Corporate Investigations After the Mortgage Meltdown
J. Justin Johnston1
I. Introduction
If the history of large-scale financial crises in the United States has taught us anything, it is that increased governmental scrutiny of companies and financial institutions will shortly follow. There is no more notable example than when, in the wake of the savings and loan crisis during the late 1980s, legislators, regulators and law enforcement officials stated “repeatedly and emphatically their belief that criminal misconduct by insiders played a crucial role in many thrift failures.”2 Such public condemnations led Congress not only to include criminal enforcement provisions in the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”),3 but also to authorize more than $220 million to be spent for investigations and prosecutions of financial institutions over the next four years, most of which was earmarked for use by the Federal Bureau of Investigation (FBI) and the United States Attorneys’ offices.4
The current financial climate bears marked similarities to the savings and loan (S&L) crisis, to include strong enforcement rhetoric by public officials, including the new President. Barack Obama has publicly declared it a priority of his administration to “crack down on mortgage fraud,”5 in part by seeking passage of the Stop Fraud Act.6 Stop Fraud contains criminal enforcement provisions, including the first federal definition of “mortgage fraud” and providing increased funding for federal and state law enforcement programs.7 Such signs foretell that we are about to enter a new era of accountability for financial firms – a time when government investigations will increase in number and intensity.
And, recent data indicates that the fallout from the mortgage crisis will be felt well beyond large firms on Wall Street. Indeed, the FBI’s 2007 Mortgage Fraud Report shows that pending mortgage fraud investigations nationwide have increased from 534 cases in 2004 to 1,204 cases in 2007.8 Moreover, the same report identifies Missouri as one of 20 states “significantly affected by mortgage fraud,” and further indicates that the Department of Housing and Urban Development Office of Inspector General identifies Missouri as a “top 10 state for pending investigations” in 2007.9 This data, coupled with recent reports that October 2008 mortgage foreclosures were up 25 percent over October 200710 suggest that federal law enforcement activities regarding mortgage fraud in Missouri, as well as in other affected states, will only grow in the near future. Thus, unlike the S&L crisis, it appears that the government may be emphasizing a more grassroots enforcement model, focusing on investigating and prosecuting mortgage and other financial fraud at the local level, in addition to its efforts to hold accountable the larger financial firms in New York.
For the better part of a decade, the policy of the Department of Justice (DOJ) on whether a corporation should be charged with a criminal offense has been closely tied to the notion that corporations which cooperate – i.e., conduct internal investigations and waive the attorney-client privilege and work product protections – are more likely to be treated leniently than those that do not.11 While this connection between waiver of traditional privileges and prosecutorial leniency has somewhat eroded over time, some level of cooperation remains a lynchpin in negotiations with federal authorities on behalf of corporations.12 Therefore, attorneys who represent financial firms large and small in Missouri must understand the critical importance of conducting a credible internal investigation when a company or its employees are the subject of a regulatory or criminal inquiry. The quality and completeness of the internal investigation may make the difference between a company that stays in the good graces of regulators and prosecutors, and one that stands indicted together with its culpable employees.
There are many hidden pitfalls on the path of internal investigations. This article examines the background, purpose, and process of conducting corporate investigations, with an emphasis on identifying difficult issues that practitioners will inevitably confront in representing corporate clients facing the prospect of regulatory or criminal enforcement actions.
II. Recent History of Corporate Investigations
It goes without saying that the attorney-client privilege is one of the oldest and most revered privileges in all of western law. The privilege generally protects confidential communications between a client and an attorney.13 The policy underlying the privilege is that of encouraging open, honest, and complete communication between clients and attorneys, which is generally regarded as essential to the promotion of respect of and obedience to the law.14
In 1999, however, then-Deputy Attorney General Eric Holder received complaints from “a group of private practitioners . . . that there was no uniformity in the way in which prosecutors decided to indict corporations.”15 In reaction to such complaints – and in a classic illustration of the adage that “no good deed goes unpunished” – Holder assembled a working group to set forth a series of guidelines, which were laid out in what’s now known as the Holder Memorandum.16 Among the policy recommendations in the Holder Memo was a discussion of corporate “voluntary disclosure,” which contained the following statement:
In determining whether to charge a corporation, that corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate with the government’s investigation may be relevant factors. In gauging the extent of the corporation’s cooperation, the prosecutor may consider the corporation’s willingness to identify the culprits within the corporation, including senior executives, to make witnesses available, to disclose the complete results of its internal investigation, and to waive attorney-client and work product privileges.17
This policy statement, coupled with the “[s]elf-reporting, [c]ooperation, and [a]cceptance of [r]esponsibility” provisions of the United States Sentencing Guidelines for Organizations,18 created a climate in which corporate cooperation with the government was so heavily incentivized that the question among private practitioners was not whether to waive the attorney-client privilege, but when to do so.
