Defense of Businesses, Individual Officers and Employees in Corporate Criminal Investigations

Defense of Businesses, Individual Officers and Employees in Corporate Criminal InvestigationsAuthor(s): Janis M. BerrySource: Public Contract Law Journal, Vol. 19, No. 4 (Summer 1990), pp. 648-688Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/25755610 .

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Defense of Businesses, Individual Officers and Employees in Corporate Criminal Investigations

Janis M. Berry*

I. Perspectives of Corporate In-house and Independent Counsel 649 A. Warning Signals and Opening Phases 649 B. Assessing Exposure 650

1. Basic Principles of Corporate Criminal Liability 651 2. The Corporate Collective Knowledge Doctrine 652 3. The Bank of New England Case 653

II. Confidentiality Issues and Limits of Attorney-Client and Work Product Privileges 658 A. Work Product Rule 658

1. Civil Work Product Applications 658 2. Criminal Work Product Applications 659 3. Who Is Included Within the Work Product

Rule? 659 4. The Work Product "In Anticipation of Litigation"

Requirement 660 5. The Work Product Rule Is Not Absolute 661

B. Attorney-Client Privilege 661 III. Determination to Conduct an Internal Investigation 664

A. The Issues Presented 664 B. Preservation of the Attorney-Client Privilege 665 C. Preservation of the Work Product Privilege 666 D. Who Should Conduct the Investigation? 667

IV. Handling Employees During a Corporate Criminal

Investigation 669 A. Outside Counsel Representing Individual

Employees 670 B. Working Joint Defense by Corporate Counsel and Outside

Counsel 672

*Janis M. Berry is a member of the law firm of Ropes & Gray in Boston, Massachusetts. The invaluable assistance of the firm's summer associates, Rich ard Batchelder and Antonio Ponvert, is gratefully acknowledged. These stu dents of law offered erudition and, in the research and drafting of the article, served as "of counsels." This article was edited by Clayton S. Marsh, Associate

Editor, Public Contract Law Journal.

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Defense of Businesses, Individual Officers and Employees

C. Law on Governmental Disqualification of Defense Counsel for Conflicts in Representation 672 1. Grand Jury Stage 672 2. Trial Stage 673

D. Paying for Outside Counsel 673 E. Timing, Representation and Conducting Employee

Interviews 675 E Initial Steps to Undertake upon Notice of a Corporate

Criminal Investigation 675 G. Avoiding Governmental Obstruction of Justice

Allegations 676 V. Voluntary Disclosure Issues 678

A. Voluntary Disclosure to the Department of Defense 679 B. Risks Inherent in Voluntary Disclosure 679

1. Scope of Internal Investigation 680 2. Specific Risks 681 3. Waiver of Attorney-Client and Work Product

Privileges 681

I. Perspectives of Corporate In-house and Independent Counsel

A. Warning Signals and Opening Phases

Prompted by inquiries or grand jury investigations into corporate misconduct by the Department of Justice or regulatory agencies of the United States Government?or possibly, but less frequently, the state?lawyers for corporations may be confronted with issues

of whether and how to conduct an internal investigation of

alleged criminal behavior and how to preserve the attorney-client and work product privileges regarding what is uncovered. There

are significant advantages to conducting a well-orchestrated in

ternal investigation, such as the opportunity to gauge the extent

of criminal wrongdoing and to begin a process of limiting corporate liability without subjecting the business or its officers and employees to further exposure or sanctions.

This commentary analyzes the extent and application of the

attorney-client and work product privileges in the context of an

internal investigation in particular, and in the context of the

defense of a business criminal prosecution in general. What are

the general boundaries of the privileges? When, if ever, is it in the client's best interest not to conduct an internal investigation? How

does one structure an internal investigation to ensure maximum

confidentiality? When and how should results be disclosed? How

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Public Contract Law Journal

does one avoid waiving privileges? What non-attorney personnel can be involved in an investigation? How does one conduct

employee interviews?

These are some of the issues that confront corporate counsel in a pending criminal investigation, grand jury proceeding, congres sional hearing, or agency inquiry. Counsel must act quickly, but

must act with unusual caution, preparation and foresight. Disre

garding minute details can be deemed to cast aside privileges and

confidentiality and seemingly insignificant acts can subject a

corporation to significant criminal exposure. The decision to conduct an internal investigation presents

difficult and competing choices for corporate counsel. The extent

and application of the work product and attorney-client privileges

regarding what is uncovered by the investigation will often be key factors in deciding whether and how to proceed. The balance becomes how to gain pertinent information to defend while

maintaining as much control as possible over the internal inves

tigation to ensure privilege protections.

B. Assessing Exposure

Until recently, assessing a corporation's exposure to criminal

liability for the unlawful acts of its officers and agents did not

require sophisticated legal analysis. Courts consistently followed traditional respondeat superior liability principles and charged a

corporation with "knowledge of all material facts of which its officer or agent receive[d] notice or acquire[d] knowledge while

acting in the course of his employment within the scope of his

authority, even though the officer or agent [did] not in fact communicate his knowledge to the corporation."1 The current state of the law, however, indicates a growing acceptance of a

"collective knowledge" doctrine under which "a corporation may be held liable for knowing violations of the law notwithstanding the absence of proof that any single agent intended to commit the offense or even knew of the existence of the operative facts that led to the violation"*

Section 1(B)(1) of this article briefly reviews basic principles of corporate criminal liability. Section 1(B)(2) provides a thorough analysis of the First Circuit's important decision in United States v.

1. American Standard Credit, Inc. v. National Cement Co., 643 F.2d 248, 270-71 n.16 (5th Cir. 1981).

2. 1 K. Brickey, Corp. Crim. Liab. ? 1:04, at 93-94 (1984) (emphasis added).

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Bank of New England, N.A.S Bank of New England's broad interpre tation of the collective knowledge doctrine represents a significant development in corporate criminal liability.

1. Basic Principles of Corporate Criminal Liability

Corporate criminal liability proceeds from the general rule that the knowledge and acts of a corporate officer, employee or agent attach to the corporation if the officer, employee or agent

acquired the knowledge or acted in the course of his employment within the scope of his authority.4 A corporation, in effect, assumes responsibility for the manner in which its employees conduct corporate affairs.5 The threat of criminal liability compels corporate management to establish procedures to insure compli ance with the requirements of law.6

Findings of liability do not depend on the status of the officer or

agent in the corporate hierarchy.7 As a result, courts may attribute

criminal acts and intent to a corporation "absent any showing that

high corporate officials either had knowledge of or participated in the wrongdoing."8 Courts do not want to encourage corporations to shift responsibility for criminal acts to low-level employees.9

3. 821 F.2d 844 (1st Cir.), cert, denied, 108 S. Ct. 328 (1987). 4. See Etshokin v. Texasgulf, Inc., 612 F. Supp. 1212, 1218 (NT). 111. 1984). The

general rule does not, however, predicate a corporation's criminal responsibility

upon receipt of an actual tangible benefit. 1 K. Brickey, supra note 2, at 10 n.38; see Old Monastary Co. v. United States, 147 F.2d 905 (4th Cir.), cert, denied, 326 U.S. 734 (1945) ("We do not accept benefit as a touchstone of corporate criminal liability; benefit, at best, is an evidential, not an operative, fact.").

5. Id. See, e.g., Coryell v. Phipps (The Seminole), 317 U.S. 406, 410-11 (1946) ("A corporation necessarily acts through human beings. The privity of some of those persons must be the privity of trie corporation else it could always limit its liability.") (emphasis added).

6. Id. For example, in Apex Oil Co. v. United States, 530 F.2d 1291, 1293 (8th Cir.), cert, denied, 429 U.S. 827 (1976), the court noted that the threat of corporate criminal liability provides "an important incentive for a corporation to train and supervise its employees on the reporting requirements of the [Water Pollution Control] Act. The court concluded that the absence of such a threat "would pit the employee, on pain of fine or conviction . . . , against his

employer." Id.

7. 1 K. Brickey, supra note 2, ? 1:04, at 9; see also, Part I (B)(3) infra. 8. Id. See, e.g., Georgia-Pacific Corp. v. Great Plains Bag Co., 614 F.2d 757

(C.C.P.A. 1980) (in trademark infringement case, court rejected Georgia-Pacific's defense that only its lower echelon personnel had observed Great Plains' use of the mark).

9. See Commonwealth v. Beneficial Fin. Co., 360 Mass. 188, 277, 275 N.E.2d 33, 84 (1971), cert, denied, 407 U.S. 910 (1972) ("[w]e believe that stringent standards must be adopted to discourage any attempt by 'endocratic' corpora tions' executives to place the sole responsibility for criminal acts on the shoulders of their subordinates").

651




Corporate criminal liability also does not hinge upon conviction

of the wrongdoing agent. A jury may therefore choose to convict

the corporation and acquit the agent whose activities formed the

basis of the charge against the corporation.10 Although appellate courts frequently react to such split verdicts with incredulity,11 the

courts have yet to reverse a conviction as a result of unsuccessful

prosecution of the agent.12

2. The Corporate Collective

Knowledge Doctrine

The collective knowledge doctrine stands on the threshold of

becoming a recognized corporate criminal law doctrine.13 Under

the doctrine, "the collective knowledge of corporate agents may suffice to establish a knowing violation of a criminal statute

notwithstanding the absence of proof that any single agent intended to commit the offense or even knew of the operative facts that led to the violation."14 The doctrine thus represents a

significant expansion of a corporation's potential liability for the

unlawful acts of its officers and agents. Prior to 1987, federal courts applied the collective knowledge

doctrine almost exclusively within the context of criminal prose cutions for knowingly and willfully violating Section 322 of the

10. See, e.g., United States v. Bank of New England, N.A., 821 F.2d 844, 847-48

(1st Cir.), cert, denied, 108 S. Ct. 328 (1987) (jury acquitted customer and two head tellers but convicted bank of thirty-one felonies).

11. See, e.ff., United States v. General Motors Corp., 121 F.2d 376,411 (7th Cir.), cert, denied, 314 U.S. 618 (1941) ("[w]e can not understand how the jury could have acquitted all of the individual defendants"); United States v. Austin-Bagley Corp., 31 F.2d 229, 233 (2d Cir.), cert, denied, 279 U.S. 863 (1929) ("[h]ow an intelligent jury could have acquitted any of the defendants we cannot conceive.").

