An End to “Backseat Driving”? The Thompson Memorandum and Government Tactics in White-Collar Crime Investigation and Prosecution
“The methods we employ in the enforcement of our criminal law have aptly been called the measures
by which the quality of our civilization may be judged.”
Douglas v. California, 372 U.S. 353, 358 n.2, 83 S.Ct. 814 (1963)
Imagine these scenarios:
– Corporations making their employees available whenever and wherever prosecutors wished to interview them, without subpoenas;
– Corporations terminating employees who refuse to cooperate with the government’s investigation;
– Corporations sharing with prosecutors interview memoranda and other materials generated in their internal investigations, notwithstanding any claim of privilege they might have;
– Corporations directing professionals working for them, including outside auditors and counsel, to meet with the government and provide prompt
access to their work papers and other records;
– Corporations unilaterally terminating severance agreements with former employees for fear that the corporation may be viewed in a negative light by prosecutors;
– Corporations agreeing to retain attorneys and accountants of the government’s choosing to evaluate their business practices, and to accept their recommendations;
– Corporations, at the behest of the government, advising their employees to meet with the government investigators without aid of an independent counsel;
– Corporations directing their employees to “cooperate” with the federal prosecutors or risk termination of payment for legal fees and costs.
These scenarios are hardly fictional.1 They represent the “brave new world” of aggressive investigation and prosecution of white-collar crime in the post-Enron era. It is difficult to imagine that the federal government’s internal policy and guidelines could enable federal prosecutors to exploit their virtually unchecked power to extract and coerce ever greater concessions, including waivers of attorney-client privileges, the surrender of confidential and privileged work product between outside counsel and the corporation, and control over the advancement of legal fees and costs by corporations to their employees-in short, jeopardize the very nature of the American adversary system.
The Origins of the Thompson Memorandum
Although the concept of corporate criminal liability has been settled since 1909,2 the Justice Department had no uniform policy on corporate prosecution until June 1999, when then-Deputy Attorney General Eric H. Holder issued a policy memorandum entitled “Federal Prosecution of Corporations” (the “Holder Memorandum”). This document attempted to provide “guidance as to what factors should generally inform a prosecutor in making the decision whether to charge a corporation in a given case.”3 The Holder Memorandum made it clear that the factors articulated in the memorandum were not “outcome-determinative and [were] only guidelines” and that “Federal prosecutors are not required to reference these factors in a particular case, nor are they required to document the weight they accorded specific factors in reaching their decision.”4 However, the language that is at the heart of the controversy over the Thompson Memorandum-waiver of attorney-client privilege and advancing of legal fees-was first found in the Holder Memorandum. The Holder Memorandum, after setting forth some common sense factors that would assist the prosecutors in deciding whether to indict a company, stated that prosecutors, in determining whether to bring charges against a company, should consider: the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of the corporate attorney-client and work product privileges.5
The Memorandum also explained what was meant by “cooperation”: [i]n gauging the extent of the corporation’s cooperation, the prosecutor may consider the corporation’s willingness to identify the culprits within the corporation, including senior executives, to make witnesses available, to disclose the complete results of its internal investigation, and to waive attorney-client and work-product privileges.6 The Memorandum further stated: Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents…a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation… may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.7
Concerning the issue of a corporation advancing attorney fees, the Memorandum clarified, in a footnote, that: Some states require corporations to pay the legal fees of officers under investigation prior to a formal determination of their guilt. Obviously, a corporation’s compliance with governing law should not be considered a failure to cooperate.8
Thus, the Holder Memorandum sent a clear signal to federal prosecutors that the advancing of attorneys’ fees to personnel of a corporation under investigation, except where such advances were required by law, might be viewed by the government as protection of culpable individuals and might contribute to a government decision to indict the entity. However, as the Holder Memorandum stated, it was not binding. Federal prosecutors were free to exercise their discretion whether to take the Memorandum into account, or not.
The outbreak of corporate scandals in 2001 changed everything. In late 2001, Enron’s collapse caused increased scrutiny into corporate accounting. Soon, other corporate scandals came to light-most notably Global Crossing, Healthsouth, Tyco International, Adelphia Communications, and ImClone. Bankruptcies and criminal prosecutions ensued including, the indictment of Enron’s auditors, Arthur Andersen LLP in March 2002-an indictment that resulted in the collapse of the firm, well before the case was tried.9 Arthur Andersen’s indictment and prosecution sent a clear message to Corporate America that companies that deliberately try to block the government from investigating corporate misconduct will be punished swiftly and severely.
