2nd Circuit Affirms Dismissal of KPMG Indictment

[Dr. Caligari]

The 2nd U.S. Circuit Court of Appeals has upheld the dismissal of criminal tax-shelter fraud charges against 13 former employees of accounting firm KPMG on the grounds that prosecutors interfered with their constitutional rights to counsel.

Acting under the guidelines set forth by the U.S. Justice Department's Thompson Memorandum, federal prosecutors had raised the specter of indictment against KPMG itself unless the company took steps to isolate those of its employees targeted in the tax-shelter probe, including cutting off assistance with legal fees for their defense.

Southern District Judge Lewis Kaplan attacked the government's conduct as violative of the Sixth Amendment right to counsel in two decisions, dismissing indictments against the 13 former KPMG employees in July 2007.

A 2nd Circuit panel of Judges Dennis Jacobs, Wilfred Feinberg and Peter Hall affirmed Thursday Judge Kaplan's ruling in a 68-page decision.

The government "unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment," Judge Jacobs wrote for the unanimous panel in United States v. Stein, 07 cr. 3042.

Prosecutors had argued on appeal that KPMG's actions in suspending its legal-fees assistance to the indicted ex-employees were voluntary on KPMG's part, but the 2nd Circuit said the government's stance in the case rendered as state action the company's decision.

"KPMG faced ruin by indictment and reasonably believed it must do everything in its power to avoid it," the court said. "The government's threat of indictment was easily sufficient to convert its adversary into its agent. KPMG was not in a position to consider coolly the risk of indictment, weigh the potential significance of the other enumerated factors in the Thompson Memorandum, and decided for itself how to proceed."

The panel also rejected the government's argument that the Sixth Amendment does not apply to third-party assistance with legal expenses. The court pointed out that it was well-established that the Sixth Amendment bars the government from interfering in cases where a lawyer elects to represent a defendant for free.

"And if the Sixth Amendment prohibits the government from interfering with such arrangements, then surely it also prohibits the government from interfering with financial donations by others, such as family members and neighbors and employers," Judge Jacobs wrote.

The Thompson memo, circulated in January 2003 by then-Deputy Attorney General Larry D. Thompson, was replaced in December 2006 by a memo from Thompson's successor, Paul J. McNulty. The McNulty memo states that, absent extraordinary circumstances, federal prosecutors cannot consider a company's advancement of legal fees to employees in deciding whether or not the company is being cooperative.

The government was represented on appeal by assistant U.S. attorney Karl Metzner of the Southern District.

The former KPMG employees were represented by a veritable murderers' row of top white-collar lawyers, including Stanley S. Arkin of Arkin Kaplan, Seth Waxman of Wilmer Cutler Pickering Hale and Dorr and John S. Martin of Martin & Obermaier.

[jcolvin2]

The opinion:
http://www.ca2.uscourts.gov:8080/isysna ... b/1/hilite

The DOJ (coincidentally?) released new Federal Guidelines for the Prosecution of Business Organizations today:

The announcement:
http://www.usdoj.gov/opa/pr/2008/August ... g-757.html

The new guidelines:
http://www.usdoj.gov/usao/eousa/foia_re ... 28mcrm.htm