SEC Mishap Highlights Taint On Government “Taint Teams”

A government agency candidly acknowledged the accidental mishandling of potentially privileged documents – this time, its own. On April 5, 2022, the U.S. Securities and Exchange Commission issued a statement identifying a control deficiency that inadvertently eroded the separation of its enforcement and adjudicatory functions. For now, the deficiency relates only to two adjudicatory matters currently in litigation in federal court over the constitutionality of the roles of administrative law judges. The agency’s refreshing candor, however, revitalized critics of the agencies’ in-house courts and begs the question: If a well-funded government agency can accidentally mishandle its own restricted documents, how are targets of a document seizure supposed to be confident that the government will protect theirs? Take, for example, the government’s mishandling of its adversaries privileged documents when “taint teams” are involved. Prosecutors have resisted overhauls to taint team protocols. To quell critics, the Department of Justice even has created its own Special Matters Unit designated to handle privilege reviews in-house. Some courts, however, rightly have called the government’s use of taint teams into question, including an important opinion from the Fourth Circuit in 2019, and opinions by the Fifth and Eleventh Circuits in 2021. To be sure, the highly criticized use of taint teams has solutions. Among them, borrowing from traditional subpoena compliance procedures, is for counsel of the privilege holder to participate in the privilege review.

SEC Adjudicatory Leak

The matters discussed in the SEC’s notification, Cochran v. SEC and Jarkesy v. SEC, were handled by the SEC’s internal adjudication system. Now in federal court, the petitioners challenged the SEC’s already heavily criticized in-house adjudication system as unconstitutional. Cochran has a pending petition for a writ of certiorari before the Supreme Court. The SEC explained that in these two matters, its internal review found that the breach did not have an impact on the decision-making of any of the SEC staff involved in investigating and litigating the cases as the enforcement agents on these matters did not review the protected documents. Its review as to scope of the issue and applicability to other matters remains ongoing.

SEC Acknowledges Inadvertent Data Breach

The SEC has the power of both enforcement and adjudication, meaning it can investigate potential securities laws violations and institute administrative proceedings. Under the Administrative Procedure Act, the two functions must necessarily be separated amongst agency staff to avoid the appearance of impropriety. As explained by the SEC in its statement, personnel in the Commission’s Division of Enforcement that are investigating and prosecuting matters file motions and briefs with the Office of the Secretary and do not communicate directly with the Commission. By contrast, staff in the Office of the General Counsel’s Adjudication Group submit internal memoranda directly to the Commission to aid it in issuing opinions and orders. In theory, this could be enough to keep conflicted processes separate. Unless, of course, the internal databases are not properly shielded.

According to the SEC in Cochran v. SEC and Jarkesy v. SEC, dating back to 2017, adjudication staff submitted memos to the Commission, and because internal databases were improperly configured, personnel from the enforcement division accessed these adjudication memos. Enforcement individuals also emailed the adjudication memos to other enforcement staff and uploaded the memos to enforcement databases. The result was that adjudication memoranda related to certain enforcement matters were available to the attorneys investigating and prosecuting those matters.

The SEC was careful to explain that for the two matters it investigated, its internal review team found no evidence that the enforcement staff reviewed the adjudicatory memos for the matters on which they were working. To its credit, the SEC hired an outside consulting firm to assist its internal team with establishing the scope and impact this control deficiency may have on other matters. This latest mistake, however, is just one example of the pitfalls that arise when government agencies are responsible for safeguarding information from themselves. Indeed, critics already are pressing for a limit on the use of in-house administrative law judges in the SEC’s enforcement actions. In a similar vein, limits should be applied on the ability of a government agency or institution to decide on privilege determinations for targets of its own prosecutions.

