Tuesday, December 12, 2006

DOJ's "Thompson Memo" out, sorta

The Department of Justice today announced it was revising it's "Thompson Memorandum." (See the McNulty Memo here) This memo, drafted in 2003 by Deputy Attorney General Larry Thompson (see here) basically lays out guidelines that says that federal prosecutors will look nicely on a corporation suspected of breaking the law, and not indict the company if it cooperates with the government. Since an indictment (not just a conviction) of an entire company can be devastating (precluding it, for example, from certain work such as government contracts or, if an audit firm, from auditing the financial statements of a public company), this memo has proven controversial. The most controverials aspects have been the sections stating:
II. Charging a Corporation: Factors to Be Considered

A. General Principle: Generally, prosecutors should apply the same factors in determining whether to charge a corporation as they do with respect to individuals. See USAM § 9-27.220, et seq. Thus, the prosecutor should weigh all of the factors normally considered in the sound exercise of prosecutorial judgment: the sufficiency of the evidence; the likelihood of success at trial,; the probable deterrent, rehabilitative, and other consequences of conviction; and the adequacy of noncriminal approaches. See id. However, due to the nature of the corporate "person," some additional factors are present. In conducting an investigation, determining whether to bring charges, and negotiating plea agreements, prosecutors should consider the following factors in reaching a decision as to the proper treatment of a corporate target:
4. the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection (see section VI,
Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation's promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation. By the same token, the prosecutor should be wary of attempts to shield corporate officers and employees from liability by a willingness of the corporation to plead guilty.
Don't underestimate how powerful these two provisions have proven to be. Basically, the Thompson memo, among other things, tells the company's board of directors that the company itself won't be prosecuted if they can lay out a roadmap to the "guilty" individuals -- and while they're at it, they better not be paying for these guys' lawyers, either. It has made the jobs of federal prosecutors significantly easier when pursuing white collar criminals, since, in the past, a crooked CEO could defend himself or herself with company funds while protecting incriminating evidence under the company's attorney-client privilege, provided the crooked parties got the company's crooked inhouse counsel involved.

This blackmail threat -- for blackmail it is, even if the results are positive and justified -- has provoked a backlash. Not only was it cited by the recent Committee on Capital Markets Regulation report as a problem (see here), but Senator Arlen Specter recently introduced legislation that would basically prohibit the Thompson memo. (See here).

What I don't get is why it took DOJ so long to come up with a fix to this issue, such that it now looks like that they are not only buckling to Congressional pressure, but that they got their asses kicked by the Committee on Capital Markets Regulation. I mean, seriously, if you are going to go down, jump out in front of that train and say you were planning on doing it all along. That's the Washington way.

Interestingly, this new McNulty Memo tries to recover some of its dignity (and usefulness to prosecutors) by taking the same approach that the Securities and Exchange Commission took in 2001 with its "Seaboard Report" (incidentally showing that Harvey Pitt is a much smarter lawyer than Larry Thompson). In other words, while the DOJ is now saying it will no longer "punish" a company for not cooperating, it will "reward" those that do cooperate.

In other words, I won't dunk your head in the toilet if you don't cooperate. But I will stop dunking your head if you do.

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