Waiver, Round Two: The McNulty Memorandum

Let me be very clear: A corporation that chooses not to waive the privilege will not necessarily be charged. Cooperation is but one factor in the analysis and waiver is considered in weighing the adequacy of the cooperation, but is not a litmus test for cooperation."¹-- Deputy Attorney General Paul J. McNulty

Deputy attorneys general come and go and so do the memorandums. It's time for round two of the attorney-client and work product privilege waivers. In my Sept./Oct. 2006 column, I discussed the status of the waivers as they relate to a company's cooperation with authorities in a federal investigation. Based upon the time-honored and constitutionally entrenched importance of ensuring confidential relations between attorneys and their clients, I emphasized the significance of preserving the privileged documents of corporate executives, counsel, and employees even though the federal government could seek waiver of them during a federal investigation.

In that column, I reviewed the state of waiver during federal investigations, as well as the driving forces toward ensuring that federal prosecutors are able to conduct thorough criminal investigations of business entities. At the time of publication, and until Dec. 12, 2006, federal prosecutors were obliged to follow the guidelines set forth by former Deputy Attorney General Eric Holder, and as modified and expanded by subsequent Deputy Attorneys General Larry Thompson and Robert McCallum in determining whether to criminally charge a business entity.

EIGHT FACTORS 

On Dec. 12, 2006, Deputy Attorney General Paul McNulty issued a new guidance for federal prosecutors. Before we get to that let's review a bit of the recent past.

In 1999, Holder set forth the following eight factors for prosecutors to consider when investigating a corporation and determining to charge it with a crime:² 

• Nature and seriousness of the offense
• Pervasiveness of wrongdoing within the corporation
• Corporation's history of similar conduct
• Corporation's timely and voluntary disclosure of wrongdoing and the willingness to cooperate in the investigation of its agents including, if necessary, the waiver of corporate attorney-client and work product protection
• Existence and adequacy of the corporation's compliance program
• Remedial actions taken by the corporation (i.e., implementation of a compliance program, management oversight, disciplinary actions against wrongdoers, restitution, and cooperation)
• Collateral consequences implemented by the corporation
• Adequacy of civil and regulatory enforcement³  

After Enron's fall, Thompson, in his memorandum to Department of Justice heads, touched upon the Holder factors and encouraged company cooperation with federal prosecutors during investigations. In 2004, the U.S. Sentencing Commission added a Section 8C2.5 to the Sentencing Guidelines for U.S. Courts that stated, "Waiver of attorney-client privilege and of work product protections is not a prerequisite to reduction in culpability score [as it relates to cooperation with federal prosecutors] ... unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization."⁴ A year later, McCallum stated in his memorandum to department heads that all federal prosecutors are to consider the Holder factors when determining whether to criminally charge a corporation or other business organization but must acquire proper approval before seeking waiver. On Nov. 1, 2006, Section 8C2.5 was removed from the U.S. Sentencing Guidelines because of an overwhelming negative response to the amendment by numerous concerned organizations, corporate counsel, and defense attorneys.

WAIVER GUIDELINES TODAY 

On Dec. 12, 2006, McNulty issued the new guidance for federal prosecutors, which cited revisions to the Thompson/McCallum memoranda.⁵ In his memorandum, McNulty set forth a two-step approach when determining to criminally charge a company.

Step 1: Legitimate Need
Prosecutors may now only request a waiver of attorney-client or work product protected documents if there's a "legitimate need" for the information in its investigation. "Whether there is a legitimate need depends on:

• The likelihood and degree to which the privileged information will benefit the government's investigation
• Whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver
• The completeness of the voluntary disclosure already provided
• The collateral consequences to a corporation of waiver"⁶  

Step 2: Approaching Waiver Categorically
Once prosecutors have found that there's a legitimate need to obtain attorney-client or work product-protected documents only the least intrusive waiver necessary for a proper investigation can be sought. To ensure this, McNulty advises prosecutors to take a step-by-step approach to requesting such information. The step-by-step approach breaks down these sought-after documents into two categories of information, both of which require approval.

"Category I" information includes purely factual information, privileged or not, relating to a company's underlying misconduct. To request Category I information, prosecutors must provide the U.S. attorney with evidence of "legitimate need" as well as the scope of the waiver sought. The U.S. attorney will then consult with the assistant attorney general for the criminal division to decide whether to approve the waiver request. Prosecutors must receive written approval from the U.S. attorney before request of waiver on the company is permissible. Upon approval, the U.S. attorney will communicate the written request to the company. Should the company refuse to submit to the government's request for Category I information, the prosecutor may consider its refusal for purposes of determining the company's cooperation efforts in the investigation.

