Originally published in Lawyers’ Professionalism and Ethics, 2005 Fall Newsletter
By: Cynthia Tolbert
Of Counsel with Casey Gilson P.C., Atlanta, Georgia
Ramifications of the disclosure of privileged materials in compliance with the governmental investigation of a corporate client
Considered near sacred in context since the sixteenth century, the attorney-client privilege has been riddled with assaults by Federal legislation, the Department of Justice, and court action alike over the past decade. The Sarbanes-Oxley Act of 2002; policy changes in the Department of Justice; and changes in various compliance procedures have had particular impact on the attorney-client privilege in corporate settings. Attorneys representing corporate clients that are undergoing investigations by governmental agencies must assess, often before the filing of a civil or criminal action against their client, what must be produced in compliance with the agency’s investigation, and what, pursuant to the attorney-client privilege, may be withheld. This article will explore the attorney-client privilege in the corporate setting and the attorney’s duty, if any, to disclose privileged materials in compliance with a governmental investigation, particularly in an effort to avoid criminal action.
I. ATTORNEY-CLIENT PRIVILEGE AND THE CORPORATE CLIENT
The attorney-client privilege found its origin in Elizabethan England, initially as a protection and consideration for the “oath and honor of the attorney,” instead of a protection afforded the client. See Radiant Burners v. American Gas Association, 320 F.2d 314, 318 (7th Cir. 1963) (citing 8 Wigmore, Evidence § 2990 (McNaughton Rev. 1961); Kelway v. Kelway, 21 Eng. Rep. 47 (Ch. 1580)). A century later, courts recognized that the client was entitled to similar protection, and by the 18th century the privilege became substantially recognized as that of the client. Id. In the early 1700’s, courts recognized that privileged communications were made, “…first, during any litigation; next, in contemplation of litigation; next, during a controversy but not yet looking to litigation; and lastly, in any consultation for legal advice, wholly irrespective of litigation or even of controversy.” Id. The parameters of the modern privilege were set out in United States v. United Shoe Machinery Corp., 89 F. Supp. 357 (D. Mass 1950.)
The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.
Id., at 358-59. Today, courts generally recognize that the attorney-client privilege is established when a communication is made between privileged persons, in confidence, for the purpose of Seeking, obtaining, or providing legal assistance to the client. Restatement (Third) of the law governing lawyers § 118 (1988.) The policy behind the privilege is to allow the client an opportunity to fully divulge all information to his attorney so that the attorney is able to give informed legal advice. Upjohn Co. v. United States, 449 U. S. 383, 389-392 (1981). Without that protection, necessary information may be withheld from the attorney, and subsequent advice may be given based on half-truths or conjecture. The privilege, therefore, evolved from common law and was subsequently codified in the Federal Rules of Evidence, as well as the Federal Rules of Civil Procedure and related state evidentiary and procedural rules. See Fed. R. Evid. 501; Fed. R. Civ. Pro. 26 (b) (3).
Federal courts have long acknowledged the attorney-client privilege, extending the privilege to the corporate client as early as 1915. See Radiant Burners, Inc. at 319 (citing United States v. Louisville & Nashville R.R., 236 U.S. 318, 336 (1915)). In the corporate setting, the attorney-client privilege is unique in that the privilege attaches to the corporate entity, typically, and not to individual employees who communicate with the attorney. Similarly, the decision as to whether to waive the attorney-client privilege belongs to the corporation, not its employees. Obviously, a corporation may only act through its agents and any communication with an attorney on behalf of the corporation must be made by an individual. Courts initially struggled with the application of the attorney-client privilege to certain individuals and the fact that the corporation itself as an “artificial creature of the law” could not communicate with its counsel. See Upjohn Co., at 389. Prior to the decision in Upjohn, Federal courts were split as to whether the privilege extended only to officers of the corporation, or whether it also extended to other employees of the corporation who had communicated with corporate attorneys. See Harper & Row Pubs., Inc., v. Decker, 423 F.2d 487 (7th Cir. 1970). Competing tests evolved for purposes of determining how and when to invoke the corporate attorney-client privilege regarding statements of corporate employees. These tests were identified as the “control group test” and the “subject matter test.” See Harper & Row Pubs., Inc., supra; General Electric Co. v. Kirkpatrick, 312 F. 2d (3rd Cir. 1962). The “control group test” recognizes that the attorney-client privilege extends to the statements of corporate employees who are in a position to control or take a substantial part in a corporate decision. See Harper & Row Pubs., Inc., at 490-491. The “subject matter test” recognizes that an employee’s statement is that of the corporation when the employee makes the communication at the direction of his superiors and where the subject matter upon which advice was given was sought by the corporation. See General Electric Co. v. Kirkpatrick, supra. Both tests were analyzed by the Supreme Court in Upjohn Co., which ruled in favor of the more broadly applied “subject matter test,” stating:
The control group test … frustrates the very purpose of the privilege by discouraging the communication of relevant information by employees of the client to attorneys Seeking to render legal advice to the client corporation. The attorney’s advice will also frequently be more significant to noncontrol group members than to those who officially sanction the advice, and the control group test makes it more difficult to convey full and frank legal advice to the employees who will put into effect the client corporation’s policy.
Upjohn, at 392.
The Upjohn case arose out of the company’s internal investigation into “kickback” payments made by certain employees to foreign officials for the purpose of securing government business. The payments exposed the company to increased tax liability, yet the company brought the issue to the attention of the Security and Exchange Commission (“SEC”) as well as the Internal Revenue Service (“IRS”). In response, the IRS issued a subpoena seeking documents related to the internal investigation, including forms completed by company employees which had been submitted to its in-house counsel. Upjohn refused to produce the forms based on the attorney-client privilege, and the IRS sought to enforce the subpoena. The Court ruled that the communications at issue were protected because (1) they were made to in-house counsel at the direction of corporate superiors; (2) they concerned matters within the scope of the employees’ in-house duties; (3) the information was not available from upper-level management; and (4) the employees were aware that they were being questioned so that the corporation could receive legal advice. Upjohn at 394-396; 397-398 (recognizing strong public policy underlying attorney work product privilege). Pursuant to the “subject matter test” therefore, the attorney-client privilege is preserved if the criteria detailed in Upjohn is satisfied, which serves to protect communications between corporate attorneys and corporate employees during fact finding investigations. Upjohn is the landmark case on the attorney-client privilege in the corporate context. See Leslie Warton, Hazards for Attorney-Client Relationship, New York Law Journal, corporate counsel, November 18, 2002. State law typically governs these issues, however, and the more rigorous “control group test” is followed in several jurisdictions. See National Tank Co. v. Brotherton, 851 S.W. 2d 193 (Tex. 1993).
