The McNulty memo

The "McNulty memo," revising the infamous Thompson memorandum on prosecuting business organizations, is now out.

My main interest here, as I've written, has been on the problem of effectively precluding individuals from defending themselves by using the threat of corporate prosecution to prevent advancement of legal expenses.

The new memo says:

Prosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment. Many state indemnification statutes grant corporations the power to advance the legal fees of officers under investigation prior to a formal determination of guilt. As a consequence, many corporations enter into contractual obligations to advance attorneys' fees through provisions contained in their corporate charters, bylaws or employment agreements. Therefore, a corporation's compliance with governing state law and its contractual obligations cannot be considered a failure to cooperate.3 This prohibition is not meant to prevent a prosecutor from asking questions about an attorney's representation of a corporation or its employees.

3 In extremely rare cases, the advancement of attorneys' fees may be taken into account when the totality of the circumstances show that it was intended to impede a criminal investigation. In these cases, fee advancement is considered with many other telling facts to make a determination that the corporation is acting improperly to shield itself and its culpable employees from government scrutiny. See discussion in Brief of Appellant-United States, United States v. Smith and Watson,No. 06-3999-cr (2d Cir. Nov. 6,2006). Where these circumstances exist, approval must be obtained from the Deputy Attorney General before prosecutors may consider this factor in their charging decisions. Prosecutors should follow the authorization process established for waiver requests of Category II information (see section VII-2, infra).

The revised memo shows that Judge Kaplan's much-maligned decision in the KPMG case, discussed in my posts linked above, had a significant effect. It's not clear, however, that the current memo goes far enough. As a WSJ editorial said today:

the McNulty Memo [tells] federal prosecutors they may no longer hold it against a firm under investigation if it declines to waive attorney-client privilege or cut off the payment of legal fees for employees who are investigated or have been charged. Whether these restrictions work remains to be seen. Mr. McNulty told us yesterday that this didn't mean prosecutors couldn't give a firm "credit" for waiving privilege. But if it counts in your favor to waive privilege, it's hard to see how it doesn't count against you not to waive. When your firm is in danger of being put out of business by a federal indictment, this is hardly the moment in which one lightly declines to answer "extra credit" questions.

As discussed in the White Collar Crime blog (with a promise of more to come), there are also questions about enforcing the restrictions on prosecutors.