New DOJ Guidelines for Corporate Prosecutions in Response to KPMG Case
Congratulations to Lewis D. Kaplan, the federal judge whose withering critique of prosecutorial abuse in the KPMG tax-shelter case was vindicated yesterday by the Second Circuit Court of Appeals.
In fact, you can double that applause, because yesterday the Justice Department went further and once again rewrote its white-collar prosecution guidelines to accommodate Judge Kaplan's demolition. Whether Justice anticipated its legal defeat before the surrender is less important than the fact that it has now restored a measure of due process fairness to corporate defendants and their employees.
The new standards, released by Deputy Attorney General Mark Filip, are the latest repudiation of the "Thompson Memo" -- and go far enough to dump it entirely. Drafted amid the Enron political inferno of 2003, the Thompson Memo gave federal prosecutors in white-collar crime cases sweeping powers that often shaded into abuse: For example, prosecutors were told they could punish an entire company if it declined to waive attorney-client privilege or cut off payment of legal fees for employees under investigation.
The result is that businesses had an incentive to admit "guilt" and throw employees over the side even when they believed what they did was legal. The practice also bludgeoned middle-level employees into premature plea deals, lest they be bankrupted merely for trying to defend themselves. Judge Kaplan had dismissed tax-evasion charges against 13 KPMG defendants on grounds that prosecutors violated their Sixth Amendment right to counsel by pressuring KPMG to cut off legal assistance. Justice appealed and has now been routed. Under the new guidelines, credit for cooperation will depend on a firm's disclosure of the relevant facts, not any waiver of privilege or work-product protections.
Congress also deserves credit for promising legislation to curtail such abuses. Sponsored by Senator Arlen Specter, the draft law has the support of business groups, but also the American Bar Association, the ACLU and even liberal Democrat Pat Leahy. You've lost everyone when that's your opposition.
Justice's long delay in admitting error here doesn't speak well of prosecutorial discretion these days. There is legitimate doubt about the substance of the KPMG cases, given that the tax shelters involved had never been ruled illegal by a tax court before the indictments were brought. Prosecutors should have to win their cases in court, not by beating defendants into submission with an abuse of due process. Congress may still want to consider legislation, as a way to prevent such abuse after KPMG is forgotten.
ABA President H. Thomas Wells Jr. issued a statement applauding the removal of the "McNulty Memorandum," but noted that the ABA desires further reforms.
While the new guidelines are a welcome improvement over the McNulty Memorandum, the rights of American employees and the businesses they work for are too important to be subject to constantly shifting administrative policies. The Department’s new guidelines are its fifth such policy in ten years and can be changed again at any time. Unlike legislation, guidelines can provide no certainty that critical attorney-client privilege, work product, and employee constitutional rights will be protected in the future. These bedrock legal rights are sacrosanct and must not be dependent on the personal leanings of each new deputy attorney general. As a result, legislation like S. 3217 and H.R. 3013, the “Attorney-Client Privilege Protection Act,” is urgently needed to permanently solve the problem of government-coerced waiver.
The new Justice Department policy also does nothing to change the similar policies adopted by the Securities and Exchange Commission, the Environmental Protection Agency and the Department of Housing and Urban Development, or the informal waiver practices of many other agencies. Such policies, like the Justice Department’s previous policy, pressure organizations to waive their privileges and violate their employees’ Sixth Amendment right to counsel and Fifth Amendment right against self-incrimination to receive cooperation credit during investigations.
While the ABA supports and appreciates the Department’s new policy, that policy cannot, standing alone, reverse the widespread “culture of waiver” created by all these federal policies—a culture that is seriously undermining both the confidential attorney-client relationship and basic employee rights in the corporate community. Comprehensive legislation is the only way to make the Department’s reforms permanent, give them the force of law, and apply them to all federal agencies.
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