Cooperation and Corporate Stewardship
Corporate Counsel Institute
March 8, 2007
Thank you for that introduction. It is my pleasure to be speaking to the Corporate Counsel Institute this afternoon. I read your program with great interest last night -- the institute has a lot of interesting topics for discussion. For instance, I noticed that you have a panel called “Ethics Roundtable: Problems for the Corporate Lawyer in the ‘Twilight Zone.’” I don’t have much to say about problems for the corporate lawyer, but given what many here may think about the McNulty Memo, I know a little about what it’s like being in the combat zone.
On that point – one difficult, yet rewarding, challenge in my tenure has been the revision of our corporate charging policy. Revising the guidance has been a thoughtful and valuable process for me. I have spoken to many of you about the problems that you have encountered as corporate counsel when your corporation is under investigation. What I have learned from all this discussion is simply this: when it comes to wrongdoing, most businesses, especially large, publicly traded companies, want to do the right thing.
In revising our policy, I strongly believed that this sentiment was important to encourage. The cornerstone to a sustained law enforcement effort involving corporate fraud is corporate self-policing. The company itself must take action to prevent misconduct. Such action includes the structure of corporate governance, emphasis on integrity by corporate officers, and effective compliance programs. Prior to the revision of the guidance, a key complaint was that our charging policy discouraged self-regulation by stifling candid and clear communication between corporate attorneys, officers and employees.
The fact that this may have been occurring was not the intent of the guidance. It is entirely consistent with the taxpayers’ interests to encourage candid internal corporate communications because the legal advice that you give, in large measure, prevents or deters the misconduct that we are charged with investigating.
But of course, even with your legal advice and despite your best efforts, things can go wrong. Maybe they can even spiral out of control. And that’s why you attend programs such as this, to learn more about best practices. I would like to discuss one potentially critical response allegations of wrongdoing– cooperating in a government investigation. As the Attorney General recently said, there are two things that American business has always needed, and will always need to remain competitive – freedom and integrity. By helping the government in its effort to root out fraud, you restore integrity and public confidence in your company. My message for you is simple: Fraud is bad for business and your cooperation promotes investor trust.
I want to first put “cooperation” in its proper context, tell you why it is necessary, discuss what it takes to be cooperative, and offer a few practical suggestions as identified in my Memorandum to Department prosecutors.
First let’s put this in context: Cooperation is only one of nine factors for consideration when deciding to charge a business organization. A prosecutor must consider and weigh all relevant factors to ensure that a proper charging decision is made. The other factors are: (1) the nature and seriousness of the alleged conduct, including the risk of harm to the public; (2) the pervasiveness of wrongdoing within the corporation; (3) the corporation’s history of similar conduct; (4) the adequacy of an existing compliance program; (5) the corporation’s remedial actions; (6) collateral consequences, including disproportionate harm to shareholders; (7) the adequacy of prosecuting individuals; and (8) the adequacy of remedies such as civil or regulatory enforcement actions.
As a former United States Attorney in one of our largest districts -- the Eastern District of Virginia -- I have participated in several corporate investigations. My experience has taught me that a prosecutor looks at a number of very important things, most importantly, whether the conduct is serious and pervasive. So the cooperation factor must be viewed in the proper perspective. Am I signaling that cooperation doesn’t matter? No. Is there always a direct connection between waiving attorney-client privilege and cooperation? No. But here’s the point - sometimes cooperation may be critical in a government investigation.
Why is cooperation necessary? In those first few hours, you must ask yourself how a corporation’s interests are served at the outset of a government investigation. Let me start with the general proposition that cooperation protects the investing public, it protects the employees, retirees and shareholders of the company, and it strengthens management’s ability to put the corporation back on track. When misconduct is disclosed, stock prices plummet, employees leave and a customer base erodes. The corporation is obligated to disclose misconduct to its regulators and shareholders. Obviously the mere fact of this disclosure will not put the company out of business. But the hard and cruel fact of the marketplace is that negative information erodes public confidence and reduces stock value, and corporate counsel has to deal with the fall-out.