Through the next decade the Supreme Court vigorously defended the attorney-client privilege against government encroachment in the corporate setting. See Swidler v. Berlin, 524 U. S. 399, 403 (1998) (public policy of attorney-client privilege was greater than the public policy of uncovering alleged wrongdoing of president); United States v. Zolin, 491 U. S. 554, 572 (1989) (to invoke crime-fraud exception to attorney-client communications challenging party must present sufficient evidence to demonstrate that the exception is warranted). But in 1999, vast policy changes in the Department of Justice (DOJ) and in 2002, the reporting requirements of § 307 of the Sarbanes-Oxley Act, served to substantially modify the application of this privilege to the corporate client. Recent changes, as late as December of 2006, substantially curtailed the more controversial DOJ policy changes affecting the attorney-client privilege. But the recent changes do not outlaw waiver demands; some threat is still directed toward the attorney-corporate client privilege during a governmental investigation.
II. INTERNAL INVESTIGATIONS AND REPORTING REQUIREMENTS
Before 1999, companies and their corporate counsel commonly conducted internal investigations regarding suspected corporate infractions without concern of waiving or forfeiting the attorney-client or attorney-work product privilege, particularly when guidelines established by Upjohn, supra were followed. See Lawrence Finder, “Internal Investigations: Consequences of the Federal Deputation of Corporate America,” South Texas Law Review, Vol. 45: 111. At that time, problems which merited inquiry would often be managed by an internal review, generally headed by outside counsel to better preserve the attorney-client and work product privileges. Id. In 1991, the Department of Justice promulgated guidelines for “Sentencing of Organizations,” which emphasized corporate cooperation during federal investigations to ensure leniency. Id. at 113-14, citing U.S. Sentencing Guidelines Manual ch. 8 (2002). At that time, the goal of most companies undergoing a federal investigation was to cooperate by disclosing” … just enough, but not too much” in an effort to avoid a waiver of the privilege and simultaneously take advantage of the promise of leniency. Id. These guidelines rewarded organizations with reduced penalties upon disclosure and further served to encourage federal prosecutors to request waivers of privilege and the production of work product underlying the internal investigations of corporations. Id.
In 1999, prosecutors from the Department of Justice became more aggressive in their inquiries and investigations of corporations following the publication of a memorandum penned by then-Deputy Attorney General Eric Holder, called the “Holder Memorandum.” Id. This memorandum, often referred to as the death knell for attorney-client privilege, identified eight factors prosecutors were to consider in their analysis of whether to file criminal charges against a corporation. Id. (citing David M. Zorrow & Keith D. Krakur, On the Brink of a Brave New World: The Death of Privilege in Corporate Criminal Investigations, 37 Am. Crim. L. Rev. 147, 147-48 (2000)). The most notable and controversial of the eight factors required the prosecuting attorney to analyze:
“[t]he 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 corporate attorney-client and work product protection.”
Id. at 119.
In 2002, Congress enacted the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 746, to redress corporate fraud. This Act required the Securities and Exchange Commission to promulgate rules setting out “minimum standards of professional conduct” for attorneys appearing and practicing before the commission. Warton, Leslie, Hazards for Attorney-Client Relationship, New York Law Journal, corporate counsel, November 18, 2002. Specifically, § 307 of the Act required that rules be issued:
1. requiring an attorney to report evidence of material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company…; and
2. if the counsel of officer does not appropriately respond to the evidence…requiring the attorney to report the evidence to the audit committee.
Id. (citing Sarbanes-Oxley Act, supra). The Act thus requires attorneys who suspect corporate infractions of law or fraud to report what they perceive to be “material violations” of federal law to the corporation’s chief legal officer or chief executive officer. Id. See also Report of Investigation Pursuant to Section 21 (a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Re. No. 34-44969 (October 23, 2001), available at http://www.sec.gov.litigation/investreport/34-44969.htm (Seaboard report: states that corporations can demonstrate cooperation by waiving privilege). Those officials, in turn, are required to report back to the attorney on all steps taken to correct the suspected corporate abuse or fraud. If the attorney is dissatisfied, he must then report “up the ladder,” to the corporation’s board of directors or to a designated committee. Max R. Crane, and Peter G. Verniero, Attorney Client Privilege Under Assault, The Metropolitan Corporate Counsel, Vol. 13, No. 1, January, 2005. Although under the rules the attorney’s reporting duty ends with the report he makes to the corporation’s board of directors or its appointed committee, the rules also provide that the attorney may report infractions to the SEC under certain situations. Id. If the attorney believes that investors’ interests are in jeopardy, the attorney may reveal confidential and privileged information to the SEC, without the company’s consent. Id. The attorney’s typical supportive position as an advocate for the corporate client is thus modified by § 307 of the Sarbanes-Oxley Act to that of corporate policeman. Id. The policing efforts encouraged by the Act also work to transform the attorney from advocate to whistleblower, which in turn, destroys the attorney-client privilege as applied and raises serious ethical issues for the reporting attorney.
