The Government’s New Corporate Cooperation Standards in the Context of Investigative Employee Interviews
By Paul B. Murphy and Lucian E. Dervan

Introduction

In July 2002, in reaction to a series of high profile corporate criminal scandals, President Bush created the Corporate Fraud Task Force, a group whose function was twofold: to enhance corporate criminal enforcement by the Department of Justice (“DOJ”), and to facilitate inter-agency cooperation in the corporate regulatory and enforcement arena. In the years following its formation, the Task Force has instituted hundreds of investigations, secured over five hundred corporate fraud convictions or guilty pleas, and charged over nine hundred defendants.¹

As part of this increased enforcement activity, the government has significantly expanded the level of cooperation required by corporations hoping to avoid criminal charges. In January 2003, Larry D. Thompson, then Deputy Attorney General, released a revised version of the “Principles of Federal Prosecution of Business Organizations,” now commonly known as the “Thompson Memo.”² In the cover memorandum to the revised principles, Thompson wrote, “The main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation. Too often business organizations, while purporting to cooperate with a Department investigation, in fact take steps to impede the quick and effective exposure of the complete scope of wrongdoing under investigation.”

As part of this new cooperation, the government also has begun aggressively requesting that companies disclose information gathered or created during internal investigations, including privileged materials. The Thompson Memo instructs prosecutors to consider, when making charging decisions, “the completeness of [the corporation’s] disclosure including, if necessary, a waiver of the attorney-client and work product protections, both with respect to its internal investigation and with respect to communications between officers, directors and employees with counsel.”

The government’s focus on corporate America and its new stringent cooperation standards have actually generated a sharp increase in the number of internal investigations, as corporations begin to perceive the importance of responding quickly to potential wrongdoing. For those engaged in conducting these investigations, understanding the potential pitfalls and perils in this practice area is vital to effectively representing a corporate client. While there are many latent hazards during an internal investigation, missteps in employee interviews can be particularly harmful to the corporation.³ In today’s enforcement climate, where a corporation may be compelled to make disclosures to the government, attorneys must approach employee interviews in a manner that protects the corporation’s control of the attorney-client privilege and, therefore, the corporation’s control of the disclosure option.

The New Corporate Cooperation Standards

Approaching employee interviews in a manner that protects the corporation’s control of the information learned is vital because the company may eventually need to disclose this information to the government. As described above, the Thompson Memo explicitly instructs prosecutors to consider the completeness of a corporation’s disclosure, including the disclosure of privileged information, when making charging decisions. Even when disclosure does not cause prosecutors to decline to prosecute, there still are benefits. Under the current Federal Sentencing Guidelines, a corporation’s fine can be reduced as a result of cooperation through disclosure of information. In some situations, the Sentencing Guidelines make clear that waiver of the attorney-client privilege may be necessary: “Waiver of attorney-client privilege and of work product protections is not a prerequisite to a reduction in culpability score . . . unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.”⁴ It should be noted, however, that the Sentencing Commission voted on April 5, 2006, to remove this language. Absent Congressional intervention, this change will become effective November 1, 2006.⁵

Despite complaints from many members of the defense bar, waiver requests appear to have been firmly embraced by the DOJ. As noted by James Comey when he served as the United States Attorney in the Southern District of New York, the standards for cooperation have gone up:

In my view, for a corporation to get credit for cooperation, it must help the Government catch the crooks. Sometimes, a corporation can provide cooperation without waiving any privileges. Sometimes in order to fully cooperate and disclose all the facts, a corporation will have to make some waiver because it gathered the facts through privileged interviews and the protected work product of counsel.⁶

Comey went on to disagree with those who believe that waiver requests, and in particular those requesting information gathered from employees, create a chilling effect and discourage employees from cooperating with investigating counsel. He stated, “the fear that the interview might be disclosed to the Government . . . has little impact. In any event, that possibility does not change the fact that, in order to fully cooperate, a corporation has to help the Government solve the crime.”⁷