Over the next several years, successor deputy attorneys general issued amended declarations tweaking DOJ policy on principles of federal prosecution of business organizations.19 But these policy declarations never wavered from the core concept that a corporation’s “voluntary disclosure of wrongdoing[,]” to include waiver of attorney-client and work product protections, would be a key consideration in prosecutors’ decisions as to whether and to what extent the corporation should be charged with any offense.20
During this time, corporations considering waiver of attorney-client privilege and work product protection in an effort to avert criminal charges faced a difficult choice. According to most courts that have addressed the issue, there is no such thing as a “partial” or “selective” waiver of the attorney-client privilege and work product protection – a corporation either maintains the integrity of the privilege as to all third parties, or it has waived its protections.21 Therefore, with private litigants waiting in the wings to seek remedies as a result of corporate fraud, corporations that chose waiver risked discovery of all such information by their adversaries in the civil forum.22 Like Odysseus, corporations had to navigate the strait between Scylla and Charybdis, and the results were predictably catastrophic.
This circumstance did not go unnoticed by commentators and legislators, who roundly criticized the DOJ’s waiver policy.23 Indeed, efforts have been underway in Congress to pass bills forbidding DOJ prosecutors from seeking any waiver of attorney-client privilege or work product protection in conjunction with corporate charging decisions.24 And, in what appears to be a significant victory for corporations and the defense bar, United States District Judge Lewis A. Kaplan questioned the constitutionality of the DOJ’s policy (as described in the Thompson memorandum), and found that federal prosecutors had violated the Fifth and Sixth Amendment constitutional rights of defendants with their practice of causing corporations to stop paying the legal fees of those under investigation or prosecution.25
In reaction to this backlash, on August 28, 2008, Deputy Attorney General Mark Filip issued the latest iteration of the DOJ’s policy on corporate charging decisions.26 In that memorandum – the key terms of which will, for the first time, be incorporated into the United States Attorney’s Manual, making it binding on all DOJ prosecutors – Filip acknowledges the critical importance of the attorney-client and work product privileges, and goes on to state:
[A] wide range of commentators and members of the American legal community and criminal justice system have asserted that the Department’s policies have been used, either wittingly or unwittingly, to coerce business entities into waiving attorney-client privilege and work- product protection. Everyone agrees that a corporation may freely waive its own privileges if it chooses to do so; indeed, such waivers occur routinely when corporations are victimized by their employees or others, conduct an internal investigation, and then disclose the details of the investigation to law enforcement officials in an effort to seek prosecution of the offenders. However, the contention, from a broad array of voices, is that the Department’s position on attorney-client privilege and work product protection waivers has promoted an environment in which those protections are being unfairly eroded to the detriment of all.27
Thus, Filip concludes, “while a corporation remains free to convey non-factual or ‘core’ attorney-client communications or work product … prosecutors should not ask for such waivers and are directed not to do so.”28 What remains critical, however, in determining a corporation’s eligibility for cooperation credit is “whether the corporation has provided the facts about [criminal] events….”29 Examples of “relevant facts” include the corporation’s knowledge of “how and when . . . the alleged misconduct occur[ed];” “[w]ho promoted or approved [the conduct];” and “[w]ho was responsible for committing it.”30
The Filip memorandum acknowledges that “[o]ften, [a] corporation gathers facts through an internal investigation. Exactly how and by whom the facts are gathered is for the corporation to decide.”31 If the corporation elects to gather facts and conduct interviews of corporate personnel through counsel, Filip concedes, “certain notes and memoranda generated from the interviews may be subject, at least in part, to the protections of attorney-client privilege and/or attorney work product.”32 Under such circumstances, DOJ policy is clear that a “corporation need not produce ... protected notes or memoranda generated by lawyers’ interviews” to earn “cooperation credit.”33 But, Filip cautions that to earn such credit, “the corporation does need to produce, and prosecutors may request, relevant factual information – including relevant factual information acquired through those interviews. . . .”34
Aside from relevant facts uncovered by counsel’s investigations, the Filip memorandum is clear in its mandate that “non-factual or core attorney work product – an attorney’s mental impressions or legal theories” – need not be disclosed by corporations to receive cooperation credit, and that prosecutors may not request such information.35
Therefore, counsel conducting internal investigations for corporations must balance many competing concerns, to include the obligation of the organization to demonstrate its cooperation and compliance efforts versus the avoidance of further collateral harm to the company, its employees, its investors, and its customers. The balance of this article discusses best practices to vindicate these many concerns.