Historically, the attorney-client privilege has not been completely impermeable. One well recognized exception to the privilege is the “crime-fraud” exception. See United States v. Zolin, supra. Under this exception the privilege does not apply to attorney-client communications if the client was engaged in a crime or fraud at the time he sought an attorney’s advice, or if the advice was sought “in furtherance of” the crime or fraud. Id. See also Hazards for Attorney-Client Relationship, supra. Attorneys are duty bound not to disclose a client’s past criminal activity, although future crimes are not protected by the privilege. United States v. Cleveland, 1997 U.S. Dist. LEXIS 5895, April 28, 1997 (citing U. S. v. Zolin, supra). In contrast, under the provisions of § 307 of the Sarbanes-Oxley Act, an attorney may report a client’s past acts. Further, § 307 provides a de facto exception to the privilege, plausibly, before corporate crime or fraud is conceived, committed, or discovered. See Hazards for Attorney-Client Relationship, supra; Report of Investigation Pursuant to Section 21 (a) of the Securities Exchange Act of 1934 and Commission Statement of the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Rel. No. 34-44969 (Oct. 23, 2001), available at http://www.sec.gov./litigatoin/investreport/34-44969.htm.
Recently, courts have applied the crime-fraud exception to the attorney-client privilege in cases where no crime or fraud was committed, but where there was evidence of intent to commit a crime or fraud. Id. In Grassmueck v. Ogden Murphy Wallace, P.L.L.C., the court held that a prima facie showing that the attorney-client communications at issue were in furtherance of criminality was not required for the exception to apply if the Plaintiffs could show that the in camera review of the evidence “…may lead to evidence that the exception applies.” Grassmueck v. Ogden Murphy Wallace, P.L.L.C., 213 F.R.D. 567,572-73 (W.D. Wash. 2003) (citing In re Grand Jury Subpoena 92-1, 31 F.3d 826, 830 (9th Cir. 1994)). The Grassmueck court further noted that the crime-fraud exception may apply to negate the privilege “…even though the attorney is unaware of the crime and takes no affirmative stop that actually furthers it.” Id. (citing In re Grand Jury Proceedings (the Corporation), 87 F.3d 377, 380 (9th Cir. 1996)). Under the more relaxed standards cited above, prosecutors and plaintiff’s counsel could easily argue that the attorney-client privilege is breached for virtually any § 307 communication, even where counsel’s initial suspicions of fraud are unfounded. See Hazards for Attorney-Client Relationship, supra.
Notably, § 307 provides no guidelines for an objective analysis of a reportable infraction and does not specifically provide for the attorney-client privilege regarding § 307 communications. Ultimately, the attorney’s own communications with corporate officials, which are mandated by the Act, may be used to prosecute the corporate client. Id. Ironically, in a situation where an internal investigation is prompted by the corporation’s attorney, under the Sarbanes-Oxley reporting mandates, the corporation may be charged with the crime that the underlying internal investigation took place to prevent or correct. Id. And the attorney’s own communications may be used to prove certain elements of the “crime.” Id.
In 2003, following the enactment of the Sarbanes-Oxley Act, the Department of Justice issued yet another memorandum. The memorandum, which was entitled “Principles of Federal Prosecution of Business Organizations” (“Thompson Memorandum” after Holder’s successor Deputy Attorney General, Larry D. Thompson), served to impose more strident requirements for a corporation’s cooperation during a governmental investigation. See Finder, Internal Investigations: Consequences of the Federal Deputation of Corporate America, at 115. This memorandum directed prosecutors who encountered companies which impeded disclosure to “weigh in favor of a corporate prosecution.” Id. Specifically, the Thompson memorandum stated:
We will not tolerate conduct that ultimately obstructs our investigations, whether veiled or overt. We are particularly watchful for: (1) overly broad assertions of corporate represent-action of employees; (2) inappropriate directions to employees to not volunteer information or decline interviews; and (3) presentations or assertions that contain misleading information or omissions.
Id. (citing Remarks of Deputy Attorney General Larry D. Thompson, Ninth Circuit Judicial Conference, http://www.usdoj.gov/dag/speech/2003/062503hawaii9thcircuit.htm (June 25, 2003)). Although disclosure is strongly encouraged, the Thompson Memorandum further stated that “…a corporation’s offer of cooperation does not automatically entitle it to immunity from prosecution.” Id. (citing Thompson Memorandum, supra, note 12, § II. A).
In response to great public and private outcry against the Thompson Memorandum, current Deputy Attorney General Paul McNulty issued his own guidelines on December 12, 2006, which curtailed some of the more egregious sections of his predecessor’s memorandum. See Memorandum from Paul J. McNulty, Deputy Attorney General, to Heads of Department Components and United States Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speech/2006/mcnulty_memo.pdf. Although the attorney-client privilege is not completely protected, the McNulty Memorandum requires prosecutors to obtain prior supervisory approval before making a demand for a waiver of the attorney-client privilege. Specifically, the McNulty Memorandum states:
Waiver of attorney-client and work product protections is not a prerequisite to a finding that a company has cooperated in the government’s investigation. However, a company’s disclosure of privileged information may permit the government to expedite its investigation. In addition, the disclosure of privileged information may be critical in enabling the government to evaluate the accuracy and completeness of the company’s voluntary disclosure.
Prosecutors may only request waiver of attorney-client or work product protections when there is a legitimate need for the privileged information to fulfill their law enforcement obligations. A legitimate need for the information is not established by concluding it is merely desirable or convenient to obtain privileged information. The test requires a careful balancing of important policy considerations underlying the attorney-client privilege and work product doctrine and the law enforcement needs of the government’s investigation.
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 the voluntary disclosure already provided; and
(4) the collateral consequences to a corporation of a waiver.
Id. The McNulty Memorandum also imposes a “step-by-step” approach to requesting information, first requiring purely factual information, which may not be privileged, which is related to the underlying alleged misconduct. This step is identified as a “Category I” request. Id. Before requesting that a corporation waive the attorney-client or work product protections for Category I information, prosecutors must first obtain written authorization from the United States Attorney, who must in turn consult with the Assistant Attorney General for the Criminal Division before granting or denying the request. Id. The prosecutor Seeking the waiver must identify the basis for and scope of the request. Id. Significantly, a corporation’s response to the government’s Category I request for waiver of privilege may be considered in determining whether a corporation has cooperated in the government’s investigation. Id.
