The decline of the attorney-client privilege in the corporate setting.

• Author: McLucas, William R.
• Position: The Changing Face of White-Collar Crime

Beginning in 2001, the American corporate landscape experienced the first of numerous scandals involving accounting irregularities, financial fraud, and other instances of misconduct. In response, law enforcement officials began an intensive effort to root out corporate fraud and to restore public confidence in our capital markets. (1) That effort--and the accompanying demands by law enforcement agencies that the corporations involved waive their attorney-client privilege--is itself beginning to raise profound issues for how corporations conduct business.

There are several issues to be considered as we evaluate the government's recent heightened level of aggression in seeking privilege waivers. First, over the last several years, cooperation with government investigations--more often than not measured by whether the corporation has waived its attorney-client privilege--has become increasingly critical as law enforcement agencies have sought to restore public confidence in our capital markets. (2) Second, internal investigations conducted by corporate counsel--the results of which are often demanded by the government in exchange for "credit" for cooperation--now have particular significance. (3) In the context of governmental demands for waiver of the attorney-client privilege, these internal investigations often turn companies against the very executives and employees who are paid to act in the company's best interests. As such, the process itself demands more careful evaluation than has, to date, been brought to bear.

The current trend has, at a minimum, eroded our traditional adversarial process and skewed the balance of power between government investigators and their corporate targets. Over time, this process may well drive a wedge between the corporate entity and the executives and employees the company relies upon for the shareholders' benefit, even when these individuals have done nothing wrong. It forces corporate managers to think first of their own liability and not the broader good of the enterprise that should be--and once was--at the core of their professional lives.

As we discuss below, the use of internal investigations by companies and their boards of directors and cooperation by corporations with the government are not new concepts. Beginning with the U.S. Securities and Exchange Commission's ("SEC" or the "Commission") "voluntary disclosure program" in the 1970s and continuing through the 1990s with several high-profile criminal inquiries, internal investigations and cooperation--often without demands for waiver of the attorney-client privilege--have played an important role in resolving securities enforcement and criminal inquiries. Recent corporate scandals, however, have led to an upset of this historical pattern, and instead, demands for privilege waiver are now commonplace.

To be sure, in looking at the investor carnage from the collection of recent accounting scandals, there are likely benefits from the government's aggressive enforcement approach that we, as yet, cannot fully appreciate. Improvements in corporate governance and aggressive activism by board members in ensuring better accounting, better disclosure, and overall good corporate citizenship, are already observable, at least anecdotally. However, far broader questions about the impact of this new order remain very much open to debate. What is the long term impact on the behavior of executives and employees who believe that in their daily service for the company, their personal behavior and interests are, in most instances, aligned with that of the company? What will be the effect on Board members who, after the settlements of the private actions in Enron and WorldCom, are now of necessity focused on their personal liability as well as on their fiduciary duties? And what, if anything, can be done about the enormous leverage of the government in requiring such inquiries and waivers as the price of avoiding criminal indictment and/or demands in governmental civil proceedings that are franchise threatening? How reasoned and consistent is the government's approach? At what level in the government are these decisions being evaluated? Have the broader implications of this dramatic change in our adversarial system been examined? We do not believe that we have yet seen the long-term consequences for a corporation when, at the suggestion of any unlawfulness, the government says, "Investigate yourself and report to us, no privilege, no tactics, no reservations, and trust us, we will do the fight thing."

The issues raised by the broader use of internal investigations by public companies and the current policy of the Department of Justice ("DOJ" or the "Department") and the SEC regarding waiver of attorney-client privilege may well have profound consequences for the every day functioning of a corporation. Indeed, there is some risk that management of the corporate enterprise may well suffer as a consequence. We normally expect that company executives act in the company's and shareholders' best interests. Now we have to be concerned that those whom shareholders have entrusted with management are, at the first hint of wrongdoing and inquiry, sufficiently focused on and distracted by their own personal risk or liability rather than the broader interests of the company, that these broad-based waiver demands may well adversely affect the way companies behave.

As background, we briefly review the historical context of cooperation by corporations, the current enforcement and regulatory landscape, the attorney-client privilege and its applicability to corporations, and the government's position on cooperation. We then assess internal investigations and the implications for the relationship between corporations and their executives and employees. We will discuss how the current culture, in which the attorney-client privilege is waived in the context of internal investigations, may create particularly acute problems within a public company. Finally, we articulate our concerns over whether this process and its impact on the loyalties of executives and employees will soon change the way those executives and employees behave as fiduciaries of the corporate enterprise.

1. EVOLUTION OF INTERNAL INVESTIGATIONS AND POLICIES REGARDING COOPERATION WITH THE GOVERNMENT

   1. HISTORICAL CONTEXT

      We should begin with some perspective. The use of internal investigations by public companies and their boards of directors, and cooperation by corporations with government regulators, are not new concepts. In the 1970s, the SEC announced its "voluntary disclosure program" (4) concerning the suspected widespread practice of public companies maintaining "off the books" slush funds, which were used to make payments both abroad and domestically for political purposes and to influence counter-parties, intermediaries, and government officials in business transactions. The results were stunning: Hundreds of U.S. corporations came forward with disclosures about the existence of such funds and the use of these "off the books" accounts to facilitate all manner of questionable payments. (5) The consequence was passage of the Foreign Corrupt Practices Act in December 1977. (6) The statute remains an integral part of the federal securities laws. It outlawed foreign bribery, required that greater accountability and internal controls be maintained by public companies over their assets, and, in theory, became a critical tool of the accounting profession and the SEC in ensuring that public companies maintain sound internal controls and accurate books and records. The voluntary disclosure program's approach to self-policing, remediation, and cooperation became a part of the SEC's enforcement arsenal over the years and, in numerous cases, was an effective tool for addressing a variety of problems in corporate America. (7)

      Even prior to the corporate scandals of the past five years or so, a similar approach to cooperation was employed by the DOJ in a number of high profile corporate criminal inquiries. (8) These precedents, along with the Thompson Memorandum, (9) established the broad outlines under which such inquiries and the process of seeking credit from the Department for cooperation would be measured.

      At the SEC, even before the Enron debacle and the passage of the Sarbanes-Oxley Act, (10) then-Chairman Harvey Pitt (who, as an attorney in private practice, had previously been quite effective in advocating the use of such internal inquiries as an alternative to the standard SEC investigation) pushed to formalize the critical considerations surrounding this process by way of a formal SEC pronouncement. In 2001 the SEC formalized the key elements of cooperation in its Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions in the Seaboard Matter (the "Seaboard Report"). (11) Since the Seaboard Report, Enron, WorldCom, Adelphia, Tyco, HealthSouth, and a litany of other such headline-grabbing corporate scandals have dramatically escalated the frequency and stakes associated with such inquiries at corporations. These scandals have taken the once-episodic notions of an internal inquiry, cooperation, and privilege waiver, to an everyday feature of the law enforcement process. (12)

   2. CURRENT ENFORCEMENT LANDSCAPE

      In the aftermath of Enron and WorldCom, securities enforcement and white collar criminal investigations have taken on renewed life. (13) The President himself helped articulate the government's corporate crime policy when he announced, in March 2002, a "Ten Point Plan to Improve Corporate Responsibility and Protect America's Shareholders." (14) Shortly thereafter, in July 2002, Congress passed the Sarbanes-Oxley Act and thus introduced the most dramatic changes to the law enforcement and regulatory landscape since the Securities Exchange Act of...