III. Internal Investigations
As noted previously, there are many reasons why corporations under governmental investigation – or facing the potential of a government investigation – should immediately conduct a thorough internal investigation. First and foremost, corporations obviously have an interest in halting improper conduct to avoid further damage to the corporation and its employees, owners or shareholders. Moreover, corporations can learn from past conduct to determine whether additional internal controls are required, and what the nature of those controls should be.36 Also, such investigations are critically important in preparing defenses to regulatory or criminal charges, and to possible claims by civil litigants. And, finally, such investigations allow the corporation to make informed decisions regarding whether to cooperate with government officials, and the degree of such cooperation.
But, as noted in the Filip memorandum, there are many ways to conduct an internal investigation, and many issues particular to each. The first question that any corporation should address prior to commencing an internal investigation is “Who should conduct the investigation?”
A. Selecting an Investigator
Clearly, an investigation can be handled by non-attorney corporate employees, such as company security, or corporate officers. The drawback to this method is that attorney-client privilege and work product protections do not attach to the result of the investigation. Thus, if the employee investigator conducts interviews of key figures within the company, any notes or memoranda of such interviews – to include mental impressions of the investigator – aren’t even arguably protected by any privilege, and may be discovered by government entities or private litigants. For obvious reasons, this method is not recommended.
A corporation could also elect to have in-house counsel conduct the investigation. This is often an attractive method for corporations, because it can be more cost-effective than retaining outside counsel, and because in-house counsel has a cache of institutional knowledge that allows greater efficiency in conducting the investigation.
There are several key questions, however, that must be addressed in deciding whether in-house counsel can conduct a sufficient and credible internal investigation. For example, is in-house counsel sufficiently independent? In many cases, corporations have available to them an “‘advice of counsel’ defense[,]” based upon communications with in-house or outside transactional counsel that took place prior to or during the conduct for which the corporation is being investigated.37 If the corporation’s decision-makers believe such a defense may be available based upon the guidance of in-house counsel, then clearly the corporation should retain outside counsel to handle the internal investigation. Moreover, in fraud cases particularly, an internal investigation may require scrutiny of high-level corporate officers and others with the power to affect in-house counsel’s future with the company. Under no circumstances should in-house counsel be asked to investigate such persons due to the inherent lack of credibility regarding his or her conclusions.
For similar reasons, corporations should hesitate to retain outside counsel who advise the corporation on day-to-day transactional matters to conduct an internal investigation. First and foremost, the same concern exists regarding a possible “advice-of-counsel defense” with outside transactional counsel as it does with in-house counsel.38 It is also not unheard of for the government to scrutinize the advice of outside counsel as a possible communication “in furtherance of a crime or fraud.”39 Under such circumstances, outside counsel cannot possibly conduct a sufficiently independent investigation.
Even if, however, a corporation decides that in-house or outside transactional counsel has sufficient independence, the corporation may decide for other reasons that uninvolved outside counsel is preferable. For example, many firms have developed an expertise in the process of internal investigation itself and the resources to do so, to include skilled staff, and document organization and production software. Also, such firms have often had experience negotiating with and litigating against the very regulators and prosecutors who will decide the fate of the company in any enforcement action. Such resources and connections are invaluable in conducting a thorough and credible internal investigation.
B. Identification of Legal Issues and Sources of Information
As with any piece of complex litigation, there may be – depending on the size of the corporate client – many thousands of pages of arguably relevant documents and scores of witnesses who could conceivably provide relevant information. Therefore, it is critical that the investigator first identify all key legal issues that need to be addressed in the investigation, to better focus the fact-gathering process and ensure a comprehensive but efficient gathering and review of documentary evidence. Clearly, this task is more art than science but, as with any case, such initial efforts will save the investigator time, and the client fees.
Once the investigator has formulated the key legal issues in the case, he or she can go about the task of considering potential sources of information, to include both documents and witnesses.