If the purely factual information provides an “incomplete basis to conduct a thorough investigation,” prosecutors may then request that the corporation provide attorney-client communications or non-factual attorney work product, which is identified as “Category II” information. Id. Prosecutors are cautioned that Category II information should only be sought in “rare circumstances.” Id. It should be noted that the McNulty Memorandum does not identify the “rare circumstances” in which this information may be sought. However, prosecutors are required to follow similar steps for authority to proceed with this avenue of investigation as required for Category I information, but, in addition, all requests for Category II information must be made in writing, setting forth the legitimate need for the information and identifying the scope of the waiver sought. Id. Such requests must also be maintained in the files of the Deputy Attorney General. Id. However, the memorandum notes that requests for Category II information do not include:
(1) legal advice contemporaneous to the underlying misconduct when the corporation or one of its employees is relying upon an advice-of-counsel defense; and
(2) legal advice or communications in furtherance of a crime or fraud, coming within the crime-fraud exception to the attorney-client privilege.
Id. The memorandum directs prosecutors not to take into account a corporation’s decision not to provide Category II information, which distinctly differs from the provisions of the Thompson Memorandum. The McNulty memorandum may serve to curtail some waiver demands from governmental prosecutors and further ensures uniformity in the government’s approach to the attorney-client privilege waiver during investigations. Id. See also Press Release, Department of Justice, U.S. Deputy Attorney General Paul J. McNulty Revises Charging Guidelines for Prosecuting Corporate Fraud, December 12, 2006, www.usdojgov.
Separately, Senate Judiciary Chairman, Arlen Specter (R-Pa), on December 7, 2006, proposed legislation that would completely bar prosecutors from forcing companies to waive their attorney-client privilege to avoid criminal charges. See Press Release of Senate Judiciary Committee, and Carrie Johnson, “Shift in Corporate Prosecution Ahead,” Washington Post, November 30, 2006 www.washingtonpost.com/wp-dyn/content/article/2006/11/29/AR2006112901316 pf. The proposed legislation preserves the corporation’s ability to offer internal investigation materials to federal prosecutors, but only if such an offer is voluntary and unsolicited by prosecutors.
III. DISCLOSURE AND WAIVER: THE McKESSON DILEMMA
The “post-Enron” world is fraught with concerns regarding the impact corporate fraud has caused investors and retirees alike. The reporting rules and guidelines promulgated by the Department of Justice and the Securities and Exchange Commission were developed, in part, to prevent the devastation and collapse of major corporations and individual retirement accounts. As noted above, a waiver of the attorney-client privilege is encouraged in certain circumstances by both agencies. Prosecutors may argue that the DOJ and SEC disclosure policies serve to prevent an employee from hiding his criminal activities behind the company‘s protective shield. They may also argue in support of their disclosure policies because these policies may act to prevent the errant and/or criminal actions of an individual employee, which could, in turn, expose an entire company to criminal sanction. This, as in the case of Arthur Andersen, may lead to the corporation’s demise. See Internal Investigations, at 121; Martin, James and Calvert, Winston, The Threat of Criminal Prosecution To In-House Counsel, The Tide Has Changed But It Is Not a Tsunami, ABA Section of Litigation Committee on Corporate Counsel, February 16-19, 2006. But the voluntary waiver of the attorney-client privilege in the face of a governmental investigation may also have far-reaching and devastating implications for the company and individual employees alike.
A. The Lessons of McKesson
On January 12, 1999, McKesson, a large publicly traded, health care supply management company and HBOC, a publicly traded, health care information management software company, merged and HBOC became a wholly owned subsidiary of McKesson. McKesson Corporation v. Green, 266 Ga. App. 157, 597 S. E. 2d 447 (2004) (cert. granted 279 Ga. 95, 610 S.E. 54 (2005)). Shortly after the merger, McKesson acknowledged that HBOC had improperly recorded revenue before the merger, which had artificially inflated HBOC’s value. Id. at 158. McKesson issued a revised earnings statement shortly following its discovery and publicly announced the overstatement, which caused the value of its stock to plummet. Id. In May of that year, McKesson hired a law firm and an accounting firm to conduct an internal investigation to determine the nature and extent of HBOC’s accounting improprieties. Id. In keeping with their investigation, attorneys and accountants conducted extensive interviews of HBOC and McKesson officials and reviewed documents and other related materials from each company. Id. Advisory memoranda were prepared following this investigation and review of materials. Id.
Within days of McKesson’s public announcement, the SEC began an investigation into McKesson, as well as HBOC, to determine whether either of the corporations had filed materially false or misleading financial statements. Id. at 159. During these investigations, McKesson voluntarily provided the audit documents to the SEC and United States Attorneys Office (USAO), after securing a confidentiality agreement which provided that the production did not waive the attorney-client and work product protection. Id. at 159 (citing O.C.G.A. § 9-11-26 (b)(3)). In the interim, various McKesson shareholders filed securities fraud law suits for the devaluation of their stock. Id. (citing McKesson HBOC, Inc. v. Adler, 254 Ga. App. 500, n. 1, 562 S.E. 2d 809 (2002)) (noting that more than 80 lawsuits arising out of the merger had been filed nationwide). During this litigation, the shareholders moved the trial court to compel McKesson to produce the audit documents that the corporation had provided to the SEC and USAO. Id. at 159. The trial court ruled that although the documents at issue were work product and should be protected from discovery, the fact that McKesson voluntarily provided audit documents to an adversary worked to waive the work product protection. Id. at 160 (citing McKesson HBOC, Inc., v. Adler, 254 Ga. App. at 501) (protection is not waived by voluntary disclosure to a third party, unless the third party was an adversary); United States v. Bergonzi, 216 FRD at 496-498 (McKesson and government were adversaries and did not share a “true common goal”); McKesson HBOC, Inc. v. Superior Court of San Francisco County, 115 Cal. App. 4th 1229, 1240, 9 Cal. Rptr. 3d 812 (2004) (finding that McKesson and the government were not aligned in any litigation and did not share the same stake or have the same goal); Saito