Thursday, September 3, 2015.

< It's time for The Open | Main | A big Houston deal >

July 17, 2007

Judge Kaplan hammers the DOJ in the KPMG case

kpmg%20logo071706.jpgAs widely anticipated, U.S. District Judge Lewis Kaplan dismissed all charges today against 13 former KPMG partners in the KPMG tax shelter case because of the prosecution's interference with the defendants' Constitutional rights under the Fifth and Sixth Amendments. A copy of the decision is here (pdf), Peter Lattman provides this handy timeline of the case, while Ellen Podgor and Larry Ribstein and Kevin Lacroix provide their usual lucid commentary on Judge Kaplan's decision.

Although expected, Judge Kaplan's decision is a watershed event in the government's campaign since the demise of Enron to increase regulation of business through criminalizing merely questionable transactions where responsibility for financial loss is more appropriately allocated among multiple participants in a civil context. The difficulties of fitting the round peg of legal business transactions into the square hole of criminal law has resulted in an unprecedented surge in dubious cases and prosecutorial misconduct epitomized by the legacy of abusive tactics of the Enron Task Force. Jamie Olis is serving six years in prison after being put through precisely the same wringer that Judge Kaplan determined was unconstitutional in the KPMG tax shelter case. But the shameless prosecutorial tactics of pursuing weak cases against unpopular targets (see also here), icing witnesses with exculpatory testimony and introducing junk evidence to confuse the jury are just as alien to justice and the rule of law as depriving defendants of their ability to mount an effective defense.

And make no mistake about it, Judge Kaplan lays the wood to the U.S. Attorneys' Office for the Southern District of New York in his decision. The following excerpts are just a sampling of his criticism. As to the government's disingenous assertion that KPMG ceased paying defense costs of its former partners on its volition and not under the threat of the DOJ going Arthur Andersen on the firm:

It now is undisputed that KPMG has been paying the defense costs of at least eleven of the sixteen KPMG Defendants in civil cases relating to the tax shelters here at issue and also the defense costs of eight of them in regulatory inquiries relating to the conduct in question in this case. . . . it is striking that KPMG has paid these costs subject to the requirement that the individuals be represented in the civil matters by attorneys who are not involved in defending this criminal case.

The fact that KPMG is paying civil defense costs, regardless of amount, is consistent with its uniform practice over many years. What makes the criminal case different is only the Thompson Memorandum and the USAO’s actions. Indeed, the fact that KPMG has been paying the civil defense costs on condition that the defendants’ lawyers in those matters be different than their lawyers in the criminal case – a condition that is at war with any consideration of economy or efficiency – demonstrates with astonishing clarity that the different treatment of the criminal case defense costs has been driven from the outset by the fear that the government would view any assistance in defending against the indictment as a black mark against KPMG. KPMG cut off payment of defense costs to anyone who was indicted for one reason and one reason alone – the Thompson Memorandum and the related actions of the USAO. In their absence, KPMG would have paid every penny, just as it always had done before.

On the prosecution's shocking manipulation of KPMG to deprive the defendants of their constitutional rights:

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. [ . . . ]

The government’s actions with respect to legal fees were at least deliberately indifferent to the rights of the defendants and others. In all the circumstances, this behavior shocks the conscience in the constitutional sense whether prosecutors were merely deliberately indifferent to the KPMG Defendants’ rights or acted more culpably.

And Judge Kaplan concludes with the following passage from Berger v. United States on the proper purpose and scope of prosecutorial conduct, the meaning of which has been lost among the current crop of prosecutors in the Department of Justice:

[A prosecutor] is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done. As such, he is in a peculiar and very definite sense the servant of the law, the twofold aim of which is that guilt shall not escape or innocence suffer. He may prosecute with earnestness and vigor – indeed, he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones. It is as much his duty to refrain from improper methods calculated to produce a wrongful conviction as it is to use every legitimate means to bring about a just one.”


Posted by Tom at July 17, 2007 12:30 AM |


I am stuck as to the particulars of this case. There's no constitutional right to have a deep pocket pay your attorney fees. Had those partners not had an agreement with KPMG, they would have been on their own, and presumably, there wouldn't have been a problem (the same if there was an agreement, but the employer goes bust and thus doesn't pay the bills). So why does KPMG not paying legal fees, regardless of how it came to its decision, deprive the defendants of their rights?

Posted by: steve sturm Author Profile Page at July 17, 2007 9:05 AM

Steve, Judge Kaplan is clear in this decision that there would have been no constitutional violation of the defendants' rights had KPMG elected to negate its long-standing policy of paying defense costs for them on its own volition. The constitutional violation occurred when the prosecutors interfered with the defendants' defense by threatening to go Arthur Andersen on KPMG unless the firm ceased paying defense costs. Stated simply, the defendants have no constitutional right to a have their defense costs paid, but they do have a constitutional right not to have the government interfere with that right if it exists.

Posted by: Tom K. Author Profile Page at July 17, 2007 9:21 AM

Tom, your excellent post and the accompanying comments bring up a larger issue. When the state goes after a private individual, the imbalance of power and resources is gigantic. Federal prosecutors splurge on taxpayer funds while defendants usually find their life savings drained as they defend themselves. Even if the defendant is eventually exonerated, he has often been financially devastated.

If we truly live in a society that values individual rights, why not require the state to fund the defendant's legal defense from the start? If the defendant is convicted, he must reimburse the state. But, if the defendant is acquitted, the state bears the cost or its error. If nothing else, this approach would encourage innocent people not to plead guilty purely for financial reasons, and it would also (hopefully) encourage the government to use its massive power more responsibly.

Posted by: Evan Author Profile Page at July 17, 2007 1:27 PM

Tom: sorry, but I still don't see it. the prosecutors didn't prevent the individual defendants from mounting a defense; they could have presented the very same defense on their own dollar they would have done with KPMG's dollars. So while it wasn't nice to potentially bankrupt the individuals, the government didn't deny them the right to counsel.

And, on a tangent of sorts, if the pressure the prosecutors put on KPMG to cut off legal fees was improper, then is KPMG not in a position to say their other concessions - including the fine they paid - were also the result of impermissable coercion?

Posted by: steve sturm Author Profile Page at July 17, 2007 2:02 PM

Steve, I think maybe you partially answered one of your questions. The quality of the defense that a defendant can mount is, to no small extent, dependent on the funds available to him. Obviously, if the defendant goes bankrupt, his able to mount any defense is limited. Therefore, we cannot assume that the defendants could mount the "very same defense on their own dollar". It seems to me that the judge, recognizing this reality, ruled that the prosecutors acted improperly by interfering with a source of defense funds that would have been available to the defendants without the coercive actions of the prosecutors.

Posted by: Evan Author Profile Page at July 17, 2007 6:24 PM

Post a comment

Thanks for signing in, . Now you can comment. (sign out)

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

Remember me?

© 2003 - 2015. Tom Kirkendall. All Rights Reserved.