12. See, e.g., United States v. Young Bros., 728 F.2d 682, 688 (5th Cir.) cert, denied, 469 U.S. 881 (1984); United States v. American Stevedores, Inc., 310 F.2d 47 (2d Cir. 1962), cert, denied, 371 U.S. 969 (1963); American Med. Ass'n v. United States, 130 F.2d 233, 252 (D.C. Cir. 1942), affd, 317 U.S. 519 (1943) (conviction may stand "even though the inconsistency can be explained by no rational considerations"); United States v. General Motors Corp., 121 F.2d 376 (7th Cir.), cert, denied, 314 U.S. 618 (1941); cf. United States v. Horowitz, 756 F.2d 1400, 1406 (9th Cir.), cert, denied, 106 S. Ct. 74 (1985) ("A defendant can be convicted upon one or some of the counts but

acquitted on another or others

and the conviction will be sustained even though rationally incompatible with the acquittal.").

13. Shirk, Greenberg & Dawson, Truth or Consequences: Expanding Civil and Criminal Liability for the Defective Pricing of Government Contracts, 37 Cath. U.L. Rev. 935, 978 (1988).

14. 1 K. Brickey, supra note 2, ? 4:01, at 83.

652




Interstate Commerce Act.15 Courts employed a two-step analysis to determine a corporation's liability under the Act.16 First, courts

invoked the collective knowledge doctrine to impute knowledge to the corporation.17 Second, courts determined whether the

corporation willfully violated the Act.18 Despite the mental gym nastics involved in drawing a definitional line between the two

mental states, courts insist that "

'[wjillfully' means something not

expressed by 'knowingly,' else both would not be used con

junctively."19 The First Circuit employed the same two-step analysis in Bank

of New England. The court of appeals' decision created a beach

head for the collective knowledge doctrine outside of Section 322 of the Interstate Commerce Act. A close examination of the

court's definition of 'knowingly' and 'willfully' discloses the reach

of a broad interpretation of the collective knowledge doctrine.

3. The Bank of New England Case

In Bank of New England, a jury convicted the Bank of thirty-one violations of the Currency Transaction Reporting Act (the Act).20

Department of Treasury regulations promulgated under the Act

require banks to file Currency Transaction Reports (CTRs) within fifteen days of customer currency transactions exceeding $10,000.21 The jury concluded that the Bank "willfully violat[ed]" the reporting requirements of the Act.22 The Bank argued on

appeal that the trial court's instructions on knowledge and specific

15. Brickey, White Collar Crime: Conspiracy, Group Danger and the Corporate Defendant, 52 U. Cin. L. Rev. 431, 448 n.63 (1983). 49 U.S.C. ? 322(e) provides criminal penalties against motor carriers which "knowingly and willfully keep any accounts, records, or memoranda contrary to the rules, regulations, or

orders." See, e.g., Inland Freight Lines v. United States, 191 F.2d 313 (10th Cir. 1951) (reversing conviction on other grounds); United States v. T.I.M.E.-D.C, Inc., 381 F. Supp. 730 (W.D. Va. 1974); United States v. Sawyer Transport, Inc., 337 F. Supp. 29 (D. Minn. 1971), affd, 463 F.2d 175 (8th Cir. 1972).

16. 1 K. Brickey, supra note 2, at 448 n.63.

17. Id. 18. Id. 19. United States v. Illinois Central R.R., 303 U.S. 239, 243 (1937) (quoting

United States v. Stockyard Terminal Ry., 178 F. 19, 23 (8th Cir. 1910)). 20. 31 U.S.C. ?? 5311-22 (1982). The Act is also referred to as the Bank

Secrecy Act. 21. 31 C.F.R. ? 103.22 (1986). 22. 831 F.2d at 847 (quoting 31 U.S.C. ? 5322 (b)).

653




intent effectively relieved the government of its responsibility to

prove that the Bank acted willfully.23 The trial judge began her instructions with a definition of the

two requisite mental states:

Knowingly simply means voluntarily and intentionally. It's designed to exclude a failure that is done by mistake or accident, or for some other innocent reason.

Willfully means voluntarily, intentionally, and with a specific intent disregard, to disobey the law, with a purpose to violate the law.24

The judge then instructed the jury on the two modes of estab

lishing the Bank's knowledge of its filing obligations. She told the

jury that it could impute to the Bank "either knowledge of one of its individual employees or the aggregate knowledge of all of its

employees."25 The trial judge's instructions on the first method of establishing

knowledge comports with traditional respondeat superior principles. She told the jury that "if any employee knew that multiple checks would require the filing of reports, the bank knew it, provided the

employee knew it within the scope of his employment. . . ,"26 The

court's instructions on the second method of establishing knowl

edge, however, broke new ground. The trial judge offered the jury a broad interpretation of the

collective knowledge doctrine. The instruction stated:

[Y]ou have to look at the bank as an institution. As such, its knowledge is the sum of the knowledge of all of the employees. That is, the bank's knowledge is the totality of what all of the employees know within the scope of their employment. So, if Employee A knows one facet of the currency reporting requirement, B knows another facet of it, and C a third facet of it, the bank knows them all. So if you find that an employee within the scope of his

employment knew that CTRs had to be filed, even if multiple checks are used, the bank is deemed to know it. The bank is also deemed to know it if each of several employees knew a part of that requirement and the sum of what the separate employees knew amounted to knowledge that such a

requirement existed.27

The First Circuit affirmed the trial court's expansive reading of the collective knowledge doctrine.

The First Circuit specifically approved of the trial court's instruction on the collective knowledge issue: "[a] collective

23. Id. at 854. 24. Id. at 854-55. 25. Id. at 855. 26. Id. 27. Id.

654




knowledge instruction is entirely appropriate in the context of

corporate criminal liability."28 The court outlined the central tenets of the collective knowledge doctrine:

The acts of a corporation are, after all, simply the acts of all of

its employees operating within the scope of their employment. The law on corporate criminal liability reflects this. Similarly, the

knowledge obtained by corporate employees acting within the scope of their employment is imputed to the corporation. Corpo rations compartmentalize knowledge, subdividing the elements of

specific duties and operations into smaller components. The

aggregate of those components constitutes the corporation's

knowledge of a particular operation.

It is irrelevant whether employees administering one component of an

operation know the specific activities of employees administering another aspect of the operation.29

The court concluded that "[s]ince the Bank had the compartmen talized structure common to all large corporations, the [trial] court's collective knowledge instruction was not only proper but

necessary."30 The trial judge's instructions on the concept of willfulness

resembled her earlier instructions on the knowledge requirement. She identified two modes of establishing willfulness:

If you find that the government has proven with respect to any transaction

either that an employee within the scope of his employment willfully failed to file a required report or that the bank was flagrantly indifferent to its

obligations, then you may find that the bank has willfully failed to file the

required reports.31

The First Circuit upheld the trial court's "flagrant indifference"

standard. The First Circuit remarked that "[w]ith respect to

federal regulatory statutes, the Supreme Court has endorsed

defining willfulness, in both civil and criminal contexts, as 'a

disregard for the governing statute and an indifference to its

requirements.' "32 As additional authority for its position, the

court of appeals cited several cases which arose in the context of

28. Id. at 856. 29. Id. 30. Id. 5\.Id. at 855. 32. Id. at 856.

655




public safety regulations.33 This reliance on public safety cases

exposes the novelty of its application of the "flagrant indiffer

ence" standard to the reporting requirements of the Bank Secrecy Act.34

Judicial approval of a "flagrant indifference" standard also

departs from prior interpretations of the reporting requirements of the Act.35 For example, in Warren, the Fifth Circuit held that the

government must prove specific intent before imposing criminal

sanctions: "[T]he defendant [must] have actually known of the

currency reporting requirement and have voluntarily and inten

tionally violated that known legal duty in order to be convicted of the crime."36 The Eleventh Circuit reached a similar conclusion in

Eisenstein: "Congress no doubt made the failure to file CTRs a

specific intent crime because, without knowledge of the reporting

requirement, a would-be violator cannot be expected to recognize the illegality of his otherwise innocent act."37

On the other hand, the Amendments to Implementing Regu lations Under the Bank Secrecy Act38 lend support to the "flagrant indifference" standard. The Amendments indicate that the Trea

sury Department will apply the concept of "willful blindness" in

determining whether a financial institution had sufficient knowl

edge of multiple transactions to recognize its obligation to file a

CTR:

"Knowledge," as used in the final rule, clearly includes the concept of'willful

blindness' as well. This concept applies to a person who has deliberately

33. Id. See, e.g., United States v. Illinois Central Ry., 303 U.S. 239 (1938) (federal statute imposing civil penalties on "knowing and willful" violations of rules governing the incarceration of cattle in railroaa boxcars); United States v.

T.I.M.E.-D.C, Inc., 381 F. Supp. 730 (W.D. Va. 1974) (criminal statute regarding truck driving while impaired).

34. Villa, A Critical View of the Bank Secrecy Act Enforcement and the Money Laundering Statutes, 37 Cath. U.L. Rev. 489, 499-500 ("Applying standards developed primarily in civil, public safety cases to the specific intent crimes arising out of failures to file CTRs poses substantially enhanced risk of criminal liability for financial institutions genuinely attempting to comply with the Bank Secrecy Act.").

35. See, e.g., United States v. Eisenstein, 731 F.2d 1540 (11th Cir. 1984); United States v. Warren, 612 F.2d 887 (5th Cir.) {en banc), cert, denied, 446 U.S. 956 (1980).

36. Warren, 612 F.2d at 890 (emphasis in original). 37. Eisenstein, 731 F.2d at 1543. 38. 52 Fed. Reg. 11,436 (1987).

656




avoided positive knowledge; that is, 'if a person has his suspicions aroused but then deliberately omits to make further inquiries, because he wishes to remain in ignorance, he is deemed to have knowledge.' If a financial institution suspects someone may be structuring transactions in order to

avoid the filling out of a record or report, but deliberately refuses to ask questions because it wishes to remain ignorant and therefore, 'innocent,' the financial institution will be deemed to have knowledge for purposes of

assessing liability under the Bank Secrecy Act.39

The First Circuit's conclusion that "there was convincing evidence that the Bank knew that [the customer's] withdrawals were

reportable"40 squares with the Treasury Department's concept of "willful blindness."41

The First Circuit's approval of the trial judge's instructions in

Bank of New England signals a new era in corporate criminal

liability.42 Bank of New England stands for the proposition that a

jury may find a corporation guilty of a serious federal felony requiring specific intent even though no individual employee, officer, or agent had the requisite intent. An assessment of a

corporation's exposure to criminal liability for the unlawful acts of

its officers and agents thus requires a full understanding of the

implications of the collective knowledge doctrine.43 The collective

knowledge doctrine reminds corporations that "[although the

diverseness of a corporate enterprise makes it very possible for

the right hand not to know what the left knows, that may be one

of the risks a large enterprise takes."44

39. Id. at 11,437 (quoting United States v. Jewell, 532 F.2d 697, 700 (9th Cir.), cert, denied, 426 U.S. 951 (1976) (citations omitted)).

