The Thompson Memo and its Discontents
Just as insidious as government attempts to compel business organizations to waive the attorney-client privilege is the attempt to force companies to cut off their employees' attorneys fees. There is an extensive debate whether or not the government improperly pressured KPMG -- in connection with the allegations that KPMG sold fraudulent tax shelters -- to withhold individual employees' and partners' defense fees. (KPMG itself, seeking to avoid the death sentence of a criminal indictment, agreed to a $456 million deferred prosecution agreement). A May 19, 2006 post of the Corporate Crime Reporter attibutes the following to the Judge who heard argument in a pretrial hearing in the KPMG matter:
Other cases have presented this same question. In March 2006, a federal judge granted a three-month postponement of the criminal trial of five former executives of Enterasys Networks. According to defense lawyers' filings, government lawyers pressured the company to cut off legal fees to the defendants to weaken the employees' ability to fight the charges. A March 28, 2006 Wall Street Journal article (via wsj.com, subscription required) discussing the Enterasys Networks case also states that in their investigation of accounting fraud at HealthSouth, federal prosecutors informed the company that payment of fees to indicted executives would be viewed as a sign of noncooperation, according to defense lawyers. The article also reports that prosecutors encouraged Symbol Technologies to withhold fees from exectives charged in an alleged accounting fraud. (Symbol apparently was able to pay the fees after it convinced prosecutors that the company bylaws required it to do so.) An article in the Spring 2006 issue of The John Liner Review (subscription required) details the government's largely successful efforts in connection with the prosecution of two executives from Westar Energy to prevent the utility from advancing defense costs to the officers despite the company's bylaws clearly mandating advancement
Isn’t it just perfectly obvious from a reading of the Thompson memorandum that it is the position of the United States Department of Justice that a company facing possible prosecution hurts its case for a favorable outcome by advancing defense costs to present and former employees, except where they are legally obligated to do so, and that the natural consequence of that is that some corporations in that position, in furtherance of their enlightened self-interest, will cut off defense costs for individuals, who in the fullness of time will be indicted, and thus be deprived to one degree or another of the means of mounting a defense against the indictment?
An extensive April 17, 2006 New York Times article discussing the issue of individuals' attorneys' fees and corporate cooperation under the Thompson Memo can be found here. (Registration required.)
The cover page of the Thompson memo states that "[f]urther experience with these guidelines may lead to additional adjustments." The time for the additional adjustments is overdue.
Update: The options backdating story has grown beyond The D & O Diary's ability to keep up with it. Fortunately, wsj.com has set up a separate page devoted to options backdating, which it updating on a daily basis. The WSJ Law Blog has an interesting post examining the apparent turf battle between the EDNY and the SDNY in issuing subpoenas in the options backdating probe (current score: EDNY 7 subpoenas, SDNY 6).