v. McKesson HBOC, Inc., 2002 Del. Ch. LEXIS 125, at 6-20 (a shareholder suit in which the trial court found that McKesson did not share a common interest with the SEC at the time the documents were disclosed, that the SEC was a “foe” of the corporation, and that McKesson was aware that an adversarial relationship existed before disclosing its work product)). The trial court further ruled that the confidentiality agreement between McKesson and the SEC did not prevent a waiver of the protection. Id. at 160 (citing United States v. Bergonzi, 261 FRD at 496-497 (II) (A) (2) (b) (1), n. 10) (finding that the confidentiality agreements between McKesson and the government were not unconditional, gave the government the power to share the documents as “it saw fit,” and therefore did not prevent a waiver of the work product protection)). In addition, the shareholders asserted that McKesson disclosed the audit documents to gain leniency from the SEC, not because there was a shared interest. Id. (citing In re Steinhardt Partner, 9 F3d at 235-236 (noting that the SEC has continued to receive voluntary cooperation from subjects of investigations even absent the promise of confidentiality, because such cooperation benefits the subject by providing the possibility of leniency and limiting the duration and parameters of the investigation and resulting litigation); Westinghouse Elec. Corp. v. Republic of Philippines, 951 F2d 1414, 1429 (3rd Cir. 1992) (finding that when a party discloses protected materials to a government adversary in order to forestall prosecution or obtain lenient treatment, such disclosure waives the work product protection because both objectives are “foreign” to the rationale behind the work product doctrine)). Interestingly, in an amicus brief to the trial court in McKesson v. Greene, the SEC admitted that it “often rewards cooperation [by the subject of the investigation] with lenient treatment.” Id. at 164 (citing In re Subpoenas Duces Tecum, 738 F2d 1367, 1369 (D.C. Cir. 1984) (recognizing that the SEC’s ‘voluntary disclosure program…promises wrongdoers more lenient treatment and the chance to avoid formal investigation and litigation in return for thorough self-investigation and complete disclosure of the results to the SEC’)). The appellate court in McKesson v. Green ruled that the trial court did not abuse its discretion in granting the shareholder’s motion to compel the discovery of the McKesson audit documents which had been submitted “in confidence” to the SEC. Id. at 166. See also McKesson HBOC, Inc. v. Superior Court, _____Cal. App. 4th _____, 2004 WL 318618 (Feb. 20, 2004) (disclosure of the audit documents to the government was not required for the attorneys to provide legal advice to McKesson, and McKesson was ordered to produce the documents to Merrill Lynch).
McKesson was obligated to report its discovery of HBOC’s misrepresented valuation, which acted to not only devalue its stock but also to trigger an internal audit and investigations by the SEC and the USAO. As noted above, the government pressured McKesson into disclosing materials and memoranda from the McKesson internal audit to the SEC with the understanding that the company would be given a more lenient treatment if faced with criminal action. Even though McKesson entered into a confidentiality agreement with the government, courts ruled that the company breached the attorney-client and work product privileges by disclosing the contents of their audit to an adversary. The internal audit documents were allowed into evidence in multiple shareholder lawsuits throughout the country and led to criminal charges against the company’s chief financial officer.
On March 30, 2004, approximately five years following the disclosure of internal audit documents to the SEC, the U.S. Department of Justice issued a press release detailing what was to become one of the largest securities fraud investigations of an individual in the country. Press Release, United States Attorney for the Northern District of California, SEC, U.S. Attorney’s Office and FBI Bring Securities Fraud Charges Against Former McKesson Chief Financial Officer Richard Hawkins (April 1, 2004). The subject of the press release was the criminal and civil securities fraud charges leveled against Richard Hawkins, the former Chief Financial Officer for McKesson. Hawkins was charged with conspiracy, securities fraud and lying to the company’s auditors. U. S. v. Hawkins, 2005 U.S. Dist. LEXIS 9839, 33 Media L. Rep. 1570 (U.S.D.C.N.D. Calif. 2005). McKesson intervened in the Hawkins litigation, asserting that the results of the internal audit conducted in 1999 were confidential attorney-client communications as well as attorney work product. Id. McKesson further contended that the contents of the audit and memoranda should be sealed and kept from public purview and access. Id. The Hawkins court held that McKesson did not prove that its interests overcame the public’s right to access of the audit documents. Id. Furthermore, during the course of Hawkins’ criminal trial, statements made by witnesses during the internal investigation became relevant to the government’s and the defense’s case, which required testimony from McKesson’s outside lawyers regarding their earlier audit and investigation of McKesson/HBO, Co. See News Releases, Orrick, San Francisco, Former McKesson CFO Richard Hawkins Not Guilty on All Counts of Securities Fraud, (July 11, 2005); Orrick, Update: McKesson Acquittal Offers Insight Into Federal Prosecutions of Corporate Defendants. Hawkins was acquitted following a six week bench trial. Id.
As noted above, McKesson’s decision to “voluntarily share” the contents of its internal audit with the SEC waived the protections of the attorney-client privilege and the attorney work product doctrine. It is also apparent that the audit documents, produced to the SEC by McKesson’s outside counsel following their investigation, were used to indict Hawkins and several of HBO’s corporate officers. Even though the disclosures were apparently made to ensure governmental leniency for McKesson, the confidentiality agreement entered between McKesson and the government was invalidated and did not serve to protect any interests, including the interests of the corporation, McKesson or the interests of the corporate officers, including Hawkins. The lesson of the McKesson dilemma may be to avoid the voluntary disclosure of internal audits and privileged documents to governmental agencies, even when leniency is promised. Today, the McKesson internal audit documents would likely fall into Category I and Category II communications under the McNulty Memorandum. Therefore, today, a refusal to produce fact-based, Category I information from an internal audit may be used by the USAO to assess corporate cooperation, or, more specifically, corporate lack of cooperation. But, as noted above, the refusal to produce Category II information, which is strictly privileged, would not, as per the McNulty Memorandum, be used against McKesson today when assessing corporate cooperation.
