Yes, Corporate America and its legal teams are cheering federal district court’s decision to dismiss charges against 13 ex-KPMG workers, amid allegations that government prosecutors had strong-armed KPMG into abandoning its employees.
Now, however, comes the difficult question of whether that one favorable decision will translate into broader new legal protections. The answer is far from clear.
Judge Lewis Kaplan, a well-respected member of the federal bench in New York City, dismissed charges against the KPMG employees on July 16 in U.S. v. Stein. Kaplan had consistently frowned on prosecutors’ tactics as the case proceeded, and his decision is viewed by many as a victory that will provide momentum for further reform of the government’s prosecutorial policies and procedures.
Krebs
“It’s a very significant decision,” says Frederick Krebs, president of the Association of Corporate Counsel. It “clearly sends a message to the Justice Department that their policies and procedures in this area are out of bounds.”
While federal prosecutors have had some success in high-profile corporate fraud prosecutions in the post-Enron era, the Justice Department has also been harshly criticized for using heavy-handed tactics, such as pressuring companies to waive attorney-client and work-product privilege and to cut off the payment of legal fees for employees under investigation so the company itself can avoid indictment. Accusations of the latter abounded in the KPMG case.
Pinales
Martin Pinales, president of the National Association of Criminal Defense Lawyers, cheered the dismissals as “a blow to the government’s use of oppressive tactics with individuals and corporations.”
“This decision says that if a company wants to support its employees, it has the ability to do so without worrying about repercussions, and employees have the right to stand up and fight with corporate support,” he says.
Still, the government has already said it plans to appeal Kaplan’s decision to the 2nd Circuit Court of Appeals. Until that appellate review occurs, legal observers say, exactly how much weight Kaplan’s decision will have in other courts is murky.
Kaplan dismissed the charges based on his assertion in a landmark June 2006 opinion that prosecutors violated the defendants’ constitutional rights by pressuring KPMG to cut off payment of their legal fees as part of its own efforts to avoid indictment. KPMG in August 2005 paid a $456 million penalty as part of a deferred-prosecution agreement.
The case will proceed to trial on the charges against five other defendants, two of whom weren’t employed by KPMG. Prosecutors allege that the group sold bogus tax shelters in violation of federal law.
DISMISSED
Below are excerpts of the District Court decision to dismiss the complaint against the ex-KPMG staffers.
The government nevertheless argues that there was no evidence that the Thompson Memorandum discouraged companies from paying employees’ legal fees by increasing the perceived risk of indictment for companies that did so. It suggests that there was no reason to believe that the defense bar—including KPMG’s counsel—ever read the Thompson Memorandum to convey such a threat. Indeed, it argues that “none of the prosecutors read the Thompson Memorandum in this way.” They construed the document, the government says, to mean that “the payment of legal fees [wa]s considered only when the Government believed such payments were part of an effort to ‘circle the wagons,’ an effort to appear cooperative while protecting culpable employees.”
The Thompson Memorandum is inconsistent with the government’s argument. It says clearly that, “depending on the circumstances, a corporation’s ... advancing of attorneys fees” could be viewed as “protecting its culpable employees and agents.” The government’s “circle the wagons” gloss simply is not in the text. Any competent lawyer reading the document would regard a corporate client that was under investigation as being at greater risk of indictment if it advanced legal fees to employees who might be viewed by prosecutors as culpable than if it did not advance legal fees. That is the plain meaning of the language. The Justice Department itself undoubtedly recognized this when, following Stein I, it changed it in the McNulty Memorandum. But this reading of the plain language of the document is supported by far more.
There can be no serious doubt that the Bar, as the Court properly inferred from the text of the Thompson Memorandum and the testimony of KPMG’s then-deputy general counsel, read the Thompson Memorandum as discouraging payment of legal fees for company employees under investigation by holding out the prospect that doing so would increase the risk of indictment. This view is supported by an abundance of published statements and literature ...