40. 821 F.2d at 857. 41. See United States y. T.I.M.E.-D.C, Inc., 381 F.

Supp. 730, 741 (W.D. Va.

1974) (company's adoption of "hands off" attitude toward compliance with the regulation estaolished beyond a reasonable doubt that it "willfully" disregarded its statutory duty).

42. See Villa, supra note 34, at 505 ("The conviction of the Bank of New England may have produced one of the most important modern decisions on the issue of corporate criminal liability.").

43. See Shirk, Greenberg & Dawson, supra note 13, at 979 ("The implications of the collective knowledge doctrine for government contractors are significant .... [TJhere is no logical reason for a court that has adopted the collective

knowledge doctrine not to apply it in the context of criminal false statements and false claims ")

44. Equitabie Trust Co. v. G&M Constr. Corp., 544 F. Supp. 736, 744 (D. Md. 1982).

657




II. Confidentiality Issues and Limits of Attorney-Client and Work Product Privileges

A. Work Product Rule

1. Civil Work Product Applications The work product doctrine, announced by the Supreme Court over forty years ago in Hickman v. Taylor,45 stands largely intact

today, shielding "an attempt, without purported necessity or

justification, to secure written statements, private memoranda

and personal recollections prepared or formed by an adverse

party's counsel in the course of his legal duties." The Court

reasoned that if discovery of the material sought were permitted,

much of what is now put down in writing would remain unwritten. An

attorney's thoughts, heretofore inviolate, would not be his own. Inefficiency, unfairness, and sharp practices would inevitably develop in the giving of

legal advice and in the preparation of cases for trial. The effect on the legal profession would be demoralizing. And the interests of the clients and the cause of justice would be poorly served.46

The Federal Rules' work product protection is not limited to

civil proceedings, but also has application in quasi-criminal and criminal proceedings, e.g., applies to tax summons enforcement

proceedings,47 proceedings to enforce grand jury subpoenas,48 to

federal grand jury proceedings, and to all other "proceedings to

compel the giving of testimony or production of documents in

accordance with a subpoena issued by an officer or agency of the

United States . . ."49

45. 329 U.S. 495 (1947). 46. In accord with Hickman, Fed. R. Civ. R 26(b)(3) preserves work product and

provides, in pertinent part: a party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) of this rule and prepared in anticipation of litigation or for trial by or for another party or by or tor that other party's representative (including the other party's attorney, consultant, surety, indem

nitor, insurer, or agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party s case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials when the required

showing has been made, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or

legal theories of an attorney or

other representative of a party concerning the litigation. [Emphasis added.] 47. Upjohn v. United States, 449 U.S. 383, 398-99 (1980). 48. In re Sealed Case, 676 F.2d 793, 808 n.49 (D.C. Cir. 1982). 49. Fed. R. Civ. P. 81(a)(3).

658




2. Criminal Work Product Applications

Attorney work product protection extends to criminal trial dis

covery. The "strong public policy" underlying the work product doctrine was reaffirmed recently in United States v. Nobles,50 and has

been substantially incorporated in the Federal Rules of Criminal

Procedure, Rule 16(b)(2), which provides that:

this subdivision [governing discovery production of defense materials to the

government] does not authorize the discovery or inspection of reports, memoranda, or other internal defense documents made by the defendant, or the defendant's attorneys or agents in connection with the investigation or defense of the case, or of statements made by the defendant, or by government or defense witnesses, or by prospective government or defense

witnesses, to the defendant, the defendant's agents or attorneys.

3. Who Is Included Within the Work Product Rule?

The work product rule is not limited to attorney-client communi

cations, or even attorney work product. Indeed, the rule applies to documents prepared in anticipation of litigation, "by or for

another party or by or for that other party's representativef,]" and "the Court shall protect against disclosure of the mental

impressions, conclusions, opinions, or legal theories of an attor

ney, or other representative of a party concerning the litigation."51 Thus, although lawyers conducting internal investigations are

often assisted by accountants, experts, investigators, and other

non-lawyers, the documents, correspondence, and other materials

prepared by these assistants in preparation for litigation by the

government?either civil or criminal?are generally protected by the work product rule.

50. 422 U.S. 225, 226-40 (1975). 51. Fed. R. Civ. P. 26(b)(3) (emphasis added). See, e.g., In re International Sys. fcf

Control Corp. Securities Lit., 693 F.2d 1235, 1238 (5th Cir. 1982) (the district court's

finding that all documents in an accounting firm's review binders "were within the work product immunity [was] clearly correct since [an outside accountant]

was a 'representative of a party,'

. . . and there was a sufficient anticipation of

litigation."); Eoppolo v. National R.R. Passenger Corp., 108 F.R.D. 292, 295 (E.D. Pa. 1985) ("It is not necessary for an attorney to be involved in the proceeding to bar discovery."); and Notes of the Advisory Committee on Rules to the 1970 Amendment to Rule 26(b)(3), 48 F.R.D. 487, 502 (1969) ("Subdivision (b)(3) reflects the trend of the cases by requiring a special showing, not merely as to

materials prepared by an attorney, but also as to materials prepared in

anticipa tion of litigation or preparation of trial by or for a party or any representative

acting on his behalf.").

659




4. The Work Product "In Anticipation of Litigation" Requirement

Federal Rule of Civil Procedure 26(b)(3) requires that documents be "prepared in anticipation of litigation or for trial" in order to

be protected by the work product rule. Several federal courts have

addressed this requirement in the context of internal investiga tions and grand jury proceedings. One of the more comprehen sive discussions is found in In re Grand Jury Investigation52

Indisputably, the work-product doctrine extends to material prepared or

collected before litigation actually commences. On the other hand, some

possibility of litigation must exist. Courts and commentators have offered a

variety of formulas for the necessary nexus between the creation of the

material and the prospect of litigation. See, e.g., Home Insurance Co. v.

Ballenger Corp., 74 F.R.D. 93, 101 (N.D. Ga. 1977) (must be a "substantial

probability that litigation will occur and that commencement of such

litigation is imminent"); In re Grand Jury Investigation (Sturgis), [412 F. Supp. 943, 948 (E.D. Pa. 1976)] (threat of litigation must be "real and imminent"); Stix Products, Inc. v. United Merchants and Manufacturers, Inc., 47 F.R.D. 334, 337 (S.D. N.Y. 1969) (prospect of litigation must be "identifiable").

In the In re Grand Jury Investigation, the Third Circuit went on to

hold that: [s]everal circumstances in this case convince us that, under any of these tests, the district court reasonably could have found that the prospect of litigation

was real enough to mandate work-product protection for the questionnaires and the interview memoranda [because] the [internal] investigation con

cerned suspected criminal violations[,] enough evidence to support a

"suspicion of illicit payments . . ." had already been uncovered, and "[i]f

further investigation confirmed that suspicion, litigation of some sort was

almost inevitable.53

In In re Grand Jury Impanelled October 8,1979 (Appeal of Hughes)54 the court held that there was a valid claim for work product

protection, even though the lawyer's client had "not yet been

indicted, for we have held that the doctrine applies to material

prepared or collected in advance of litigation." And in In re LTV

Securities Litigation,55 the court held that an internal investigation

prompted by an SEC investigation of the company was conducted in anticipation of litigation even though no official lawsuit, pros ecution, or other specific litigation had been filed when the internal investigation began. The court held that "[investigation by a federal agency presents more than a 'remote prospect' of

52. 599 F.2d 1224, 1229 (3d Cir. 1979). 53. Id. (citations omitted). 54. 633 F.2d 282, 285 (3d Cir. 1980). 55. 89 F.R.D. 595 (N.D. Tex. 1981).

660




future litigation and gives grounds for anticipating litigation sufficient for the work product rule to apply."56

5. The Work Product Rule Is Not Absolute

The Supreme Court, in Hickman v. Taylor, stated:

We do not mean to say that all written materials obtained or prepared by an

adversary's counsel with an eye toward litigation are necessarily free from

discovery in all cases. Where relevant and nonprivileged facts remain

hidden in an attorney's file and where production of those facts is essential to the preparation of one's case, discovery may properly be had. . . . And

production might be justified where the witnesses are no longer available or can be reached only with difficulty.57

B. Attorney-Client Privilege

The attorney-client privilege is most often defined by reference to

United States v. United Shoe Machinery Corporation, which provides that:

The privilege applies only if (1) the asserted holder of the privilege is or

sought to become a client; (2) the person to whom the communication was

56. Id. at 612. But see Cedrone v. Unitv Savings Ass'n, 103 F.R.D. 423, 425 (E.D. Pa. 1984), where, though acknowledging that the "work-product doctrine, recognized initially in Hickman v. Taylor

. . . protects from discovery materials

prepared or collected by an attorney 'in the course of preparation for possible litigation,'

" the court held that:

The burden of demonstrating that information was prepared in preparation for litigation, and is thereby protected by work product,

rests with the party asserting the doctrine. See Conoco Inc. v. United States Dept. of Justice, 68/ F.2d 724, 730 (3d Cir. 1982). This burden is not to be taken lightly. In the words of Judge Edward R. Becker, "[a]dvising a client about matters which may or even likely will ultimately come to litigation does not satisfy the 'in anticipation of standard. The threat of litigation must be more real and imminent than that." In re Grand Jury Investigation (Sturgis), 412 F. Supp. 943, 948 (E.D. Pa. 1976).

Cedrone at 426 57. Hickman v. Taylor, 329 U.S. 495, 511 (1947). In Upjohn Co. v. United

States, 449 U.S. 383, 399 (1980), the Court stated that "[t]he above-quoted language from Hickman . . . did not

apply to 'oral statements made by witnesses

. . . whether presently in the form of [the attorney's] mental impressions or memoranda.' ... As to such material, the [Hickman] Court did 'not believe that

any showing of necessity can be made under the circumstances of this case so as to justify production. ... If there should be a rare situation justifying produc tion of these matters, petitioner's case is not of that type.'

"

The Upjohn Court noted, with respect to work product which is based on oral statements by witnesses, that "such work product cannot be disclosed simply on a showing of substantial need and inability to obtain the equivalent without undue hardship." Upjohn, 449 U.S. at 401. The Court was not prepared "to say that such material is always protected by the work-product rule," but held that a "far stronger showing of necessity and unavailability by other means than was

made by the Government ... in this case would be necessary to compel disclosure." Id. at 401-02.

58. 89 F. Supp. 357, 358-59 (D. Mass. 1950) (Wyzanski, J.).

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made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communi

cation relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.