C. Gathering, Review, and Analysis of Documents
Before an investigator begins the all-important process of interviewing corporate employees and other available witnesses, it is advisable that the investigator identify and gather all possible sources of documentary evidence relating to the conduct in question. After all, as with any witness, corporate employees’ memories of key events may fade with time, or their memory may be colored by their perception of “what should have occurred,” as opposed to “what actually occurred.” Therefore, it is critical that the internal investigator gather key documents prior to interviews for purposes of providing the investigator with a more complete picture of key transactions, and for use to refresh witnesses’ recollections of events.
The first step in this process is to circulate notification among all corporate employees that all documents – both hardcopy and electronic – are to be preserved going forward, and that nothing is to be deleted or destroyed. If the company has a record retention and destruction policy, the “litigation hold” provision of that policy should be immediately invoked.40
Next, using knowledge gained during the issue and source identification process, the investigator can winnow the universe of potentially relevant documents to a group of records that are helpful in understanding key events, and formulating a positive case for the company. Such records can include, but not be limited to, the company’s hardcopy files relating to a particular transaction, and written correspondence among central players. The investigator should also consider whether it is necessary to gather documents not in the possession of the company but nonetheless under the company’s control, such as banking records, and records in the hands of independent service providers such as accountants, attorneys, consultants, actuaries, and others. Such documents are often critical in giving the investigator a complete understanding of the conduct in question, and will also permit the investigator to further ensure protection of any applicable privileges.
In gathering documents, the investigator should keep in mind that, increasingly, document creation and retention is shifting to electronic and digital data storage media. Therefore, the investigator should consider whether electronic documents such as letters, memoranda, spreadsheets, or images may be relevant to the investigation, and where such documents are stored. Also, the investigator needs to be aware that electronic documents could be stored in many different levels of data storage media, to include individual employees’ desktop or laptop computers; at the server level; archived on magnetic tapes or optical media; or on portable storage media such as DVDs, CDs, USB flash drives, or portable hard drives.
Similarly, electronic communications media are supplanting regular mail and telephone calls as a principal means of communication in the professional world. Accordingly, where appropriate, the investigator should consider whether a key witness’s e-mails, text messages, instant messages, or other electronic communications should be gathered and analyzed.
Concerning electronic media specifically, the investigator must also preserve the forensic integrity of any electronic documents gathered and reviewed.41 Moreover, it is important to the company that the gathering of relevant electronic documents is as minimally disruptive as possible to the business. In order to satisfy these concerns, it is often necessary to hire a firm that handles the copying and retention of e-discovery.
Once the relevant universe of documents is gathered, the investigator’s team can begin the process of reviewing and analyzing the documents. There are at least three major objectives of the document review and analysis process: (1) identify documents that are helpful or harmful in relation to the key legal issues; (2) identify and ensure the protection of any applicable privilege, confidentiality, or proprietary or trade secret; and (3) preserve the investigator’s efforts and avoid unnecessary duplication of work if the case ends up in collateral civil, regulatory, or criminal litigation.
The best way to achieve all of these goals is often the use of litigation technology tools and software, which allow the investigator to gather, process, organize and analyze documentary evidence all in one database.42 Such software allows for the scanning of hardcopy documents and reading of electronic documents in optical character recognition (OCR) format, making them fully searchable by key word searches. They also allow electronic coding for “searchability” of all such documents in categories including privilege; work product; witnesses/involved parties; issue; date; and “hot document” or other useful organizational fields. Finally, the software aids the user in creating summaries and chronologies, with links to key documents supporting them. All of these features permit the investigator’s team to access and collate information at the touch of a button; ensure that no privileged or confidential material “slips through the cracks;” and create a central, fully organized database that can be used by future counsel, if necessary, to avoid the need to “recreate the wheel.”
Finally, another reason it is important for investigating counsel to control the document gathering process is that, depending on the nature of the government investigation, both the company and counsel may be required to vouch to the government that the company has fully complied with a document subpoena.43
Once the key documents have been gathered and analyzed, the investigator is ready to interview witnesses.
D. Witness Interviews
As with depositions in any type of case, the witness interview may be the most important fact-gathering task counsel performs during an internal investigation. Counsel must be artful in conducting these interviews, keeping in mind that the content of such interviews may be revealed to different audiences at some point in the future. The investigator must conduct the interviews in a way that ensures a sufficiently complete disclosure of relevant facts to satisfy the government, while at the same time being conscious of the risk that the interviews could, at some point, be used by employees or third parties in litigation against the company.
Before beginning the process of witness interviews, however, counsel must consider a key ethical concern: counsel conducting an internal investigation represents the company, and not the witnesses. Therefore, counsel must tread lightly to ensure that he or she does not run afoul of his or her own ethical obligations owed to unrepresented persons, but also to ensure that he or she does not create a conflict of interest regarding counsel’s representation of the company.