The Thompson Memorandum
On July 9, 2002, President Bush issued Executive Order 13271, which established a Corporate Fraud Task Force (the “Task Force”) headed by United States Deputy Attorney General Larry D. Thompson.10 On January 20, 2003, Mr. Thompson issued a document entitled Principles of Federal Prosecution of Business Organizations (the “Thompson Memorandum”), which practically was a revision of the Holder Memorandum. In fact, the language concerning “cooperation” and advancing of legal fees by business entities was carried forward without change. Nonetheless, the Memorandum drastically altered the focus of prosecutors in making a determination to charging a corporate entity. The Memorandum stated that “[t]he main focus of [its] revisions is increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation” with government investigations.11 The revised guidelines instruct prosecutors to consider whether a company, “while purporting to cooperate with a Department investigation,” has in fact been engaging in conduct that “impede[s] the quick and effective exposure of the complete scope of wrongdoing under investigation.”12
The Thompson Memorandum appeared to encourage federal prosecutors to evaluate a corporation’s “cooperation” in an investigation and to judge whether the cooperation was authentic. Further, unlike its predecessor, the Thompson Memorandum was binding on all federal prosecutors.13 Accordingly, United States attorneys were now required to consider the advancing of legal fees by business entities, except where such advances were required by law, as indicative of a corporation’s attempt to protect culpable employees and as a factor weighing in favor of indictment.
On the one hand, Mr. Thompson exhorted federal prosecutors, “I cannot stress strongly enough that the prosecution of guilty individuals should always take precedence over the prosecution of entities.”14 While during this same period, he made the public comments that “they [the employees] don’t need fancy legal representation”15 if they did not believe that they acted with criminal intent.
Surely it cannot be legal naiveté that could have led the Deputy Attorney General to make this comment. After all, it is well known that a white-collar criminal defense in a case arising out of a complex business environment requires special skills, business sophistication, and resources that are generally more expensive than those in less complex criminal matters. Moreover, the need to review and analyze frequently voluminous documentary evidence greatly increases the amount of attorney time required for, and, the cost of a competent defense.16
The mandate of the Thompson Memorandum and the overzealous investigations and prosecutions of corporations and their personnel by federal prosecutors in wake of the recent corporate scandals were bound to conflict with the constitutional rights of the criminal defendant. These factors came to a head-on conflict and were brought to light in the KPMG case. In June 2006, Hon. Lewis A. Kaplan, a federal judge in Manhattan, issued an 83-page rebuke of the Justice Department’s white-collar prosecution tactics in an opinion for a case involving former partners of troubled accounting firm, KPMG. Judge Kaplan’s opinion offered a searing criticism of the Thompson Memorandum. To understand the tactics of the U.S. attorneys, which have led to concerns from the defense bar and civil liberties associations, it is imperative to analyze the KPMG case.
The KPMG Case: The Anatomy of a White-Collar Criminal Investigation17
At or around the time of the Enron, Global Crossing, Tyco International, Adelphia Communications, and ImClone debacles, the Internal Revenue Service (IRS) began investigating KPMG for creating and advocating allegedly abusive tax shelters. A few months later, the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs “began an investigation into the development, marketing and implementation of abusive tax shelters by accountants, lawyers, financial advisors, and bankers.”18
This led to public hearings in November 2003 at which several senior KPMG partners or former partners-three of whom were later indicted-testified. KPMG’s reception at the hearing was not favorable.19
This led the late Eugene O’Kelly, then KPMG chair, to retain Robert S. Bennett of Skadden Arps Slate Meagher & Flom (“Skadden”), “to come up with a new cooperative approach.”20 One aspect of that new approach was KPMG’s decision to ask its senior partners, who had testified before the Senate and who were later indicted, to leave. One of the partners who was asked to leave was deputy chair Jeffrey Stein. Given Mr. Stein’s senior position and his relationship with Mr. O’Kelly, his departure was cushioned substantially.21
However, KPMG’s efforts to stave off trouble by “cleaning house,” came too late- much damage already had been done. In the early part of 2004, the IRS made a criminal referral to the Department of Justice (DOJ), which in turn passed it on to the United States Attorney’s Office (USAO).
KPMG’s policy prior to this investigation concerning the payment of legal fees of its partners and employees was clear. KPMG had always advanced and paid legal fees, without a preset cap or condition of cooperation with the government. These fees covered counsel for partners, principals, and employees of the firm in any civil, criminal, or regulatory proceeding involving activities arising within the scope of the individual’s duties and responsibilities as a KPMG partner, principal, or employee.
When the referral reached the USAO on February 5, 2004, it came under the supervision of Shirah Neiman, who was chief counsel to the United States Attorney, the USAO’s liaison to the IRS and a participant in the drafting of the Holder Memorandum. The USAO notified Skadden of the referral, and an initial meeting was scheduled for February 25, 2004.
In the meantime, the USAO prepared “subject” letters-letters advising the recipient that he or she is a person whose conduct is within the scope of a grand jury’s investigation- to between twenty and thirty KPMG partners and employees. In preparation for the meeting, Ms. Neiman and other members of the prosecution team conferred. At the outset, the prosecutors decided to ask Skadden whether KPMG was paying the legal fees of individuals under investigation. The meeting was attended by Mr. Bennett, Ms. Neiman, and many others on both sides. Mr. Bennett informed the government attorneys that KPMG had decided to clean house and had already taken high-level personnel action; further, it would cooperate fully with the government’s investigation. It was made clear to the government attorneys that KPMG’s objective was to save itself, not to protect any individuals. In an obvious reference to the fate of Arthur Andersen, Mr. Bennett remarked that an indictment of KPMG would result in the firm going out of business.
