Feds’ Tactics On Legal Bills Draw Scrutiny

Some recent court cases may be indicators that the tide is turning back in favor of the once-common practice of advancing legal fees to employees entangled in government investigations, which had appeared to be under fire by federal prosecutors in recent years.

With the decisions, legal experts say, U.S. courts appear to be taking a close look at accusations raised by some defense attorneys that federal prosecutors pressure corporations to cut off the advancement of legal fees to employees involved in criminal investigations, so the companies can be viewed as “cooperative” and avoid prosecution.

In the spotlight right now is a case against 16 former KPMG employees indicted for selling questionable tax shelters. A hearing was held earlier this month to determine whether the government improperly pressured the accounting firm to stop paying the employees’ legal fees.

Hockeimer

At press time, the judge had not ruled on the issue. But Henry Hockeimer, a partner at Ballard Spahr Andrews & Ingersoll, cites it as “a prime example that there appears to be some serious pushback by courts in whether this is an appropriate tactic for the Department of Justice to take.”

Experts say issues surrounding the payment of legal fees for employees under government investigation stems from a standard under the now-famous Thompson Memo, a December 2003 memorandum authored by then-Deputy Attorney General Larry Thompson. The document sets forth the criteria prosecutors should consider in determining whether to indict a company, and stipulates that advancing attorney fees can be considered by prosecutors when weighing the extent and value of a corporation’s cooperation (see box above, right).

Bronis

Some say the memo has chilled companies’ willingness to pay legal fees for employees charged with wrongdoing. The Justice Department has steadfastly refuted such criticism, stating, according to spokesmen, that the government doesn’t “force corporations to do anything.” But Stephen Bronis, a partner at Zuckerman Spaeder, describes the memo’s language as “troubling” and says it “creates an atmosphere where the decision for a company to advance or pay legal fees for an employee becomes a very tough one for the company to make.”

“The norm in past years was that legal fees were readily advanced and paid for prior to conviction,” Bronis says. “Now that’s becoming more of an exception, and it’s adversely impacting the rights of those presumed innocent employees and executives to get adequate defense and effective assistance of counsel.”

In the KPMG case, as part of a deferred prosecution settlement KPMG agreed last August to pay $456 million and admit to committing fraud in the marketing of questionable tax shelters. According to press reports, after prosecutors questioned the payment of legal fees, the firm, to avoid indictment itself, told the 16 indicted employees it would pay up to $400,000 of their legal fees if they cooperated with the government. Hockeimer says companies will be “closely monitoring” the judge’s decision.

THE THOMPSON MEMO

The excerpt below is from The Thompson Memo,"

which was a January 20, 2003, memo from Department of Justice Deputy Attorney General Larry D. Thompson to the "Heads of Department Components, United States Attorneys." The memo was titled, "Principles of Federal Prosecution of Business Organizations," and the excerpt below was from Section VI, "Charging a Corporation: Cooperation and Voluntary Disclosure." Relevant provision has been highlighted in red:

A. General Principle: In determining whether to charge a corporation, that corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate with the government's investigation may be relevant factors. In gauging the extent of the corporation's cooperation, the prosecutor may consider the corporation's willingness to identify the culprits within the corporation, including senior executives; to make witnesses available; to disclose the complete results of its internal investigation; and to waive attorney-client and work product protection.

B. Comment: In investigating wrongdoing by or within a corporation, a prosecutor is likely to encounter several obstacles resulting from the nature of the corporation itself. It will often be difficult to determine which individual took which action on behalf of the corporation. Lines of authority and responsibility may be shared among operating divisions or departments, and records and personnel may be spread throughout the United States or even among several countries. Where the criminal conduct continued over an extended period of time, the culpable or knowledgeable personnel may have been promoted, transferred, or fired, or they may have quit or retired. Accordingly, a corporation's cooperation may be critical in identifying the culprits and locating relevant evidence.

In some circumstances, therefore, granting a corporation immunity or amnesty or pretrial diversion may be considered in the course of the government's investigation. In such circumstances, prosecutors should refer to the principles governing non-prosecution agreements generally. See USAM § 9-27.600-650. These principles permit a non prosecution agreement in exchange for cooperation when a corporation's "timely cooperation appears to be necessary to the public interest and other means of obtaining the desired cooperation are unavailable or would not be effective." Prosecutors should note that in the case of national or multi-national corporations, multi-district or global agreements may be necessary. Such agreements may only be entered into with the approval of each affected district or the appropriate Department official. See USAM §9-27.641.

In addition, the Department, in conjunction with regulatory agencies and other executive branch departments, encourages corporations, as part of their compliance programs, to conduct internal investigations and to disclose their findings to the appropriate authorities. Some agencies, such as the SEC and the EPA, as well as the Department's Environmental and Natural Resources Division, have formal voluntary disclosure programs in which self-reporting, coupled with remediation and additional criteria, may qualify the corporation for amnesty or reduced sanctions. Even in the absence of a formal program, prosecutors may consider a corporation's timely and voluntary disclosure in evaluating the adequacy of the corporation's compliance program and its management's commitment to the compliance program. However, prosecution and economic policies specific to the industry or statute may require prosecution notwithstanding a corporation's willingness to cooperate. For example, the Antitrust Division offers amnesty only to the first corporation to agree to cooperate. This creates a strong incentive for corporations participating in anti-competitive conduct to be the first to cooperate. In addition, amnesty, immunity, or reduced sanctions may not be appropriate where the corporation's business is permeated with fraud or other crimes.

