The Life and Death of the Thompson Memo

That summer, Martz reached out to her old contacts at the Chamber and other business groups. She and ACLU lobbyist Lisa Graves arranged a one-hour pitch via teleconference. They argued the Patriot Act had gone too far in allowing government access to confidential files on businesses and their employees. Among the issues: the Justice Department’s use of secret orders from the Foreign Intelligence Surveillance Court to get access to businesses’ privileged or proprietary documents without having to provide a factual basis for why the documents were needed.

The pitch worked, and by November, the media were filled with stories about business groups breaking with the Bush administration on aspects of the Patriot Act. “This was not an easy thing for business to do,” says Martz, “to put themselves on the firing line for the Patriot Act because they were going through asbestos reform and other things they didn’t want to aggravate allies on.”

Eventually, eight of the nine changes that the business groups had sought in the Patriot Act became law. For groups like the NACDL and the ACLU, it was far from everything they had wanted but better than nothing.

“Sometimes issues make you have interesting bedfellows,” says Bob Shepler, a lobbyist for the National Association of Manufacturers.

A single issue might not keep such groups in bed very long, but through the relationships built during the Patriot Act debate, the business organizations, the Association of Corporate Counsel, and the NACDL found that they shared common ground when it came to the issue of the attorney-client privilege in corporate fraud investigations.

“I think that what happened when we worked together on the Patriot Act was trust developed,” says the Chamber’s Lawson. “We didn’t have completely overlapping interests.”

Through the Patriot Act debate, the groups had shown their commitment to each other. And that was key as a number of the interest groups reassembled, with the help of the ABA, as the Coalition to Preserve the Attorney-Client Privilege. One potential problem was, again, image. The Association of Corporate Counsel and the business groups most interested in changing Justice’s corporate charging policies could easily be cast as an alliance of big business and defense lawyers merely pushing back at an aggressive government crackdown on fraud.

Again, it fell to Martz to serve as the bridge between the groups that had an obvious interest in the debate — the Association of Corporate Counsel and their allied business groups — and the ACLU, whose interest was less clear. She pitched the issue to the ACLU as one in which ordinary employees could find themselves under indictment for talking to company lawyers, who would then turn potentially incriminating conversations over to prosecutors when they felt they needed to waive the attorney-client privilege. The ACLU also worried that the DOJ was eroding the Sixth Amendment right to adequate counsel. And the earlier cooperation on the Patriot Act made them more receptive. “The business groups did stand very strong with us on [the Patriot Act],” says Jesselyn McCurdy, a lawyer for the ACLU.

The seed of the current battle was planted in 1999, when Eric Holder Jr., deputy attorney general in the Clinton administration, issued an advisory memo that laid out nine factors prosecutors could consider when deciding whether to indict a company. Most of the points were hardly controversial: a company’s history of wrongdoing, the seriousness of the offense, or the pervasiveness of criminal behavior within the company.

But the factor that would later prove most controversial was an assessment of a company’s level of cooperation. In assessing that, prosecutors could take into account whether a company’s lawyers had waived the attorney-client privilege and granted the government access to its own internal investigation of wrongdoing. Additionally, in certain circumstances, prosecutors could also assess whether a company had chosen to stop paying legal fees for culpable employees.

For the Justice Department, the provisions were sensible. Giving federal agents access to a company’s internal investigation saved a tremendous amount of time and resources and allowed the government to carry out more fraud prosecutions. Also, forcing companies to cut off legal fees was seen as helpful in certain cases in preventing companies from “circling the wagons” and keeping employees from cooperating with investigators.

At the time, company lawyers were wary of the Holder memo, but because it was merely advisory, it was generally noncontroversial. “The Holder memo was put out almost as a discussion draft,” says Philip Urofsky, a former DOJ fraud prosecutor involved in drafting it. Fred Krebs, the president of the Association of Corporate Counsel, was an early critic of the memo, though at that time, he says, his protests amounted to “spitting in the wind.”

