As The D & O Diary has previously noted (most recently here), the Thompson Memo, the Department of Justice’s corporate criminality guidelines for prosecutors, has been the target of significant criticism. In the KMPG tax shelters prosecution, the judge found prosecutor’s implementation of the Memo to be unconstitutional (here). Most recently, Sen. Arlen Specter proposed legislation that would have overridden the Thompson Memo’s provision that compelled corporations seeking to avoid prosecution to waive their attorney client privilege and withhold payment of their employees’ attorneys’ fees.
On December 12, 2006, in apparent response to this criticism and possibly in an attempt to forestall the legislative efforts, the Department of Justice announced (here) that U. S. Deputy Attorney General Paul J. McNulty had released new guidelines revising the Thompson Memo. The new guidelines, entitled "Principles of Federal Prosecution of Business Organizations" may be found here. An Executive Summary of the new guidelines may be found here. The revised guidelines identify nine factors for prosecutors to use when deciding whether or not to charge a corporation with a criminal offense.
The most significant revisions in the McNulty Memo relate to the attorney-client privilege and the advancement of attorneys’ fees. With respect to the attorney-client privilege, the guidelines adopt a "tiered approach," by which the prosecutor must now obtain advanced written approval from the Deputy Attorney General in order to request a corporation to waive its attorney client privilege. In order to obtain approval, the prosecutor must "establish a legitimate need" by showing the likely prosecutorial benefit, as well as the absence of alternative means to obtain the information and the extent of voluntary disclosure already provided. According to the Executive Summary, prosecutors should seek attorney-client communications only in "rare circumstances."
The revised guidelines also provide new standards for when prosecutors may request a waiver of privilege in order to obtain facts uncovered in a company’s internal investigation. Before requesting these materials, prosecutors must seek the approval of their local United States Attorney, who must consult with the Assistant Attorney General for the Criminal Division.
Prosecutors are also directed in connection with their charging decision not to consider a corporation’s decision not to provide attorney-client communication after the government makes the request. (However, the prosecutors may still favorably consider a corporation’s voluntary provision of attorney-client privilege material or information.) The new memorandum also instructs prosecutors in connection with their charging decision that the cannot consider a corporation’s advancement of attorneys’ fees to employees, except in "rare exception" where the advancement of fees combined with other facts shows that the payment of fees was intended to impede the government’s investigation. (Even in the exceptional circumstances, the advancement of fees may only be considered if authorized by the Deputy Attorney General.)
The new guidelines are effective immediately and apply to ongoing investigations.
The revisions have already been criticized for not going far enough. According to news reports (here), critics are concerned that the guidelines don’t bar prosecutors from rewarding companies that waive their privilege; according to these critics, the ability to reward includes the reward to withhold the reward, which operates exactly like a punishment.
Hat tip to the White Collar Crime Prof blog (here) for the link to the McNulty Memo and the Executive Summary.
A Close Look at A Credit Rating Agency: Shareholders, creditors and even D & O underwriters who depend on the reports of credit rating agencies will want to read the December 12, 2006 New York Times article entitled "Objectivity of a Rating Questioned" (here, registration required). The article examines questions raised by 34 industrial customers of Portland General Electric in connection with a Standard & Poor’s report the utility relied upon to support the utility’s regulator petition for a rating increase.
The customers subpoenaed documents that had gone between the utility and S & P during the 21 months preceding the report’s completion. The documents showed that S & P "solicited comment from the utility on a draft report and then made at least 48 changes that the utility sought before releasing the report." The utility then used the report as "independent corroboration" of its request to raise rates, increase its profit margin, and shift fuel-cost risks to its customers.
As reflected in a comment reported in the article, the "documents illustrate a fundamental problem with allowing companies that issue stocks and bonds to pay for evaluations by credit reporting agencies."
Portland General Electric is now an independent company, but it was owned by Enron from 1997 to April 2005.