The U.S. attorneys immediately focused on the subject of legal fees and made a specific reference to the Thompson Memorandum. KPMG’s counsel informed the U.S. attorneys that KPMG’s common practice had been to pay legal fees. However, counsel added that KPMG would not pay legal fees for employees who declined to cooperate with the government, or who took the Fifth Amendment, as long as it had discretion to take that position. Ms. Neiman responded by remarking that “misconduct” should not “be rewarded” and referred to “federal guidelines.”22 KPMG understood this remark to mean that payment of legal fees by KPMG, beyond any that it might legally be obligated to pay, could well count against KPMG in the government’s decision whether to indict the fi rm. Any doubt that this was the message conveyed was dispelled by an assistant U.S. attorney’s comment that the government will look at KPMG’s discretion regarding payment of legal fees “under a microscope.”23
Shortly after the February 25, 2004 meeting, Skadden reported to the U.S. attorneys that KPMG was planning on putting a cap on legal fees and making the payment conditional for any given partner or employee on that individual’s “cooperating fully with the company and the government.”24 KPMG assured the USAO that it would be “as cooperative as possible” so that the USAO would not exercise its discretion to indict the firm. The USAO urged that KPMG tell its people that they should be “totally open” with the USAO, “even if that [meant admitting] criminal wrongdoing.”25
The actions of the USAO, coupled with the mandate of the Thompson Memorandum, had the desired effect. KPMG’s counsel informed counsel for the partners and/or employees who were the focus of the government investigation that KPMG would pay an individual’s legal fees and expenses, up to a maximum of $400,000, on the condition that the individual “cooperate with the government and…be prompt, complete, and truthful.”26 Importantly, KPMG further made clear that “payment of…legal fees and expenses will cease immediately if… [the recipient] is charged by the government with criminal wrongdoing.”27 In addition, KPMG sent an advisory memorandum to a broader audience of KPMG personnel regarding potential contacts by the government. The memorandum urged full cooperation with the investigation, but it advised also that recipients had a right to be represented by counsel if they were contacted by the government. The Memorandum also mentioned some advantages of consultation with counsel, and stated that KPMG had arranged for independent counsel for those who wished to consult them.
The advisory memorandum upset the USAO. They immediately advised Skadden that they were “disappointed with [its] tone” and demanded that KPMG send out a supplemental memorandum in a form that the USAO proposed.28 The only significant point of difference between the memorandum that the government demanded and KPMG’s original memorandum was an insertion of language that an employee was not required to utilize services of independent counsel before speaking with the government’s investigators and that an employee “was free to deal directly with the investigators without counsel.”29 It was evident that the government’s purpose in demanding the supplement was to increase the chances that KPMG employees would agree to interviews without consulting or being represented by counsel, whether provided by KPMG or otherwise.
Eager to demonstrate that KPMG was cooperating, Skadden asked the government to notify it if any current or former KPMG employee failed to “cooperate.” As was to be expected, the government took full advantage of this offer. It repeatedly notified Skadden when KPMG personnel failed to comply with government demands. In each case, Skadden promptly advised the individual or attorney for the individual in question that the payment of legal fees would be terminated “[a]bsent an indication from the government within the next ten business days that your client no longer refuses to participate in an interview with the government.”30 In some cases, the individuals in question relented and submitted to interviews with the government. Others did not, whereupon KPMG terminated their employment and cut off the payment of legal fees.
As the investigation continued, KPMG was desperately seeking a resolution short of an indictment of the firm. On the other side, the government was aggressively pressing for admissions of extensive wrongdoing, a great deal of money, and changes in KPMG’s business. The USAO informed KPMG that it had issues with KPMG’s grant of rich severance packages to certain executives. KPMG tried to deflect the issue by agreeing that severance packages were “high in one or two cases” but reiterating that its “expectation” was that legal fees of individuals would be paid only up to $400,000 and only on condition that recipients cooperated with the government.31 Notwithstanding this problem, KPMG repeatedly tried to convince the USAO not to indict the firm, touting its cooperation with the investigation and its limitation of attorneys’ fees for individuals. However, in meetings in March 2005 with David N. Kelley, then United States Attorney, this approach did not yield the desired result. On March 2, 2005, Mr. Kelley interrupted Mr. Bennett’s claim that the fi rm had cooperated by saying, “Let me put it this way. I’ve seen a lot better from big companies.”32 With a last-ditch effort to prevent an indictment, KPMG unilaterally terminated the consulting services portion of the Stein severance agreement and cut off payment of Mr. Stein’s attorneys’ fees. It did so, “because [KPMG] thought it would help [the firm] with the government.”33
Having dealt, as best it could, with the Stein problem, KPMG now attempted to persuade Deputy Attorney General James Comey not to indict the firm. The meeting took place on June 13, 2005. Skadden, in avoiding indictment, relied upon KPMG’s “never heard of before” cooperation with the government, in addition of course to other arguments.34
This time, KPMG was more successful.