There is no longer any question that the privilege may be invoked by corporations.59 Thus, the privilege may be asserted to

prevent disclosure of communications pertaining to a company's internal investigation. The First Circuit has analyzed the privilege in the context of a joint defense to a criminal investigation:

In order to assert the attorney-client privilege with respect to a document

provided by an attorney, the person asserting the privilege is required to make four showings: (1) that he was or sought to be a client of [the attorney]; (2) that [the attorney] in connection with the [document] acted as a lawyer; (3) that the [document] relates to facts communicated for the purpose of securing a legal opinion, legal services, or assistance in a legal proceeding; and (4) that the privilege has not been waived.

The burden of proving the existence of the privilege is on the party asserting the privilege.60

As the First Circuit further analyzed the issue in Bay State Ambulance:

To qualify for the privilege, the communication must have been made in confidence. See United States v. Keplinger, 776 F.2d 678, 701 (7th Cir. 1985), cert, denied, 476 U.S. 1183 (1986); United States v. Friedman, 445 F.2d 1076, 1085 n.4 (9th Cir.), cert, denied, 404 U.S. 958 (1971). In addressing whether a given communication was meant to be confidential, what "the client

reasonably understood" is "the key question." Kevlik v. Goldstein, 724 F.2d 844, 849 (1st Cir. 1984) (quoting McCormick on Evidence, ? 91 (1972)). "[T]his circuit also looks to the intent of the client." Id.61

The Court in Upjohn Co. v. United States62 explained that:

The privilege only protects disclosure of communications; it does not

protect disclosure of the underlying facts by those who communicated with the attorney:

"[T]he protection of the privilege extends only to communications and not to facts. A fact is one thing and a communication concerning that fact is

59. See Upjohn, 449 U.S. 383 (1981); Radiant Burners Inc. v. American Gas Ass'n, 320 F.2d 314 (7th Cir. 1953).

60. United States v. Bay State Ambulance & Hosp. Rental Serv. Inc., 874 F.2d

20, 27-28 (1st Cir. 1989). 61. Bay State Ambulance, 874 F.2d at 28. 62. Upjohn, 449 U.S. 395-96.

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an entirely different thing. The client cannot be compelled to answer the

question, 'What did you say or write to the attorney?' but may not refuse to disclose any relevant fact within his knowledge merely because he incorporated a statement of such fact into his communication to his

attorney."

Philadelphia v. Westinghouse Electric Corp., 205 F. Supp. 830, 831 (ED Pa. 1962). See also Diversified Industries, 572 F.2d at 611; State ex. rel. Dudek v. Circuit Court, 34 Wis. 2d 559, 580, 150 N.W. 2d 387, 399 (1967) ("the courts have noted that a party cannot conceal a fact merely by revealing it to his lawyer.").63

The Court in Upjohn emphasized that it was only deciding "the case before us" and that it did "not undertake to draft a set of rules which should govern challenges to investigatory subpoenas."64 Thus, application of the privilege must be deter

mined on a "

'case-by-case' basis." The Court did rely upon certain factors, however, in reaching its decision that "the com

munications by Upjohn employees to counsel are covered by the

attorney-client privilege."65

The communications at issue were made by Upjohn employees to counsel for Upjohn acting as such, at the direction of corporate superiors in order to secure legal advice from counsel.

Information, not available from upper echelon management, was needed to supply a basis for legal advice . . .

The communications concerned matters within the scope of the employ ees' corporate duties, and the employees themselves were sufficiently aware that they were being questioned in order that the corporation could obtain legal advice.

A statement of policy accompanying the questionnaire clearly indicated the legal implications of the investigation. Pursuant to explicit instructions from the Chairman of the Board, the

communications were considered 'highly confidential' when made . . . and have been kept confidential by the company.66

The participation of in-house counsel does not alter the appli cation of the privilege.

The privilege attaches equally to [a corporation's] General Counsel and his staff who were also performing services of a legal nature and furnishing legal advice. . . . Whatever doubt may have existed, Upjohn laid to rest

suggestions that House Counsel are to be treated differently from outside counsel with respect to activities in which they are engaged as attorneys.67

63. Id. 64. Id. 65. Id. at 397. 66. Id. at 394-95. 67. In re LTV Securities Litigation, 89 F.R.D. 595, 601 (N.D. Tex. 1981).

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Upjohn also resolved any uncertainty as to the question of which

corporate personnel may be consulted without waiving the priv

ilege: While not every communication from corporate personnel to a corpora tion's attorney will be deemed a privileged communication from the corporate "client," . . . [i]n Upjohn, the Court made clear that the attorney client privilege applies to communications made by corporate employees concerning matters pertinent to their job tasks, regardless of echelon, if

sought by the corporation's attorney in order to formulate and render legal advice to the corporation.68

The attorney-client privilege covers only confidential communications

between attorney and client, and it focuses on the attorney-client relation

ship. Thus, information other than "communications," or communications

that do not involve both attorney and client are unprotected.69

However, because the courts have

recognized that an attorney's effectiveness depends upon his ability to rely on the assistance of various aides, be they "secretaries, file clerks, telephone operators, messengers, clerks not yet admitted to the bar, and aides of other

sorts[,]" United States v. Kovel, 296 F.2d 918, 921 (2d Cir. 1961), "[t]he privilege must include all the persons who act as the attorney's agents." 8

Wigmore, Evidence ? 2301 . . .70

III. Determination to Conduct an Internal Investigation A. The Issues Presented

Counsel for the corporation is faced with conflicting interests when deciding whether to conduct an internal investigation into

alleged wrongdoing. Many of these interests are diametrically opposed. On the one hand, pressures to conduct an internal

investigation are prompted by the need to respond quickly and

effectively to an impending or ongoing criminal or agency inves

tigation. The requirements of voluntary disclosure programs, the

obligations of government contracts, the need to gauge the extent

of corporate liability, and to implement remedial measures, all

weigh in favor of conducting an immediate and thorough inves

tigation. Counsel cannot respond to government inquiries, pre vent further criminal exposure for the business, or conduct an

adequate defense without information. And, the internal investi

gation, in whatever form, is the principal way to obtain this information.

68. Id. at 601-02. 69. In re Sealed Case, 676 F.2d 793, 808-09 (D.C. Cir. 1982). 70. Von Bulow v. Von Bulow, 811 F.2d 136, 146 (2d Cir. 1987).

664




On the other hand, the results of such an investigation, partic

ularly when reduced to tangible form, can hand the government a warm and smoking gun. If the internal investigative report is

not properly protected, if it is unintentionally waived, not only are

the benefits of such information lost to the company, but the

government's case will virtually have been prepared by the

corporation itself. Moreover, an internal investigation, even when

not waived or voluntarily disclosed, can create concern among

employees and can direct the government's attention to areas,

conduct, or records it otherwise would have overlooked. Thus, an

internal investigation must be carefully structured, or it may well

not be in the corporation's best interest. Further, because employ ees, corporate officers, and directors may be deemed to have

waived certain of their rights by complying with an internal

investigation, and because the attorney-client or work product

privileges in the information provided belong to the corporation and not to the individuals, an internal investigation may reveal

conflicts that prohibit a joint defense effort between counsel for the corporation and counsel for individual employees.

B. Preservation of the Attorney-Client Privilege

The attorney should obtain authorization for the investigation by the Board of Directors or an executive with authority to act on the

business' behalf. This authorization and specific directions re

garding the scope of the investigation and the areas to be

reviewed should be in writing. Because the attorney-client privi

lege only protects communications regarding legal opinions, services, or advice, the written authorization and directions

should explicitly state that the investigation is in furtherance of

these goals. It must be clear that the purpose of the authorized

investigation is to secure legal assistance.

Under Upjohn, communications by employees to counsel are

covered by the attorney-client privilege when: (1) the communi

cations are made at the direction of corporate superiors; (2) when

they are made to secure legal advice from counsel; (3) when they concern matters within the employee's duties; (4) when the

employees are aware that they are being questioned for the

purpose of securing legal advice for the corporation; (5) when a

policy statement accompanying the request for information ex

plains the legal implications of the investigation; (6) when the

665




communications are instigated pursuant to instructions from the

managing corporate executives; and (7) when the communica

tions are kept confidential.

To preserve the attorney-client privilege, these guidelines should be complied with. How the corporation addresses the

question of the employees' possible criminal exposure, and the extent of the corporation's obligation to inform the employees of

their own individual liability, will necessarily impact on these issues.71

All documents, tangible things, and other information obtained

in the investigation must be stamped "privileged," "attorney-client communications," "confidential," "joint defense materials" or with some other identifying mark.

All communications to employees concerning the investigation should be written by or co-signed by counsel. All communications

from investigators or interviewers concerning information gath ered in the investigation should be stamped with identifying marks and be addressed to counsel.

All communications must be maintained and controlled by counsel, and strict confidentiality must attach to them.

The privilege covers only "communications." Therefore, docu ments that do not contain "communications" between counsel, or

counsel's assistants, and the client, made in order to secure legal advice, are unprotected by the privilege.

C. Preservation of the Work Product Privilege Because the work product privilege protects only those docu ments and communications prepared "in anticipation of litiga tion," authorization for the internal investigation should refer

explicitly and as exhaustibly as possible to the fact that the inquiry is being conducted in anticipation of litigation by the government

?either civil administrative review, quasi-criminal or pure crimi

nal?and to the fact that the governmental litigation may take any of a number of enumerated forms, i.e., civil litigation, grand jury investigation, criminal prosecution, agency review, suspension and debarment proceedings, etc. Moreover, the letter of engage ment with an accountant or other expert should set forth the

purposes of the investigation and should explain that the engage

71. See Part IV of this article.

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ment and the investigation are for the purpose of obtaining legal advice for possible future governmental litigation.

Because work-product protection extends to "mental impres sions, conclusions, opinions, or legal theories of an attorney . . .

concerning the litigation,"72 all interview notes, communications, and other documents which counsel wishes to protect should in

corporate the impressions, etc., of counsel. Counsel should inter

sperse legal theories and opinions throughout any document he seeks to protect. Avoid factual recitations. The more impressions and the more the document reveals the attorney's litigation strat

egy, the greater the likelihood of privilege as to its contents.

Avoid tape recordings or transcripts of witness interviews.

Verbatim records, because they do not contain counsel's impres sions, etc., may not qualify as work product.

Moreover, under the "Reverse Jencks" rule,73 the government

may be entitled to discover the adopted or written statements or

questionnaires of a witness, or a witness's "substantially verbatim" statement. Thus, avoid taped transcripts and, unless adverse and

subject to change, do not have a witness "adopt" his statement. To

maximize protection, counsel should infuse any interview notes

with protected material.

D. Who Should Conduct the Investigation? The Supreme Court, in United States v. Nobles stated that the

work product doctrine

is an intensely practical one, grounded in the realities of litigation in our

adversary system. One of those realities is that attorneys often must rely on

the assistance of investigators and other agents in the compilation of

materials in preparation for trial. It is therefore necessary that the doctrine

protect material prepared by agents for the attorney as well as those

prepared by the attorney himself.

