DOJ Revises Charging Guidelines on Privilege; Some Say Legislation Still Necessary

Deputy Attorney General Mark R. Filip announced yesterday (Aug. 28) that the Department of Justice (DOJ) has revised its charging guidelines - formally known as the Principles of Federal Prosecution of Business Organizations - to enhance the protection of attorney-client privilege. The guidelines, enhanced under then-Deputy Attorney General Larry Thompson, and subsequently revised by then-Deputy Attorney General Paul McNulty, were heavily criticized by the bar for eroding attorney-client privilege and interfering with the right to legal defense by crediting companies with 'cooperation" for waiving attorney client privilege and withholding legal defense fees.

As outlined in DOJ’s press release, supplemented by Filip’s remarks, the revised guidelines will:
state that credit for cooperation will not depend on the corporation’s waiver of attorney-client privilege or work product protection, but rather on the disclosure of relevant facts,
prohibit prosecutors from asking for what the old guidelines designated as “Category II” information (i.e. non-factual attorney-client privileged communications and work product, such as legal advice) with two exceptions, which Filip said are “well-recognized in existing law,”
instruct prosecutors not to consider a corporation’s advancement of attorneys’ fees to employees when evaluating cooperativeness,
make clear that the mere participation in a joint defense agreement will not render a corporation ineligible for cooperation credit, and
provide that prosecutors may not consider whether a corporation has sanctioned or retained culpable employees in evaluating whether to assign cooperation credit to the corporation.

The revised guidelines “will be committed for the first time to the United States Attorneys Manual, which is binding on all federal prosecutors within the Department of Justice… [and] will be effective immediately," stated DOJ's press release.

The American Bar Association (ABA) and the Association of Corporate Counsel (ACC) issued statements yesterday (ABA statement; ACC statement) praising DOJ's action, but reiterating their position that legislation is needed to give permanence to these actions, and to provide a government-wide solution, since DOJ's action does not impact similarly criticized policies at the SEC and other agencies.

Legislation (the Attorney-Client Privilege Protection Act) has passed the House, but is pending in the Senate, reintroduced by Sen. Arlen Specter in July. Specter’s statement issued yesterday said: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”

Federal Appeals Court Upholds Judge Kaplan’s Decision in KPMG Tax Case
Also yesterday, as reported in “U.S. Pares Its Arsenal in White-Collar Crime Fight" by Evan Perez and Amir Efrati in today’s Wall Street Journal, "the Second Circuit Court of Appeals dealt what could be a final blow to a case that was once billed as the U.S. government's biggest criminal-tax prosecution. The court upheld a ruling by New York U.S. District Court Judge Lewis A. Kaplan, who had dismissed charges against 13 former partners and employees of KPMG LLP because prosecutors, who were weighing charges against the firm, pressured the firm to cut off payment of the employees' legal fees."

A lawyer for one of the KPMG defendants - Michael Madigan of Orrick, Herrington & Sutcliffe, defending John Lanning, former head of KPMG's tax practice - was quoted in a New York Times today (“U.S. Lifts a Policy in Corporate Crime Cases" by Jonathan D. Glater and Michael M. Grynbaum) saying: "This decision is a watershed event that is going to go down as one of the most important decisions in the last 20 years in the criminal justice system."

Separately, issues of waiver of privilege relating to disclosures made to auditors by companies remain an issue as well. The 'Treaty' struck between the American Bar Association and the AICPA decades ago may be more tenuous today, as noted in various comment letters on FASB's Exposure Draft to amend disclosures of contingencies under FAS 5. We covered some of these issues in our article in Financial Executive Magazine in Sept. 06, “Has Privilege Lost its Reward?”

FEI's Committee on Taxation (COT) and Committee on Corporate Reporting (CCR) filed an amicus brief in the Textron case, which addresses matters concerning the review of attorney-client, tax practitioner-client, and work product privileges with regard to tax accrual workpapers, and discusses when those privileges could be overcome. Matt Miler, FEI's Director of Tax and Economic Policy reported earlier this week, "Oral arguments in the Textron appeal are going to be held on Sept. 5 in Boston." See this FEI summary for details on the Textron case and a link to FEI’s amicus brief. Matt is coordinating FEI efforts in this area and can be contacted at mmiller@financialexecutives.org or by telephone at (202) 626-7804. If you received this blog post from ‘a friend’ you can sign up here to get the blog by email.

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