This week, a federal judge ruled that the Department of Justice's "encouragement" of firms to cooperate in the investigation of their employees cannot include forcing those corporations to cut off their employees' legal fees.
Judge Lewis Kaplan, a federal judge sitting in the Southern District of New York who had already expressed his concern over the government's policy, ruled that "those who commit crimes - regardless of whether they wear white or blue collars - must be brought to justice. The government, however, has let its zeal get in the way of its judgment. It has violated the Constitution it is sworn to defend."
The judge's opinion could not be more clear. The case, which has attracted much attention because of the judge's outspoken views, arises from KPMG's development and promotion of tax shelters that the government has alleged were fraudulent. Another judge had raised similar questions in a pending federal criminal prosecution in New Hampshire. These cases graphically illustrate how the DOJ is overstepping, even compromising, the Sixth Amendment right to counsel.
The implication of Kaplan's opinion is that the federal policy that curtailed a company's agreement to advance legal fees to its employees is misguided and heavy-handed, and it turned the presumption of innocence on its head. We submit that the government should be less concerned about the ability of the accused to fund an adequate defense than about the rightness of its cause. Why should a loyal employee, even a misguided one, be faced with the choice of obtaining adequate defense or facing financial ruin?
In 2003, at the height of the corporate criminal scandals swirling around Enron, Arthur Andersen, WorldCom and Health South, then-U.S. Deputy Attorney General Larry Thompson issued a memorandum to federal prosecutors on what factors they should consider in deciding whether to indict a corporation. The Thompson memorandum states that companies too often "take steps to impede the quick and effective exposure of the complete scope of wrongdoing under investigation." Prosecutors should weigh "whether the corporation appears to be protecting its culpable employees and agents. . . . [T]he advancing of attorneys fees . . . may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation."
According to Kaplan's ruling, the memo violated the KPMG defendants' Sixth Amendment right to counsel. In the absence of any evidence of obstruction or indication of a lack of full cooperation by a prospective defendant, he stated, the government cannot interfere with the right of an individual to obtain resources lawfully available to them in order to defend themselves.
In New Hampshire, officers and employees of Enterasys Networks (ETS), the successor to Cabletron, were indicted in federal court for "cooking" the company's books, i.e., issuing false and misleading financial statements, overstating the company's earnings and understating its losses. Under the corporation's Delaware bylaws, ETS was required to advance legal fees and costs to the officers and indemnify them. (In both the KPMG and ETS cases, the defendants were acting in their roles as employees executing policies on behalf of and for the benefit of their corporate employer.)
Once ETS learned that the DOJ was considering indicting the corporation, ETS agreed to cooperate. Relying on the Thompson memo, the DOJ "strongly advised" ETS to stop paying indicted officers' legal fees. Implicit in the government's "suggestion" was that the canceling of defense reimbursement to its executives was critical to the determination of cooperation. ETS complied, fearful of being indicted and not being viewed as "cooperative." Defense counsel for the indicted ETS officials filed motions challenging this action as a violation of their clients' Sixth Amendment rights.
In March 2006, New Hampshire U.S. District Judge Paul Barbadoro expressed serious concerns about the government's overreaching. Based on the judge's stated concerns, ETS reversed itself and agreed to continue paying the legal fees.
In 2005, KPMG narrowly avoided an indictment over the tax shelter issue. As part of a deferred prosecution agreement entered into with the government, KPMG agreed to pay the United States $456 million and "cooperate." A number of KPMG officers and partners were indicted for developing and promoting the same tax shelters. According to a New York Times article, one of the Southern District prosecutors actually told KPMG, "if you have discretion regarding fees, we will look at that under a microscope." Not surprisingly, KPMG demonstrated its cooperation by ending legal fees for its employees the government planned to indict.
Kaplan's opinion should come as no surprise. At a hearing in late March in the criminal case against the former KPMG executives, Kaplan, referring to the Thompson memo and KPMG's cutting off payment of legal fees for its then unindicted officers and employees as a show of cooperation, stated, "But they [the indicted KPMG officers and employees] have a right to KPMG making that decision [whether to advance legal fees] without your [DOJ's] thumb on the scale saying that if you do this, you're aiding a wrongdoer because we [DOJ] say they're wrongdoers. I find this shameful."
Groups ranging across the political spectrum, from the National Association of Criminal Defense Lawyers to the U.S. Chamber of Commerce have agreed with Kaplan's March statements that the government's use of the Thompson memo to interfere with the right to counsel of choice is wrong.
Companies should not be forced to choose between supporting loyal employees and being denied credit for their otherwise cooperative/remedial conduct. Many firms cannot risk their survival on a trial because of their dependence on government contracts or reimbursement. No matter how justified, a corporate defense for these companies is a luxury they can't afford. The company's vulnerability, however, should not handicap the defense of its employees.
By a stroke of the pen, the Department of Justice should now amend the Thompson memo, so that "justice is also done" to corporate employees entitled by company bylaws to advancement of legal fees for conduct occurring during and within the scope of employment.
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