All of you are aware, some with first-hand experience, that at the beginning of an investigation, the Department and the company are often working at different speeds. The company wants to get the consequences of the misconduct behind it immediately, while the Department has an obligation to investigate thoroughly. For corporate counsel, the prospect of a protracted criminal investigation draining the company of employee time, generating huge bills, and forcing the production of millions of pages of documents is discouraging to contemplate. Federal prosecutors also face a daunting challenge – the challenge of launching a large-scale investigation of a company, and most probably the multiple individuals targeted, with a lack of time and resources to do the job as quickly as they would like.
In your decision-making as corporate counsels, many of the facts relevant to the [guidance factors] McNulty factors cannot be changed. The criminal activity already occurred -- a company cannot change the nature and scope of that conduct after the fact. A company cannot change the adequacy of an existing compliance program. A company cannot change a history of regulatory violations. But there is one factor you can influence. Whether to cooperate with the government – that is the single most important decision that you, as a corporate counsel or as a corporate representative, can make in a criminal investigation.
Second, what does it take to be cooperative? In my experience, it starts at the top. When the leadership of a corporation step up and makes it clear it is committed to accountability and transparency, corporate counsel is encouraged to form a positive relationship with investigators and prosecutors. All parties is that environment are united by a desire to move forward towards a fair and appropriate resolution.
But how does that translate to specifics you can really use? You know that when prosecutors consider cooperation, we must look at a variety of sub-factors – the completeness of a company’s disclosure, whether the company identified the wrongdoers, and whether the company made witnesses available. One of the most controversial sub-factors we consider in evaluating a company’s cooperation is whether the company disclosed the results of an internal investigation, and if necessary, waived attorney-client privilege. My memo now makes it clear that “waiver of attorney-client or work product protections is not a prerequisite to a finding that a corporation has cooperated in the government’s investigation.” Prosecutors are now expressly told that they cannot condition cooperation on whether or not a company waived its privilege.
The new guidance identifies the attorney-client privilege as an important and valued right of a corporation. Critics can no longer say that federal prosecutors request waiver without cause or without limitation. Under the new guidance, that simply cannot be true. My memorandum creates an incremental approach to requesting privileged information from a potential defendant – requests are made step-by-step, from the least to the most intrusive. Prosecutors must evaluate their request at each step, stopping when they have enough information to complete the investigation.
Most important, the prosecutor may only request waiver when there is a “legitimate need” for the information. This “legitimate need” test requires the prosecutor to consider four factors. They are: (1) the likelihood that the requested information will benefit the government investigation; (2) whether the information can be obtained using alternative means; (3) the completeness of any voluntary disclosure already provided; and (4) collateral consequences to the corporation of a waiver. If the prosecutor cannot establish a legitimate need for the information, supervisory approval will not be given. This requires the prosecutor to engage in preliminary investigative fact-finding and meaningful dialogue with the corporate counsel prior to seeking waiver. A prosecutor cannot simply “pound the table” with a privilege demand for a lawyer’s files. To the extent that it ever happened, (and this is anecdotal) it cannot happen now.
Practically speaking, experienced prosecutors never wanted unimpeded access to an attorney’s files anyway. The fact is that counsel’s advice to the corporation regarding what steps to take during the course of a criminal investigation is simply irrelevant to our charging decision. The production of this information is not going to result in admissible evidence a prosecutor could use at trial.
Of course, there are exceptions, especially where there is some indication that a corporation is actively taking steps to cover up misconduct by hiding or concealing documents and attempting to influence the testimony of witnesses. But these instances are rare. As a general matter, our requests by and large are restricted to specific factual information. Even in those circumstances, it is quite common to negotiate the disclosure of certain types or categories of documents or to restrict the time period of the waiver request.