Then came Enron’s bankruptcy in 2001 and what became known within the Justice Department as the “summer of fraud” in 2002: In short succession, Arthur Andersen was indicted and Adelphia and WorldCom declared bankruptcy. Holder’s successor, Larry Thompson, was tapped to lead the government’s corporate fraud task force to help restore investor confidence in American markets. Part of the problem for prosecutors, as Thompson saw it, was discerning when companies were truly cooperating with prosecutors and when they were stonewalling investigations by claiming that key pieces of evidence couldn’t be turned over to the government because they were protected by the attorney-client privilege.

In January 2003, with minor revisions, Thompson made Holder’s advisory memo official Justice Department policy, and, somewhat ironically, supplanted Holder as every corporation’s nemesis. (Even more ironically, Thompson is now general counsel for PepsiCo.) Every prosecutor was now instructed to formally consider whether a company had waived privilege. Though Thompson’s memo made clear this wasn’t “an absolute requirement,” corporate lawyers soon came to see it as virtually mandatory in staving off indictments (the DOJ and defense attorneys have vigorously disputed just how important the consideration of waivers actually was). Whether corporations cut off attorney fees to culpable employees also became a formal consideration.

The next year, the U.S. Sentencing Commission added a provision to its sentencing guidelines that suggested companies deserved leniency in punishment for agreeing to waive the privilege, granting a judicial imprimatur to the principle.

LAYING THE GROUNDWORK

The push-back started slowly. At the American Bar Association’s annual convention on white-collar crime in the spring of 2003, a number of defense attorneys complained that the DOJ routinely sought waivers. In May of that year, former Sen. John Danforth (R-Mo.) wrote an op-ed published in The New York Times warning that the waiver provisions of the Thompson memo created a “perilous dilemma” for companies under scrutiny. The problem, as Danforth saw it, was that the memo forced companies to choose between turning over their lawyers’ internal investigations (and thus putting themselves at the mercy of federal prosecutors and plaintiffs attorneys) and declining to waive the privilege, thus risking the kind of indictment that turned Arthur Andersen into dust.

Not everyone thinks the Justice Department’s policy was such a threat to business or constitutional rights. “I think the bar just put one over on the ACLU and business,” says William Simon, a professor at Columbia University Law School. “This confidentiality stuff is just a marketing advantage of the bar.”

By late 2005 the organized push to change the privilege policy was under way, and given the Justice Department’s steadfast position, the lobbying alliance chose to focus its early efforts on winning over the sentencing commission. At commission hearings in November 2005 and March 2006, the alliance made its case, marshaling support with a survey of corporate counsel and defense lawyers that found that nearly 75 percent believed a “culture of waiver” had developed in government investigations.

Meanwhile, the business groups took their shot at winning over Gonzales at the January 2006 meeting at the Justice Department’s headquarters on Constitution Avenue in Washington. The more left-leaning members of the coalition were deliberately not invited — and they worried that Gonzales would persuade the business groups to step back from the issue.

“I was afraid all these groups were going to come out of this meeting thinking, �This guy really wants to work with us, let’s stop doing things that are in his face,’ ” says Martz.

But the lobbyists left the meeting with the realization that if Justice was going to change its position on waivers, it would have to be forced into it.And so they took their case to Congress.

CLIMBING THE HILL

The coalition persuaded House Judiciary Chairman F. James Sensenbrenner Jr. (R-Wis.) to hold a hearing on the subject in the spring of 2006. The Chamber and the business groups lobbied Sensenbrenner and Rep. Dan Lungren (R-Calif.) heavily on the issue, while their counterparts at the ABA and the ACLU wooed key Democrats on the panel, including Rep. William Delahunt (Mass.). To defend its case to the committee, the DOJ sent then-Associate Attorney General Robert McCallum, who had served as acting deputy attorney general before McNulty.

But McCallum took a bipartisan mauling from members of the panel. “Don’t you see the creeping intrusion here?” Lungren demanded at one point.

“You don’t want someone like Lungren from California, you know, a far-right conservative Republican, and Delahunt, this Northeast liberal, filing legislation on this, because I think that is the order of magnitude that is being expressed here,” Delahunt said.

“I will certainly take that message back, Mr. Delahunt,” McCallum responded.

As pressure on the Justice Department increased that spring, the sentencing commission, in an unusual move, reversed course and struck the language relating to attorney-client privilege from the guidelines it had issued less than two years before.

