CORPORATE CRIME REPORTER

McNulty Defends His Memo
21 Corporate Crime Reporter 43, October 25, 2007

Today, Paul McNulty defended his memo.

“Since I know everyone in this room is well versed on the McNulty memo, I can only assume that you are here today out of morbid curiosity to see how I will tap dance my way around this issue now that I’m a white collar defense lawyer and not a prosecutor,” McNulty opened his luncheon speech at the American Bar Association’s National Institute on Securities Fraud at the Fairmont Hotel in downtown Washington, D.C. “Well, the simple answer is that I will not be signing on to the next letter by former Department of Justice officials denouncing the McNulty memo.”

McNulty is currently a partner at Baker & McKenzie in Washington, D.C.

“So, even though the it may not make the client development folks at Baker & McKenzie happy, I am prepared today to defend the current Department of Justice policy of seeking waivers of attorney-client privilege as expressed in the guidance that federal prosecutors announced last December by the former Deputy Attorney General,” he said at one point.

And toward the end of the speech, there was: “So my last point, before the Baker & McKenzie executive committee comes over here and drags me off this stage.”

But he didn’t back away from his memo, nor from his hard and fast position that Congress ought to defeat legislation championed by Senator Arlen Specter (R-Pennsylvania) that would prohibit federal prosecutors from asking for the waiver of corporate attorney-client privilege.

McNulty started with a jab at Senator Specter, who last week wrote an opinion piece in the Wall Street Journal titled – “A Question for Mr. Mukasey” in which he called McNulty’s memo “a swing and a miss.”

“In my obviously biased view, the McNulty memo is not a swing and a miss,” McNulty said. “It’s not a home run either. I would say it’s more like a stand up double.”

“Why do I say that? Especially now that I’m free to speak candidly?”

“First, anyone who has defended a corporation in a criminal investigation knows this – waiving attorney-client privilege or work-product protection is frequently advantageous to the client. When something really bad happens, what goes through the mind of the corporate leadership? What are their primary concerns? Saving the company from destruction, preventing the loss of jobs and stock value, even avoiding prison. The reputation of the business is on the line. And board members and corporate officers are also concerned about their personal reputations. Our job is to convince the government to do nothing. Yes wrongdoing has occurred. But here’s why it doesn’t warrant government sanction. This requires making legal and factual arguments. But it also involves presenting to the government an image of the corporation that is positive and law abiding. And, oh by the way, we need to do this rather quickly, because the longer the investigation drags on the more harm done to the company’s reputation. As a purely practical matter, all of this is hard to do without disclosing protected information.”

McNulty said the typical conversation goes something like this:

CEO: So, high-paid corporate defense lawyer, walk us through how this is going to work.
Lawyer: Well, the United States Attorney’s office will decide whether or not to indict the company, most likely in consultation with the Main Justice.

CEO: We can’t have that. What are you going to do?

Lawyer: Well, we will give them the notebook addressing the nine factors laid out in the department’s guiding memo. But we may have an uphill climb given the breakdown of our compliance program, the nature of the wrongdoing, the individuals who were involved with this scandal – and the problem we had with that other wrongdoing we had two years ago, which we are currently dealing with.

CEO: Sounds way too risky. What else can we do?

Lawyer: We can cooperate and try to get a deferred prosecution agreement. But we may have to waive privilege and turn over information from our internal investigation.

CEO: What are you waiting for?

“The reality is that companies are going to cooperate out of principle, or because they are simply worried about being indicted,” McNulty said. “They have a compelling story to tell that will necessitate disclosure. I have seen this in just two months of private practice. Whatever the reason, corporations will continue to waive the privilege because it is in their best interest to do so.”

“It doesn’t matter therefore, if prosecutors are prohibited from ever asking or severely restricted from asking – as they are under my memo,” he said. “Companies will continue to voluntarily waive, because they will want to be cooperative, for all of the reasons I have stated. It is hard to be cooperative without crossing the waiver line.”

“Supporters of the legislation to prohibit the government from seeking waivers seem to think that if the government is not allowed to ask, the pressure to waive will go away. The problem with that view is that other forms of cooperation may not be sufficient to overcome a strong possibility of indictment in cases involving extensive wrongdoing. There is only so much you can do to cooperate without providing information.”

“Imagine the most reasonable prosecutor you can. Let’s say the U.S. Attorney in the Eastern District of Virginia – not the Southern District of New York. He or she will appreciate in a nice Virginia southern kind of way – appreciate the company’s spirit of cooperation, its commitment to integrity, and any information short of waiver that the corporation can offer. But there still has to be an investigation. And this Virginia prosecutor will say – I appreciate your decision not to waive, and I am certainly not asking you to do so. Now, let’s talk about where we go from here. Maybe I should tell you about the grand jury’s schedule and ask when your CEO will be available to testify before the grand jury. And when can we have all of those e-mails from the past five years?”

“That’s the problem. Most audit committees will not want you sitting on an internal investigation while the company is dragged through a prolonged criminal investigation. And that is true even when they know that there are shareholder suits on the way.”

McNulty said that under his memo, “for all intents and purposes, the Department has stopped seeking waiver of privilege.”

“The last I heard – there were four requests over the past ten months. And none of them involved attorney communications – that are no Level II requests. Is that what this debate is all about – four requests?”

In his Wall Street Journal article, Senator Specter wrote: “In the corporate context, this attorney-client dialogue is especially necessary to ensure that corporate conduct is informed and that executives identify and stop problems before they rise to the level of a front-page headline.”

