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Responding to a Government Investigation
As Chief Legal Officer, Why Should I
Not Drive the Ship?
Kevin M. Kinross
Reprinted from Acredula -- Summer 2007
When faced with the prospect of a government
inquiry, even the Chief Legal Office may feel a
little lost at sea. As leaders within the organization,
however, they must take the wheel and make
several critical decisions throughout the process.
Of these decisions, the two that will likely draw
the most attention are:
When should the Chief Legal Officer or in-house
counsel (collectively, “CLO”) be involved in an
investigation?
Regardless of whether the CLO is involved in the
actual investigation, their presence and moderate
oversight helps the ship sail smoothly. In addition
to adding efficiency to the process, one of the
primary reasons why special counsel should be
engaged to conduct an internal investigation is to
add credibility to the results of the investigation.
This does not mean that the CLO could not effectively
conduct the investigation, but depending on
the issues involved and how high up the chain of
command the alleged violation touches, government
investigators will place more credibility in an
investigation conducted by an outside, independent
counsel. Still, the CLO will need to be tangentially
involved in the process since outside counsel, especially
outside counsel hired specifically to conduct
the investigation, will not be as familiar with
the company’s operations, departments, internal
workings, or even the basics of how the company
functions. To ensure that the independent counsel’s
time is well spent and efficient, the CLO may be
needed to assist in creating the broad plan of action.
Internal company information can help focus
the investigation on the areas that were potentially
involved in the alleged misconduct.
However, the CLO’s presence cannot conflict with
direction of the investigation or the route that independent
counsel decides it needs to travel. But
if the investigation starts to stray into areas of the
organization that are not remotely related, then as
CLO, you should step in to keep the investigation
from veering off course. Still, the key is that for
the investigation to remain credible, therefore the
CLO cannot be directly involved, pressure, or attempt
to limit the scope of the investigation from
areas of inquiry that may be related to the alleged
wrongdoing.
Independent counsel will be well aware of the fact
that the CLO will be left with, and will need to live with,
the condition of the organization after the investigation.
Therefore, it’s important to help independent
counsel understand the layout and operations of the
organization so they can determine the proper areas
of investigation, which will be appreciated.
After recognizing that as CLO you will have limited
involvement in the investigation, you need to
know when the CLO should actually conduct without
outside counsel. The basic rule of thumb and
question to ask is how high up in the organization
does the alleged violation go? For larger organizations,
the higher up the greater the consideration
should be to engage independent counsel. Smaller
organizations should think about independent
counsel immediately.
As CLO, if your organization is facing a government
inquiry, you will likely have the desire to
jump in, get involved, throw the life preserver and
be the hero. However, most of the time you are
better suited and needed more back at headquarters
to manage the indirect costs and consequences
associated with an investigation. This includes
dealing with:
The costs of conducting the investigation itself
Employees/witnesses and their respective
requests
Management distractions as a result of the
investigations
The company’s clients or potential clients
raising concerns about the investigation
Employee discipline issues as a result of the
investigation
What to report to regulators
Privilege issues
Accordingly, the impact of a government investigation
will require your attention and skills as
CLO, but the organization is better served with
your attention not directly involved in the actual
conducting of the investigation.
When or Why Should The Organization Waive the
Attorney-Client or Work Product Privilege?
Waiving privilege, as stated at the outset of this
article, is a critical and complicated decision to
evaluate. The decision must weigh the anticipated
value and benefit of cooperation that a waiver might
reward your organization against the exposure to
private litigants and the plaintiffs.
Historically, the government has demanded that
organizations waive the privilege in order to be
considered as cooperative in the investigation.
Cooperation was, and still is, heavily weighed by
the government in its charging decisions. This
“culture of waiver” was further advanced when
the Department of Justice (DOJ) released the
Thompson Memorandum in January 2003. Since
its release, the Thompson Memorandum has faced
harsh criticism by the bar, courts, and Congress.
This criticism was recently fueled by Judge Lewis
Kaplan’s decision in June 2006 in the United
States v. Stein. In Stein, Judge Kaplan held that
prosecutor’s use of the Thompson Memorandum
was unconstitutional in its inducement of KPMG
to stop paying the legal fees of its former partners
and employees.