1. Ethical Concerns in Witness Interviews
Missouri Rule of Professional Conduct 4-4.3, entitled “Dealing With Unrepresented Person,” states:
In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.44
It goes without saying, of course, that if counsel conducting the internal investigation intends to conduct an interview of key corporate personnel whose actions are possibly criminal, this rule is implicated. Thus, where confronted with this situation, the safest path is obviously to apprise the interviewee, at the outset, of counsel’s identity as a lawyer for the company, and that counsel does not represent the witness. If counsel dispenses any advice whatsoever to this person, it should only be that the witness should, if they wish, secure his or her own counsel.
If the witness expresses a desire to retain his or her own counsel, Missouri Rule of Professional Conduct 4-4.2 may be implicated:
In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.45
The comments to this rule make clear that “[t]he prohibition on communications with a represented person only applies in circumstances where the lawyer knows that the person is in fact represented in the matter to be discussed. This means that the lawyer has actual knowledge of the fact of the representation.…”46 Thus, there may be an argument that it is permissible to continue communications with a person who has merely expressed a desire to retain counsel, but has not in fact done so, so long as that person has been advised that he or she should retain their own counsel. This is shaky ethical ground, however, and the safest course would be to terminate the interview until such time as the witness has consulted with their own counsel.
These ethical rules defining the lawyer’s obligations, however, are not the only grounds upon which employees may have rights and duties associated with the witness interview. Generally speaking, an employee’s rights vary in each case, depending upon the terms of any contract the employee has with the company; any applicable statutory rights; and any constitutional provisions which may be implicated. For example, many executive contracts contain broad indemnification provisions, requiring the company to indemnify the executive for reasonable costs and attorneys’ fees incurred in the defense of any claim to which he or she is made a party by reason of being an officer, director or employee of the company. Similarly, Missouri’s corporate indemnification statute provides for indemnification for “expenses, including attorneys’ fees, actually and reasonably occurred” by an officer or director where such officer or director “has been successful on the merits or otherwise in the defense of any action, suit or proceeding.”47 Thus, in representing the corporation in an internal investigation, it is critical for counsel to determine the rights of any employee witness to avoid exposure to suits for indemnification or other torts arising out of counsel’s actions during the internal investigation.
On the other hand, counsel should be firm in asserting the rights of the company to demand answers from its employees, within the bounds of the ethical rules and other applicable laws. Every employee has a duty to cooperate with his or her employer, in the course or scope of the employer/employee relationship. In Missouri, such duty is recognized at common law,48 and has been extended, in the public employment context, to require cooperation by the employee in an internal investigation.49 Thus, if the employee refuses to consent to the interview, the company may be entitled to terminate his or her employment. Therefore, from a practical perspective, at the outset of the investigation the company should circulate a memorandum directing all employees to cooperate in the investigation to ensure that the employee has been apprised of his or her duties.
Finally, a critical problem a company may face in this process is what to do if an employee witness refuses to cooperate in the investigation by invoking his or her Fifth Amendment right to be free from self-incrimination. Generally speaking, of course, the right to be free from compelled self-incrimination does not apply to protect employees from questioning by their employers, because there is no state action involved in the employer’s inquiry.50 Given this principle, an employee’s failure to discuss conduct committed within the course of his or her employment with the company likely constitutes good cause for termination.
But, if an employee insists on invoking the Fifth Amendment privilege in response to questioning by the employer, it is probable that the same employee will invoke the privilege in response to compelled administrative inquiries, or questions posed in depositions by third-party civil litigants. Given the rule that adverse inferences from a non-party corporate agent’s assertion of the privilege are permitted against a corporate party,51 investigative counsel should make every effort to negotiate the impasse with the recalcitrant employee and his or her counsel, perhaps even considering the possibility of a joint defense agreement with the employee, depending upon the importance of information known to him or her.52
2. The Interview Process
After completing issue formulation, document review and analysis, and balancing the competing rights of the company and employees, counsel should have a sufficient foundation to begin interviewing witnesses. In light of all of the difficult issues that have been discussed in this article, a few guiding principles can be distilled to aid the investigator in conducting employee interviews.