B. To Produce or Not Produce; the Attorney’s Dilemma
Closely following the wake of the Enron scandal, in March of 2002, the Department of Justice brought an obstruction of justice charge against the Arthur Andersen firm in its entirety. See The Threat of Criminal Prosecution To In-House Counsel, supra. Arthur Andersen was charged with violating 18 U.S.C. § 1512 (b)(2)(A), which makes it a crime to “corruptly persuad[e] another person” to withhold or alter documents for use in an official proceeding. Id. See also Arthur Andersen v. United States, 125 S. Ct. 2129, 2136 (2005). None of the individuals who actually caused the destruction of volumes of documents concerning Enron were indicted. Id. In the Arthur Andersen case, Nancy Temple, who was serving as in-house counsel to the firm, allegedly in anticipation of an SEC investigation, gave instructions for Arthur Andersen employees to “follow company document retention policy,” which called for the destruction of documents after a certain period of time. Id. This action led to the indictment of the company. Id.
The guilty verdict entered against Arthur Andersen led to the destruction of the entire company, which once employed thousands. The Threat of Criminal Prosecution To In-House Counsel, supra. The company’s downfall became the bane of the Department of Justice, which was severely criticized for its decision to bring criminal charges against the firm instead of the responsible individuals. Id. Following the collapse of Arthur Andersen, certain U.S. Attorneys and a U.S. Deputy Attorney General asserted that the focus of future corporate fraud prosecutions would be on the corporate representatives responsible for the criminal conduct, including in-house counsel. Id. (citing Lanny A. Brever & Christopher J. Burke, Lawyers, Accountants and Other Capital Market “Gatekeepers” Come Under Prosecutors’ Scrutiny, Wash. Legal found: Legal Backgrounder, Aug. 22, 2003, available at http://www.wlf.org/upload/082203LBBreuer.pdf.). This initiative undoubtedly lead to the prosecution of Richard Hawkins, the McKesson CFO. See supra.
In 2003, the Department of Justice announced its intention to investigate the role of in-house counsel in corporate fraud cases. Id. In its First Year Report to the President by the Corporate Task Force, the Task Force stated:
Task Force members have recognized that many of the corporate fraud schemes under investigation could not have occurred without various professionals, including attorneys, accountants and financial advisors, sometimes facilitating, aiding and abetting the conduct being investigated. Therefore, the conduct of professionals has been a focus of the Task Force.
Id. (citing, Press Release, United States Attorney for the Northern District of California, SEC, U.S. Attorney’s Office and FBI Bring Fraud and Conspiracy Charges Against Former McKesson HBOC Chairman Charles McCall; U.S. Attorney’s Office and FBI also Indict Former HBOC General Counsel (June 4, 2003), available at http://www.usdoj.gov.sazo/can/press/htm1/2003_06_04 mekesson.htm.1). By the end of 2005, 14 in-house counsel had been indicted with criminal charges, including counsel for Rite Aid Corp.; Tollman-Hundley Hotels; Tyco International; HBO & CO.; U.S. Wireless, Inc.; KPMG; and Hollinger, Inc. Id.
In May of 2005, the U.S. Supreme Court overturned the conviction of Arthur Andersen, holding that jury instructions given in the case were “flawed.” Id. (citing 125 S. Ct. 2129, 2137 (2005)). The Court also limited criminality under 18 U.S.C. § 1512 to “persuaders conscious of their wrongdoing.” Id. (citing 125 S. Ct. at 2136). As noted above, in July of 2005, McKesson CFO Richard Hawkins was also acquitted in a bench trial. Id. Of the 14 indicted in-house counsel noted above, only seven were convicted, and two of those seven pled guilty. Id.
The issues triggering the indictments of the several in-house counsel are whether they lied; whether they participated in a “cover-up” or destruction of evidence; and/or whether they refused to produce documents or obstructed justice during a governmental investigation. Id. Clearly, the destruction of evidence, lying, or hiding evidence are all proof that the “persuaders [are] conscious of their wrongdoing.” Id. See also 125 S. Ct. at 2136. It is patently evident that destroying evidence, lying and/or hiding evidence are palpably wrong from an ethical, legal and procedural standpoint. Yet, the ethical considerations and obligations regarding the production of privileged materials during a governmental investigation are not as clear. Of some concern is whether an attorney’s or corporation’s refusal to produce privileged materials during a governmental investigation constitutes an obstruction of justice as defined by DOJ policies and rules.
IV. PROTECTING THE ATTORNEY-CLIENT/ WORK PRODUCT PRIVILEGE
Several months prior to the institution of the McNulty Memorandum by the Department of Justice, the court in U.S. v. Stein called into question several practices of the USAO regarding internal corporate investigations and practices, and how the government identified “cooperating” corporations as per the Holder and Thompson memoranda. See United States v. Stein, 435 F. Supp. 2d 330 (S. D. N.Y. 2006); Timothy P. Harkness and Carmel E. Gabbay, U.S. v. Stein: Rewriting The Rules of Corporate Cooperation With Government Investigations, The Metropolitan Corporate Counsel, August, 2006, 19 (“‘Cooperation’ has been the watchword for corporations subject to governmental scrutiny and investigation.”) Specifically at issue in Stein was Section IV of the Holder memorandum which elaborated on what was meant by “cooperation” during governmental investigations of a corporation. Stein, at 337. The court took judicial notice of the Holder memorandum and noted that prosecutors gauge cooperation by a number of factors, including the corporation’s willingness to identify the culprits in the company; its willingness to make these witnesses available; its willingness to disclose the complete results of the internal investigation; and its willingness to waive the attorney-client privilege. Id. Stein specifically turned on the following commentary from the Holder memorandum:
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…. may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.
Id. Tracing the history of governmental investigations of corporations, the court further noted that the Thompson memorandum, instituted in 2003, was only moderately distinct from the Holder memorandum, yet was binding on all federal prosecutors. Id. at 338. The court observed that “all United States Attorneys now are obliged to consider the advancing of legal fees by business entities…as at least possibly indicative of an attempt to protect culpable employees and as a factor weighing in favor of indictment of the entity.” Id.
