Judge Dismisses KPMG Charges for Government Misconduct Respecting Right to Counsel

There was big news today in the white collar tax fraud case of 16 former partners and employees of the accounting powerhouse, KPMG. The Judge dismissed the charges against 13 of the defendants, harshly rebuking the Government for interfering with the defendants' 5th and 6th Amendment rights to due process, to effectively prepare and present a defense and to be represented by counsel of choice.

The opinion is here (pdf). For a wrap-up of news reports on the ruling, check out White Collar Crime Blog.

In a nutshell, and I'm coming late to the case, the Government made a cooperation deal with the company and offered it a deferred prosecution for its alleged misdeeds. In exchange, the Government for all intents and purposes demanded KPMG stop its long-time policy of paying legal fees for indicted employees.

The Judge previously had ruled these actions by the Government violated the indicted employees' 5th and 6th Amendment rights. But, he refused to dismiss the Indictment because attempts were being made in other court actions and on other fronts to get KPMG to pay the legal fees.

Those fell through, the Government refused to budge, and today it paid the price. The Court granted the dismissal against 13 defendants. The remaining three, whose legal fees were not subject to payment by KPMG, will go to trial.

The Government likely will appeal.

What's at issue is the so-called "Thompson Memorandum," named for former Ashcroft Deputy Attorney General Larry Thompson.

More (advance warning, this is one of the longest posts ever)...

The first time the issue came up, the Judge ruled:

“KPMG’s decision to cut off all payments of legal fees and expenses to anyone who was indicted and to limit and to condition such payments prior to indictment upon cooperation with the government was the direct consequence of the pressure applied by the Thompson Memorandum and the USAO. Absent the Thompson Memorandum and the actions of the USAO, KPMG would have paid the legal fees and expenses of all of its partners and employees both prior to and after indictment, without regard to cost.”

The Government argued the Judge was misinterpreting the Thompson memo. Not so, says the Judge.

The Memorandum did not, the government contends, discourage payment of legal fees for company employees by increasing the risk of indictment of a company under investigation that chooses to make such payments. The Court disagrees. Not only is the Court’s reading of the document correct, and in any case certainly well within the bounds of its role as fact finder, but it is a reading shared by the Bar in general and KPMG’s counsel in particular.

A copy of the Thompson Memorandum is here (pdf). Its intent was to provide guidance in charging corporations with a crime. It stated that cooperation with the Government's investigation was a factor to be considered. It also said,

"[i]n 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. ”

As if that wasn't bad enough, the memo continued:

“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."

In other words, as the Judge ruled today, the Thompson Memorandum said that if a corporation voluntarily paid legal fees for employees involved in the investigation, the Government could use that to decide the company was not cooperating after all. There was an exception for legal fees the corporation was contractually obligated to pay. It said,

“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.”

After the Judge first ruled this policy violated the defendant's rights, the Justice Department, in December 2006, revised the Thompson Memo. The revised version is called the McNulty Memo, and is available here (pdf).

Still, the Government claimed the Thompson Memo only referred to "circling the wagons," meaning instances in which the company was making an effort to appear cooperative while protecting culpable employees.”

Hogwash, said the Judge today.

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.

I'm only up to page 11 of the 68 page opinion. If the case interests you, and it should, because the 5th and 6th Amendments are bedrocks of our criminal justice system and the case reeks of Government misconduct in trying to block the defendants from both guarantees, go on over and finish reading the opinion.

Ok, here's a little more. The Court said it wasn't necessary to decide whether the Thompson Memo amounted to outrageous conduct in order to find a due process violation. It then turned to the U.S. Attorneys' conduct and found their conduct was outrageous enough to shock the conscience of the court.

In this case, the USAO pressured KPMG to withhold payment of legal fees. As Stein I found, the prosecutors understood “that the threat inherent in the Thompson Memorandum, coupled with their own reinforcement of that threat, was likely to produce exactly the result that occurred – KPMG’s determination to cut off the payment of legal fees for any employees or former employees who were indicted and to limit and condition their payment during the investigative stage.”

And that's not the end of the prosecutorial misconduct.

The actions of the prosecutors with respect to legal fees may be considered also in light of their actions with respect to obtaining proffers from KPMG employees under suspicion, all of whom had a Fifth Amendment right to decline to speak to the government.

The prosecutors knew that the Thompson Memorandum effectively compelled KPMG to make its personnel available for interviews by the government. They knew, as the government said at the fee hearing, that “there are two ways the company could get their people in. One is they could hold over their head their job. The other is they could cut off their legal fees.”