Though many in DOJ insist that requests for privilege waivers are not commonplace, members of the defense bar have reported an increase. According to a recent study conducted by a coalition of major American organizations, three out of four attorneys participating agreed that a “‘culture of waiver’ has evolved in which governmental agencies believe it is reasonable and appropriate to expect a company under investigation to broadly waive attorney-client privilege or work product protections.”⁸ Perhaps in response to such growing uncertainty or as a means of curtailing a perceived issue, in October 2005, then Acting Deputy Attorney Robert D. McCallum, Jr. issued a memorandum directing all United States Attorney’s Offices to create written waiver review processes:

To ensure that federal prosecutors exercise appropriate prosecutorial discretion under the principles of the Thompson Memorandum, some United States Attorneys have established review processes . . . that require federal prosecutors to obtain approval from the United States Attorney or other supervisor before seeking a waiver of the attorney-client privilege or work product protection. Consistent with this best practice, you are directed to establish a written waiver review process for your district or component.⁹

While this new policy may create more uniformity and reduce the number of waiver requests directed toward companies, the possibility that information learned during employee interviews, including privileged information, will need to be provided to the government as part of the company’s cooperation remains very real.

The Dangers of Employee Interviews

In today’s enforcement environment, counsel should take care not to establish an attorney-client relationship with an interviewed employee. Establishing such a relationship can jeopardize the corporation’s control of the information learned during the interview and prevent the corporation from disclosing the information to the government without the employee’s permission. Accordingly, counsel should be familiar with how an attorney-client privilege can arise and what steps they should take to prevent the establishment of such a relationship with an employee during a corporate internal investigation.

Establishing an attorney-client relationship

The basic principle of the attorney-client privilege is to protect “[c]onfidential disclosures by a client to an attorney made in order to obtain legal assistance.”¹⁰ Under the “classic test,” the attorney-client privilege applies in the following situation:

The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.¹¹

While the relationship hinges on the client’s belief that such a relationship exists, this subjective belief alone is not pivotal.12 Rather, “the putative client must show that his subjective belief that an attorney-client relationship existed was reasonable under the circumstances.”¹³

Understanding how attorney-client relationships are formed is vital for investigating counsel because establishing an attorney-client relationship with an employee, even inadvertently, can have significant ramifications for the company. Absent an existing conflict of interest, it is permissible to represent both a corporation and its employees.¹⁴ When conducting an internal investigation, however, it may be difficult for counsel to recognize actual or potential conflicts of interest until the facts are unearthed or until the government decides to pursue some enforcement action against the company. In some cases, years may pass between the internal investigation and the commencement of an official enforcement action.¹⁵

Counsel also must consider the potential long term negative consequences of multiple representations in the investigatory setting. For instance, a future conflict may prevent counsel from continuing to represent either the company or its employee absent their consent.¹⁶ While counsel may receive such consent, the government has begun moving with greater frequency to disqualify defense counsel because of prior representations that may impede counsel’s work and lead to ineffective assistance claims.¹⁷ Furthermore, even if counsel obtains consent to continue the representations, the duty to maintain the confidentiality of information obtained from the employee may persist.¹⁸ This sustaining duty of loyalty means the company may be prevented from cooperating with the government through waiver of the attorney-client privilege with regard to communications between investigating counsel and the represented employee without the employee’s consent. As it is becoming increasingly common for the government to request information learned during internal investigations, an attorney’s duty of confidentiality to an employee can be an insurmountable hurdle to the company’s ability to cooperate. The significant risks associated with multiple representations during an internal investigation should give pause to both company and counsel.