On August 29, 2005, KPMG and the government entered into a Deferred Prosecution Agreement (DPA). KPMG agreed, among other things, to waive indictment, to be charged in one-count information, to admit extensive wrongdoing, to pay a $456 million fine, and to accept considerable restrictions on its practice. The government agreed that it would seek dismissal of the information if KPMG complied with its obligations. Further, the DPA obliged KPMG to cooperate extensively with the government, both in general and in the government’s prosecution of its partners and employees. This meant that anything the government regarded as “a failure to cooperate” almost certainly would result in the criminal conviction that KPMG labored so mightily to avoid. Clearly, the admissions that KPMG was forced to adopt foreclosed a successful defense.
At about the same time, the government filed the indictment against the individual KPMG defendants in the U.S. District Court for the Southern District of New York. As promised by KPMG, it immediately cut off payments of legal fees and expenses to the defendants.
On January 19, 2006, the KPMG defendants moved to dismiss the indictment on the ground that the government had interfered improperly with the advancement of attorneys’ fees by KPMG in violation of their constitutional and other rights. The government, in an attempt to avoid an evidentiary hearing, took the position that it had “no objection whatsoever to KPMG exercising its free and independent business judgment as to whether to advance defense costs . . . and that if it were to elect to do so the government would not in any way consider that in determining whether [KPMG] had complied with the DPA.”35 However, to resolve this issue, the court granted limited discovery and conducted an evidentiary hearing that was held on May 8-10, 2006.
Following the evidentiary hearing, the court made the following factual findings:36
First, the Thompson Memorandum caused KPMG to consider departing from its long-standing policy of paying legal fees and expenses of its personnel in all cases and investigations.
Second, the USAO reinforced the threat inherent in the Thompson Memorandum. It raised the issue and then repeatedly focused on KPMG’s obligation to advance defense costs, implying that anything more than compliance with demonstrable legal obligations could be held against the firm. U.S. attorneys’ statements that misconduct should not be rewarded and that the USAO would look at any discretionary payment of fees by KPMG “under a microscope” drove the point home.
Third, the government conducted itself in a manner that evidenced a desire to minimize the involvement of defense attorneys.
Fourth, KPMG’s decision to cut off all payments of legal fees and expenses to anyone who was indicted and to limit and to make a condition of such payments prior to indictment upon cooperation with the government was the direct consequence of the pressure applied by the Thompson Memorandum and the USAO.
United States’ Attorneys’ Conduct Pursuant to the Thompson Memorandum Violated the KPMG Defendants’ Fifth and Sixth Amendments Rights
The Fifth Amendment Due Process Violation The United States Supreme Court has long protected a defendant’s right to fairness in the criminal process. It has grounded this protection primarily in the Due Process Clause37 as well as more specific provisions of the Bill of Rights, including the Confrontation and Assistance of Counsel Clauses of the Sixth Amendment.38 The Supreme Court consistently has held that criminal defendants are entitled to be treated fairly throughout the process.39 Proper respect for the individual prevents the government from interfering with the manner in “which the individual wishes to present a defense.”40 This means that the government may not both prosecute a defendant and then seek to influence the manner in which he or she defends the case.41 As Judge Kaplan put it succinctly: “fairness in criminal proceedings requires that the defendant be firmly in the driver’s seat and that the prosecution not be a backseat driver.”42
The Due Process Clause has been interpreted to provide not only procedural protection for deprivations of life, liberty, and property, but also substantive protection for fundamental rights-those that are so essential to individual liberty that they cannot be infringed by the government unless the infringement is narrowly tailored to serve a compelling state interest.43 Even though the United States Supreme Court has not explicitly characterized the right to fairness in criminal proceedings as a “fundamental” right,44 the high court’s repeated recognition of the constitutional mandate of fairness in criminal proceedings strongly suggests that this right is “fundamental” for substantive due process purposes, at least in some circumstances. 45
However, a criminal defendant’s right to obtain and use resources lawfully available to him or her to prepare a defense, free of knowing or reckless government interference, is a right that is basic to the American concept of justice and fair play. It can be said with a fair degree of certainty that this right is fundamental.46
Judge Kaplan reasoned that the evidentiary hearing clearly demonstrated that the Thompson Memorandum and the USAO pressure on KPMG to deny or cut off defendants’ attorney fees impinged on the KPMG Defendants’ ability to defend themselves. The Thompson Memorandum and the USAO’s actions, therefore, were subject to strict scrutiny and accordingly must have been narrowly tailored to achieve a compelling government interest.47
There is no denying that one of the objectives of the Thompson Memorandum and the USAO’s actions pursuant to the memo- investigating and fairly prosecuting crime- was compelling. However, the Thompson Memorandum did not say that payment of legal fees may be viewed in favor of indictment only if they are used as a means to obstruct an investigation.48 The court found that this aspect of the Thompson Memorandum was not narrowly tailored to achieve a compelling objective. It discouraged and, as a practical matter, often prevented companies from providing employees and former employees with the financial means to exercise their constitutional rights to defend themselves. Further, the USAO knew that the threat inherent in the Thompson Memorandum, coupled with its own reinforcement of that threat, was likely to lead corporate defendants to cut off the payment of legal fees for any employees or former employees who were indicted and to limit and condition their payment during the investigative stage. The court ruled that the memo and the USAO’s actions were not narrowly tailored to serve compelling governmental interests and, therefore, violated the Due Process Clause.49