Though the investigation is primarily concerned with providing legal advice to the client, as a practical matter the nature of the

inquiry will often require the assistance of investigators, accoun

tants, auditors, and other experts. The primary concern then is

72. Fed. R. Civ. P. 26(b)(3). 73. United States v. Nobles, 422 U.S. 225, 230-32 (1975). 74. Id. at 238-39.

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the protection of the attorney-client and work product privileges with respect to what these assistants uncover.

Note u[N]o confidential accountant-client privilege exists under federal law, and no state created privilege has been recognized in federal cases."75 Nor is there a privilege between the client and

other non-lawyer assistants or experts. 1. To protect the internal investigation the engagement con

tract should be between the accountant (or other investigator) and

preferably the independent outside attorney, and not directly with the corporation generally.76

2. All independent accountants and investigators must work for and at the direction of counsel and must be under counsel's direct control.77

3. The work product of the assisting staff?be it investiga tor or accountant?should be prepared for the attorney, e.g., to

the attention of the attorney, and should bear the stamped legend "attorney-client privileged" or other similar identifying legends.78

4. Independent outside accountants, rather than inside audi

tors, or regularly retained outside auditors, should be used to

maximize protection of the privilege. This may avoid confusion as to where the privilege resides, and may enhance credibility by independence.

5. The attorney-client privilege may

be extended to protect communications by the lawyer to his . . . agents

. . .

if those communications reveal confidential client communications. . . .

However, the privilege protects only confidential client communications; that is, communications not intended to be disclosed to third persons other than in the course of rendering legal services to the client or transmitting the communications by reasonably necessary means.79

Thus, communications between counsel and his agent must be made (1) in confidence, and (2) with the intention that they will not be disclosed to third parties.

75. Couch v. United States, 409 U.S. 322, 335 (1973). 76. See United States v. Kovel, 296 F.2d 918, 922 (1961). 77. Id. 78. See United States v. El Paso Co., 682 F.2d 530, 541 (5th Cir. 1982), where

the court denied a claim of privilege because, among other things, "[w]e cannot say that any single memorandum in the El Paso's tax department is stamped with an attorney's seal."

79. United States v. Under Seal, 748 F.2d 871, 874 (4th Cir. 1987).

668




6. Confidential communications by the client to counsel's

assistants for the purpose of explaining or translating information to aid counsel in rendering legal advice are protected.80

7. Because there is a heavy burden on the party seeking to

establish a work product or attorney-client privilege, and because

gray areas still exist, prudence dictates that all discussions with

counsel's assistants regarding the status of the investigation be

carefully structured.

IV. Handling Employees During a Corporate Criminal Investigation

In considering the parameters of corporate criminal liability vis-a-vis employees, consider the following:

[M]iddle-level?and indeed lower-level?employees can, by actions within the scope of their employment, embroil the corporation in serious legal difficulties, and it is only natural that these employees would have the relevant information needed by corporate counsel if he is adequately to advise the client with respect to such actual or potential difficulties.81

The acts of a corporation are, after all, simply the acts of all its employees operating within the scope of their employment.

. . . Similarly, the knowl

edge obtained by corporate employees acting within the scope of their

employment is imputed to the corporation.82

[A corporation] cannot "know" anything, except to the extent that the

knowledge of some human being or human beings, acting for the corpora tion, is attributed to the corporation.83

As the above quotations attest, employees at any level can

legally bind the corporation. They are often the important wit nesses to, or participants in, the misconduct being investigated. Thus, it is absolutely critical to establish early communication with

employees. There may be conflicting interests. On the one hand, as early as

is practically possible, the corporation must address the difficult

question of the employees' right to counsel and whether the

corporation has a moral, economic, or fiducial obligation to

80. El Paso, 682 F.2d at 541, where the court stated that "the privilege does not attach unless the accountant is translating complex

tax terms into a form

intelligible to a lawyer at the lawyer's behest.' See also United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961).

81. Upjohn v. United States, 449 U.S. 383, 391 (1981). 82. United States v. Bank of New England, 821 F.2d 844, 856 (1st Cir. 1987). 83. Johnsbury Trucking Co. v. United States, 220 F.2d 393, 398 (1st Cir. 1955).

(Chief Judge Magruder, concurring).

669




inform employees of their own potential criminal liability. In certain circumstances, corporate counsel has an obligation to

warn employees that any information they provide may later be

disclosed to the government as part of the corporation's defense.

Corporate counsel should advise employees that counsel repre sents the business not the individual employees.

On the other hand, counsel needs information and cooperation from employee-witnesses in order adequately to manage the

investigation and defend any resulting criminal charges. How

ever, precisely these potentially conflicting interests?that is, the

necessary disclosures to employees concerning counsel's corpo rate representational loyalty to the company and the lack of a

direct counsel/employee attorney privilege where the lawyer's

engagement is not by the employee but by the corporation qua

corporation to determine corporate facts?may cause the individ

ual employee to be reluctant to speak. Moreover, the require ments of voluntary disclosure programs with the Department of

Defense or the Department of Justice may also impinge on

counsel's freedom of movement here because compliance with the

spirit of these programs requires full cooperation with any

investigation, and may give rise to a determination on the

company's part to expose individual employee criminal miscon

duct for corporate voluntary disclosures.

These concerns form the backdrop for a number of decisions that

face counsel immediately upon learning of an investigation. Should

the corporation provide representation for employees? How should

this representation be provided, i.e., independent outside or in-house

counsel? How will the different types of representation affect work

product and attorney-client privileges? How are these options to be

communicated to employees? What if employees refuse to cooperate? What precisely are the ethical and legal obligations to employees? Is there a danger of obstruction of justice?

A. Outside Counsel Representing Individual Employees

It may be appropriate for the business to recommend?and to pay the fees for?independent counsel for employees who may be

called as witnesses to appear before the grand jury or who are

potentially targets or subjects. As the Canons of Ethics provide, counsel retained to represent an individual employee bears an

unqualified obligation of loyalty and zealous representation for

670




the individual employee, and once engaged, must honor that

obligation even if action beneficial to the employee's legal position may be adverse to the corporation.

Identify the need for separate counsel as early as possible. Where the matter presents a realistic possibility of criminal

exposure for the corporation or individuals within the corpora tion, seek experienced outside criminal trial lawyers. Even if

experienced criminal trial lawyers are available within the corpo ration, outside counsel provides both the reality and the appear ance of independence?perhaps not so readily available to in

house representation by counsel associated with the corporation's ordinary course of business.

Choose outside counsel whom the prosecutor will respect for

the truthfulness of their representations and the thoroughness of

their investigation and preparation. Most importantly, the prose cution must know that counsel is not afraid to go to trial.

Counsel's experience in criminal law, willingness to try a criminal case and the perceived ability to win, are important factors in the

prosecution's analysis of the strength of its case.

Ethical rules and obstruction of justice statutes may further

militate against in-house representation of individual corporate

employees. Ethical rules disallow multiple representation where a

conflict of interest may interfere with an attorney's duty to his

client.84 Counsel's ability to provide effective assistance to his clients is especially problematic when the interests and positions of those clients are inconsistent.85

These concerns are exacerbated when in-house counsel repre sents, in addition to numerous employees of the corporation, its

officers, directors, or management personnel. This is particularly true where clients have different degrees of criminal liability.86 Counsel's employment relationship with the corporation may play a role in the conflict of interest equation as well.87

84. See, e.g., Model Code of Professional Responsibility, Disciplinary Rule 5-105(B).

85. See United States v. Marshall, 488 F.2d 1169 (9th Cir. 1973); and Peek v. United States, 321 F.2d 934, 944 (9th Cir. 1963) ("[I]t is well recognized in the Federal courts that the existence of a conflict of interest on the part of counsel

representing two different defendants deprives the accused of the effective assistance of counsel.").

86. See United States v. Donahue, 560 F.2d 1039 (1st Cir. 1977). 87. See United States v. Bernstein, 533 F.2d 775, 788 (2d Cir. 1976), where the

court stated that "[p]lainly here there was a probability

of conflicting and inconsistent defenses based upon corporate ana individual liability" since the

employee defendant "could well take the stand and present a defense that her

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B. Working Joint Defense by Corporate Counsel and Outside Counsel

Outside criminal counsel for the corporation should, in conjunc tion with in-house counsel, identify those employees who need

separate representation. Such counsel may consider, if advanta

geous to the individual client, a joint defense with counsel for the

company and counsel for the other individuals involved. Employ ees may be grouped, based on their status as witness, subject or

target of the investigation, or on the foreseeable evidentiary conflicts that may arise. Although an increase in the number of

counsel may increase the cost and the perceived complexity of the

representation, such groupings will improve the efficiency and

effectiveness of the joint defense. It may also allay perceptions of

conflict of interest, which could lead to disqualification proceed

ings under Federal Rule of Criminal Procedure 44(c), or charges of ineffectiveness of counsel.

C. Law on Governmental Disqualification of Defense Counsel for Conflicts in Representation

Fiscal restraints and a desire to minimize the complexity associ

ated with multiple representation may dictate that one attorney or

law firm represent a significant number of individual employees. This is particularly likely where the individuals are witnesses and

not targets of the investigation, and a conflict of interest problem is not as likely to appear.

1. Grand Jury Stage The prevailing view is that courts will not disqualify common counsel in the context of a grand jury proceeding absent a

showing of an actual conflict of interest, some proof of obstruc

tion of justice, or unless the possibility of an actual conflict, without proof, becomes great enough.88

employers were the guilty ones because she was only obeying the orders of her

superiors and following standard office procedure," fjut the employer defendant "could assert the defense that [the employee] had acted ultra vires and on her own."

