The SEC resolved an action brought against Biopure Corporation and its General Counsel with the entry of a consent decree enjoining the company from future violations of the antifraud and reporting provisions of the federal securities laws, General Counsel Jane Kober from aiding and abetting violations of the reporting provisions, and requiring Ms. Kober to pay a $40,000 fine. See SEC v. Biopure Corporation, et al., Civil Action No. 05-11853-PBS (D. MA) http://www.sec.gov/litigation/litreleases/2006/lr19825.htm The consent decree also requires the company to retain an independent consultant to review its disclosure and to adopt the recommendations of the consultant. The SEC’s complaint alleged that the company failed to disclose negative information it received from the FDA regarding the approval of its synthetic blood product or falsely disclose the information as positive results. The SEC dismissed the antifraud charges against Ms. Kober.
Deputy Attorney General Paul J. McNulty stoutly defended the Thompson Memorandum in testimony before the Senate on Tuesday, asserting that in fact the government only wants the facts about what happened, the names of the bad guys and is only concerned about legal fees and lawyers when the company and the bad guys are obstructing the DOJ’s investigation. According to Mr. McNulty corporate America should be thankful for the Thompson Memorandum, not its critic. (for all testimony see http://judiciary.senate.gov/hearing.cfm?id=2054)
Mr. McNulty’s remarkable testimony is based on the claim that federal criminal law “favors charging a corporation, not allowing it to escape the consequences of its employee’s misdeeds.” According to Mr. McNulty, “the irony of the attacks on the Thompson Memo is that the federal criminal justice system would be a much harsher, less predictable, and less transparent environment for corporations and their counsel in the absence of this guidance. As Deputy Attorney General, I support the principles articulated in the Thompson Memorandum.” Waiver of the attorney client privilege is not required if the company can give the department the facts and identify the bad guys. Otherwise a waiver will be requested – if the company wants to cooperate. Likewise, Mr. McNulty told the Senate committee that “a corporation may make a decision not to advance fees, if it has the discretion to do so, but it is the company’s choice alone. It is a business decision we do not control.” The justice department has listened to concerns about the Thompson Memorandum and “no critic has produced any empirical data demonstrating that prosecutors are routinely requesting, let alone coercing waivers.”
Mr. McNulty’s remarks even mention the decision of Judge Kaplan in the KPMG case, U.S. v. Stein, http://www.nysd.uscourts.gov/rulings/05CR888_6272006_0835TS.pdf holding that the Thompson Memorandum violated the Fifth and Sixth amendments, with good reason. In Stein, the court repeatedly chastised federal prosecutors for making exactly the same type of claims in his court room.
Mr. McNulty’s claim about a kinder softer prosecutorial touch and clear standards emanating from the Thompson Memorandum was answered by the testimony of former Attorney General Edwin Meese who began his remarks by paraphrasing the speech of then Attorney General and later Supreme Court Justice Robert Jackson’s at a meeting of all United States Attorneys. In those comments Mr. Jackson noted that although prosecutors have a tremendous amount of discretion and that there is a temptation “to misuse his power, often in subtle manners that no one would ever be able to prove wrongful . . . [it must be used ‘to the spirit of fair plan and decency . . .'” Since the threat of indictment can quite possibly be the death knell of an organization, the problem with the Thompson Memorandum, Mr. Meese noted, is that it fails to specify the standards under which a waiver might be required or when a failure to waive privilege or take other steps might be held against a company. In view of these vague and undefined standards, a company attempting to avoid prosecution and, thus, survive has no choice except to assume that it must fully comply with each of the points in the Memorandum. The vagueness and unpredictability of the Thompson Memorandum in practice is therefore inherently coercive. Mr. Meese concluded by telling Senators that the Thompson Memorandum needed to be reformed by: 1) eliminating any reference to the waiver of privilege or the payment of legal fees; and 2) by implementing an express national policy (not a separate policy instituted by each U.S. Attorney’s office, a practice now being instituted under the McCallum Memorandum) which only permits a request for a waiver under circumstances which would “bring into operation the well established crime fraud exception to the attorney-client privilege.”
Mr. McNulty’s unserving defense of his predecessor and his subordinates in Stein is perhaps understandable but nevertheless misguided in view of the increasing clamor that the Thompson Memorandum is eroding fundamental rights. If Mr. McNulty had consideed the words of Justice Jackson quoted by Mr. Meese or the command of the Supreme Court in Berger v. U.S., 55 S.CT. 629 (1935), noting that prosecutors have an obligation to be fair, perhaps he would have reconsidered the department’s position. No doubt the government wants companies to self-report. No doubt companies will report when appropriate to both the justice department and the SEC (under its Seaboard standards) to avoid prosecution. But it is time for the government to stop enforcing the law by eroding it. Mr. McNulty should be taken at his word: if the government simply needs the facts about the incident and the identification of those involved, then the standards for cooperation should be amended to state such policy and that alone. There is no need to discuss waiver or the payment of legal fees. Unfortunately, the refusal of the department to amend those standards (and the total silence of the SEC on this subject) can only be taken as a tacit admission that in fact the government intends to continue its present course.