That’s why the new guidance creates two categories of privileged information - the first category is purely factual information -- information which can be requested only with the approval of the United States Attorney in consultation with the Assistant Attorney General. That is the information we most often will ask for in the appropriate case. This includes chronologies, summaries, time lines and witness statements. Many of these items may not even be privileged, but where privilege is asserted and waived, and the information is provided to the prosecutor expeditiously, the life of a criminal investigation is significantly shortened.
The second category for which approval may be sought is attorney-client communications. If a prosecutor can establish a legitimate need for attorney-client communications or non-fact work product, the United States Attorney must come to me for written approval. This will only be granted in rare circumstances. And even after I may grant the approval, the corporation may decline to provide the information anyway and prosecutors are specifically instructed that the declination may not be considered in evaluating whether to charge the corporation.
These approval requirements for privilege waiver send a strong message -- they promote confidence in corporate America that its privileged communications are respected by law enforcement and that seeking waiver of that privilege should not be undertaken as a routine matter by government prosecutors. But at the same time, the new guidance also preserves this vital tool for prosecutors, allowing them to consider privileged materials and moving the investigation to a faster conclusion.
Finally, a few practical suggestions about how to move forward together. Members of the private bar, including former DOJ officials, have complained that waiver of the privilege encourages excessive follow on litigation, such as shareholder lawsuits. Many of you are supporting Senator Specter’s legislation which if passed, would eliminate large sections of our charging policy. However, this legislation is an extreme response to our policy and we are oppose to it.
In an effort to find a middle ground, the Department supports the adoption of proposed Federal Rule of Evidence 502 which provides for selective waiver. The selective waiver rule will allow a company to provide documents to the government during its investigation without necessarily waiving its privilege in litigation with third parties. The passage of this rule will allow us the ability to do our job and would allow you to shield the materials you want to protect in collateral law suits.
I have also heard many complaints from you about the conduct of Assistant United States Attorneys – namely, that you run into some “rough and tough” prosecutors who “coerce” a particular result. If you encounter that problem, get the United States Attorney involved. I know, I know – you have responded to me, “easier said than done” because you don’t want an angry AUSA to retaliate. I say again - get the United States Attorney involved. I have spoken to USAs throughout the country. They want to hear from you, they may even share some of your concerns, and they will support full and frank dialogue to come to the right resolution in your case.
And their resolutions have become more creative. The Department has been using deferred prosecution agreements more frequently since 2003 and to date, have entered into more than 50 such agreements. Where appropriate, DPAs allow us to address corporate misconduct without convicting the corporate entity. Our DPAs include compliance and cooperation provisions, special monitors, reporting requirements, and they provide for consequences in the event of a breach of the agreement. These agreements are another example of ways in which the Department recognizes the need to protect innocent employees, retirees, and shareholders from the collateral consequences of a criminal conviction.
Finally, keep an eye on the big picture - often a specific case is connected to what is happening in your industry or of interest on Capitol Hill. For instance, in my negotiations with Boeing in Eastern Virginia, opposing counsel properly recognized that there were forces on the Hill that wanted to see reforms in the way defense contractors were doing business. By cooperating with the government in its investigation, Boeing publicly signaled that it was receptive to change and it gained greater credibility with its critics.
So, in conclusion, we all recognize the importance of this conference because there is a lot at stake. As the Chairman of the Corporate Fraud Task Force, I can tell you that the Department is as committed as ever to fighting corporate fraud. But we want to do it with professionalism and civility and we want to do it right. And to do it right, we must have meaningful discussions with you, as corporate counsel, about the benefits of early cooperation in our criminal investigations.
Responsible corporate leaders have much in common with government officials. We both share an interest in a strong economy and a level playing field so that every business can compete fairly. We want to strengthen American companies with greater transparency and investor trust. Good corporate governance promotes trust and trust requires compliance with the law.
So if you get the dreaded telephone call from a federal prosecutor notifying you of a criminal investigation against your company, consider cooperation – and consider it quickly.
It may be the best advice you’ll ever give.