying while containing some improvements, this new policy does not adequately protect the right to attorney-client privilege, and unwisely ignores many of the recommendations of former senior Justice Department officials, the American Bar Association, and a massive coalition of some of the nation's most prominent business, legal, and civil rights groups.

It remains to be seen, of course, whether the McNulty Memo will result in corporations not being forced to waive their attorney-client privilege and work product protections during government investigations.