"Category II" information includes privileged attorney-client communications or non-factual attorney work product. Category II information encompasses any legal advice given to the company before, during, or after the occurrence of the alleged misconduct. Category II information should only be sought in rare circumstances; that is, if the factual information available to the government is insufficient to conduct a complete investigation. To obtain approval to request Category II information, the U.S. attorney must present the deputy attorney general with evidence of "legitimate need" as well as the scope of the waiver sought. Written approval from the deputy attorney general is required. Upon approval, the U.S. attorney will communicate the written request to the company. Should the company refuse to submit to the government's request for Category II information, the prosecutor may not consider its refusal for the purposes of determining the company's cooperation efforts in the investigation.

In addition to the new protocol requiring prosecutors to find a legitimate need and seeking higher authority before requesting a waiver of attorney-client or work product protected documents, the McNulty Memorandum generally prohibits federal prosecutors from considering whether a company advances attorneys' fees to employees while under investigation.

Although the McNulty Memorandum appears to make waivers harder to obtain, numerous opponents claim that the guidance continues to interfere with long-established constitutional attorney-client and work product protections.

MCNULTY MEMORANDUM FEARS 

Several legal organizations and defense counsels claim that the McNulty Memorandum doesn't adequately address the practical impact of the new provisions on corporate clients. A coalition of organizations is encouraging the U.S. House of Representatives to enact the Attorney-Client Privilege Protection Act of 2006, introduced by Senator Arlen Specter, R-Pa.⁷ The Association of Corporate counsel says, "For centuries, it has been for the courts to decide the scope and applicability of attorney-client privilege and work-product protections -- and waiver of these protections is the decision of the client ... prosecutors don't get to decide when they think waiver is necessary, even if the McNulty Memo makes them go up the latter to the Deputy Assistant Attorney General."⁸ 

"To serve the purpose of the attorney-client privilege, attorneys and clients must have a degree of confidence that they will not be required to disclose privileged communications," says Specter.⁹ To address the fear that the granting of waivers under the McNulty Memorandum are nonetheless subject to a subjective review by the Department of Justice, the Attorney-Client Privilege Protection Act of 2006 unequivocally prohibits the consideration of waiver by federal prosecutors when a company asserts a valid attorney-client or work product protection.

CURRENT STATE OF WAIVER 

In my Sept./Oct. 2006 column, I stated that it's not likely that the issue would be resolved in the near future. Well, I still believe that waiver issues are in a state of quandary. This is a clear example of the ever-changing state of law involving corporate crime. Therefore, please refer back to that column for tips to help ensure privilege.

Furthermore, always be aware that if your company is under federal criminal investigation, anticipated confidential information traditionally protected under attorney-client or work product doctrines could be subject to a waiver request. As of now, the choice to waive such material is up to you. Just remember -- refusing to turn over Category I information may be used for measuring your cooperation with a federal investigation, whereas refusing to turn over Category II information may not. I'll keep you posted on developments.

Juliana Morehead, J.D., CFE, is a legal writer and editor for the ACFE.

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.Fraud-Magazine.com or ACFE.com. Permission of the publisher is required before an article can be copied or reproduced.  

¹ Testimony of Deputy Attorney General Paul J. McNulty to the Senate Judiciary Committee, "The Thompson Memorandum's Effect on the Right to Counsel in Corporate Investigations" (Sept. 12, 2006).

² Holder's factors were applicable for determining whether to charge corporations with a crime. It wasn't until 2003 that the Thompson Memorandum modified the Holder Memorandum to include all business entities, rather than just corporations.

³ See memorandum from Deputy Attorney General Eric J. Holder to heads of Department of Justice components and U.S. attorneys, "Bringing Criminal Charges Against Corporations" (June 16, 1999),  [Referred to herein as the "Holder Memorandum"].

⁴ "U.S. Sentencing Commission: Sentencing Guidelines for U.S. Courts," 71 F.R. 28063 (§8C2.5) (2006).

⁵ See Memorandum from Deputy Attorney General, Paul J. McNulty to heads of Department of Justice components and U.S. attorneys, "Principles of Federal Prosecution of Business Organizations" (Dec. 12, 2006), available at www.usdoj.gov/dag/cftf/corporate_guidelines.htm [Referred to herein as the "McNulty Memorandum"].

⁶ Id. at pg. 9.

⁷ Those in favor of Specter's proposed legislation include the National Association of Defense Lawyers, the American Civil Liberties Union, the Association of Corporate Counsel, and the U.S. Chamber of Commerce.

⁸ The Association of Corporate Counsel: "What Does the DOJ's Issuance of the 'McNulty Memorandum' Mean for You and Your Client," (Dec. 13, 2006), available at www.acc.com/public/attyclientpriv/mcnulty-tp.pdf.

⁹ Sen. Arlen Specter, "A bill to provide appropriate protection to the attorney-client privileged communications and attorney work product," Referred to Senate committee on Jan. 4, 2007.