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August 28, 2008 7:44 PM

With Thompson Trashed and McNulty Moot, Filip Memo's Time Has Come

Posted by Brian Baxter

On the same day that a three-judge panel of the Second Circuit Court of Appeals unanimously upheld the dismissal of criminal charges against 13 former KPMG employees, the Justice Department debuted its new standards for the investigation and prosecution of corporate crimes.

Deputy U.S. attorney general Mark Filip made the announcement on Thursday morning at the New York Stock Exchange. Filip, profiled by The Am Law Daily in June, announced new corporate charging guidelines that forbid federal prosecutors from pressuring corporations and their employees from waiving certain protections during federal investigations.

In the aftermath of the Enron and WorldCom corporate fraud scandals, Main Justice adopted new policies designed to assist prosecutors in corporate criminal investigations. Two widely-publicized proclamations of those policies in January 2003 and December 2006--the ballyhooed Thompson and McNulty memorandums--were soundly criticized by defense lawyers for perceived undue burdens they placed on potential defendants.

That issue was front and center in the KPMG case, in which federal prosecutors in Manhattan threatened to indict the accounting firm if it didn't assist the government in its probe of employees caught up in a tax evasion investigation. U.S. district court judge Lewis Kaplan eventually dismissed the case against the employees--several non-KPMG defendants are set to go to trial in October--ruling that prosecutors had overstepped when they warned KPMG not to pay their attorney's fees. (Julie Triedman profiled the defendants' plight in the The American Lawyer's 2007 Litigation Supplement.)

The government appealed Kaplan's decision, but the Second Circuit upheld the ruling in a 68-page opinion delivered on Thursday. Chief Judge Dennis Jacobs wrote the opinion, which was joined by Wilfred Feinberg and Peter Hall.

The appellate ruling and Filip's remarks on Wall Street were a coincidence--sources say Filip couldn't have known precisely when the Second Circuit's decision would come down and almost certainly wouldn't have chosen the same day to make his announcement--but the impact of both moves was felt in legal circles.

"It's been three years now since the indictment and [this ruling] is a great conclusion," says Ronald DePetris, a former federal prosecutor and founding partner of New York's DePetris & Bachrach who defended former KPMG tax partner Philip Wiesner in the case. "The government's conduct was wrong and when they did nothing to cure the violation, the indictment was properly dismissed. Justice has really prevailed here."

But despite the Second Circuit's decision in the KPMG case and the guideline changes mandated by Main Justice, some think that corporate defense lawyers still have reason for concern.

"The key problem is when you have factual information that can only be provided by waiving [privilege]--what happens then?" asks former deputy AG Paul McNulty, author of the McNulty Memo, and now a litigation partner with Baker & McKenzie in Washington, D.C. "If the answer is you don't provide it, then you don't get [the government's] full cooperation credit."

McNulty also thinks that Filip's announcement could stall legislation passed by the House and currently before the Senate prohibiting the government from asking companies to provide information protected by attorney-client privilege.

"While I think that [Filip's announcement] is a good-faith effort to try to address the ongoing concerns that have existed, I think there is still an issue here that will continue to generate concern among lawyers who represent companies in these criminal prosecutions," McNulty says. "In [the new guidelines] there is still a pressure to waive attorney-client privilege if you have 'relevant factual information' covered by attorney-client privilege that the government wants to get."

"And quite a bit of 'relevant factual information' is subject to privilege claims," McNulty adds. "Take notes from witness interviews, sure, you can tell the government what the person said, but the government is often interested in seeing the notes of the interview and other material memoranda that would be subject to privilege."

"If that material is seen as 'relevant factual information,' then what is that company to do?" asks McNulty. "Now the Justice Department will say, 'You don't have to waive,' but everybody's in that boat when it comes to dealing with the government. They don't care whether or not you waive, they just want some information."

From McNulty's perspective, the fundamental issue of defense lawyers concerned about the power wielded by federal prosecutors remains, because there is still underlying pressure on companies to waive attorney-client privilege in many instances.

"I don't know if there's a policy that anybody can develop that will really take that pressure away, other than not expecting corporations to cooperate as much," McNulty says. So while the debate will continue, notes McNulty, so too will prosecutorial pressure on companies.

McNulty admits he's a bit wistful to see his memo take its spot on the ash heap of history (Filip's revisions will be inserted into Title 9 of the official United States Attorneys' Manual, and thus not readily available in memo form).

"It's a nostalgic time," he says. "I think [former deputy AG] Eric Holder was happy when his name was disassociated with government overreach, and so was [former deputy AG] Larry Thompson," McNulty jokes. "So this should be my big day too."

Thirteen former KPMG employees certainly would agree.

Download the Second Circuit's decision in the KPMG case.

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