First, if possible, counsel should do his or her best to interview employees before government investigators or regulators do. This is important for several reasons. As noted above, witnesses who are interviewed “cold” by government agents – and without the assistance of documents – may have a faded recollection of key events. There is a risk that such witnesses will engage in speculation and conjecture during their interview with the government, which can only harm the company and cloud its credibility should the company later decide to disclose factual material to the government. But if the witness is given the benefit of refreshing his or her recollection with documents early in the process, the danger is lessened that the witness will be inaccurate in his or her discussions with the government.
Second, counsel should take the time to interview employees face-to-face, and not through the use of written inquiries or questionnaires. As with written interrogatories in a civil case, written questionnaires are of lessened utility, because there is no opportunity for follow-up if the answer given is incomplete, evasive, or untruthful. Moreover, there is a distinct possibility that the written questions and answers will not be subject to work-product protection, because they will not contain mental impressions of the lawyer asking the questions.
Third, if possible, the witness interview should be conducted by one lawyer and one non-lawyer assistant who will prepare the notes of the interview. This circumstance will hopefully avert the possibility that the lawyer conducting the interview becomes a “witness” in a later proceeding. At the conclusion of the interview, only one memorandum regarding the interview should be prepared, preferably by counsel, to ensure that work product protections attach to the memorandum.
Fourth, at the outset of the interview, the witness should be apprised that counsel represents the company and not the witness, and that the interview will be conducted under the auspices of the company’s attorney-client privilege. The witness should further be told that the company’s privilege may be waived by the company alone, and not by the employee. These admonitions should fulfill the lawyer’s ethical obligation to disabuse the employee of any notion that he or she represents the employee, and at the same time preserve the company’s ability to later make decisions regarding what, if anything, to do with the information disclosed during the interview.
Fifth, and perhaps most important, the interview should be conducted in a way that ensures it will later be viewed with complete credibility. The interviewer should avoid asking leading questions, bullying the witness, or putting words in the witness’s mouth. The witness should be confronted with all key documents – favorable or unfavorable – concerning his or her part in past conduct. And, the witness should be given the opportunity to explain their answers completely, should they so desire.
With these principles in mind, counsel should be able to conduct a thorough, incisive, credible, and privileged witness interview for later use as the company sees fit.
IV. Minimizing Collateral Consequences – FRE 502(a)
As noted in Section II, supra, over the past nine years, corporations considering waiver of attorney-client privilege and work product protection in an effort to avert criminal charges faced a difficult choice. The company could, in seeking cooperation credit with the government, engage in a so-called “partial waiver” of privileged information – disclosing, for example, factual information gathered during attorney-client privileged employee interviews. The almost paralyzing problem with such a disclosure was that courts have largely held that there is no such thing as a “partial” or “selective” waiver of the attorney-client privilege and work product protection.53 That is, preservation of such privileges was an all-or-nothing proposition: a corporation either maintained the integrity of the privilege as to all third parties, or it waived its protections.54
The necessity of making this unenviable Hobson’s choice, however, may have recently been eliminated by the enactment and signing into law of Federal Rule of Evidence 502, effective September 19, 2008. Rule 502(a) states, in relevant part:
The following provisions apply, in the circumstances set out, to disclosure of a communication or information covered by the attorney-client privilege or work-product protection.
(a) Disclosure Made in a Federal Proceeding or to a Federal Office or Agency; Scope of a Waiver
When the disclosure is made in a Federal proceeding or to a Federal office or agency and waives the attorney-client privilege or work-product protection, the waiver extends to an undisclosed communication or information in a Federal or State proceeding only if:
(1) the waiver is intentional;
(2) the disclosed and undisclosed communications or information concern the same subject matter; and
(3) they ought in fairness to be considered together.55
The “Explanatory Note on Evidence Rule 502” of a proposed amendment to the Federal Rules of Evidence explains this portion of the rule as follows:
The rule provides that a voluntary disclosure in a federal proceeding or to a federal office or agency, if a waiver, generally results in a waiver only of the communication or information disclosed; a subject matter waiver (of either privilege or work product) is reserved for those unusual situations in which fairness requires a further disclosure of related, protected information, in order to prevent a selective and misleading presentation of evidence to the disadvantage of the adversary. . . . Thus, subject matter waiver is limited to situations in which a party intentionally puts protected information into the litigation in a selective, misleading and unfair manner.56
Thus, Federal Rule of Evidence 502(a) appears to have been specifically crafted to do away with the common-law doctrine that waiver of the attorney-client privilege and work product protections is an all-or-nothing proposition. The rule – applied in cases where civil litigation parallel to or following a government investigation is possible – would appear to give companies some degree of breathing room in making the decision as to whether to disclose purely factual or non-core attorney-client privileged communications to a government entity, without fearing the possibility that a complete subject matter waiver of the privilege may occur.
