Ending the ‘culture of waiver’ in governmental investigations
Published: December 1, 2008, Massachusetts Lawyers Weekly
By William A. Haddad
On Oct. 6, the Securities and Exchange Commission’s Division of Enforcement issued and released, for the first time, a manual designed to provide basic policy and procedure guidance to its line enforcement staff. The manual contains a number of important policy changes, including some additional protections for individuals and companies under investigation.
Most notably, Section 4.3 of the manual signals a shift by the division from its prior practice of giving significant weight to a party’s decision to waive (or not waive) its attorney-client privilege when determining whether the party has “cooperated” with the enforcement staff. (A party that is determined to have “cooperated” often benefits from lesser allegations and charges; in some cases, a cooperating party is not charged at all.)
The division’s current position, published a month after the U.S. Department of Justice issued a nearly identical policy, is that “[w]aiver of a privilege is not a pre-requisite to obtaining credit for cooperation.” Stated another way, “[a] party’s decision to assert a legitimate privilege will not negatively affect their claim to credit for cooperation.”
To drive the point home, the manual specifically instructs that “[t]he staff should not ask a party to waive the attorney-client or work product privileges and is directed not to do so.”
So why the change in policy?
The short answer is that there was a widespread backlash against what many considered to be an overly zealous SEC/DOJ waiver policy. That policy had effectively conditioned “cooperation” on a party’s willingness to waive privilege and to make other concessions, including agreeing not to indemnify executives in connection with the investigation and agreeing to fire executives who were implicated in internal investigations.
In doing so, the government seriously undermined one of the cornerstones of the American legal system. As the Supreme Court has stated:
“The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law. Its purpose is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice. The privilege recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer’s being fully informed by the client.” Upjohn Co. v. U.S., 449 U.S. 383, 387 (1981).
Holder Memo
It all began in 1999, when the DOJ, in the so-called 1999 Holder Memo, stated that waiver of the attorney-client privilege might be required to show “cooperation.” The SEC took a similar position in its 2001 Seaboard Release, which listed waiver of a privilege as an example of cooperation.
To further persuade companies and individuals under investigation to turn over privileged documents, the SEC and DOJ also offered “non-waiver agreements,” which, in theory, permitted the party under investigation to turn over privileged documents without fear that the privilege would be lost as to private litigants waiting in the wings to sue.
A number of companies that signed such agreements were sued by plaintiffs’ firms that promptly issued requests for the documents previously turned over to the SEC and/or DOJ. To the surprise and displeasure of those companies, most courts addressing the issue found that the non-waiver agreements were not enforceable and ordered disclosure. See, e.g., In re Qwest Communications Int’l, Inc., 450 F.3d 1179 (10th Cir. 2006); In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289 (6th Cir. 2002).
Thompson Memo
The DOJ turned up the heat on corporations in its 2003 Thompson Memo, issued in the wake of the Enron and WorldCom debacles. The memo stated that waiver “is critical in enabling the government to evaluate the completeness of a corporation’s voluntary disclosure and cooperation.”
The tone of the Thompson Memo was markedly more distrustful and aggressive toward corporations than the Holder Memo — “[t]he main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation.”
Faced with such a strong emphasis on appearing “cooperative,” many defense lawyers and in-house attorneys felt that they had no practical option other than to recommend that their clients waive the privilege. Thus, a “culture of waiver” was born.
The combined DOJ/SEC policy of requesting privilege waivers and other concessions drew a great deal of criticism from a wide variety of political actors. For example, the U.S. Chamber of Commerce, American Civil Liberties Union, American Bar Association and other groups joined together in a coalition seeking a rollback of DOJ/SEC waiver policy.
Some courts also began to reject the government’s strong-arm tactics. Notably, in United States v. Stein, the court found the portion of the Thompson Memo permitting DOJ lawyers to consider a company’s decision to indemnify corporate executives when assessing “cooperation” to be unconstitutional. See United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006), aff’d 541 F.3d 130 (2d Cir. 2008).