The Sixth Amendment Right to Counsel Violation
Apart from the Due Process violation, Judge Kaplan found that the Thompson Memorandum and its aggressive implementation by the government infringed the KPMG defendants’ Sixth Amendment right to counsel.50 The Sixth Amendment guarantees more than the mere presence of a lawyer at a criminal trial. It protects, among other things, an individual’s right to choose the lawyer or lawyers he or she desires and to use one’s own funds to mount the defense that one wishes to present.51 The KPMG defendants demonstrated that the government’s implementation of the Thompson Memorandum impinged on their Sixth Amendment rights to counsel and to present a complete defense. Interference with these rights was improper if the government’s actions were “wrongfully motivated or without adequate justification.”52 The court held that the Thompson Memorandum, by discouraging companies from providing their employees with the financial means to exercise their constitutional rights, undermines the proper functioning of the American adversary process of determining guilt or innocence in criminal cases.53 The fact that advancement of legal fees occasionally might be part of an obstruction scheme is insufficient to justify the government’s interference with the right of individual criminal defendants to obtain resources lawfully available to them in order to defend themselves.54 Further, the court held that the KPMG defendants’ deprivation of their right to counsel of their choice was “complete” when they were erroneously prevented from being represented by the lawyer they wanted, regardless of the quality of the representation they received.55 The defendants were not required to show prejudice. Finally, to remedy the constitutional violations suffered by the KPMG defendants, the court attempted to restore the defendants to the position they would have occupied but for the government’s constitutional violation (i.e., pay the defendants their defense costs already incurred and yet to be incurred).56 Sovereign immunity from monetary claims prevented the court from sanctioning the government.57 Instead, Judge Kaplan assumed “ancillary jurisdiction” over defendants’ claim that KPMG should resume making payments to employees and opened a civil docket number for the claims of the KPMG defendants against KPMG.58
A month later, Judge Kaplan issued a second major decision in the case, holding that the government was responsible for indirectly pressuring two former KPMG partners to provide statements in violation of their Fifth Amendment privilege against compelled self-incrimination.59 The court found that the individuals’ statements were economically coerced by KPMG by its threat to stop paying their legal fees or terminating their employment, or both, if they did not cooperate with the government. The court concluded that the firm undertook this action at the government’s behest and as an attempt to curry favor with the prosecutors.60 The court held that the statements were inadmissible.61
The Stick and Carrot Approach of the Thompson Memorandum and Its Consequences on Individual Rights
In the KPMG case, the government brandished a “big stick”-it threatened to indict KPMG. And it held out a very large carrot. It offered KPMG the hope of avoiding the fate of Arthur Andersen if KPMG could deliver to the USAO employees who would talk, notwithstanding their constitutional right to remain silent, and strip those employees of economic means of defending themselves.”62 Zealous enforcement of the Thompson Memorandum strains the relationship between corporations and their individual employees. Corporations eager to earn recognition for “authentic” cooperation are more likely to “find” employee misconduct and share those employees’ inculpatory “admissions” made during the companies’ internal investigation interviews. The unsuspecting employees may not even be aware that they are not talking to their lawyer and that their statements could be offered to prosecutors. Eager to curry favor with prosecutors, corporations may further try to distance themselves from their allegedly culpable employees, painting them as “rogue” managers whose conduct, the corporations may argue, should not fairly be attributed to the entity itself.63 Corporations may hesitate or, as occurred in the KPMG case, may be manipulated or coerced into not advancing attorneys’ fees to individual employee-defendants for fear of appearing to be “protecting its culpable employees and agents.”64 The combination of these factors creates certain tension, if not outright dangers:
There is a very real question as to whether the exchange will significantly increase the unsavory practice of ‘scapegoating,’ in which corporations find and offer up to prosecutors lower echelon officials in order to save the firm. Middle managers find, to their surprise, their rights eroded and their futures clouded by their prominence in the press. To their dismay, both prosecutors and their own employer have a huge stake in their public humiliation and incarceration. The prosecutor seeks to relieve public pressure generated by financial scandals; the firm seeks to survive.65
This desire to appease federal prosecutors motivates companies to quickly interview, terminate, and incriminate as many employees as possible-even where careful consideration of the facts would not otherwise warrant it. It is shocking that little attention, if at all, is paid to the inherent conflict between the two interests-the interests of companies who are eager to demonstrate genuine cooperation and the interests of individual employees, including the right against compelled self-incrimination. More often than not, a government investigation leads outside counsel and the boards or audit committees to pursue a strategy of aggressively “selling management up the river.”66
For companies’ in-house and external counsel, a nuanced understanding of the Thompson Memo and its successor, the McNulty Memo, is essential. It enables them to view these guidelines not as a potential minefield, but rather as a roadmap of opportunities for effective advocacy and protection of companies’ long-term interests.67 At the same time, for criminal defense attorneys defending individuals accused of white-collar crimes, these guidelines call for vigilance against a serious threat that may undercut the constitutional rights of the individual defendant.