V. Conclusion
While internal investigations are an essential tool in protecting companies facing regulatory or criminal enforcement actions, they are also fraught with peril for the unwary or uninformed practitioner. The consequences of a poorly conducted investigation can be drastic for the company and its employees, owners, and customers. Counsel should therefore proceed with caution, considering all of the above-described issues.
Footnotes
1 J. Justin Johnston is a shareholder at Wyrsch Hobbs & Mirakian, P.C. in Kansas City. He is a 2000 graduate of the University of Missouri at Kansas City School of Law.
2 Bruce A. Green, After the Fall: The Criminal Law Enforcement Response to the S&L Crisis, 59 Fordham L. Rev. S155, S156 (1991).
3 Pub. L. No. 101-73, 103 Stat. 183 (1989).
4 See Financial Insitutions Reform, Recovery and Enforcement Act, Pub.L.No. 101-73, 103 Stat. 183 at § 966(a)(1); Crime Control Act of 1990, Pub. L. No. 101-647, 104 Stat 4789 (1991).
5 See Plan To Strengthen The Economy, http://www.barackobama.com/issues/economy/ (last visited February 23, 2009).
6 Stop Fraud Act, S. 2280, 109th Cong. (2006).
7 Id. at §§ 2 & 4.
8 See 2007 Mortgage Fraud Report, http://www.fbi.gov/publications/fraud/mortgage_fraud07.htm (last visited February 23, 2009).
9 Id.
10 Foreclosures Up Five Percent in October (November 13, 2008), http://www.consumeraffairs.com/news04/2008/11/home_sales17.html
11 Memorandum from Eric H. Holder, Jr. , Deputy Attorney General, United States Dep’t of Justice, to All Component Heads and United States Attorneys (June 16, 1999), available at http://www.usdoj.gov/criminal/fraud/docs/reports/1999/chargingcorps.html.
12 See, infra, note 25 and accompanying text.
13 State ex rel. Great Am. Ins. Co. v. Smith, 574 S.W.2d 379, 384-85 (Mo. banc 1978).
14 See, e.g., McCaffrey v. Estate of Brennan, 533 S.W.2d 264, 267 (Mo. App. E.D. 1976); Rule. 4-1.6, Comment.
15 Posting of Peter Lattman, The Holder Memo and its Progeny, The Wall Street Journal Law Blog, December 13, 2006, to http://blogs.wsj.com/law/2006/12/13/the-holder-memo (last visited February 24, 2009).
16 Id.
17 Memorandum from Eric J. Holder, Jr., Deputy Attorney General, U.S. Dep’t of Justice, to All Component Heads and United States Attorneys (June 16, 1999), http://www.usdoj.gov/criminal/fraud/docs/reports/1999/chargingcorps.html (emphasis added) (last visited February 25, 2009).
18 U.S.S.G. §8C2.5(g) (2007).
19 See Memorandum from Larry D. Thompson, Deputy Attorney General, United States Dep’t of Justice, to Heads of Department Components and United States Attorneys (January 20, 2003), http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm (last visited February 26, 2009); Memorandum from Paul J. McNulty, Deputy Attorney General, United States Dep’t of Justice, to Heads of Department Components and United States Attorneys, http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf (last visited March 2, 2009).
20 See Thompson Memorandum at Section II (A)(4); McNulty Memorandum at Section VII (B)(2).
21 For a comprehensive discussion of the conflicting standards among the United States Circuit Courts of Appeal regarding what may constitute a so-called “subject matter” waiver of attorney-client privilege and/or work product protections, see Andrew Gilman, The Attorney-Client Privilege Protection Act: The Prospect of Congressional Intervention Into the Department of Justice’s Corporate Charging Policy, 35 Fordham Urb. L.J. 1075, 1088 (2008).
22 Id.
23 See, e.g., Testimony on The Thompson Memorandum’s Effect on the Right to Counsel in Corporate Investigations: Hearings Before the Senate Judiciary Committee, 110th Cong. 21 (2006) (statement of Thomas J. Donohue, president and chief executive officer, U.S. Chamber of Commerce) (“If company employees responsible for compliance with complicated statutes and regulations know that their conversations with attorneys are not protected, many will simply choose not to seek legal guidance. The result is that the company may fall out of compliance – not intentionally – but because of a lack of communication and trust between the company’s employees and its attorneys.”).
