Restricting Prosecutors'' Powers: Increasing Oversight to Reinstate Corporate Interests

• Author: Katie M. True
• Position: J.D. Candidate, The University of Iowa College of Law, 2007
• Pages: 1525-1550

J.D. Candidate, The University of Iowa College of Law, 2007; B.B.A., The University of Iowa, 2003. First and foremost, I would like to thank my fianc, James, whose love and patience made this possible, and the rest of my family, whose steadfast support I will forever cherish. Special thanks to Professors Stephanos Bibas and Tung Yin for their valuable suggestions. Any errors or omissions are my own.

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I Introduction

The pervasiveness of corporate scandals throughout the past decade has necessarily captured the attention of legislators and federal agencies that are charged with protecting the interests of investors at a time when many investors carry with them the bitter memories of past corporate mismanagement.¹ Responding to reports of employees committing illegal acts at all levels of the corporate hierarchy, President Bush created the Corporate Fraud Task Force with the hope of curbing scandals and ultimately restoring the confidence of jaded investors.² Joining in the effort to curb corporate crimes, the Sentencing Commission issued a number of amendments to the Organizational Sentencing Guidelines ("Guidelines") in 2004 that have provided guidance for federal prosecutors conducting investigations.³ Following suit, Department of Justice heads have issued a series of memos in an attempt to give federal prosecutors further guidance when investigating business organizations.⁴ Federal regulatory agents' adherence to the advice of agency heads⁵ and to the provisions of thePage 1526 Guidelines⁶ has been due, at least in part, to the need to increase investor protection. Yet examining the level of scrutiny companies now endure throughout criminal investigations⁷ raises the question of whether, in attempting to remedy this crisis of confidence, regulatory agencies have inadvertently damaged the legitimate interests of business organizations- though the organizations are stakeholders equally entitled to agency protection.⁸

A controversial part of the Guidelines' commentary discusses cooperation and its role in a prosecutor's calculation of the fines applicable to an organization that has committed an offense.⁹ The 2004 amendments to the Guidelines include additional discussion of the cooperation requirement, which has been a source of great controversy in recent years.¹⁰ Although the objectives of the Sentencing Commission in adopting the 2004 amendments and of Department of Justice heads in releasing the Thompson and McNulty Memos were to promote corporate legal compliance,¹¹ the need to restore investor confidence has created an opportunity for federal agencies and prosecutors to reap a number of personal gains throughout the process.¹² Part II of this Note explains the Guidelines' "cooperation" provision and its effects on corporate operations.¹³ Part II also discusses some of the less-apparent motivations that could influence agency actionsPage 1527 and tempt prosecutors to overlook the original intent behind the laws Congress has passed.¹⁴

Arguably, one of the most daunting consequences of cooperation is the potential waiver of attorney-client privilege since a third party may be able to access information the organization previously shared with the government for that third party's personal use in a subsequent civil suit against the business organization.¹⁵ This "litigation dilemma" created by waiver of attorney-client privilege has incited fear and confusion about the cooperation provision.¹⁶ On one hand, business organizations feel pressured to cooperate with government investigations in order to protect the company's livelihood. Ironically, however, the measures it takes to cooperate with the government could leave the company dangerously vulnerable to civil suits brought by other parties. Confusion over how to handle this dilemma is widespread, as the circuit courts, lacking specific guidance from a higher authority, differ considerably in their approaches to privilege protection.¹⁷ Part III details the competing approaches to privilege protection across the circuits.¹⁸

In light of the controversy surrounding discussions of waiver in the Guidelines and Department of Justice memos, Part IV suggests amendments to the Guidelines' waiver language, calling for (1) a more specific description of instances that would require waiver in order to satisfy the cooperation provision and (2) a mechanism for heightened regulation of federal agencies and prosecutors themselves.¹⁹ Such amendments and restrictions on agencies, accomplished in large part by codifying various provisions of the McNulty Memo, along with other possible changes to the waiver language previously proposed by advisory committees,²⁰ will ensure aPage 1528 more uniform treatment of waiver and will more adequately protect all of the interests that government agencies are responsible for safeguarding.

II Background: The Rise of Heightened Corporate Regulation and the "Cooperation" Requirement

Recent events have unveiled a number of deceitful business practices among many high-profile business organizations.²¹ Material misrepresentations and indictments of corporations for criminal violations captured the attention of legislators and government agencies charged with protecting public interests.²² Facilitating the movement to thwart unlawful business conduct, lawmakers introduced higher standards for organizations in both everyday operations and during periods of investigation and prosecution.²³ The 2004 amendments to the Guidelines were one example of such enhanced scrutiny, providing a heightened set of factors prosecutors may consider when determining criminal sanctions for organizations.²⁴

Because prosecuting a corporation-a legal entity-is inherently different from prosecuting individual defendants, the Sentencing Commission provided for the calculation of a culpability score to better "coordinat[e] the offense behavior characteristics with the offender characteristics."²⁵ Prosecutors then use the culpability score to determine an organization's fine range.²⁶ Prosecutors determine a company's culpabilityPage 1529 by (1) assessing the measures the company took to prevent and detect criminal conduct, (2) examining the extent to which company employees were involved in the conduct, and (3) considering the company's conduct after the offense.²⁷ When looking at the company's conduct after the offense, prosecutors may consider as a factor in calculating the culpability score the extent to which the company "cooperated" during its investigation.²⁸ An organization may achieve a significantly reduced culpability score by "fully cooperat[ing] in the investigation."²⁹ Compliance with this standard, of course, requires a proper definition of "cooperation."

A Defining "Cooperation"

According to the Guidelines, an organization's acts must be both "timely"³⁰ and "thorough"³¹ to qualify for a reduced culpability score. However, much uncertainty remains about how "thorough" cooperation must be.³² Under the Guidelines, the requisite thoroughness demands that a company "disclos[e] . . . all pertinent information known by the organization" that would allow prosecutors to determine specific individuals and crimes involved.³³

Although the Guidelines do not explicitly require corporations to waive their attorney-client privilege,³⁴ organizations may increasingly find waiver to be an essential element of receiving favorable treatment.³⁵ The Guidelines state that some circumstances may require organizations to waive their attorney-client privileges before the government will consider lowering their culpability scores for cooperating.³⁶ However, the Guidelines fall short of providing specific instances in which waiver would be a prerequisite,³⁷Page 1530 effectively granting agencies considerable leeway in their interpretations of "thorough" cooperation.

The guidance offered to Department of Justice prosecutors in two memorandums, known as the "Thompson Memo" and the more recent "McNulty Memo,"³⁸ demonstrates the wide latitude given to agencies in this matter.³⁹ Issued before the 2004 amendments, the Thompson Memo provided a set of instructions intended to increase the emphasis on an organization's cooperation.⁴⁰ The Thompson Memo was aimed at enhancing prosecutors' scrutiny of a business organization's conduct throughout an investigation and even suggested that prosecutors should conduct the investigation with an eye toward prosecution.⁴¹ Addressing the issue of waiver, the Thompson Memo states that waiver is not an "absolute requirement" but that it is "often critical in...