Former Department of Justice attorneys’ comments on the Thompson Memo are instructive.68 They describe the approach to law enforcement embodied in the Thompson Memorandum “as moving the process governing the American system away from the form the Founders expressly meant it to take-an accusatorial system-and toward something they feared-an inquisitorial system.” The Thompson Memorandum shifted the power politics: it shifted power from courts and juries to the Department of Justice and the U.S. Attorneys who work for it.69
The Aftermath: The McNulty Memorandum-A Strategic Retreat By the Government
Several weeks after the court’s ruling, the Senate Judiciary Committee conducted hearings regarding the policies underlying the Thompson Memorandum. Vigorous efforts of the anti-attorney-client waiver lobbying groups had resulted in a widespread awareness of the coercive tactics of federal prosecutors.70 This helped persuade Senate Judiciary Chairman Arlen Specter (R-Penn.) to hold a Senate hearing on the waiver issue in September 2006. Just before the hearing, a bipartisan group of ten former senior Justice Department officials released a letter condemning the DOJ’s waiver policy.71 The lobbying efforts paid off. Senator Specter threatened to introduce legislation of his own if the DOJ didn’t change its policy. On December 7, 2006, on the second-to-last day of the Senate’s session, he followed through.72
Five days later, the Justice Department responded. On December 12, 2006, U.S. Deputy Attorney General Paul J. McNulty announced that he was releasing revised corporate charging guidelines for federal prosecutors throughout the country.73 The new guidance supersedes and replaces the Thompson Memorandum. The new memo creates new approval requirements that federal prosecutors must comply with before they can pressure corporations to waive attorney-client privilege and work-product protections. It also limits prosecutors’ ability to consider a refusal to provide such material when making the decision whether to charge a corporation with criminal misconduct.
Further, as a direct response to the KPMG decision, the new guidance also instructs prosecutors that they generally cannot consider a corporation’s advancement of attorneys’ fees to employees when making a decision whether to charge the corporation. A rare exception is created for those extraordinary instances where the advancement of fees, combined with other significant facts, shows that such a step was intended to impede the government’s investigation. In those limited circumstances, fee advancement may be considered only if authorized by the Deputy Attorney General.
At this time, it is somewhat premature to offer criticisms of the McNulty Memorandum. Nonetheless, the following “flaws” have been observed by legal scholars, defense attorneys, and civil liberties groups:74
– The guidelines are internal policy, unenforceable at law, and there is no remedy per se if a prosecutor fails to follow them;
– The pressure to waive privilege is unabated under the guidelines because although they prohibit prosecutors making charging decisions from considering a corporation’s refusal to provide sensitive attorney-client information, they do allow favorable consideration when a company agrees;
– Prosecutors in making a decision to bring charges, may not consider a corporation’s advancement of attorney fees to employees, except when it was done to impede the government’s investigation-a standard that is open to interpretation and that in reality, may be too easy to meet. For example, fees combined with joint defense agreements or failure to terminate employees who refuse to cooperate, could be sufficient for prosecutors to use the exception;
– The guidelines continue to allow prosecutors weighing a corporation’s cooperation to consider joint defense agreements, information-sharing between a corporation and employees about a government investigation, or a corporation’s retention or failure to sanction employees who assert Fifth Amendment rights.