One factor the prosecutor may weigh in assessing the adequacy of a corporation's cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections, both with respect to its internal investigation and with respect to communications between specific officers, directors and employees and counsel. Such waivers permit the government to obtain statements of possible witnesses, subjects, and targets, without having to negotiate individual cooperation or immunity agreements. In addition, they are often critical in enabling the government to evaluate the completeness of a corporation's voluntary disclosure and cooperation. Prosecutors may, therefore, request a waiver in appropriate circumstances. The Department does not, however, consider waiver of a corporation's attorney-client and work product protection an absolute requirement, and prosecutors should consider the willingness of a corporation to waive such protection when necessary to provide timely and complete information as one factor in evaluating the corporation's cooperation.

Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation's promise of support to culpable employees and agents, either through the advancing of attorneys fees*, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation. By the same token, the prosecutor should be wary of attempts to shield corporate officers and employees from liability by a willingness of the corporation to plead guilty.

Another factor to be weighed by the prosecutor is whether the corporation, while purporting to cooperate, has engaged in conduct that impedes the investigation (whether or not rising to the level of criminal obstruction). Examples of such conduct include: overly broad assertions of corporate representation of employees or former employees; inappropriate directions to employees or their counsel, such as directions not to cooperate openly and fully with the investigation including, for example, the direction to decline to be interviewed; making presentations or submissions that contain misleading assertions or omissions; incomplete or delayed production of records; and failure to promptly disclose illegal conduct known to the corporation.

Finally, a corporation's offer of cooperation does not automatically entitle it to immunity from prosecution. A corporation should not be able to escape liability merely by offering up its directors, officers, employees, or agents as in lieu of its own prosecution. Thus, a corporation's willingness to cooperate is merely one relevant factor, that needs to be considered in conjunction with the other factors, particularly those relating to the corporation's past history and the role of management in the wrongdoing.

Note, Source

* The original document included the following footnote: "Some states require corporations to pay the legal fees of officers under investigation prior to a formal determination of their guilt. Obviously, a corporation's compliance with governing law should not be considered a failure to cooperate."

The Thompson Memo: Principles Of Federal Prosecution Of Business Organizations

In another case involving Enterasys Networks, defense attorneys had argued that federal prosecutors should be sanctioned for allegedly pressuring the company to stop paying fees for former employees charged in an alleged accounting fraud. In a decision in March, the judge in that case refused to sanction the prosecutors—but, Hockeimer notes, the judge also said he had “concerns about the government exerting pressure on the company.” Enterasys subsequently agreed to pay the employees’ past and future legal fees.

“There’s a scent of a trend that courts are becoming more combative, and less receptive to what are perceived to be government strong-arm techniques against companies to cut off the ability of employees to mount decent defenses” in criminal cases, Hockeimer says.

In A Difficult Position

Regardless of whether prosecutors really do pressure corporations to cut off legal support to targeted employees, companies regularly have no choice but to cover legal expenses—if, say, they are obligated to advance legal fees to workers under an employment contract, a company bylaw, or a state statute providing for indemnification.

Henning

Peter Henning, a professor at Wayne State University Law School, notes that companies are sometimes put in a “difficult” position. “There’s a clash between companies trying to curry favor with prosecutors to avoid an indictment, and meeting its legal and contractual obligations” to indemnify employees, Henning says.

For companies with bylaws that require indemnification or that are incorporated in states with laws that provide for mandatory indemnification, the issue is much diminished. A footnote in the Thompson Memo notes that a corporation’s compliance with governing law shouldn’t be considered a failure to cooperate. Hockeimer points to fraud charges filed against executives of Symbol Technologies in 2003 and 2004. Defense attorneys said federal prosecutors had encouraged the company to withhold fees from executives charged in an alleged accounting fraud, but Symbol convinced prosecutors that its bylaws required it to pay the employee’s legal fees.

But in instances where indemnification is discretionary, “some aggressive prosecutors may scrutinize the company’s implementation of that discretion,” Hockeimer says.

“For a company in that position, the question becomes ‘Who would you rather do battle with?’” Bronis says. “Would you rather fight the government because you’re complying with your contractual obligations or bylaws, or an employee who takes you to court to get a judge to compel you to pay their legal fees? Many companies take the position that they’d rather not fight with the government.”

Still, Henning notes that courts in Delaware, where many companies are incorporated, “have gone out of their way to enforce agreements to protect employees.” He cites the case last fall of Tafeen v. Homestore, in which both the Delaware Supreme and Chancery Courts rejected Homestore’s attempt to avoid advancing attorney’s fees to an officer ensnared in the investigation who eventually pled guilty (see box above, right for Tafeen decision).

However, Henning says, “I think you’ll see fewer instances of voluntary payment of legal fees unless the company has a contractual obligation.”

With the exception of the pending KPMG case, Bronis says that so far, criminal court judges for the most part have argued that they have no authority to force the government to reverse the positions it takes in a prosecution, or otherwise sanction the government for enforcing provisions of the Thompson Memo that say companies ought not to pay employees’ legal fees.

Still, he notes that accused employees have had more success filing lawsuit in the state courts. In Delaware and other states, Bronis says, employees have persuaded some civil judges to force companies to pay their legal fees under state statutes.

Bronis, who chairs the White Collar Crime Committee of the American Bar Association, says the issue of legal fees is just one aspect of the Thompson Memo that’s come under fire by portions of the legal community.

He told Compliance Week that the ABA’s criminal justice section is preparing some ethical standards, including a standard by which prosecutors should not gauge the culpability of a company by its decision to pay for the defense of employees who haven’t been convicted of any crimes. The group hopes to have the standards ready in time for the ABA’s August meeting.

Related cases, coverage and columns can be found in the box above, right.