On June 27th, Judge Lewis Kaplan of the United States District Court for the Southern District of New York ruled that the Department of Justice (DOJ) had violated the substantive due process rights and the right to counsel and fair trial of former employees and partners of KPMG by inducing KPMG to cut off the advancement of attorneys fees—in violation of KPMG’s own indemnification policy.
The impetus for Judge Kaplan’s decision was that KPMG had a long-standing policy (without exception) of advancing attorneys fees to employees and partners under criminal investigation. Judge Kaplan focused in on DOJ policy (the so called Thompson Memorandum), which requires DOJ prosecutors to take into account in their enterprise charging decision whether KPMG was "protecting its culpable employees and agents . . . through the advancement of attorneys fees." The statements of DOJ officials during negotiations with KPMG’s counsel (e.g., "Misconduct should not be rewarded.") reinforced that KPMG would be substantially increasing its risk of indictment if it followed its existing indemnification policy.
As a result of DOJ’s Thompson Memorandum and communications from DOJ prosecutors during negotiations, KPMG changed its long-standing policy in two ways. First, it cut off advancement of pre-indictment fees to anyone who did not cooperate fully with the government’s investigation. Second, it cut off any advancement of fees completely upon indictment. KPMG was rewarded with a Deferred Prosecution Agreement in the tax shelter investigation.
Judge Kaplan ruled that "but for" the language in the Thompson Memorandum and the pressure put on KPMG during negotiations, KPMG would have followed its long-standing policy of advancing fees both before and after indictment until the cases as to its personnel had been fully adjudicated. The key to Judge Kaplan’s decision was that KPMG had a long standing policy and practice of advancing attorneys fees. The outcome may have been different if KPMG had not had a consistent and long-standing policy of advancing fees.
Even in states in which indemnification is a matter of right, the advancement of fees may be discretionary. And the environment for officers and directors insurance has toughened. Ultimately, the best protection for officers and directors is to have the corporation’s bylaws require the advancement of fees in the event of an investigation. Corporations may be chary to amend their bylaws to give new protections to officers and directors in the current post-Enron atmosphere, but it will certainly assist companies in recruiting and retaining talented people to do so.
The DOJ has issued a press release standing by the Thompson Memorandum. It may take another couple of rounds before this issue is resolved. In the meantime, it is a victory for the indemnification rights of employees and agents of companies faced with investigation or indictment arising out of their employment.
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