They therefore understood that KPMG would threaten to fire or cut off payment of legal fees for employees and former employees whom prosecutors reported were not cooperating – i.e., who were refusing to submit to interviews with the government.

Yet the prosecutors identified such persons to KPMG anyway. These actions are significant not only in themselves, but also for the insight they provide into the prosecutors’ actions with respect to payment of legal fees. For they demonstrate a willingness by the prosecutors to use their life and death power over KPMG to induce KPMG to coerce its personnel to bend to the government’s wishes notwithstanding the fact that the Constitution barred the government from doing directly what it forced KPMG to do for it.

The Judge is really rocking now, and we're only up to page 38. He continues with his finding,

Their actions were not justified by any legitimate governmental interest. Their deliberate interference with the defendants’ rights was outrageous and shocking in the constitutional sense because it was fundamentally at odds with two of our most basic constitutional values – the right to counsel and the right to fair criminal proceedings.

....The government’s actions with respect to legal fees were at least deliberately indifferent to the rights of the defendants and others. In all the circumstances, this behavior shocks the conscience in the constitutional sense whether prosecutors were merely deliberately indifferent to the KPMG Defendants’ rights or acted more culpably.

The court then moves on to the argument that the Government deprived the defendants of their right to counsel of choice. He rules as to some of them it did.

The Supreme Court and the Second Circuit have recognized, a criminal defendant has a constitutional right “to control the presentation of his defense.”... “Inherent in a defendant’s right to control the presentation of his defense is the right to choose the counsel who presents it. ”... This includes the right to a second lawyer or law firm if the defendant can afford it, either from his own resources or from resources lawfully available to him from others.

The court cites last year's Supreme Court decision in Gonzales-Lopez:

“Where the right to be assisted by counsel of one’s choice is wrongly denied, . . . it is unnecessary to conduct an ineffectiveness or prejudice inquiry to establish a Sixth Amendment violation. Deprivation of the right is ‘complete’ when the defendant is erroneously prevented from being represented by the lawyer he wants, regardless of the quality of the representation he received.

To argue otherwise is to confuse the right to counsel of choice – which is the right to a particular lawyer regardless of comparative effectiveness – with the right to effective counsel – which imposes a baseline requirement of competence on whatever lawyer is chosen or appointed.”

He's much stronger on ruling that the Government impaired the defendants' ability to defend themselves.

This post has gone on long enough, so let me just say that any defense lawyer in a federal multi-defendant, document intensive case is going to want to read this part.

He concludes:

All of the KPMG Defendants as to whom the government concedes dismissal to be the proper remedy say that KPMG’s refusal to pay their post-indictment legal fees has caused them to restrict the activities of their counsel, limited or precluded their attorneys’ review of the documents produced by the government in discovery, prevented them from interviewing witnesses, caused them to refrain from retaining expert witnesses, and/or left them without information technology assistance necessary for dealing with the mountains of electronic discovery.

The government has not contested these assertions. The Court therefore has no reason to doubt, and hence finds, that all of them have been forced to limit their defenses in the respects claimed for economic reasons and that they would not have been so constrained if KPMG paid their expenses
subject only to the usual sort of administrative requirements typically imposed by corporate law departments on outside counsel fees.

Interestingly, when the court turns its attention to remedies (p. 52) it considers whether appointing CJA counsel would solve the problem. He says it won't. Those interested in that issue will want to read this section.

The judge finds that the Government's interference with the defendants' right to counsel of choice alone warrant dismissal of the Indictment -- irrespective of the other violations.

Lastly, in dismissing the charges against 13 of the 16 remaining defendants , the court quotes these memorable words of the Supreme Court in 1935 in Berger v. United States.

a prosecutor “is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done.

As such, he is in a peculiar and very definite sense the servant of the law, the twofold aim of which is that guilt shall not escape or innocence suffer. He may prosecute with earnestness and vigor – indeed, he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones.

While the Government wanted this dismissal so it could take the issue to the Second Circuit, it may have gotten more than it bargained for.

Update: White Collar Crime Blog has some more commentary and analysis here and here.