88. See, e.g., In re Grand Jury Proceedings, 859 F.2d 1021, 1026 (1st Cir. 1988) ("[G]enerally there must be a direct link oetween the clients of an attorney?or at least some concrete evidence that one client, such as an immunized witness,

672




Further, although the Supreme Court has held that district courts "must be allowed substantial latitude in refusing waivers of

conflicts of interest . . . where a potential conflict exists which

may or may not burgeon into an actual conflict,"89 a court may not

disqualify counsel by reliance on "inferences" alone, but "must

make more specific findings of fact regarding any perceived conflict of interest."90

2. Trial Stage

Disqualification at the trial stage is similarly circumscribed. How

ever, the Supreme Court has held that "where a court justifiably finds an actual conflict of interest, there can be no doubt that it

may decline a proffer of waiver, and insist that defendants be

separately represented."91

D. Paying for Outside Counsel

From the perspective of disqualification, it is not grounds for

attorney disqualification that the corporation pays the fees of

counsel for individual employees. The corporation is generally free (subject to its bylaws and articles of incorporation) to provide counsel for its employees. The fact that a person's employer or

even his co-defendant pays the costs of his representation "is not

necessarily a disqualifying circumstance nor does it necessarily create a conflict of interest."92

Most state laws allow corporations to pay for the legal repre sentation of employees. Although each state's indemnification

has information about another client, such as a target of a grand jury investiga tion?before the right to counsel of choice is barred by disqualification."); In re

Special Feb. 1977 Grand Jury, 581 F.2d 1262 (7th Cir. 1978) (Even though the court

acknowledged that "without proof of the existence of an actual conflict of interest, . . . [it] may, in the proper exercise of its discretion, move to 'nip any

potential conflict of interest in the bud,' "

id. at 1264, it held that disqualification was

improper where "there was no testimony or evidence to indicate that these

immunized witnesses can incriminate [the attorney's] other clients." Id. at 1265). 89. Wheat v. United States, 108 S. Ct. 1692, 1699 (1988). 90. In re Grand Jury Proceedings, 859 F.2d at 1026. 91. Wheat, 108 S. Ct. at 1698. 92. United States v. Hoffer, 423 F. Supp. 811, 818 (S.D.N.Y. 1976), aff'd, 556

F.2d 561 (2d Cir. 1976). See also Cuyler v. Sullivan, 446 U.S. 335, 350 (1980) ("we hold that the possibility of conflict is insufficient to impugn a criminal conviction. In order to demonstrate a violation of his Sixth Amendment rights, a defendant must establish that an actual conflict of interest adversely affected his lawyer's performance.").

673




law differs somewhat, Massachusetts General Laws, Chapter 156B, Section 67, provides a basis for a discussion of the relevance

of such laws to the payment of counsel fees for employees within

the context of a criminal investigation. 1. A corporation has the power, but not the obligation, to

indemnify employees of the corporation "to whatever extent shall

be specified in or authorized by (i) the Articles of Organization or

(ii) a by-law adopted by the stockholders or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors."

2. The corporation may provide payment for representation in conjunction with an actual civil or criminal trial or any

preliminary proceedings. "Such indemnification may include pay ment by the corporation of expenses incurred in defending a civil or criminal action or proceedings in advance of the final disposi tion of such action or proceeding ..."

3. Former employees may be indemnified. "Any such indem

nification may be provided although the person to be indemnified is no longer an . . .

employee ... of the corporation ..."

4. Before indemnification will be provided, the employee must undertake "to repay such payment if he shall be adjudicated to be not entitled to indemnification under this section . . ." An

employee will be found to be not entitled to indemnification if he is found "with respect to any matter as to which he shall have been

adjudicated in any proceeding not to have acted in good faith and in the reasonable belief that his action was in the best interest of

the corporation . . ."

5. "The absence of any express provision for indemnification

shall not limit any right of indemnification existing independently of this section."93

Although the foregoing law has been held to be "arguably too broad," and "although Section 67 has been labeled 'uniquely bad'

(J.W. Bishop, Law of Corporate Officers and Directors Indemni

fication and Insurance ? 6.29, at 133 [1981 and 1986 Supp.]), it is not appropriate, absent a valid constitutional challenge, for a

court to disregard the authorization granted by Section 67."94

93. Mass. Gen. L., ch. 156B ? 67. 94. Dynan v. Fritt, 508 N.E.2d 1371, 1380 (Mass. 1987).

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E. Timing, Representation and Conducting Employee Interviews

If employees are interrogated by government prosecutors without

proper assistance of counsel and without adequate awareness of their rights, they may innocently expose themselves to perjury or

obstruction of justice, may become a prime target of the investi

gation or may bind and expose the corporation to vast criminal

liability. Additionally, if unrepresented employees are interrogated by government investigators, the corporation may never learn of a damaging witness or testimony. Therefore, the business should

consider providing separate counsel as appropriate. In any event, conduct witness interviews as soon as is practically

possible. Notify employees likely to be contacted by the govern ment that a justice department, governmental agency or grand

jury investigation has begun and that a government investigator may contact them for information. It is proper to advise employ ees of their rights, including that they are under no legal obligation to comply with government information or interview

requests?absent the issuance of formal witness process by sub

poena and actual grand jury appearance or summons, e.g.,

inspector general summonses and actual administrative deposi tion?that the choice whether to be interviewed is a completely

voluntary one to be made by the employee individually, and that, under most circumstances, it is far more advisable to proceed with

assistance of counsel. Inform the employees whether counsel will be

provided by the corporation and under what conditions. Note that no

person is legally compelled to respond to an informal interview re

quest by government agents. While practical considerations may lead

to voluntary compliance with informal governmental request?e.g.,

requests without compulsory legal process?and there may be rea

sons supporting voluntary record production and interviews, the law,

however, does not so compel.

R Initial Steps to Undertake upon Notice of a

Corporate Criminal Investigation

The issues in employee relations are complex and are addressed

more fully in P&rt IV. The following may serve as a quick checklist. As soon as corporate counsel becomes aware of the investigation, consideration may be given to the following:

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Notify employees to inform counsel or a designated officer of

any contacts by governmental auditors, agents or investigators.

Notify employees that no corporate records should be produced to the government by individual employees, but rather that

record production will be coordinated by the company. To compile research and to coordinate the corporate record

search, distribute memoranda to employees, see e.g., Form A:

Model for Corporate Document Retrieval in Response to Grand

Jury Subpoena; and Form B: Response Form Regarding Doc

uments Requested in Subpoena (both forms are reproduced in

the Appendix). As appropriate, secure outside criminal counsel for the corpo ration.

Advise employees of the investigation and of their rights and

responsibilities.

Identify potential witness, subject, and target groups of employ ees.

Assist in securing outside criminal counsel for individual em

ployee witness, subject, and target groups, as necessary in the

circumstances.

Plan and coordinate corporate and outside counsel defense

efforts, privileges, joint defense agreements, etc.

Inform the prosecutor that counsel has been retained to repre sent the corporation and, if so, individual employees. Discuss

with the government attorney arranging employee interviews

through counsel and make known that counsel is willing to assist

in that endeavor. Also, counsel should notify the prosecutor that

the government may serve document subpoenas upon counsel

rather than upon an unidentified keeper of the records. ABA

Disciplinary Rule 7-104(A)(1) and ABA Model Rule of Profes sional Conduct 4.2 limit the circumstances under which the

prosecutor is ethically permitted to contact a party he knows to

be represented.

G. Avoiding Governmental Obstruction of Justice Allegations

Any conduct that looks like an attempt to influence an employee's

testimony may be actionable under the federal obstruction stat

utes. Hence:

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If communications regarding any aspect of the pending crimi

nal investigation are initiated, accurate full disclosure to em

ployees is required to avoid engaging in "misleading conduct"

under Section 1512. Thus, any group discussions, memoranda, or one-on-one meetings with employees who have even the

slightest chance of being called as a witness must be entered into

with extreme caution and must be strictly circumscribed by the

exigencies at hand.

Use counsel to initiate and conduct communications pertaining to any aspect of the investigation. This may provide some

protection for the communications particularly where the sub

ject matter is of a legal nature.

Warn the client to avoid changing in any material way the

wages, hours, or working conditions of any of its employees

during the pendency of the investigation. If these changes are

favorable, they may be seen as bribery to obstruct the

employee's communication of information, and charges under

Section 1510 may result. If the changes are unfavorable, they may be actionable as a "threatening communication" under

Section 1505 or 1503. Warn the client to avoid any appearance of having retaliated

against its employees under the meaning of Section 1513. Any threatened harm or adverse action against employees might

subject officers and the corporation to criminal liability. Disciplining employees, as well as possibly subjecting the com

pany or its officers to charges under the foregoing statutes, has

the added downside of providing the prosecution with a clear

picture of who participated in the illegal conduct being investi

gated. The prosecutor will thus, in effect, be handed a list of

witnesses, many of whom will either have participated in crim

inal activity or will know who did. Disciplining employees in the midst of a criminal investigation also creates distrust and morale

problems alienating potential allies and severing what might have been an effective joint defense into numerous factions

fighting against each other for survival. This scenario is partic

ularly frightening where the prosecution is after high-level executives and disgruntled employees can be persuaded to

trade knowledge for immunity. However, despite these problems, the corporation may have

to discipline employees. For example, discipline may be in order

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to convince the government that good faith efforts are being made to comply with the investigation, and to unearth and

punish the wrongdoers. This is especially important in respect to potential suspension and debarment parallel proceedings. Be aware, however, that "an attorney's involvement in, or

recommendation of, a transaction does not place a cloak of

secrecy around all incidents of such transaction."95 The privilege does not automatically attach but depends upon all of the facts and circumstances of the case.

V. Voluntary Disclosure Issues

The decision whether to disclose the results of an internal

investigation to interested government agencies or any other

third party is a complex one. Because submitting the report outside the corporation can waive the attorney-client privilege to

the contents of the report, as well as to any underlying documents

and communications, the decision to release should be made at

the highest levels.

The report should not be released or disclosed in any way until

the client has consulted with counsel. Disclosure to independent auditors can waive the privilege.96

The decision to release the results of an internal investigation, or any report concerning the investigation, should only be made

after the investigation and the report are completed. Uncertainty as to the report's release will enhance the confidential nature of

the investigatory process; whereas if the report's release is pre ordained, and if it is understood throughout the investigation that

the report will be made public, less privilege will attach.97 The Department of Defense (DOD) has adopted a voluntary

disclosure program to increase compliance with the many laws

95. Matter ofFischel, 557 F.2d 209, 212 (9th Cir. 1977); see also United States v. Freeman, 619 F.2d 1112, 1119-20 (5th Cir. 1980).

96. See In re John Doe Corp., 675 F.2d 482 (2d Cir. 1982) (where a conversation between an outside accountant and the corporation's general counsel, and disclosure of a report to outside underwriter's counsel, waived the attorney client privilege). See also Permian Corp. v. United States, 665 F.2d 1214, 1220-21 (D.C. Cir. 1981); Diversified Indus, v. Meredith, 572 F.2d 596, 601 (8th Cir. 1977) (en banc)\ Securities & Exch. Comm'n v. Dresser Indus., Inc., 453 F. Supp. 573, 576 (D.D.C. 1978), aff'd, 628 F.2d 1368 (D.C. Cir.), cert, denied, 449 U.S. 993 (1980).

97. Compare United States v. Under Seal, 748 F.2d 871 (4th Cir. 1984) (privileged because release not previously decided), with United States v. Jones, 696 F.2d 1069 (4th Cir. 1982) (not privileged where release was planned).