Then, in May, came the indictment of Milberg Weiss in Los Angeles. Milberg Weiss was the first major firm or company the government had charged criminally since Arthur Andersen. The business groups in the coalition were torn. They had cheered the government’s investigation into kickbacks the plaintiffs firm had allegedly paid to cooperative shareholders. “Plaintiff-shopping and kickback schemes have been a persistent problem among some trial lawyers,” a Chamber lawyer told The Wall Street Journal. But the Chamber was pained that one of the factors in the government’s decision to indict was Milberg Weiss’ failure to waive the attorney-client privilege. After the indictment, the Chamber issued a release saying it “opposes any attempt to deny the constitutional right to attorney-client privilege.”

But real momentum for the alliance came from a quarter over which the lobbying groups had limited sway: Judge Lewis Kaplan. In June, Kaplan, a federal judge in Manhattan, issued a stinging 83-page rebuke of the Justice Department’s white-collar prosecution tactics in an opinion for a case involving former partners of troubled accounting firm KPMG (members of the coalition filed an amicus brief in the case). Ironically, one of the prosecutors Kaplan singled out for criticism in the opinion, Shirah Neiman, had played a leading role in the development of the original Holder memo.

Though Kaplan’s decision was focused on the issue of prosecutors forcing KPMG to cut off legal fees, rather than the waiver of attorney-client privilege, it offered a searing criticism of the Thompson memo nonetheless.

“The KPMG decision was significant,” says Michael Sklaire, a former prosecutor now at Williams Mullen in Northern Virginia. “You had an assistant [U.S. attorney] who took the Thompson memo to the extreme. It outraged the defense bar, it outraged the ABA, and it sped up any push-back.”

After the decision, the anti-waiver lobbying groups continued to raise the stakes in Congress. Through a vigorous lobbying effort, they helped persuade Senate Judiciary Chairman Arlen Specter (R-Penn.) to hold a Senate hearing on the waiver issue in September. Just before the hearing, a bipartisan group of 10 former senior Justice Department officials released a letter condemning the DOJ’s waiver policy. Signatories included former Attorneys General Dick Thornburgh and Griffin Bell, as well as other officials from the Reagan, George H.W. Bush, and Clinton eras.

But the letter hadn’t been penned by any of the signatories. It was drafted by R. Larson Frisby, an ABA lawyer who had been active in lobbying on the issue, and edited by Martz and other members of the coalition. Each group then fanned out to collect signatures from former officials to which it had ties: The NACDL and other Democratically affiliated groups reached out to former Clinton officials such as former Deputy Attorney General Jamie Gorelick and former Solicitor General Walter Dellinger (though they failed to persuade former Attorney General Janet Reno to sign on), while the American Chemistry Council and the Chamber gathered signatures from Republicans such as Thornburgh and Kenneth Starr (though they couldn’t get former Attorney General William Barr, now general counsel of Verizon, to sign on).

This time around, the Justice Department sent McNulty to defend its policy. Once again, the DOJ found little support from members of either party, who appeared to be well versed in the coalition’s arguments.

“As I read this policy . . . I think it is coercive. It may even rise to the level of being a bludgeon,” said Specter at the hearing.

Specter threatened to introduce legislation of his own if the DOJ didn’t change its policy. On Dec. 7, on the second-to-last day of the Senate’s session, he followed through.

Five days later, the Justice Department responded, issuing what it termed the �McNulty memo.’ Although it still allowed prosecutors to consider the waiver of the attorney-client privilege as a factor in charging decisions, it stripped prosecutors in the field of the ability to request a waiver on their own. Permission would now be needed from senior Justice Department officials. Additionally, prosecutors could no longer pressure companies to cut off attorney fees except in extremely rare circumstances, a direct response to the KPMG decision.

The deputy attorney general says the Senate hearing was a touchstone. “After that hearing, it was really now a question of time” before changes were announced, he says.

The voices in opposition to the memo had spoken too loudly and from too many quarters to go unconsidered. “Part of the reason I felt it was time to make these revisions is because I wanted to address the credibility of the Department of Justice,” he says.

The decision, McNulty says, had been driven in part by a “misperception” on the part of the department’s critics of what prosecutors in the field were actually doing. Nevertheless, that “misperception” had to be addressed.

Or, as one senior Justice official put it, “To some degree here, perception is the reality.”