Forum – Part I

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Nathan A. Fishbach

On Dec. 12, 2006, the U.S. Department of Justice (DOJ) revised its internal policies on charging corporations with federal crimes, issuing new guidance to federal prosecutors around the country.

Known as “the McNulty Memo” after author Deputy Attorney General Paul J. McNulty, the directive is the latest in a series of DOJ statements outlining the factors, which prosecutors should consider when deciding whether to seek criminal charges against a corporation. The McNulty Memo is available at www.usdoj. gov/dag/speech/2006/mcnulty_memo.pdf.

The Context

To assess the McNulty Memo’s importance, it is necessary to place it into the appropriate context. In recent years, the DOJ has increased its focus on combating corporate crimes. Acts previously add-ressed in the civil and administrative arenas are now the focus of federal criminal investigations and prosecutions. To a large extent, this allocation of law enforcement resources to fighting corporate crime is aided by the steady expansion of federal criminal jurisdiction to offenses previously reserved for prosecution by state attorney generals and local district attorneys.

What heightens the stakes for corporations is the relatively modest standard, which prosecutors must meet to establish a corporation’s criminal culpability. The majority view (including that of the Seventh Circuit) holds that a corporation is “‘vicariously criminally liable for the crimes committed by its agents acting within the scope of their employment — that is, within their actual or apparent authority and on behalf of the corporation’ — when the agents’ actions were ‘intended, at least in part, to benefit’” the entity.

The corporation can be liable even if the agent’s “acts were illegal, contrary to [the corporation’s]… instructions or against [its]… general policies.” The theory behind this standard for establishing corporate criminal liability is that the corporation “has a duty to prevent its employees from committing” crimes. 7th Cir. Fed. Jury Instruction — Criminal 5.03.

An investigation, let alone a prosecution (even resulting in an acquittal), can be devastating to a corporation. The impact has ripple effects (really tidal waves) across the corporation’s numerous “stakeholders,” such as stockholders, staff, customers, suppliers, and lending institutions.

Given the DOJ’s increased focus upon corporate crimes, the modest requirements for establishing corporate criminal liability, and the negative impact of a criminal investigation and/or prosecution, the factors considered by the Government in its charging decisions is quite important. The McNulty Memo provides guidance to prosecutors in making this determination and to corporations in addressing allegations of corporate misconduct.

The McNulty Memo’s Major Changes

The McNulty Memo outlines nine broad factors which federal prosecutors should consider in deciding whether to charge a corporation. Prior to the McNulty Memo, federal prosecutors used the Thompson Memo as a guide. Issued in 2003 by then Deputy Attorney General Larry D. Thomp-son, the Thompson Memo lists most of the same factors as the McNulty Memo.

However, the McNulty Memo revises two portions of the Thompson Memo —relating to the Government’s request for the production of privileged material and the Government’s consideration of the corporation’s payment of the attorneys’ fees for its personnel.

Production of Privileged Material

In the McNulty Memo as well as the Thompson Memo, one of the nine factors that is considered in reaching its charging decision is “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.”

In determining the extent of the corporation’s cooperation, the Thompson Memo states that a prosecutor could consider “if necessary, the waiver of corporate attorney-client and work product privilege.” The McNulty Memo revises this portion of the Thompson Memo by setting forth specific criteria which prosecutors must consider and procedures which they must follow prior to seeking the production of privileged material.

The McNulty Memo provides that prosecutors may request privileged material only “when there is a legitimate need for the privileged information to fulfill their law en
forcement obligations.” The McNulty Memo states that there must be “a careful balancing of the important policy considerations underlying the attorney client privilege and work product doctrine and … law enforcement needs…”

The McNulty Memo sets forth four criteria which prosecutors should use in determining whether there is a “legitimate need” for the privileged information. It notes that “[i]f a legitimate need exists, prosecutors should seek the least intrusive waiver necessary to conduct a complete and thorough investigation, and should follow a step-by-step approach to requesting information.”

The McNulty Memo divides privileged material into two categories. Category I consists of “purely factual information,” such as “key documents, witness statements, or purely factual interview memoranda regarding the underlying misconduct, organization charts created by company counsel, factual chronologies, factual summaries, or reports (or portions thereof) containing investigative facts documented by counsel.”

By contrast, Category II material consists of “attorneys-client communications or non-factual attorney work product,” including “legal advice given to the corporation before, during, and after the underlying misconduct occurred.” As described below, because of its sensitive nature, prosecutors face greater hurdles seeking authorization to request Category II legal material as opposed to Category I factual material.

To a large extent, the McNulty Memo’s revision of the DOJ’s policy for seeking privileged material is a response to criticism that the Thompson Memo “may be discouraging full and candid communication between corporate employees and legal counsel.” In September 2006, the Senate Judiciary Committee received statements addressing the impact of the Thompson Memo on the right to counsel in corporate investigations. Moreover, proposed legislation — the “Attorney Client Privilege Protection Act of 2006” — governing Government requests for privileged information (as well as other aspects of litigation with the Government), is now under consideration.

Attorneys Fees

Under the Thompson Memo, in assessing a corporation’s cooperation, the prosecutor may weigh “whether the corporation appears to be protecting its culpable employees and agents.” It noted that “while cases will differ depending on the circumstances, a corporation’s promise of support to culpable employees and agents…may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.” One such type of corporate support referred to in the Thompson Memo was “the advancing of attorneys fees.”

	Related Article Part II

The McNulty Memo reverses this position, noting that “[p]rosecutors generally should not take into account whether a corporation is advancing attorneys’ fees to employees or agents under investigation and indictment.” The McNulty Memo states that “[i]n 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.”

To some extent, the McNulty Memo can be seen as a reaction to the highly publicized decisions of U.S. District Judge Lewis Kaplan, who sharply criticized the Government for advising a corporation that it would consider its payment of their employees’ legal fees. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006); United States v. Stein, 2006 WL 2060430 (S.D.N.Y. July 25, 2006); The Thompson Memorandum’s Effect on the Right to Counsel in Corporate Investi-gations Before the U.S. Senate Committee on the Judiciary (Sept. 12, 2006) (statement of Mr. Andrew Weissmann, Jenner & Block LLP).

In reversing the prior policy, the Mc-Nulty Memo notes that many corporations are required by state statute and/or contract to advance the fees for these corporate officials and therefore, such payments “cannot be considered a failure to cooperate.”