“I could not have said it better myself. I fully agree with the Senator,” McNulty said. “And that is precisely why I required the Deputy Attorney General’s personal approval before requesting any attorney communications. I repeatedly explained that the reason for this unusual procedure is exactly for what Senator Specter is saying – to promote candid and effective communications between companies and counsel. And again, there have been no such requests since the memo was issued ten months ago.”

“Now, I know what many of you are thinking – yes, Paul, but there have been dozens of voluntary waivers in the past ten months,” McNulty said. “That is true. But even if there had been zero requests we would still have voluntary waivers because they are often that advantageous to the corporation. Even the legislation concedes this point. It specifically provides that voluntary waivers will continue to occur.”

“So, there you have it,” McNulty said. “My new business plan on how to complicate my life in private practice by still sounding like a government prosecutor.”

McNulty said there is a more fundamental grievance underlying the debate over waiver.

“I don’t think the real issue is whether the government can make four or two or zero requests for protected factual information in a ten month period of time,” McNulty said. “The real issue is that corporate leaders and their lawyers are frustrated by what they see as the criminalization of business mistakes. This is especially true in the post-Sarbanes Oxley world. They see the lives of business people ruined, people just like yourselves, and hundreds of millions of dollars being paid out in settlements. And they basically think that much of it is unfair.”

“Partly this is based upon lots of conversations that I’ve had,” McNulty said. “And I’ve had lots of very interesting conversations with corporate leaders about the McNulty memo. And I have found this repeatedly – the sense of concern about the balance of power. Even those leaders who have devoted themselves to building a culture of integrity within their companies – and many, many have done so – they are concerned about this trend.”

“As one general counsel put it about a convicted corporate official – ‘I can assure you, that person did not come to work in the morning intending to commit a crime.’ When you add to this perception the fact that the mere existence of a criminal investigation is damaging to the company, you understand why more and more business people think the deck is stacked against them and that prosecutors have all of the power.”

“The waiver issue is a symbol of this deeper concern. Again, that’s why I set the bar so high for getting attorney communications because corporate officers have a desperate need for full and candid legal advise.”

“Having spent my entire career developing and enforcing federal criminal laws, I can appreciate this concern about the criminalization of business mistakes. I have seen first hand the evolution of federal policy in relation to economic crime. It’s the topic of another speech at another time. For now, all I will say is that the solution to this problem lies in the substance of the federal criminal code and the exercise of prosecutorial discretion.”

During the question and answer period, Tom Hanusik, a partner at Crowell & Moring in Washington, asked McNulty about the situation where a company wants to cooperate, but the government still puts it through the ringer – including hitting it with grand jury subpoenas and the like.

“Your question points to the balance of power theme,” McNulty responded. “When the approach is made by the company to the government, the company has so little at its disposal to try to affect the course of what is about to happen. It requires a certain effort at trying to build a relationship that will connect the cooperation with certain outcomes. There is nothing you can do to avoid the situation you outlined. That is a reality. You come in, you say – we are here to cooperate, we have conducted the investigation, I know you will be interested in that. We are prepared to talk to you about that. The board is very willing to work with you here. I have explicit instructions to demonstrate our integrity and commitment to take care of the wrongdoing.”

In response to another question, McNulty said that “at the end of the day, it is the client’s privilege to waive.”

“And if the board of directors believes that this will help us in some fashion, they are going to waive the privilege,” he said. “I have many CEOs say to me – I will get fired if I told the board – this will be beneficial to us, but we are not going to waive.”

McNulty was asked – “If you believe that companies are going to waive whether or not the Specter bill becomes law, then why do you oppose the Specter bill?”

“I believe it is unnecessary,” McNulty said. “The Department should police itself rather than the legislative branch telling the executive branch how it should conduct its investigations and how it should communicate the context of the investigation. If the executive branch can get it right, then there is no need for legislation. That is why we haven’t had legislation in this area before. And of course, there have been only four requests in ten months. But at least in those four instances, the government decided that there was a legitimate need for four requests for a waiver. While that is a small difference between what the bill contemplates – no requests for waivers – and the four that currently exist – it at least allows on that side of the equation some requests to go forward under certain circumstances.”

One lawyer wanted to know what should be done about line prosecutors who violate Main Justice policy on waivers.

“As someone who defends the policy, I don’t know what to do with those stories,” McNulty said. “They are anonymous in nature. They don’t say – this particular prosecutor said this to this person at this particular time. And then a lawyer will say to me – that’s all well and good Paul, but last week, I was in a meeting, and before the air was out of cushion of my chair when I sat down, the government hit me with a demand for a waiver. If that happened, that would be an acute violation of the Department’s policy. And there we have a prosecutorial compliance issue. The fact that we have 93 different offices is a challenge that you can’t just overcome. You have to hope that there is some standard that tries to pull things together. We are better off with a kind of structure or regime. Prosecutors are being trained in this process. They are having to follow these rules. If we have the legislation, there would be no need for that. You just couldn’t ask. But I would bet you that if had the legislation, there would still be stories – stories about, well, I got into a room, and the first thing he said was – I can’t ask any more, I can’t even go to the Department and seek requests, but boy, waiver would certainly make our lives easier. You are likely to still get those stories, but you wouldn’t have any structure for training prosecutors and holding them accountable through the process that has been set in place. That’s what I like about where we are right now. It does channel that discussion into a system of oversight.”

[For the complete prepared text of Paul McNulty’s speech, see 21 Corporate Crime Reporter 43, October 29, 2007, print edition only.]


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