The Broader Problem in Criminal Cases

Although the recently-revealed SEC mishap appears to have been limited to its own materials, the inappropriate access to privileged materials is an ongoing problem that exists across prosecutorial and enforcement agencies and institutions. When prosecutors seize documents pursuant to a search warrant, common practice has become to establish a taint team to screen items for potential privilege. The trouble, of course, is that this team comprises the prosecutors’ colleagues and is conducted within the agency that is responsible for prosecuting the matter. Indeed, regardless of the euphemistic term, a “taint team” by design enables government lawyers to read and analyze a target’s most privileged materials. A more logical solution is to leave the responsibility of the privilege review with the privilege holder’s counsel, as is done when a grand jury issues a subpoena or, when in countless civil cases, adversaries demand documents from one another.

Increased Skepticism Of Taint Teams

For years, practitioners have challenged the government’s routine use of taint teams to review seized documents for potential privilege, with little response from the government. The current version of the Justice Manual (generally applied when searches of attorneys’ files are conducted) simply instructs that “[w]hile every effort should be made to avoid viewing privileged material, the search may require limited review of arguably privileged material to ascertain whether the material is covered by the warrant. Therefore, to protect the attorney-client privilege and to ensure that the investigation is not compromised by exposure to privileged material relating to the investigation or to defense strategy, a ‘privilege team’ should be designated, consisting of agents and lawyers not involved in the underlying investigation.” Notably, the provision does not require any third-party involvement, including from the privilege holder, although it contemplates that a discussion regarding review procedures should take place “prior to approval of any warrant.”

In our 2016 article “Government Searches: The Trouble With Taint Teams,” my partner, Richard Albert, and I examined the difficulty a defendant may have in obtaining any relief following a government intrusion into the attorney-client privilege. Even where courts have found that the government “disregarded” privilege while utilizing a taint team through actions that “risk undermining” trust in the government, courts have ruled after that no prejudice resulted from the violation. Defendants then often are left without recourse. Since 2016, skepticism has only grown, as have attempts to protect privileged information before it is inadvertently turned over to the prosecutorial team.

In a highly critical 2019 opinion, the Fourth Circuit shook up the taint team landscape when it ruled that the use of a “filter team” to review all of the materials seized from a law firm was an improper assignment of judicial functions to the executive branch. In that case, the Maryland U.S. Attorney’s Office initiated an investigation into an attorney suspected of helping his client commit felonies. An IRS agent applied for a warrant to conduct a search of the attorney’s office and contemporaneously included a taint team protocol. The protocol indicated that the taint team would undertake to review all the potentially privileged materials that were seized and automatically send materials it deemed nonprivileged to the prosecution team. Only in instances where the taint team identified potentially privileged material or material it believed could be redacted would it consult with the law firm’s attorneys or seek judicial input. The law firm that was the subject of the warrant challenged the taint team protocols.

In reversing, the Fourth Circuit expounded “the important legal principals that protect attorney-client relationships” and recognized that “an adverse party’s review of privileged materials seriously injures the privilege holder.” The opinion called into question the overall practice of taint teams – stating, “[w]e have recognized that, when a dispute arises as to whether a lawyer’s communications or a lawyer’s documents are protected by the attorney-client privilege or work-product doctrine, the resolution of that dispute is a judicial function . . . especially when the executive branch is an interested party in the pending dispute.” In finding that the taint team caused the appearance of unfairness, the court observed that “prosecutors have a responsibility to not only see that justice is done, but to also ensure that justice appears to be done.”

The government scrambled to quell concerns after this opinion. In 2020, the Department of Justice created a Special Matters Unit to oversee taint teams. According to the DOJ’s 2020 Fraud Section Year In Review, the SMU “was created . . . to focus on issues related to privilege and legal ethics, including evidence collection and processing, pre- and post-indictment litigation, and advising and assisting Fraud Section prosecutors on related matters.” In short, the SMU is an internal middleman, whose responsibilities include: “(1) conduct[ing] filter reviews to ensure that prosecutors are not exposed to potentially privileged material, (2) litigat[ing] privilege-related issues in connection with Fraud Section cases, and (3) provid[ing] training and guidance to Fraud Section prosecutors.”

