The Decline of the Attorney-Client Privilege in the Corporate Setting
McLucas, William R., Shapiro, Howard M., Song, Julie J., Journal of Criminal Law and Criminology
Beginning in 2001, the American corporate landscape experienced the first of numerous scandals involving accounting irregularities, financial fraud, and other instances of misconduct. In response, law enforcement officials began an intensive effort to root out corporate fraud and to restore public confidence in our capital markets. (1) That effort--and the accompanying demands by law enforcement agencies that the corporations involved waive their attorney-client privilege--is itself beginning to raise profound issues for how corporations conduct business.
There are several issues to be considered as we evaluate the government's recent heightened level of aggression in seeking privilege waivers. First, over the last several years, cooperation with government investigations--more often than not measured by whether the corporation has waived its attorney-client privilege--has become increasingly critical as law enforcement agencies have sought to restore public confidence in our capital markets. (2) Second, internal investigations conducted by corporate counsel--the results of which are often demanded by the government in exchange for "credit" for cooperation--now have particular significance. (3) In the context of governmental demands for waiver of the attorney-client privilege, these internal investigations often turn companies against the very executives and employees who are paid to act in the company's best interests. As such, the process itself demands more careful evaluation than has, to date, been brought to bear.
The current trend has, at a minimum, eroded our traditional adversarial process and skewed the balance of power between government investigators and their corporate targets. Over time, this process may well drive a wedge between the corporate entity and the executives and employees the company relies upon for the shareholders' benefit, even when these individuals have done nothing wrong. It forces corporate managers to think first of their own liability and not the broader good of the enterprise that should be--and once was--at the core of their professional lives.
As we discuss below, the use of internal investigations by companies and their boards of directors and cooperation by corporations with the government are not new concepts. Beginning with the U.S. Securities and Exchange Commission's ("SEC" or the "Commission") "voluntary disclosure program" in the 1970s and continuing through the 1990s with several high-profile criminal inquiries, internal investigations and cooperation--often without demands for waiver of the attorney-client privilege--have played an important role in resolving securities enforcement and criminal inquiries. Recent corporate scandals, however, have led to an upset of this historical pattern, and instead, demands for privilege waiver are now commonplace.
To be sure, in looking at the investor carnage from the collection of recent accounting scandals, there are likely benefits from the government's aggressive enforcement approach that we, as yet, cannot fully appreciate. Improvements in corporate governance and aggressive activism by board members in ensuring better accounting, better disclosure, and overall good corporate citizenship, are already observable, at least anecdotally. However, far broader questions about the impact of this new order remain very much open to debate. What is the long term impact on the behavior of executives and employees who believe that in their daily service for the company, their personal behavior and interests are, in most instances, aligned with that of the company? What will be the effect on Board members who, after the settlements of the private actions in Enron and WorldCom, are now of necessity focused on their personal liability as well as on their fiduciary duties? And what, if anything, can be done about the enormous leverage of the government in requiring such inquiries and waivers as the price of avoiding criminal indictment and/or demands in governmental civil proceedings that are franchise threatening? …