The KPMG Defendants’ Dismissal: Consequences, Implications and Pending Congressional Action

In a 64-page opinion dated July 16, 2007 (here), U.S. District Court Judge Lewis Kaplan granted the dismissal motions of thirteen of sixteen of the individual defendants in the KPMG tax shelter litigation, ruling that he had no choice but to dismiss the charges because prosecutors had violated the constitutional rights of defendants when they coerced KPMG to cut off the defendants’ legal fees.

Judge Kaplan had previously ruled (see prior post, here) that the government’s action in implementing the now-superseded Thompson Memorandum (which provides guidelines for corporate prosecution) violated individuals’ constitutional rights. Since that time, Judge Kaplan and the Second Circuit had wrestled with the appropriate remedy for these constitutional violations. (The Second Circuit's opinion can be found here.) In his July 16 order, Judge Kaplan ruled that dismissal was the only appropriate remedy under the circumstances.

It is important to note that the government itself had urged, in light of the Court’s prior finding of constitutional misconduct, that dismissal was the appropriate remedy for thirteen of the sixteen defendants. (The government's filing in connection with the dismissal motion can be found here.) The government’s position was widely viewed as tactical, calculated to hasten the government’s opportunity to appeal to the Second Circuit Judge Kaplan’s prior finding of constitutional violation. News reports discussing the goverment's position can be found here.

But Judge Kaplan not only granted the dismissal, as the government itself had sought, and not only reconfirmed his prior findings of constitutional violation, he added additional findings that the government’s conduct “shocks the conscience in the constitutional sense.” Speaking of the prosecutors, Judge Kaplan said

Just as prosecutors used KPMG to coerce interviews with KPMG personnel that the government could not coerce directly, they used KPMG to strip any of its employees who were indicted of means of defending themselves that KPMG otherwise would have provided to them. 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. But the Court does not rest on this finding alone. It would reach the same conclusion even if the conduct reflected only deliberate indifference to the defendants’ constitutional rights as opposed to an unjustified intention to injure them.

Judge Kaplan reviewed the impact of the government’s conduct on each of the individual defendants, concluding that four of the defendants were deprived of counsel of their choice, and nine defendants were would be forced to mount less of a defense than they would have presented had KPMG paid their fees. Three of the defendants, a former KPMG partner and two former KPMG employees, would not have had their fees paid by KPMG and therefore their rights were not violated and their dismissals were denied.

In granting the individual defendants’ motion, Judge Kaplan squarely put the blame on the government:

The Department of Justice, in promulgating the aspects of the Thompson Memorandum here at issue, and the [United States Attorney’s Office] in the respects discussed above and in [Judge Kaplan’s prior opinion], deliberately or callously prevented many of these defendants from obtaining funds for their defense that they lawfully would have had absent the government’s interference. They thereby foreclosed these defendants from presenting defenses they wished to present and, in some cases, even deprived them of counsel of their choice. This is intolerable in a society that holds itself out to the world as a paragon of justice. The responsibility for the dismissal of this indictment as to thirteen defendants lies with the government.

While Judge Kaplan’s strongly worded ruling unquestionably represents a defense victory, the government will undoubtedly appeal Judge Kaplan’s findings of unconstitutionality, so the battle for the dismissed defendants is far from over. (The White Collar Crime Prof Blog has an interesting commentary, here, on the possible impact of the government’s tactical maneuvering on its appeal prospects.)

There are several noteworthy aspects of Judge Kaplan’s dismissal ruling. The first relates to his observations about the defense expense associated with a case as massive as the KPMG tax shelter case. Although a few of the defendants are in straitened circumstances, most of them are millionaires. Yet even the wealthier individuals could not, Judge Kaplan found, afford to mount the defense their case required, given its magnitude. Or at a minimum they could not afford to mount the defense they would have mounted had KPMG paid for their defense. Judge Kaplan noted that while individual’s defense expense estimates ranged from $7 million to $24 million, the estimates averaged $13 million, an amount clearly far beyond the reach of even many wealthy individuals.

The enormous potential costs of this type of criminal litigation – and the enormous power of the government to impose costs of this magnitude on individuals – absolutely requires that the government only exercise this power pursuant to strict constitutional guidelines. For the government to use its coercive power to compel employers to withhold funding for legal fees, particularly fees of this magnitude, imposes a form of severe punishment on individuals prior to a finding of guilt or even trial. The need for restraints around government behavior that could produce results of this type will clearly gain momentum from Judge Kaplan’s opinions in the KPMG tax case.

The government, perhaps with its hand forced, had evinced its recognition of the circumstances; in December 2006, the Department of Justice , as noted in a prior post (here), issued modified guidelines in the form of the McNulty Memorandum. But in the meantime, Congress has stepped forward to address these issues.

As a means to address these issues through legislative action, Senator Arlen Specter introduced a Senate bill (as discussed in a prior post, here) designed to address a variety of concerns with the government’s corporate criminality guidelines, specifically to bar the government to use the threat of indictment to compel corporations to waive their attorney client privilege or cut off the payment of employees’ attorneys’ fees.

On July 12, 2007, Rep Bobby Scott (D. Va.) introduced a House Bill (H.R. 3013, "The Attorney-Client Privilege Protection Act of 2007," here) which is identical to the Senate bill. In his press release announcing the bill (here), Rep. Scott said that “when government agencies use tactics that violate Constitutional rights, it is time for Congress to act.” The legislation enjoys the support of diverse groups, including the ACLU (here), the American Bar Association (here), and the National Association of Criminal Defense Lawyers (here).

The need for reinforced constraint and clarity in this area is compelling. Corporations faced with their own possible criminal prosecution must be certain that their payment of attorneys’ fees to employees will not subject them to the possible corporate death sentence in the form of a criminal indictment. Individuals facing the possibility of defense fees so enormous they could exceed the ability of all but a very few individuals to pay would like the reassurance that their rights to indemnification from their employer will be honored. These individuals’ ability to defend themselves – indeed, their ability to benefit from their constitutional rights – hangs in the balance.

The New York Times article discussing Judge Kaplan's dismissal opinion can be found here. A Bloomberg.com article discussing the opinion can be found here.

Hat tip to the WSJ.com Law Blog (here) for the links to Judge Kaplan's July 16 opinion, the government's dismissal memorandum and the Second Circuit opinion. The WSJ.com Law Blog has a helpful chronology of events leading up to Judge Kaplan's most recent opinion, here.