15 Dec I can tell you – you're my lawyer, right?
Editor’s note: This is the final in a three-part series of op-ed pieces on corporate governance. The articles, part of WTN Media’s Boardroom Perspectives column, are written by associates in the Madison-based public accounting firm Candela Solutions, LLC.
According to the Association of Certified Fraud Examiners, approximately 74 percent of frauds are detected by someone saying something (tips, 34.2 percent; internal audit, 20.2 percent; and internal controls, 19.2 percent). If those people thought that they couldn’t tell their employer – because they could be prosecuted – how many would open their mouths?
When clients communicate with their lawyers, there are two protections that apply: the Attorney-Client Privilege and the Work Product Doctrine. These protections are under attack by the U.S. Department of Justice (the “DOJ”). Since 1999, the DOJ has had a policy of seeking the waiver of the protections of the Privilege and the Doctrine when it was considering whether or not to prosecute a company.
In 2003, the DOJ revised its policy to demand waiver if a company wanted to get credit for “cooperating.” Credit for cooperation is a big deal for anyone facing prosecution. Under the DOJ’s policy, if a corporation is considered to be “cooperating,” it might escape prosecution completely or get a much lighter charge and sentence.
The practical effect of the DOJ’s policy is that companies are put in a terrible position: they want to investigate possible wrong doing in their organizations, but if they do they must agree to turn over the notes, findings, and recommendations to the DOJ to be considered cooperative. Employees who might be interviewed have to consider why they would cooperate with their employer – if they say anything, it’s the same as telling the DOJ.
Most internal investigations start as small matters. Typically, the investigation starts as conversations between employees. If the matter grows in importance, the company asks its lawyer to conduct the investigation, thinking that the lawyer can’t reveal what was said. The involvement of the lawyer has benefits and detriments. The benefits are that the lawyer will be a more skilled investigator than most managers, and that the company has the ability to claim the protections of the Privilege and/or the Doctrine. The detriments are that employees should be warned that they are not covered by the Privilege or Doctrine and, as a result of that warning, employees may insist on the presence of their own lawyer before responding to the employer’s questions.
The company lawyer represents the company, not any individual employee, including the president or any member of the board. When something is said to the company lawyer, the company, not the individual, gets to decide whether it wants to waive the Privilege or Doctrine to get credit for cooperating. If it does, everything comes out. The net result: the employee may be facing an indictment by a Federal Grand Jury as a result of talking with the company lawyer.
Obviously, this has a chilling effect on anyone’s interest in talking with the company lawyer. Case-in-point: Andrew McKelvey. In case you haven’t heard of Mr. McKelvey, he founded Monster Worldwide, Inc. 39 years ago. Monster’s lawyers are investigating questions about the backdating of stock options. Mr. McKelvey was the chairman and CEO until early October 2006. When the lawyers started asking questions, he resigned and became a director and “Chairman Emeritus.” Because the lawyers kept asking questions, he resigned those positions as well. His reason – Monster and its board demanded full compliance with its investigation. Thus, 71-year-old Mr. McKelvey gave up running the company he founded.
Another example: three former executives at Converse Technology have been charged criminally with fraud connected with alleged options backdating. All three had given statements to company lawyers. One of these three, the former CFO has now pleaded guilty.
Even if the company waives the Privilege and Doctrine so as to be deemed to have cooperated, the company could still face litigation. Assuming its “cooperation” keeps the DOJ away, one or more of its shareholders might file suit against the company in a “derivative claim” and demand that the company produce all of the information provided to the DOJ. Meaning: the company may have to provide potentially “smoking gun” information to the shareholders suing the company.
To work toward a change in the DOJ’s policy, a very unusual group of organizations banded together. This group includes the Association of Corporate Counsel (the “ACC”), the Business Roundtable, the National Association of Manufacturers and the U.S. Chamber of Commerce as well as the American Civil Liberties Union, and the National Association of Criminal Defense Lawyers. This group surveyed in-house counsel (75 percent of whom felt there is a “culture of waiver”), and included this survey in a report entitled: “The Decline of the Attorney Client Privilege in the Corporate Context that was presented to the DOJ and the U.S. Senate’s Judiciary Committee. The ACC also testified to the Judiciary Committee.
The American Bar Association has done three things: its president wrote to Attorney General Alberto Gonzales seeking the end of the policy, it asked the Judiciary Committee for hearings (which were held Sept. 12), and its president testified before the Judiciary Committee. In August, the ABA’s House of Delegates adopted the report of its Attorney-Client Privilege Task Force – opposing the requirement of forced waivers.
The DOJ dozen
In a truly extraordinary development, 12 former DOJ officials signed a letter asking the DOJ to “revise its policy to state affirmatively that waiver of attorney-client privilege and work-product protections should not be a factor in determining whether an organization has cooperated with the government in an investigation.” The 12 former officials include two former Attorney Generals: Griffin Bell and Dick Thornburgh, three former Deputy Attorney Generals, and four Solicitor Generals, including Kenneth Starr and Theodore Olson.
Finally, the U.S. Sentencing Commission (which issues guidelines that federal judges are to follow when sentencing criminals, including companies) removed from it’s guidelines the suggestion that waiver of the Privilege or Doctrine be considered when judges determine if a company should get credit for cooperation.
The response of the DOJ so far has been to issue a memorandum, in October 2005, requiring the establishment, by each U.S. Attorney’s office, of a review process for prosecutors to follow before seeking a waiver. (Few offices have established such a process, and no efforts have been made to enforce this memo.) The DOJ also responded in a letter to the ABA, not offering any change, but saying, “We look forward to continuing to work with you on these efforts.”
In its testimony before the Judiciary committee, the DOJ said that it wished to keep the dialogue open and welcomed constructive criticism. It also said that the time could come when revisions would be needed to its policy, and they will make them when convinced such changes are necessary and in the public interest. The DOJ also said that they believed their current policy struck “an effective balance between the interests of the business community and the investing public.”
Two days after the hearing, Senator Arlen Spector, R-Penn., announced he would introduce legislation to curb the DOJ’s policies and practices regarding waivers by companies.
Spector of a bill
On Dec. 8, Spector introduced a bill called the “Attorney-Client Privilege Protection Act of 2006.” This act would make it illegal for any agency, not just the DOJ, to:
• Condition its treatment of the organization on the basis of waiver of the attorney-client privilege or any attorney work product protections.
• Determine an organization is not “cooperating” because the organization has validly asserted the attorney-client privilege or attorney work product, provided counsel to or paid the fees of counsel to its employees, entered a “joint defense” agreement with its employees, shared information with its employees, or failed to terminate one or more of its employees.
The DOJ did just this in its prosecution of KPMG over tax shelters that it deemed illegal. By doing so, the DOJ was able to exert tremendous pressure on both KPMG and its employees. On June 27, 2006, the Federal Court in Southern New York ruled that the DOJ was violating the constitutional rights of the KPMG employees to a fair trial and to legal representation.
What can you do? Call your representatives in Washington now and tell them how important this issue is to your company. With the change in the leadership of Congress, Spector’s bill could be lost in the shuffle. Don’t let it drop off the table! If you want your people to be forthcoming, to alert you to problems with your company, this legislation needs to become law. It is clear the DOJ won’t change without it.
Other Boardroom Perspectives
• Ron Kral: Corporate control begins with a strong board
• Jerry Norton: Auditors paying more attention to IT woes
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of the Wisconsin Technology Network, LLC. WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein. The article was written only for informational purposes and is not intended to convey legal advice.