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  • Display: Sort:
    ok, a question: (none / 0) (#1)
    by cpinva on Tue Jul 17, 2007 at 09:10:30 AM EST
    how is the "thompson memorandum" any different, in ultimate effect, from the gov't seizing all your assets, prior to any trial or conviction, in a RICO case? both have the net effect of denying you your 5th & 6th amendment rights, as near as i can tell. both have the effect of taking the funds necessary to defend yourself, and choose your counsel.

    were i an enterprising young atty., i would be looking at this opinion as the blunt end of a sharpened stake, to drive through the heart of the RICO statutes.

    of course, i realize this is a bit of a stretch, but such is what supreme court cases are sometimes built upon.

    good point, cp, but not likely to go far (none / 0) (#2)
    by scribe on Tue Jul 17, 2007 at 11:33:07 AM EST
    in today's judicial climate, nor for the forseeable future.

    But as I understand the distinction here, as oppposed to the RICO and forfeiture situations you put forward, is along these lines:

    1.  The Thompson and McNulty Memoranda threaten the indictment of the corporation in the event they fail to "cooperate" with the government in the government's investigation, "cooperate" being defined by the government as whatever suits its fancy.  
    2.  The corporation or partnership ("entity") involved in any such investigation is almost certainly subject to severe penalties (in the practical sense) in the event of indictment, let alone conviction.  
    For example (and speaking only sort of hypothetically) in the event of indictment, the entity may be required by some law or regulation somewhere to withdraw from dealing in securities, or to withdraw from auditing public authorities or governments, or to lose government contracts, or to lose security clearances, or there may be clauses in the entity's private contracts imposing some loss of business or contractual rights in the event of indictment.  As we saw in the Arthur Andersen case, indictment, trial and conviction later overturned was, nonetheless, a death sentence.  The public/government contracts could not be maintained as a matter of law governing the public/government bodies.  The private clients would not stick around, as the people looking at their books would question the audits' validity, given they were performed by a(n allegedly) criminal entity.
    1.  To avoid this fate, the entity would be inclined to do what it had to, to satisfy the government.  The government demanded the entity give up its employees.
    2.  This impeded the employees in their 5th and 6th amendment rights.  It appears it was intended to.
    (a) the employees' 5th amendment rights were impinged because, inter alia, they were being compelled to talk, contrary to their right to not talk.
    (b) the employees' 6th amendment rights were impinged because they could not hire appropriate counsel.  Many corporations, as a part of their bylaws, provide counsel to their employees for charges arising out of the employees' work for the corporation.  For example, many trucking companies will provide their employee drivers (less likely for independent contractors) with counsel in the event of, say, a speeding ticket or a charge arising out of an accident.  For another example, by law, many governments will provide (i.e., pay for) defense counsel of a cop's choice, if the cop is criminally charged relative to his involvement in enforcing the law.  Say, when the cops shoot someone and get charged - the government usually indemnifies for the cop's defense counsel.
    5.  The government would not have been able to so impinge upon the employees rights had it not been acting through the entity.  "Talk or else" has an entirely different ring when it comes from your boss - when the "or else" means no more employment.  Hire Joe the attorney because you cannot lay out a $250k (or more) retainer (You don't keep that kind of cash laying around?) for defense by someone skilled in federal criminal defense, tax and securities law.

    The RICO and forefeiture contexts are quite different.  (RICO seizures are just a species of forfeitures generally)  I know I've discussed this before:

    1. In a forefeiture case, the forfeited property is deemed guilty - as it is either contraband or the proceeds of the crime.  
    2.  Forfeited property - contraband or proceeds, it matters not - is deemed to have belonged to the government from the instant it became infected with criminality.  In the case of contraband, this would be ab initio.  In the case of proceeds it would be from when, say, the house was bought with drug money.
    3.  The forfeiture action is considered to be the government recovering possession of what was rightfully the government's property.
    4.  If you think the property being forfeited is yours (i.e., not properly subject to forfeiture), you must prove the property's innocent nature (or derivation) and your entitlement to it, in a civil action.
    5.  There is no 5th Amendment right implicated, other than providing a due process forum to adjudicate whether the forfeiture is proper.  Because the property is property, it is incapable of having "rights" to violate, and it is incapable of being "innocent until proven guilty" of anything.
    6.  There is no right to counsel which the property can be deprived of.

    Power (none / 0) (#3)
    by Abdul Abulbul Amir on Tue Jul 17, 2007 at 01:06:00 PM EST
    ...a willingness by the prosecutors to use their life and death power over KPMG...

    Does anyone else here feel that it is wrong for a prosecutor to have such power at in the first place?

    Totally Feel That Way (none / 0) (#4)
    by Jeralyn on Tue Jul 17, 2007 at 10:33:37 PM EST
    That's why the defense bar has hated the Thompson memo since it came out.