Establishing the SMU did not go far enough, and circuit courts continued to be highly critical of taint teams. In July 2021, the Fifth Circuit reversed a pre-indictment motion seeking the return of documents seized by the government pursuant to a search warrant. There, prosecutors from the Eastern District of Texas U.S. Attorney’s Office obtained a warrant to search a healthcare system’s offices in connection with possible criminal activity. The government assembled a taint team from another division in the Eastern District and conducted a privilege review of the seized material. Following the review, the healthcare system challenged the government’s refusal to return documents it already decided were privileged. In refusing to return or destroy the privileged material, the government argued that a future taint team could review the privilege logs and disagree. The Fifth Circuit interpreted this argument as a concession that the government “has no intent to respect [the target’s] interest in the privacy of its privileged materials as the investigation unfolds” and remanded the case for further proceedings.

One month later, the Eleventh Circuit heard a matter involving taint teams. There, the U.S. Attorney’s Office for the Northern District of Ohio was conducting a criminal investigation into money laundering. Pursuant to a search warrant, which included a taint team review protocol, the government seized documents from the corporate offices of a group of businesses, including files from the business’s in-house attorney. Following the seizure, representatives from the businesses filed a motion to intervene, arguing that privileged material had been seized and challenging the use of the taint team to review privileged documents. A magistrate judge granted the motion and later concluded that the original taint team protocol did not provide sufficient protection. The judge revised the protocol, but the intervenors sought additional modifications before the District Court and Court of Appeals. The Eleventh Circuit upheld the protocol as modified by the magistrate judge. In doing so, it required the government to comply with far more safeguards than taint teams historically used, including allowing the privilege holders to conduct the initial privilege review and requiring the privilege holders’ permission or a court order before any potentially privileged documents were disclosed to the prosecution.

It’s Time To Look Outside Of The Government For Privilege Protections

The SEC’s recent acknowledgement of missteps further demonstrates that the government’s efforts to shield material from itself is, even if well-intentioned, unworkable. Search warrant targets should not be made to surrender their important right to counsel and other privileges to a system that repeatedly has proven it is ill-equipped to protect privilege concerns. Any internal review of a target’s sensitive and privileged material by the government agency that is ultimately responsible for prosecuting the matter represents an inherent conflict of interest.

Once a seizure has taken place and the document have been secured, other easily implemented systems of review are available in instances where a party or the government reasonably believes this seized material contains privileged materials. The most obvious and balanced solution is to handle potentially privileged documents as they are dealt with across traditional criminal and civil litigations involving subpoenas. After the government has seized and secured the documents, in the face of reasonable privilege concerns and assuming the investigation is overt, it could permit counsel to the potential privilege holders to review the seized material or a copy of them. Counsel’s responsibility would be to make privilege calls and, as is common with subpoenas, to provide the government with a privilege log. The government would have the opportunity to seek judicial guidance on any disagreements. Counsel for the privilege holder is no less capable of protecting privilege than the prosecutor’s colleagues whose eyes should not be set upon the privileged materials. Such a process, of course, could essentially eliminate a defendant’s challenge based on violations of privilege related to the seized material.

A second alternative, where the complexity of the facts or other factors justify it, such as cases when an investigation is not yet overt or known to the potential privilege holder, is to appoint a special master to oversee the privilege review. If overt, counsel can also seek a self-review of the documents and/or a review by the judge before any privileged documents are released to the prosecuting team, as the Eleventh Circuit permitted. Although still more reasonable than utilizing taint teams, this alternative may be less welcomed by overburdened courts.

In any event, the government has demonstrated in numerous contexts that regardless of its intentions, serious breaches can and do occur. When they do, a party’s important privileges should not be the casualty.

To read more from Robert J. Anello, please visit www.maglaw.com.

Courtney Morphet, an associate at the firm, assisted in the preparation of this article.