As a unanimous Supreme Court wrote long ago, the interest of the government “in a criminal prosecution is not that it shall win a case, but that justice shall be done.”75 Justice is not done when the government uses the threat of indictment-a matter of life and death to many companies-to coerce companies into depriving their present and even former employees of the means of defending themselves against criminal charges.76 The determination of guilt or innocence must be made fairly-not in a proceeding in which the government has obtained an unfair advantage long before the trial even has begun. As Judge Kaplan put it, criminal defendants are “entitled to a fair shake.”77
More importantly, a criminal defendant’s exercise of his constitutional rights should not be feared or avoided by the government: No system worth preserving should have to fear that if an accused is permitted to consult with a lawyer, he will become aware of, and exercise those rights. If the exercise of constitutional rights will thwart the effectiveness of a system of law enforcement, there is something very wrong with that system.78
|1||See Wray, C., “Corporate Criminal Prosecution In A Post-Enron World: The Thompson Memo In Theory And Practice,” 43 Am. Crim. L. Rev. 1095, 1136.|
|2||See New York Cent. & Hudson R.R. Co. v. United States, 212 U.S. 481, 495 (1909) (holding that corporations are criminally liable for any act committed by an employee in the course of such person’s employment that is intended to benefit the corporation).|
|3||http://www.usdoj.gov/criminal/fraud/policy/Chargingcorps.html (last visited January 2, 2007).|
|5||Id. at § II, ¶ 4.|
|6||Id. at § VI, ¶ A.|
|7||Id. at ¶ B.|
|8||Id. at ¶ B, n. 3.|
|9||United States v. Stein, 435 F.Supp.2d 330, 337 (2006) citing Ken Brown, et al., “Called to Account: Indictment of Andersen in Shredding Case Puts Its Future in Question,” Wall. St. J., Mar. 15, 2002, at A1.|
|11||See The Thompson Memorandum, preface (http://www.usdoj.gov/dag/cftf/corporate_guidelines. htm) (last visited January 2, 2007) (emphasis added).|
|12||Id. (emphasis added).|
|13||Id. at 338; also see U.S. Department of Justice, Criminal Resource Manual § 163 (2005) (“The Thompson Memorandum sets forth nine factors that federal prosecutors must consider in determining whether to charge a corporation or other business organization.”). Further, on December 12, 2006, U.S. Deputy Attorney General Paul J. McNulty released a revised memorandum that superseded and replaced the Thompson Memorandum. The McNulty Memorandum is discussed at the end of this article.|
|14||Larry D. Thompson, Deputy Attorney General, Remarks at the Corporate Fraud Task Force Conference AN END TO “BACKSEAT DRIVING”? 45 (Sept. 26, 2002), available at http:// www.usdoj.gov/ dag/speech/2002/092602dagremarks.htm (last visited January 2, 2007).|
|15||Laurie P. Cohen, “In the Crossfire: Prosecutors’ Tough New Tactics Turn Firms Against Employees,” Wall. St. J., June 4, 2004, A1. Mr. Thompson’s comments remind me of the legendary trial lawyer Edward Bennett Williams’ retort, when told that criminal defendants were not entitled to him – an expensive and “fancy” lawyer. Williams’ reply: “You mean they’re entitled to a defense, but not the best defense?” Thomas, Evan (1991), The Man To See, Simon and Schuster publication, pg. 2.|
|16||See Judge Kaplan’s comments in United States v. Stein at 338-339.|
|17||The facts narrated in this section have been taken from Judge Lewis A. Kaplan’s July 26, 2006 Opinion in United States v. Stein, 435 F.Supp.2d 330, 339 (2006).|
|18||Staff of the Permanent Subcomm. on Investigations of the S. Comm. on Homeland Security and Governmental Affairs, “The Role of Prof. Firms in the U.S. Tax Shelter Indus. 1” (Comm. Print 2005) (“Senate Report”).|
|19||“U.S. Tax Shelter Industry: The Role of Accountants, Lawyers, and Financial Professionals, Hearings Before the Permanent Subcomm. on Investigation of the S. Comm. on Governmental Affairs,” 108th Cong. 2 (2003).|
|20||United States v. Stein, 435 F.Supp.2d 330, 339 (2006).|
|21||Mr. Stein retired from the firm with a $100,000 per month, three-year consulting agreement. In turn, he agreed to release the firm and all of its partners, principals, and employees from all claims. Further, Mr. Stein and KPMG agreed that Mr. Stein would be represented, at KPMG’s expense, in any suits brought against KPMG or its personnel and himself, by counsel acceptable to both him and the firm or, if joint representation were inappropriate or if Mr. Stein were the only party to a proceeding, by counsel reasonably acceptable to Mr. Stein.|
|22||United States v. Stein, supra at 342.|
|23||Id. at 344.|
|24||Id. at 345.|
|27||Id. at 345-346.|
|28||Id. at 346.|
|30||Id. at 347.|
|32||Id. at 348.|
|34||Id. at 349.|
|35||Id. at 351.|
|36||Id. at 352-353.|
|37||U.S. Const. amend. V, XIV.|
|38||Id. amend. VI.|
|39||Powell v. Alabama, 287 U.S. 45, 53 S.Ct. 55, 77 L.Ed. 158 (1932); Faretta v. California, 422 U.S. 806, 820, 95 S.Ct. 2525, 45 L.Ed.2d 562 (1975).|