Upjohn warnings

The creation of even an inadvertent attorney-client relationship presents the same potential risks for the company as an intentional relationship. Therefore, counsel should take steps to ensure an implied relationship is not established, especially during employee interviews. One means by which investigating counsel can prevent the inadvertent creation of an attorney-client relationship is by giving an Upjohn warning. ¹⁹ A typical Upjohn warning, also known as “Corporate Miranda,” contains the following elements:

• the attorney represents the corporation and not the individual employee;
• the interview is covered by the attorney-client privilege, which belongs to and is controlled by the company, not the individual employee; and
• the company may decide, in its sole discretion, whether to waive the privilege and disclose information from the interview to third parties, including the government.

The Upjohn warning serves two critical purposes. First, the warning assists an attorney in fulfilling her ethical obligation not to mislead an employee with interests adverse to those of the corporation.²⁰ As discussed before, it is extremely difficult in the investigative setting to determine whether an employee’s interests are in accord with the corporation’s. Attorneys should, therefore, give a thorough Upjohn warning before each interview to ensure they are fulfilling their ethical obligations. Second, the warning makes the communications between the investigating counsel and the employee privileged and protects the company’s control of that privilege. If an attorney fails to give an adequate Upjohn warning, the employee may hold the privilege jointly with the corporation. As described above, if the privilege is held jointly, the employee can prevent the disclosure of information learned during the interview.

A case a few years ago has caused some attorneys to supplement the typical Upjohn warning. In September 2004, the DOJ charged two former executives of Computer Associates International with securities fraud conspiracy, obstruction of justice, and conspiracy to obstruct justice. The obstruction charges resulted from the government’s contention that the defendants purposefully misled investigating counsel with the intent that “the Company’s Law Firm would present these false and misleading justifications to the United States Attorney’s Office, the SEC and FBI.”²¹ As a result of the Computer Associates case, some attorneys have begun to include a statement in their Upjohn warning that employees may be prosecuted for misleading an internal investigation. The other ramification of the Computer Associates prosecution and the revised Upjohn warning is that it further chills employees’ willingness to cooperate with investigating counsel, thus increasing the tension between the company and its employees and potentially handicapping the company’s ability to gather facts that may later be shared with the government.

Conclusion

As the government’s enforcement focus on corporate America grows increasingly vigorous, corporations and the attorneys who conduct internal investigations for them must act in a manner that protects all available options for cooperation in the future. One of the most valuable means of cooperating today is disclosure. This avenue, which can be highly successful in averting prosecution or reducing penalties where a prosecution does occur, can be cut off if the corporation or investigating counsel approaches employee interviews without significant contemplation of and preparation for the risks that such contact with employees may present. Through careful consideration of the issues presented by employee interviews, both corporations and investigating counsel can keep the ever shifting summit of modern day cooperation within reach.

Notes

1. See Second Year Report to the President: Corporate Fraud Task Force (July 20, 2004), available at <www.usdoj.gov/dag/cftf/2nd_yr_fraud_report.pdf>

2. The Thompson Memo is available at <www.usdoj.gov/dag/cftf/corporate_guidelines.htm>.

3. For a discussion of the various risks in corporate internal investigations, see Paul B. Murphy and Lucian E. Dervan, “Watching Your Step: Avoiding the Pitfalls and Perils of Corporate Internal Investigations,” Vol. XVI, No. 2 ALAS LOSS PREVENTION JOURNAL (Summer 2005).

4. U.S. Sentencing Guidelines Manual § 8C2.5 cmt. 12 (Culpability Score) (Nov. 1, 2004).

5. As further indication of diminishing support for some of the new cooperation standards, Judge Lewis A. Kaplan, the federal judge overseeing the prosecution of sixteen former KPMG partners and two others, recently suggested that the Thompson Memo’s requirement of waiver may be unconstitutional in certain circumstances. See “Corporate Injustice,” WALL STREET JOURNAL, Apr. 6, 2006, at A14.

6. “Interview with United States Attorney James B. Comey Regarding the Department of Justice’s Policy on Requesting Corporations under Criminal Investigation to Waive the Attorney Client Privilege and Work Product Protection,” 51 U.S. ATTORNEYS’ BULLETIN 6, at 1 (Nov. 2003), available at <www.usdoj.gov/usao/eousa/foia_reading_room/usab5106.pdf>.