In sum, KPMG and its counsel knew from the Thompson Memorandum, even before they first communicated with the USAO, that the payment of the legal fees of KPMG employees, in the absence of a legal obligation to do so, would increase the risk of indictment of the firm, as prosecutors might view that action as protecting culpable employees. So the Court turns to the government’s next contention, viz. that KPMG conditioned and then cut off payment of legal fees entirely on its own, “not cowed by” the Thompson Memorandum and the actions of the USAO.
Source
U.S. District Court of Southern New York (July 16, 2007)
The government, which had joined in the defense’s motion to dismiss, filed a notice to appeal on July 16. A statement by Michael Garcia, U.S. Attorney for the Southern District of New York, said the government “respectfully disagrees with Judge Kaplan as to whether there was any constitutional violation in this case” and will “continue to pursue appellate review.”
Lehner
Randall Lehner, a partner at the law firm Reed Smith, says the appeal “sends a mixed message” that leaves uncertainty among corporate executives and defense lawyers about how the indemnification of legal fees will be viewed by the government.
Thompson, McNulty Memos
Following Kaplan’s June 2006 opinion scorching prosecutors’ conduct in the case, the Justice Department revised its guidelines for prosecuting corporations. Those rules had been described in a controversial 2003 document known as the Thompson Memo, issued by then-Deputy Attorney General Larry Thompson, and listed nine criteria prosecutors should consider before indicting a company—one of the worst things that can happen to a business.
Its resulting successor—the McNulty Memo, named for outgoing Deputy Attorney General Paul McNulty—arrived in December 2006. The McNulty Memo affirms the original nine criteria, but also requires prosecutors to seek approval to request waivers of attorney-client privilege and work-product protections. It also says prosecutors shouldn’t take into account the advancement of legal fees except in rare cases where circumstances show it was intended to impede an investigation.
Ribstein
Larry Ribstein, a law professor at the University of Illinois, says, the Justice Department’s decision to appeal U.S. v. Stein, and risk the consequences of an adverse ruling, “indicates how important they think having that flexibility [to use those tactics] in future cases is … What happens in the future depends a lot on the extent to which the 2nd Circuit agrees or disagrees with Judge Kaplan.”
Others, such as Michael McGovern, a former assistant U.S. attorney for the Southern District of New York and now a partner in the law firm Ropes & Gray, agree. Kaplan’s ruling, while significant, is still only the opinion of one federal judge, he says. The opinion of a federal appeals court “will have tremendous persuasive effect on other federal circuits, and perhaps even the Supreme Court, if the case makes it that far.”
McGovern
Regardless, McGovern says, even if this latest decision is overturned, “The changes from Kaplan’s first decision [in June 2006] have already had an effect on DOJ policy and aren’t likely going to be reversed in the near term even if this decision is reversed on appeal. He’s already accomplished the modification of what were considered to be some of the more egregious provisions of the Thompson Memo.”
Krebs says Kaplan’s latest decision gives momentum to broader efforts to curb abusive tactics by prosecutors, including legislation introduced this year in both the House and Senate aimed at protecting attorney-client privilege.
That privilege “has been under attack and battered and bruised for many years,” Krebs says, but Kaplan’s ruling—along with a July decision in the 3rd Circuit, Teleglobe v. BCE, which upheld a claim of attorney-client privilege by a corporation in a dispute with subsidiaries—suggest that “the pendulum is swinging the other way.”
If Kaplan’s findings of fact and conclusions of law survive appeal, McGovern says, “I believe that in current and future investigations, the government is going to be quite wary of dictating to a company what it needs to do vis-à-vis its employees in order to avoid indictment.”
On the other hand, he warns, “If they reverse him, the question is, how far will they go?”
McGovern says the 2nd Circuit has already given “hints … that they aren’t as convinced as Kaplan that there was a constitutional violation here.” For example, the appeals court found that Kaplan didn’t have ancillary jurisdiction to adjudicate the issue of attorneys’ fees in the KPMG case.
While McGovern expects the court will show Kaplan some deference on his factual findings, “They are free to draw a different conclusion from the facts,” he says. “They may say the conduct by government was not improper. Or it could be a mixed bag, which is how a lot of people are handicapping it now.”
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