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and regulations applied to government contracting. The Securi ties and Exchange Commission (SEC) and the Internal Revenue Service (IRS) have adopted similar programs in their fields of authority. Government agencies lack the resources to investigate each corporation suspected of a violation. To encourage corpo rate participation, the various agencies promise to take into consideration voluntary disclosure efforts in formulating their enforcement decisions. These sections review the effect of volun

tary disclosure to the DOD and other agencies, and the applicable case law to provide corporations with an understanding of the risks involved in voluntary disclosure.

A. Voluntary Disclosure to the Department of Defense

In a letter dated July 24, 1986, the DOD encouraged all defense contractors to adopt a policy of voluntary disclosure.98 Participants in the program would investigate and disclose "problems affect

ing their corporate contractual relationship with the Department of Defense," including "potential criminal or civil fraud issues."99 As an incentive, the DOD stated that "early disclosure, coupled with full cooperation and complete access to necessary records, are strong indications of an attitude of contractor integrity even in the wake of disclosures of potential criminal liability."100 The Taft letter sent a clear signal to all defense contractors that refusal to

participate in the program could jeopardize their continued

government contracting eligibility.101

B. Risks Inherent in Voluntary Disclosure

Corporations should weigh the risks and benefits of participation in the voluntary disclosure before voluntarily disclosing informa

tion to the government.102 As a preliminary matter, corporations

98. Letter from William H. Taft, IV, Deputy Secretary of Defense, to Defense contractors (July 24, 1986).

99. Id. 100. Id. 101. See, e.g., In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988), petition

for cert, filed, 57 U.S.L.W. 3495 (U.S.Jan. 12, 1989). 102. See In re Sealed Case (Tesoro Petroleum), 676 F.2d 793, 822 (D.C. Cir.

1982) ("When a corporation elects to participate in a voluntary disclosure

program like the SEC's, it necessarily decides that the benefits of participation outweigh the benefits of confidentiality for all files necessary to a full evaluation

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should keep abreast of the political climate and the agency's

regulatory proclivity.103 Second, corporations should recognize that a government agency such as the DOD operates under

several internal constraints. For example, the DOD's budget

sharply limits its investigatory activity. Despite the favorable odds, corporations should still consider

the consequences of refusing to participate in voluntary disclo sure. If a corporation refuses to participate and subsequently becomes a target of a DOD investigation, the DOD may choose to

treat it harshly to set an example for other corporations.104

Conversely, if staffing shortages prevent the DOD from carrying out this threat with any regularity, corporations may decide to

take the gamble and refuse to participate in the program.105

1. Scope of Internal Investigation

Participation in any voluntary disclosure requires a corporation to

conduct a full-scale internal investigation. Before conducting an

internal investigation, a corporation should understand that it

must disclose any unfavorable information uncovered during the course of its investigation.106 Like Pandora, a corporation should

recognize that once it begins its investigation, it must face any adverse consequences.107 Unless a corporation can convince the

government agency that it conducted a thorough investigation, its

participation in voluntary disclosure will only arouse suspicion. For example, anything short of a comprehensive investigation could result in a formal DOD investigation.108

of its disclosures. It forgoes [sic] some of the traditional protections of the adversary system in oraer to avoid some of the traditional burdens that

accompany adversary resolution of disputes, especially with such formidable adversaries as the SEC").

103. For example, the SEC assumed a more active role in investigating possible violations of the securities laws following the insider trading scandal of trie early

104. Note, The Limited Waiver Rule: Creation of an SEC-Corporate Privilege, 36 Stan. L. Rev. 789, 802 n.67 (1984).

105. Id. at 822-23. 106. In re Sealed Case (Tesoro Petroleum), 676 F.2d 793, 804 (D.C. Cir. 1982). 107. Mathews, Internal

Corporate Investigations, 45 Ohio St. L.J. 655, 685?86

("If the corporation is not willing to face up to what it has found and correct it as quickly as possible, then it should never have decided to investigate itself.").

108. See Mathews, supra note 107 at 702 n.265 ("Corporations that have attempted to utilize the internal investigation technique as a cover-up or to

produce a misleading whitewash report have not fared well.").

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The court in SEC v. Dresser Industries, Inc.109 upheld the SEC's

right to pursue a formal investigation following a corporation's voluntary disclosure of information under the SEC program. The SEC filed a motion for an order requiring obedience to its subpoena duces tecum issued in furtherance of its investigation concerning the use of Dresser's corporate funds in connection with questionable foreign payments.110 The court held that

"[throughout the voluntary disclosure program the SEC reserved its rights to pursue a formal investigation and issue subpoenas if

necessary."111 The court's conclusion precludes a corporation from

asserting that its participation in a voluntary disclosure program stays an agency's investigatory powers.

2. Specific Risks

Corporations should assess several factors militating against par

ticipation in voluntary disclosure. In addition to possible waiver of the attorney-client and work product privilege,112 corporate dis closure involves other risks. First, if the internal investigation discovers any skeletons in the corporate closet, its disclosure

obligations under the securities laws may force it to make negative disclosures at the shareholders' expense.113 Second, major inves

tigations involving independent accounting firms and outside counsel are expensive.114 Third, facts uncovered during an inter nal investigation may trigger parallel proceedings against a

corporation.115 Finally, depending on the degree of corporate

wrongdoing exposed as a result of an internal investigation, a

corporation may face adverse publicity.116

3. Waiver of Attorney-Client and

Work Product Privileges

Courts have not reached a consensus on whether voluntary dis

closure waives a corporation's attorney-client and work product

109. 453 F. Supp. 573 (D.D.C.), aff'd, 628 F.2d 1368 (D.C. Cir. 1978), cert, denied, 449 U.S. 993 (1980).

110. Dresser Indus., 453 F. Supp. at 575. 111. M 112. See notes 117-168 infra and accompanying text. 113. Mathews, supra note 107 at 672. 114. Id. 115. Id. 116. Id.

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privileges.117 The case law on the waiver issue falls into three

categories. One line of cases holds that a corporation's prior

voluntary disclosure, for example, to the SEC does not constitute a waiver of the attorney-client privilege in subsequent litigation.118

More recent cases have criticized the limited waiver rule embraced

in Diversified and have held that disclosure to the SEC, or any other government agency, constitutes a waiver of the attorney client privilege.119 A third line of cases supports a middle-of-the

road position that enables corporations to specifically reserve the

right to assert the privilege at the time of disclosure.120 The weight of authority supports the absolute waiver position.121

In the first few cases following the inception of the SEC

voluntary disclosure program, a few courts adopted the limited

waiver rule. In Diversified, the Eighth Circuit held that disclosure of documents in a separate and nonpublic SEC investigation did not constitute a waiver of Diversified's attorney-client privilege.122 Diversified had provided the SEC with the report of its internal

investigation of commercial bribery allegations.123 The court based

its holding on public policy grounds: "To hold otherwise may

117. See Roundtable: Attorney-Client Privilege in SEC Investigations [1982 Transfer

Binder] Fed. Sec. L. Rep. (CCH) at 85,253 (August 8, 1982) ("By reason of the differing views of the courts that have addressed the

'general waiver' versus

'limited waiver' theories, a corporation seeking to participate in a voluntary program discloses privileged materials to the staff without certainty as to waiver of privilege protections and at its peril.") (statement of John M. Fedders, Director, SEC Division of Enforcement).

118. See, e.g., Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc); In re International Sys. & Controls Corp., 91 F.R.D. 552 (S.D. Tex. 1981), vacated on other grounds, 693 F.2d 1235 (5th Cir. 1982) (no waiver of attorney client or work product privileges through disclosure of privileged information in discussions with SEC); In re LTV Securities Litigation, 89 F.R.D. 595 (N.D. Tex. 1981) (no waiver of attorney-client privilege through partial disclosure to SEC); Byrnes v. IDS Realty Trust, 85 F.R.D. 679 (S.D.N.Y. 1980) (no waiver of attorney client privilege through voluntary cooperation with SEC); and In re Grand Jury Subpoena Dated July 13, 1979, 478 F. Supp. 368 (E.D. Wis. 1979).

119. See, e.g., In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988), petition for cert, filed, 57 U.S.L.W. 3495 (U.S. Jan. 12, 1989) (No. 88-1157); In re Subpoena Duces Tecum (Fulbright fcf Jaworski), 738 F.2d 1367 (D.C. Cir. 1984); United States v. El Paso Co., 682 F.2d 530, 538-42 (5th Cir. 1982), cert, denied, 466 U.S. 944 (1984); In re Sealed Case (Tesoro Petroleum), 676 F.2d 793, 823-25 (D.C. Cir. 1982); In re John Doe Corp. (Southland), 675 F.2d 482, 487-89 (2d Cir. 1982); Permian Corp. v. United States, 665 F.2d 1214, 1220-22 (D.C. Cir. 1981); and In re Weiss, 596 F.2d 1185 (4th Cir. 1979).

120. Schnell v. Schnell, 550 F. Supp. 650 (S.D.N.Y. 1982); Teachers Ins. 8c Annuity Ass'n v. Shamrock Broadcasting Co., 521 F. Supp. 638 (S.D.N.Y. 1981).

121. See notes 68-80 supra and accompanying text. 122. Diversified, 572 F.2d at 611. 123. Id. at 599.

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have the effect of thwarting the developing procedure of corpo rations to employ independent outside counsel to investigate and advise them in order to protect stockholders, potential stockhold ers and customers."124

The Byrnes court also predicated its decision on the overriding

public policy of encouraging full disclosure to the SEC. The court held that "it is apparent that voluntary cooperation with the

Securities and Exchange Commission or with an Internal Reve nue Service or grand jury investigation would be substantially curtailed if such cooperation were deemed to be a waiver of a

corporation's attorney-client privilege."125 Later decisions of the same court, however, have rejected the limited waiver rule.126

Teachers Insurance illustrates the court's new position on the

waiver issue. The court concluded that rejection of the limited

waiver rule will not have a deleterious effect on the SEC's ability to investigate.127 The court did not, however, adopt the absolute

waiver approach. Instead, the court fashioned a third alternative to the two treatments of the waiver issue.128 The court held that

"disclosure to the SEC should be deemed to be a complete waiver

of the attorney-client privilege unless the right to assert the

privilege in subsequent proceedings is specifically reserved at the time the disclosure is made."129 No other court has specifically endorsed the approach adopted in Teachers Insurance.m As a

result, a corporation should not rely on the fact that prior to

disclosure, it specifically reserved its right to assert the privilege in

subsequent proceedings. The weight of recent authority supports the absolute waiver

doctrine. With the exception of the Eighth Circuit,131 every other

124. Id. at 611. But see Permian Corp. v. United States, 665 F.2d 1214, 1221 n.13 (D.C. Cir. 1981) ("Unlike the Eighth Circuit, we cannot see how 'the

developing procedure of corporations to employ independent outside counsel to

investigate and advise them' would be thwartea by telling a corporation that it cannot disclose the resulting reports to the SEC if it wishes to maintain their confidentiality").