|40||Martinez v. Court of Appeal of Cal., 528 U.S. 152, 165, 120 S.Ct. 684 (2000) (Scalia, J., concurring).|
|41||United States v. Stein, supra at 357.|
|42||Id. at 358.|
|43||See, e.g. Washington v. Glucksberg, 521 U.S. 702, 721, 117 S.Ct. 2258, 138 L.Ed.2d 772 (1997).|
|44||United States v. Stein, supra at 360.|
|45||Moore v. City of East Cleveland, 431 U.S. 494, 503, 97 S.Ct. 1932, 52 L.Ed.2d 531 (1977) (plurality opinion); United States v. Curran, 724 F.Supp. 1239, 1241 (C.D.Ill.1989), rev’d on other grounds, United States v. Spears, 965 F.2d 262 (7th Cir. 1992), cert. denied, 506 U.S. 989, 113 S.Ct. 502, 121 L.Ed.2d 438 (1992).|
|46||United States v. Stein, supra at 362.|
|48||Id. 48. Id. at 363. This instruction has been now been incorporated in the McNulty Memorandum.|
|49||Id. at 364. The court also observed that “it makes no difference that the Thompson Memorandum is a policy of the DOJ and implemented by the USAO rather than legislation enacted by Congress. Due process requires that government action ‘through any of its agencies must be consistent with the fundamental principles of liberty and justice which lie at the base of our civil and political institutions, which not infrequently are designated as ‘the law of the land.”… The government cannot avoid strict scrutiny of actions that impinge upon the fundamental right of fairness in the criminal process simply by acting through DOJ policy rather than by statute or formal regulation.” Id.|
|50||Id. at 365.|
|51||See, e.g., Wheat v. U.S., 486 U.S. 153, 164, 108 S.Ct. 1692 (1988); Caplin & Drysdale, Chartered, 491 U.S. at 624, 109 S.Ct. 2646. Further, in Stein, the government first argued that the Sixth Amendment right to counsel attaches only upon the initiation of a criminal proceeding. The court held that the Thompson Memorandum on its face and the USAO’s actions were parts of an effort to limit defendants’ access to funds for their defense. The fact that events were set in motion prior to indictment with the object of having, or with knowledge that they were likely to have, an unconstitutional effect upon indictment cannot save the government. The government then argued that the KPMG Defendants have no right, under the Sixth Amendment or otherwise, to spend “other people’s money” on expensive defense counsel. The court disagreed and held that the KPMG Defendants had at least an expectation that their expenses in defending any claims or charges brought against them by reason of their employment by KPMG would be paid by the firm. This expectation was the defendants’ property, not that of a third party’s. See United States v. Stein, supra at 366-367.|
|52||United States v. Stein, supra at 367 citing Via v. Cliff, 470 F.2d 271, 274-75 (3d Cir.1972); accord, United States v. Morrison, 602 F.2d 529, 531 (3d Cir. 1979), rev’d on other grounds, 449 U.S. 361, 101 S.Ct. 665, 66 L.Ed.2d 564 (1981).|
|53||Id. at 368-369.|
|54||Id. at 369.|
|56||Id. at 374.|
|57||Id. at 374-375.|
|58||Id. at 378.|
|59||United States v. Stein, — F.Supp.2d —-, 2006 WL 2060430 (S.D.N.Y.)|
|62||Id. at *17.|
|63||Wray, C., “Corporate Criminal Prosecution In A Post-Enron World: The Thompson Memo In Theory And Practice,” 43 Am. Crim. L. Rev. 1095, 1181-1182.|
|64||Thompson Memorandum at Part VI.|
|65||Wray, C., supra at 1182 quoting Dale A. Oesterle, “Early Observations on the Prosecutions of the Business Scandals of 2003-03:. On Sideshow Prosecutions, Spitzer’s Clash With Donaldson Over Turf, the Choice of Civil or Criminal Actions, and the Tough Tactic of Coerced Cooperation,” 1 Ohio St. J. Crim. L. 443, 480 (Spring 2004); also see Laufer, W. Legal Issues and Sociolegal Consequences of the Federal Sentencing Guidelines: Corporate Prosecution, Cooperation, and the Trading of Favors, 87 Iowa L. Rev. 643, 663-68 (2002).|
|67||Wray, C., “Corporate Criminal Prosecution In A Post-Enron World: The Thompson Memo In Theory And Practice,” 43 Am. Crim. L. Rev. 1095, 1098.|
|68||Id. at 1095.|
|70||McLure, J. “The Life and Death of Thompson Memo,” Legal Times, Dec. 18, 2006.|
|71||Id. Signatories included former Attorneys General Dick Thornburgh and Griffin Bell, as well as other officials from the Reagan, George H.W. Bush, and Clinton eras.|
|73||http://www.usdoj.gov/dag/speech/2006/mcnulty_ memo.pdf (last visited on January 2, 2007).|
|74||See Coyle, M., “The McNulty Memo: Real Change or Retreat?,” The National Law Journal, Dec. 20th, 2006.|
|75||Berger v. United States, 295 U.S. 78, 88, 55 S.Ct. 629, 79 L.Ed. 1314 (1935); see also, e.g., Brady v. Maryland, 373 U.S. 83, 87, 83 S.Ct. 1194 (1963) (“Society wins not only when the guilty are convicted but when criminal trials are fair; our system of the administration of justice suffers when any accused is treated unfairly. An inscription on the walls of the Department of Justice states the proposition candidly under the federal domain: ‘The United States wins a point whenever justice is done its citizens in the courts.'”)|
|76||United States v. Stein, 435 F.Supp.2d 330, 382 (2006).|
|77||Id. at 357.|
|78||Escobedo v. Illinois, 378 U.S. 478, 490, 84 S.Ct. 1758, 12 L.Ed.2d 977 (1964).|