Feds Denied Questioning Carte Blanche

Federal prosecutors and investigators must get permission from a company's lawyer before questioning its employees, according to a ruling by a federal appeals court [U.S. ex rel. Daniel G. O'Keefe v. McDonnell Douglas Corp., No. 97-2261, 8th Cir., Jan. 6,1998].

The decision could seriously affect government investigations of all kinds of corporate wrongdoing, including environmental law violations.

The case arose in 1993 when Daniel G. O'Keefe, a former McDonnell Douglas employee, filed suit in federal district court in St. Louis under the False Claims Act (FCA).

The suit alleges that McDonnell Douglas overstated labor costs on a Navy contract. The FCA encourages employees who know about fraudulent goings-on to sue their employers on behalf of the government. After such cases are filed, the Justice Department (DOJ) can assume responsibility for pressing the matter, and the whistleblowers can share in the recovery.

Indeed, DOJ intervened in 1995, and soon afterward, Defense Department investigators began making contacts with current and former company employees who may have participated in the illegal activities.

Government agents questioned employees who were suspected of participating in the alleged billing scam. Investigators visited current and former workers at their homes. Sometimes the agents simply sent out questionnaires.

McDonnell Douglas promptly asked U.S. District Judge George F. Gunn, Jr. for a protective order preventing such contacts. As the company's lawyer saw it, the investigators simply were acting on behalf of DOJ lawyers and, thus, were bound by Missouri's legal ethics requirements.

Under the rules of professional conduct for lawyers who practice in Missouri and in virtually every other state, a lawyer for one side in a dispute cannot talk with individuals who are linked with the opposing side, unless either the lawyer for the opposing side approves or the inquiring lawyer is authorized by law to do so.

Such private conversations are known as ex parte contacts. The purpose of the rule is to protect unsophisticated laymen from ensnarement by wily lawyers. Almost without exception, the federal courts adopt the legal ethics rules of the states where they are located. Missouri rules hold sway in the federal courthouse where Judge Gunn sits.

The government, for its part, argued that a protective order was not warranted because the ex parte contacts were "authorized" under the Attorney General's own rules, which permit contacts with individuals who are not (or were not) key high-level employees.

Judge Gunn granted the protective order, concluding that the Attorney General's permissive rules exceeded her legal authority.

He ordered the government to stop all contacts and to turn over to the defendant all information obtained from ex parte contacts already made. "The suggestion that [federal prosecutors] should be exempted from a longstanding and applied ethical norm is alarming," Judge Gunn said.

On appeal, the U.S. Court of Appeals for the Eighth Circuit in St. Louis upheld the lower court decision. In effect, government attorneys now must abide by the ethical standards imposed by local rules of United States courts - even if such rules hamper a federal investigation.

Defense lawyers applauded the decision, which puts a crimp in gung-ho government probes of corporate activities. According to Fordham University law professor Daniel C. Richman, a former federal prosecutor, "This really strikes at the heart of what the government thinks is important."

Historically, DOJ has taken the position that its lawyers are not subject to ethical standards in local federal courts. In 1989, DOJ lawyers began relying on a controversial memo written by then-Attorney General Richard Thornburgh to justify their disregard of local ethics rules.

In 1994, Attorney General Janet Reno formally issued a regulation that purported to authorize federal prosecutors and agents to interview anyone connected with a targeted entity except for so-called "controlling individuals" - i.e., current top-level employees who participate as decision-makers in formulating the organization's legal position or in investigating the subject matter.

Although the Eighth Circuit ruling directly affects federal investigations in Arkansas, Missouri, Iowa, Minnesota, North Dakota and South Dakota, prosecutors throughout the country are now obliged to reexamine their tactics in corporate investigations.

Such a disruption of DOJ operating procedures almost guarantees that the government will appeal.

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