24 See Attorney-Client Privilege Protection Act of 2006, S. 30, 109th Cong. (2006); Attorney-Client Privilege Protection Act of 2007, H.R. 3013, 110th Cong. (2007); Attorney-Client Privilege Protection Act of 2007, S. 186, 110th Cong. (2007); Attorney-Client Privilege Protection Act of 2008, S. 3217, 110th Cong. (2008).
25 United States v. Stein, 435 F.Supp.2d 330, 364 (S.D.N.Y. 2007), aff’d, 541 F.3d 130, 157 (2d Cir. 2008)
26 Memorandum from Mark Filip, Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Department Components and United States Attorneys (August 28, 2008), http://www.usdoj.gov/dag/readingroom/dag-memo-08282008.pdf (last visited February 25, 2009).
27 Id. at 8.
28 Id. at 9.
29 Id.
30 Id.
31 Id. at 9,10.
32 Id. at 10, n.3.
33 Id.
34 Id.
35 Id. at 12.
36 See, e.g., Filip Memorandum at 14-15, note 25; U.S.S.G. §§ 8B2.1 & 8C2.5(f)(1) (2007).
37 See, e.g., Pitt v. Dist. of Columbia, 491 F.3d 494, 504-05 (D.C. Cir. 2007); United States v. Wenger, 427 F.3d 840, 853-54 (10th Cir. 2005).
38 Filip Memorandum at 12
39 Id.
40 It is a violation of 18 U.S.C. §§ 1512(b)(2) and 3551 et seq. to “alter, destroy, mutilate [and/]or conceal” objects – including documents and records – “with intent to impair the objects’ integrity and availability for use in official proceeding[s]” of the United States. The most famous recent example of the government’s “you shred, you’re dead” policy is United States of America v. Arthur Andersen, LLP, No. CRH-02-121 (S.D. Tex. filed March 7, 2002). See the Indictment in which Arthur Andersen, LLP was charged with obstructing justice relating to its partners’ assignment to Andersen personnel to “destroy immediately documentation relating to Enron,” and “to work overtime if necessary to accomplish the destruction.” Id. Available at http://fl1.findlaw.com/news.findlaw.com/hdocs/docs/enron/usandersen030702ind.pdf.
41 See, e.g., Williams v. Sprint/United Mgmt. Co., 230 F.R.D. 640, 646-48 (D. Kan. 2005) (discussing meaning of “metadata” – electronic information describing the history, tracking, or management of an electronic document – its utility as electronic evidence, and the importance of preserving such data).
42 One such commercially available litigation support software is CT Summation, available at http://www.summation.com/.
43 See, e.g., Securities and Exchange Commission Division of Enforcement, Enforcement Manual, Section 3.2.6.2.6, “Confirming Completeness of Production,” available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf.
44 Rule 4-4.3 (2008).
45 Rule 4-4.2 (2008).
46 Id. at Comment 8.
47 Section 351.355 930, RSMo (2006).
48 See, e.g Dixon v. Stoam Indus., Inc., 216 S.W.3d 688 (Mo. App. S.D. 2007); Craig v. Thompson., 244 S.W.2d 37 (Mo. banc 1951) (“In every contract of employment, it is implied that the employee will obey the lawful and reasonable rules, orders and instructions of the employer.…”)
49 See Brown v. City of North Kansas City, 779 S.W.2d 596, 599-600 (Mo. App. W.D. 1989) (holding that public employee may be compelled to cooperate in employer’s internal investigation, and that employee’s refusal to cooperate was grounds for termination).
50 See, e.g., Pub. Utils. Comm’n v. Pollak, 343 U.S. 451, 461 (1952).
51 See RAD Servs., Inc. v. Aetna Cas. and Sur. Co., 808 F.2d 271, 275 (3rd Cir. 1986).
52 For many years, joint defense agreements between a corporation and its employees were frowned upon by prosecutors in evaluating a corporation’s cooperation. But, the Filip Memo retreats slightly from the prior position, stating that “the mere participation by a corporation in a joint defense agreement does not render the corporation ineligible to receive cooperation credit, and prosecutors may not request that a corporation refrain from entering into such agreements.” Filip Memorandum, note 25 at 13.
53 See note 20 and accompanying text.
54 Id.
55 Fed. R. Evid. 502(a) (2008) available at http://www.law.cornell.edu/rules/fre/rules.htm.
56 Fed. R. Evid. 502 (Proposed Official Draft 2007) available at http://www.lexisnexis.com/applieddiscovery/LawLibrary/CourtRulesArticles/proposedrule502.pdf.