The relevant facts in Stein centered on a 2004 investigation of KPMG by the USAO and the IRS for fraud related to the planning of tax shelters. Id. at 339. At that time, government prosecutors suggested that to the extent KPMG employees needed outside counsel, that they retain attorneys who understood that “cooperation was the best way to go.” Id. at 342-43. The government further pressured KPMG not to “reward misconduct” by paying attorneys fees for those employees who refused to cooperate. Id. The government also warned KPMG that if it, in fact, had the discretion not to pay attorney fees for its employees, it would look at its decision to pay legal fees “under a microscope.” Id. at 344.
The Stein court held that the government violated the Fifth and Sixth Amendments by causing KPMG to cut off payment of legal fees and other defense costs for its employees upon indictment. Id. at 356. The court also found that government’s actions violated the substantive due process right to fairness in the criminal process. Id. at 360-62. The court specifically noted that the defendants were entitled to substantive due process protections since the government coerced a third party (KPMG) to withhold funds lawfully available to the each of the criminal defendants. Id. Thus, the court found at least one provision of the Thompson Memorandum unconstitutional, bringing into question other provisions, including the government’s demands for privilege waivers. Id. In criticizing the Thompson Memorandum, the court noted that it was designed to minimize the involvement of defense attorneys in corporate investigations, which is also a violation of the Sixth Amendment right to counsel. Id.
In 2005, the ABA Task Force on the Attorney-Client Privilege submitted a proposed resolution to the ABA House of Delegates which opposed governmental policies that erode the protections of the attorney-client privilege and the attorney work product doctrine. Jeffrey Thomas and Susan T. Stead, Attorney-Client Privilege and Confidentiality Issues, The Brief, Vol. 35, No. 4, Summer, 2006, 13-21, at 17. The resolution, which was unanimously approved by the ABA, states, in part:
… that the American Bar Association strongly supports the preservation of the attorney-client privilege and work-product doctrine as essential to maintaining the confidential relationship between client and attorney required to encourage clients to discuss their legal matters fully and candidly with their counsel so as to (1) promote compliance with law through effective counseling, (2) ensure effective advocacy for the client, (3) ensure access to justice and (4) promote the proper and efficient functioning of the American adversary system of justice; and
… that the American Bar Association opposes policies, practices and procedures of governmental bodies that have the effect of eroding the attorney-client privilege and work product doctrine and favors policies, practices and procedures that recognize the value of those protections …
… that the American Bar Association opposes the routine practice by government officials of seeking to obtain a waiver of the attorney-client privilege or work product doctrine through the grant or denial of any benefit or advantage.
The opinion published in U.S. v. Stein, the recommendations of the American Bar Association, as well as Congressional outrage, prompted recent revisions regarding the Federal prosecution of corporations as set forth in the McNulty Memorandum. Yet, the McNulty Memorandum also assesses “the value of cooperation” during governmental investigations by assessing, in part, whether the corporation at issue waived the attorney-client and work product protections; whether the corporation shielded culpable employees and agents; and whether the corporation obstructed the investigation. See Memorandum from Paul J. McNulty, supra. One element of the “obstruction of justice” analysis in the McNulty Memorandum is whether the corporation asserts “overly broad or frivolous assertions of privilege to withhold disclosure of relevant, non-privileged documents.” Id. Thus, the recent revisions to the Federal Prosecution of Business Organizations as set forth in the McNulty Memorandum provide for and even encourage a waiver of attorney-client privileges, particularly since raising the privilege may result in an obstruction of justice charge against the corporation and its attorneys alike.
The protections afforded by the Fifth and Sixth Amendments should serve, ultimately, as per Stein, to prevent a miscarriage of justice by the government against the corporate client. When faced with the threat of governmental investigation or criminal sanction, corporate clients and their attorneys should avoid the voluntary disclosure of any privileged documents to prevent a breach of the attorney-client privilege. Nonetheless, if an internal investigation is conducted, each step of the investigation may, in due course, be turned over to the government. See Internal Investigations: Consequences of the Federal Deputation of Corporate America, supra; Memorandum from Paul J. McNulty, supra.
If a corporation receives notification of a governmental investigation, outside counsel should be immediately employed to review the basis of the investigation. The in-house attorney should draw up an agreement limiting the parameters of the outside counsel’s investigations, expressly noting the confidential nature of the work. The agreement should also contain a provision requiring outside counsel to report only to in-house counsel instead of the corporate officers, or a business group to avoid a breach of the privilege. Questions directed to employees on behalf of the company must be carefully administered by outside counsel. If counsel interviews a corporate employee, the employee must be told that the lawyer represents the company, not the employee-witness. See Attorney-Client Privilege and Confidentiality Issues, at 15. Otherwise, the employee may be able to claim the attorney-client privilege and any statements made during the interview could be privileged. Id. (citing Waggoner v. Snow, Becker, Kroll, Klaris & Krauss, 991 F. 2d 1501, 105006 (9th Cir. 1993)).
To further safeguard the privilege for the corporate client, communications from counsel should be limited. Counsel should clarify with all employees questioned that interviews are conducted for the purpose of gathering information to enable the attorney to give appropriate legal advice. Id. The employee must also be advised that the interview is made on behalf of the corporation and is confidential so that the employee does not breach the privilege. Id. Outside counsel must also carefully consider whether to limit all communications regarding the internal investigation to oral communications, which may be advisable. If communications are in writing, however, the attorney-client privilege may be easier to delineate since the written document may be marked as an “attorney-client/ work product” document. In line with the McNulty Memorandum, all communications should be identified as either Category I, fact-based communications, or Category II, or privileged communications. The privileged communications should be kept separately from the fact-based, Category 1 communications.