Additionally, Senator Arlen Spector introduced a
bill in the Senate the (Attorney-Client Privilege
Protection Act of 2006 (ACPPA)) that would
disallow the government from requesting that an
organization waive its privilege or considering
in its charging decision, an organization’s decision
to pay the legal fees the of employees under
investigation.
Shortly after the ACPPA was introduced, the DOJ
acted and Deputy Attorney General Paul McNulty
released a memorandum (the “McNulty Memorandum”), which was
intended to replace the Thompson
Memorandum.
The McNulty Memorandum was released
approximately five days after
the introduction of the ACPPA. While similarly titled,
“Principles of Federal Prosecution
of Business Organizations” like
the Thompson Memorandum, the
McNulty Memorandum supersedes
Thompson.
The McNulty Memorandum re-writes
the provisions of the Thompson
Memorandum dealing with privilege
waiver and advancement of attorneys’
fees but keeps intact other factors that prosecutors
must consider when determining whether to charge
an organization.
For privilege issues, the McNulty Memorandum
states “waiver of the attorney-client and work product
protections is not a prerequisite to a finding that
the company has cooperated in the government’s
investigation.” Further, the McNulty Memorandum
states that a request for a waiver may only be made
when there is a “legitimate need for the privileged
information to fulfill the legal obligations.”
To establish a “legitimate need”, prosecutors under
McNulty, must show:
Likelihood and degree to which the privileged
information will benefit the government investigators;
Whether the information sought can be obtained
in a timely and complete fashion by an alternative
means;
The completeness of voluntary disclosure already
provided by the organization; and
The collateral consequences to the organization
in requiring a waiver.
McNulty goes further in its attempts to fix the
Thompson Memorandum and establishes two
tiers of privileged information and standards for
approval for requesting waiver of each category
of information.
Category I (factual information): This
includes witness statements, factual interview
memorandum without attorneys’ thoughts or impressions,
chronologies, and fact summaries.
Category II (non-factual attorney-client communications):
This includes legal advice or
non-factual attorney work product,
attorney’s notes, legal determinations
resulting from the internal
investigation, and legal advice
given to the organization.
Before government investigators
may seek the waiver of Category
I information, they must seek the
approval of their U.S. Attorney
who then must consult with the
Assistant Attorney General for the
Criminal Division. McNulty allows
for a prosecutor to consider an
organization’s response to a waiver
of Category I information in its
charging decision.
A request for a waiver of Category II information
needs prior written approval of the Deputy
Attorney General and is to be reserved for “rare
circumstances.” However, a prosecutor is not
allowed to consider an organization’s refusal to
waive privilege on Category II information in its
charging decision. But a prosecutor may favorably
consider an organizations waiver in determining
cooperation.
Thus, while the goal of the McNulty Memorandum
was to “quiet” the criticism of the Thompson
Memorandum, it has essentially created a “carrot
and stick” approach to a waiver that you, as CLO,
must weigh in determining whether or not to waive
privilege. While the government cannot consider a
refusal to waive Category II information to punish
the organization, it can favorably view a waiver as
cooperation.
While the benefit of cooperation is important
and heavily weighed during an investigation, it
must be balanced against the risk of exposure to
private litigants, competitors, customers, and the
plaintiff’s bar.
The majority of courts take the position that when
an organization waives its attorney-client communication
and work product privilege to one party,
i.e. a governmental agency, the organization has
effectively waived the privilege for all.
Leading cases out the of D.C., Federal, Third,
Fourth, Sixth, and Tenth Circuit Courts of Appeal
all have declined to adopt a rule of “selective
waiver” in such situations. In essence the waiver
of the privilege during a government investigation
will be risking exposure to all.
One option to consider is entering into a confidentiality
agreement with the investigating agency.
Even in this situation, courts are split on whether
a confidentiality agreement is enough to protect the
privilege and exposure outside of the investigation.
Courts range from the Sixth Circuit rejecting “selective
waiver” in any form regardless of whether a
confidentiality agreement exists or not, to the other
end of the spectrum where several federal district
courts recognize a difference between disclosing
information to a government agency and to a private
litigant. Thus, a careful analysis of current
position in your jurisdiction is necessary.
These two decisions, (1) the CLO’s role in the investigation;
and (2) whether the Company should
waive privilege, are two of the most critical choices
that must be made during an investigation. While
it is best that the CLO does not “drive the ship”--
the decisions to these questions will greatly impact
how to navigate the course.