7. Id. at 3.

8. “The Decline of the Attorney-Client Privilege in the Corporate Context,” available at <www.acca.com/Surveys/attyclient2.pdf>; see Susan Hackett, “Corporate Confidentiality is Only For the Privileged Few,” WALL STREET LAWYER, July 2005, at 1.

9. “Waiver of Corporate Attorney-Client and Work Product Protection” Memorandum, Acting Deputy Attorney General Robert D. McCallum, Jr. (Oct. 21, 2005), available at <www.abanet.org/poladv/mccallummemo212005.pdf>.

10. In re Grand Jury Subpoena, 415 F.3d 333, 338 (4th Cir. 2005) (quoting Fisher v. U.S., 425 U.S. 391, 403 (1976)).

11. Id. at 339 n. 3; see also United States v. Jones, 696 F.2d 1069, 1072 (4th Cir. 1982).

12. See In re Grand Jury Subpoena, 415 F.3d at 339 (“An individual’s subjective belief that he is represented is not alone sufficient to create an attorney-client relationship.”).

13. Id. (emphasis added); see also Nelson v. Green Builders, Inc., 823 F. Supp. 1439, 1445 (E.D. Wis. 1993) (“A party establishes an implied attorney-client relationship if it shows (1) that it submitted confidential information to a lawyer, and (2) that it did so with the reasonable belief that the lawyer was acting as the party’s attorney.”).

14. See ABA Model Rules of Prof’l Conduct R. 1.13(g). Such multiple representations also are consistent with the United States Supreme Court’s pronouncements on effective assistance of counsel. See Cuyler v. Sullivan, 446 U.S. 335 (1980).

15. See In re Grand Jury Subpoena, 415 F.3d at 335-37 (SEC subpoenaed AOL three years after investigating counsel told employees they could be represented).

16. See ABA Model Rules of Prof’l Conduct R. 1.7 cmt. 4 (“If a conflict arises after representation has been undertaken, the lawyer ordinarily must withdraw from the representation, unless the lawyer has obtained the informed consent of the client.”).

17. See In re Paradyne Corp., 803 F.2d 604, 608 n.7 (11th Cir. 1986) (“The government has standing to seek disqualification of defense attorneys facing potential conflicts of interest due to the government’s interest in preventing reversals of convictions on sixth amendment grounds.”).

18. See ABA Model Rules of Prof’l Conduct R. 1.6 cmt. 2 (“A fundamental principle in the client-lawyer relationship is that, in the absence of the client’s informed consent, the lawyer must not reveal information relating to the representation.”); see also ABA Model Rules of Prof’l Conduct R. 1.9 (Duties to Former Clients).

19. The warning is so named because it comes from the case of Upjohn Co. v. United States, 449 U.S. 383 (1981), which established that communications made by employees to company counsel at the direction of superiors to securelegal advice from counsel are protected by the company’s attorney-client privilege.

20. Under ABA Model Rule of Professional Conduct 1.13(f), “In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.”

21. Information, United States v. Kaplan, Cr. No. 04-330 (E.D.N.Y. Apr. 2004); see also DOJ Press Release, Former Computer Associates Executives Indicated on Securities Fraud, Obstruction Charges, Former General Counsel Pleads Guilty, Company Enters Into Cooperation Agreement (Sept. 22, 2004), available at <www.usdoj.gov/opa/pr/2004/September/04_crm_642.htm>.

About the Author

 Paul B. Murphy (PBMurphy@KSLAW.com) is a partner with King & Spalding’s Special Matters and Government Investigations Group. He previously served as the United States Attorney for the Southern District of Georgia, Associate Deputy Attorney General, and Chief of Staff to the Deputy Attorney General. Lucian E. Dervan (LDervan@KSLAW.com) is an associate with King & Spalding’s Special Matters and Government Investigations Group.