125. Byrnes, 85 F.R.D. at 688 (quoting In re Grand Jury Subpoena Dated July 13, 1979, 478 F.

Supp. at 372-73).

126. See Schnell, 550 F. Supp. at 653; Teachers Ins., 521 F. Supp. at 644-45. 127. Teachers Ins., 521 F. Supp. at 645-46.

128. Id. at 646. 129. Id. at 644-45. 130. A case decided in the same court the following year cited Teachers Ins. with

approval. See Schnell, 550 F. Supp. at 653. 131. See Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en

banc).

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circuit that has addressed the waiver issue has concluded that a

corporation's voluntary disclosure of information to the SEC, or

any other government agency, constitutes a waiver of the

attorney-client privilege.132 The courts uniformly criticized

Diversified's limited waiver theory. The D.C. Circuit has consistently held that disclosure of privi

leged information to a government agency constitutes a waiver of

the attorney-client privilege.133 Permian, Tesoro Petroleum, and Ful

bright sf Jaworski each involved the effect of voluntary disclosure to the SEC on subsequent proceedings.134 In Permian, the lower court issued a permanent injunction barring the SEC from

providing the Department of Energy with access to certain

documents relating to the legality of Permian's pricing practices for crude oil.135 Permian disclosed the documents to the SEC to

expedite approval of a registration statement.136 On appeal, Per

mian asked the D.C. Circuit to adopt the limited waiver theory of

Diversified Industries v. Meredith. The D.C. Circuit found the

limited waiver theory "wholly unpersuasive"138 and concluded that

Permian's disclosure of the documents to the SEC "was incompat ible with the continued survival of the [attorney-client]

privilege."139 The Permian court rejected the argument "that some public

policy imperative inherent in the SEC's regulatory program

requires the traditional waiver doctrine be overridden."140 The court warned corporations that "the attorney-client privilege should be available only at the traditional price: a litigant who wishes to assert confidentiality must maintain genuine confidentiality."141 In light of additional case support in favor of

132. See note 119 supra. 133. See In re Subpoena Duces Tecum (Fulbright & Jaworski), 738 F.2d 1367 (D.C.

Cir. 1984); In re Sealed Case (Tesoro Petroleum), 676 F.2d 793 (D.C. Cir. 1982); Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981).

134. See Note, supra note 104, at 815 n.117 ("The SEC often refers cases to other government agencies for civil prosecution as well as to the Department of Justice for criminal prosecution.").

135. Permian, 665 F.2d at 1215, 1217. 136. Id. at 1216. 137. Id. at 1220. 138. Id. 139. Id. at 1222. 140. Id. at 1221. 141. Id. at 1222.

684




the absolute waiver theory, corporations should heed the Permian

court's advice.

In Tesoro Petroleum, the D.C. Circuit again rejected Diversified's limited waiver theory of attorney-client and work product

privileges.142 Judge Skelly Wright, writing for the court, described the risks inherent in voluntary disclosure:

[Tesoro Petroleum] entered into an arrangement with the SEC under which, as a matter of both common sense and common knowledge, [Tesoro]

relinquished its right to prevent the government from examining whatever documents were necessary for a fair evaluation of the final report offered to

its shareholders and the SEC. Just because [Tesoro] was successful in hiding crucial documents from the SEC, we need not allow Company to withhold them from a grand jury investigating possible crimes uncovered during the SEC investigation.143

The court concluded that an alternative holding would encourage

corporations to "either hide documents from the SEC or hope that the SEC staff does not stumble upon them, and then claim

privilege against other arms of government as soon as the SEC

inquiry has ended."144 Corporations certainly cannot expect any court to sanction such a result.

Two years later, the D.C. Circuit expanded the scope of the

absolute waiver doctrine.145 In Fulbright ?sf Jaworski, private party

litigants subpoenaed documents Tesoro Petroleum previously furnished to the SEC and to a grand jury.146 The court held that "[f]or the purposes of the attorney-client privilege, there is

nothing special about another federal agency in the role of

potential adversary as compared to private party litigants acting as

adversaries."147 The court concluded that Tesoro's disclosure to

the SEC "sacrificed its attorney-client confidentiality."148 Once

again, the D.C. Circuit denounced a corporation's tactical employ ment of the attorney-client privilege.149

The Second, Fourth, and Fifth Circuits have applied the absolute waiver doctrine in contexts other than SEC investiga

142. In re Sealed Case (Tesoro Petroleum), 676 F.2d 793, 823-24 (1982). 143. Id. at 817. 144. Id. at 824. 145. See In re Subpoenas Duces Tecum (Fulbright fcf laworski), 738 F.2d 1367 (D.C.

Cir. 1984). 146. Id. at 1368. See In re Sealed Case (Tesoro Petroleum), 676 F.2d 793 (D.C. Cir.

1982) (court rejected Tesoro's attempt to withhold documents from grand jury's investigation).

147. In re Subpoenas Duces Tecum, 738 F.2d at 1370. 148. Id. 149. Id.

685




tions.150 In Martin Marietta, a former employee sought an order to

compel production of his corporate employer's internal audit

reports.151 Martin Marietta had previously disclosed the results of

its internal audit in a direct attempt to settle active controversies it

had with the United States Attorney and the Department of Defense.152 Martin Marietta argued that the court should limit the

waiver to the information that it actually disclosed to the govern ment rather than implying a waiver as to all materials on the same

subject as those provided the government.153 The Fourth Circuit

disagreed: "[A] subject matter waiver has been worked as to the

attorney-client privilege and as to non-opinion work product."154 The court held that "if a client communicates information to his

attorney with the understanding that the information will be revealed to others, that information as well as 'the details under

lying the data which was to be published' will not enjoy the

privilege."155 The Fifth Circuit also supports the absolute waiver doctrine.156

In El Paso, the IRS petitioned the court to enforce two summonses

issued to the El Paso Company with regard to a tax audit.157 El Paso

raised the attorney-client privilege and work product doctrine as

a defense to the IRS summonses.158 The court held that El Paso's disclosure of the tax pool analysis to independent accountants

waived El Paso's right to claim the attorney-client privilege.159 The

150. See In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988), petition for cert, filed, 57 U.S.L.W. 3495 (U.S.Jan. 12, 1989); United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982), cert, denied, 466 U.S. 944 (1984); In re John Doe Corp. (Southland), 675 F.2d 482 (2d Cir. 1982).

151. In re Martin Marietta Corp., 856 F.2d at 621. 152. Id. at 625 ("Martin Marietta faced criminal charges in one instance and

debarment from federal contracting in the other."). 153. Id. at 423. 154. Id. The court held that subject matter waiver should not extend to

opinion work product for two reasons. First, courts should accord great

protection to opinion work product. Second, the protection of lawyers from the broad repercussions of subject matter waiver in the context of a pure expression of legal theory or legal opinion strengthens the adversary process and may further the search for trutn. Id. at 626.

155. Id. at 623 (quoting United States v. Under Seal, 748 F.2d 871, 875 (4th Cir. 1984)).

156. United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982), cert, denied, 446 U.S. 944 (1984).

157. Id. at 532. One summons sought El Paso's 'tax-pool analysis'?a summary of El Paso's contingent liability for additional taxes should the IRS ultimately determine that El Paso owed more taxes than indicated on its return.

158. Id. at 533. 159. Id. at 540. El Paso revealed the tax pool analysis to the independent

accountants as part of their audit.

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court recognized that "no confidential accountant client privilege exists under federal law."160 The court also concluded that "the tax

pool analysis does not contemplate litigation in the sense required to bring it within the work product doctrine."161 The Second Circuit's holding in El Paso demonstrates the applicability of the absolute waiver doctrine to a wide range of parallel proceedings.

The Second Circuit addressed the waiver issue in a case similar to El Paso.162 In Southland, the corporation conducted an internal

investigation of its business practices in response to an SEC

request.163 The corporation provided access to the confidential

report to its outside auditors and its underwriter's counsel in connection with a public offering of Southland securities.164 The

corporation later refused to divulge the report to a grand jury investigating bribery allegations against it.165 The Second Circuit concluded that disclosure to the auditors and counsel for the underwriter waived the attorney-client privilege since it "evi

dence^] a corporate decision to use the materials for purposes other than seeking legal advice."166 The court's decision represents yet another rejection of a "pick and choose" theory of attorney client privilege.167

Participation in a voluntary disclosure program exposes a

corporation to several risks. The weight of authority suggests that

voluntary disclosure of privileged information to the DOD, or any other government agency, waives a corporation's attorney-client and work product privileges. Voluntary disclosure could thus

160. Id. (quoting Couch v. United States, 409 U.S. 322, 335 (1973)). The court also noted that the attorney-client privilege "does not attach to tax work

prepared by accountants unless the accountant is translating complex tax terms into a form intelligible to a lawyer at the lawyer's behest." Id. at 541.

161. Id. at 543. "Materials assembled in the ordinary course of business, or

pursuant to public requirements unrelated to litigation. ..." are excluded from work product materials. Fed. R. Civ. R 26(b)(3) advisory committee's note.

162. See In re John Doe Corp. (Southland Corp.), 675 F.2d 482 (2d Cir. 1982). 163. Id. at 484 n.2. 164. Id. at 485. 165. Id. at 484. 166. Id. at 488; see also United States v. Brown, 478 F.2d 1038 (7th Cir. 1973)

(when the corporation seeks advice of an accounting nature, and not legal advice, the mere presence of an attorney does not invoke the attorney-client privilege).

167. Id. at 489. See In re Subpoenas Duces Tecum (Fulbright ?sf Jaworski), 738 F.2d 1367, 1370 (D.C. Cir. 1984); In re Sealed Case (Tesoro Petroleum), 676 F.2d 793, 818 (D.C. Cir. 1982) (voluntary breach of confidence or selective disclosure for tactical

purposes waives the privilege); Permian Corp. v. United States, 665 F.2d

1214, 1221 (D.C. Cir. 1981) ("The client cannot be permitted to pick and choose among his opponents, waiving the privilege for some and resurrecting the claim of confidentiality to obstruct others. . . .").

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expose a corporation to suits brought by shareholders, other

corporations, or government agencies other than the DOD.168

Despite the risks inherent in voluntary disclosure, the threat of an

enforcement action should keep the number of nonparticipants to a minimum.

168. Note, supra note 104, at 797.

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Documents

Defense of Businesses, Individual Officers and Employees in Corporate Criminal Investigations