Today there is an even greater concern regarding waiver when communications take place via e-mail. E-mails are easily transferred to third parties, and outside IT consultants may have access to the communications. Joseph L. Buckley and Michael R. Potenza, Best Practices for Maintaining The Attorney-Client Privilege in Email Communications, The Metropolitan Corporate Counsel, Vol. 12, No. 11, November 2004 (citing Ben Delsa, E-Mail and the Attorney-Client Privilege: Simple E-Mail in Confidence, 50 La. L. Rev. 935, 939 (1999)). It has been suggested that law firms enter into agreements with any and all outside IT consultants prohibiting access to the content of corporate and law firm e-mails. Id. It has also been suggested that attorney-generated e-mails be marked with the appropriate “Attorney-Client Communication;” “Privileged and Confidential;” or “Attorney Work-Product” markings as all written communications. Id. Further, all business and legal e-mail and other written communications should be kept separately. Attorney e-mails should be kept in a separately dedicated server. Id. It has also been suggested that corporations develop a document retention policy, and that all legal e-mails and other written communications should be periodically deleted in accordance with the company’s policy. Id. But this suggestion carries with it a caveat. Such “retention policies,” which are actually “document destruction policies,” could lead to a charge of obstruction of justice, particularly if the documents are destroyed in anticipation of or during a governmental investigation. See The Threat of Criminal Prosecution to In-House Counsel, The Tide Has Changed But It Is Not a Tsunami, supra.
In the event the government, following the guidelines established in the McNulty report, requests privileged information from an attorney or the corporate client, the privilege should be asserted and the documents should not be produced voluntarily. This should force the government to either subpoena the documents or formally demand the documents through court action. At this time, the corporate defendant could file a formal objection placing the matter before a court of law. A recently decided case, which is similar, factually, to the McKesson line of cases, underscores the adverse ramifications of voluntarily divulging privileged materials. See United States of America v. Gregory L. Reyes, No. CR 06-0556 CRB, N.D. Calif, December 22, 2006. In this case, Brocade, a company threatened with litigation concerning fraudulent accounting practices, hired two outside law firms to conduct an internal audit. Brocade published restatements of its valuation which, in turn, triggered multiple lawsuits, as in the McKesson situation, supra. Brocade and its attorneys conferred and agreed to meet with officials from the SEC and the DOJ. One of the law firms (MoFo) did not provide the governmental officials with written material, although attorneys from this firm prepared notes for the meeting. Instead, MoFo orally briefed the government regarding relevant facts. Its counterpart firm, WSG&R, prepared a written briefing as well as a multimedia presentation. Both firms signed confidentiality agreements with the government, specifically denying any intent to waive applicable privileges. Although the agreements restricted dissemination of information to other parties, it allowed the government agencies the discretion to reveal the disclosed information to others as their duties required.
Following the conference with Brocade and its attorneys, the United States filed a criminal action against Reyes and Jensen, who were former officers of Brocade. In this case, Reyes issued a subpoena for various documents in support of his defense, including all information and documents produced by MoFo and WSG&R. Specifically, Reyes sought information produced from Brocade’s internal investigation. Although the Court did not find that Reyes’ subpoena fell within the strict language of Civil Rule of Procedure 17(c), it did find that both law firms voluntarily waived their attorney-client and work product privileges, and that all of the documents and information could be produced for an in-camera inspection regarding their relevancy to the Reyes case. The court specifically held that MoFo and WSG&R surrendered whatever privileges may have attached to the subpoenaed materials when they shared the contents with the government. Because the law firms waived both the attorney-client privilege when they disclosed the substance of their investigative interviews, reports, and conclusions with the government, the Court found that those privileges posed no obstacle to Reyes’ attempt to subpoena them. The Court further found that the attorney-client privilege cannot be partially waived, stating that “parties cannot be permitted to pick and choose” in their disclosures, thus, “waiving the privilege for some and resurrecting the claim of confidentiality to obstruct others.” Id. (citing In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F. 3d 289,302-04 (6th Cir. 2002); United States v. Mass. Inst. of Tech., 129 F. 3d 681, 684-86 (1st Cir. 1997); Genentech, Inc. v. U. S. Int’l Trade Comm’n, 122 F. 3d 1409, 1415-18 (Fed Cir. 1997); In Re Steinhardt Partners, L.P., 9 F 3d 230, 234-36 (2d Cir. 1991); In Re Martin Marietta Corp., 856 F. 2d 619, 623-26 (4th Cir. 1988); Permian Corp. v. United States, 665 F.2d 1214, 1220-22 (D.C. Cir. 1981)). The Court further noted that the putative confidentiality agreements did not preserve the privilege. Id. Compare In re McKesson HBOC, Incl, Sec.Litig., 2005 WL 934331 (N.D. Cal. Mar. 31, 2005), with United States v. Bergonzi, 216 F.R.D. 487 (N.D. Cal. 2003). Thus, the lessons of McKesson and its progeny continue. Unless a corporation and its attorneys are comfortable with a complete dissemination of their internal audits or other privileged information, they should not voluntarily release privileged materials, information or work product to the government or any adversary.
Attorneys who represent corporations involved in governmental investigations will likely need to walk a tight rope between compliance with government policies and the protection of attorney-client and work product privileges. This may require the attorney to maintain all internal investigatory documents, even if the corporate document retention policy calls for periodic document destruction, particularly if the company is on notice of the government investigation. Yet, to avoid a breach of the attorney-client privilege, these same attorneys may not voluntarily disclose the privileged documents to the government, even to avoid criminal sanction and even if a confidential agreement is in place.
Although most of the cases cited above concern investigations regarding SEC violations, these same concerns may impact other areas where regulation and reporting requirements are at issue, such as the insurance industry. See Attorney-Client Privilege and Confidentiality Issues in Internal and External Investigations, supra. It is not difficult to imagine similar issues arising during either OSHA or EPA compliance investigations.
In short, the DOJ policy, and the rules promulgated by the Sarbanes-Oxley Act which encourage if not demand a waiver of the attorney-client privilege, present serious legal and ethical issues for both attorney and client alike. It is advisable to develop a structure and corporate wide policy for a self-policing, periodic, internal corporate investigation which protects the attorney-client/ work product privilege, far in advance of any governmental inspection or investigation.
Cynthia Tolbert is of counsel with the Casey Gilson P.C. law firm in Atlanta, GA. She has practiced law for the past 20 years defending corporate clients, insurance companies, refineries and municipalities in litigation throughout the nation. Areas of particular focus include personal injury defense, products liability defense, professional liability defense, the defense of toxic tort cases including the defense of companies in the face of EPA investigations and hearings as well as the defense of commercial liability, premises liability and property damage in state and federal courts.