The court also found that the DOJ had improperly emphasized that paying the defendants’ legal fees would be considered a negative factor in determining whether the defendants’ former employer — KPMG — had cooperated with the investigation. The court concluded that the DOJ’s pressure tactics, which ultimately caused KPMG to cut off attorneys’ fees for the defendants, violated the defendants’ Sixth Amendment right to counsel and Fifth Amendment right to due process.
As the clamor for reform grew, Congress responded by holding hearings. During those hearings, witnesses, including several former high-ranking DOJ officials, testified that the waiver policy had gone too far.
In addition, certain then-current government lawyers began to voice their objections to the policy. For example, in a speech given to the Federalist Society on Sept. 21, 2006, SEC Commissioner Atkins stated: “I strongly believe that the commission should not view a company’s waiver of privilege as a factor that will afford cooperation credit. … Maybe it is time for the commission to revisit this issue in a formal way and to clarify that waiver … will not result in lesser allegations and/or remedies.”
McNulty Memo
On Dec. 7, 2006, Sen. Arlen Specter introduced a bill entitled the Attorney-Client Privilege Protection Act, which, if enacted, would have barred government agencies from requesting waiver. Within days, the DOJ issued a new policy statement — the so-called McNulty Memorandum, which attempted to “tone down” the aggressive posture taken in the Thompson Memo.
But the McNulty Memo did not flatly prohibit waiver requests. Instead it set up a series of procedural hoops that a prosecutor had to jump through before requesting a full-blown waiver.
Pursuant to that memo, a prosecutor had to divide all information sought from a company into two categories: (1) copies of key documents, witness statements or purely factual interview memoranda regarding the underlying misconduct; and (2) attorney-client communications or non-factual attorney work product. The prosecutor was not allowed to request Category II information unless a request for Category I information had been made and the response was deemed insufficient.
Because the changes in the McNulty Memo were too modest, Congress increased the pressure on the DOJ. On Jan. 4, 2007, Sen. Specter introduced S. 186, also known as the Privilege Protection Act of 2007. On July 12, 2007, an identical bill was introduced in the House, and, on Nov. 13, 2007, the House passed its version. The Senate did not act on its version of the Privilege Protection Act of 2007. Instead, Sens. Specter and Leahy asked Deputy Attorney General Mark Filip to review the DOJ’s existing policy and to make recommendations in 2008.
By the summer of 2008 it became clear that the promised recommendations were not forthcoming. Accordingly, on June 26, 2008, Specter, along with a bipartisan group of 11 co-sponsors, introduced S. 3217, also known as the Privilege Protection Act of 2008.
The new bill elicited a response from the DOJ; on July 9, 2008, Deputy AG Filip sent a letter to Specter suggesting some minor changes to the McNulty Memo and asking for time to implement and review those changes.
Specter sent a reply letter expressing his frustration at the lack of progress by the DOJ on revising McNulty: “I think it is too much to ask for the legislative process to await a written revision of McNulty and then await a review of the implementation of a new memorandum for a ‘reasonable amount of time’ which could be very long.”
The DOJ got the message and, in August 2008, issued the so-called Filip revisions to the McNulty Memo, which, like the SEC manual, includes a flat ban on requests for waiver.
Whether the Senate will decide that the changes embodied in the SEC manual and Filip revisions have sufficiently reinvigorated a party’s right to assert the attorney-client privilege is unclear. The Senate may be taking a “wait-and-see” approach to determine whether it needs to enact the Privilege Protection Act.
What is clear is that SEC and DOJ are under intense scrutiny regarding any attempts to further weaken a party’s right to assert the privilege. Consequently, individuals and companies under investigation should realize that they no longer need to waive the privilege to be considered “cooperative.” That is the first step in ending the “culture of waiver.”
William A. Haddad is an associate at Dwyer & Collora in Boston.