This earlier post examined the Justice Department’s policy under the controversial Thompson Memo to threaten to go Arthur Andersen on companies that fulfill an obligation to pay defense counsel for current or former employees who are under criminal investigation or indictment by the DOJ.
According to the Thompson Memo, the DOJ expects companies under investigation to surrender any right against self-incrimination and to cut their accused employees adrift. The memo is incredibly bad public policy in that it now places a business executive on notice that even seeking legal counsel from company counsel could later be used against the executive in court as evidence that the executive knew what he or she was doing might not be proper. Under those circumstances, what rational executive would seek legal advice from company counsel in the first place?
Now, this Lynnlee Browning/NY Times article reports on U.S. District Judge Lewis Kaplan’s decision to conduct a hearing in the criminal case against the former KPMG partners who the firm served up as sacrifical lambs in connection with the DOJ’s probe of KPMG in connection with the firm’s creation and promotion of allegedly illegal tax shelters. Judge Kaplan is clearly troubled by the DOJ’s pressure on the accounting firm to stop paying the defense costs of the former KPMG partners. Peter Lattman (here and here), Ellen Podgor (here and here) and the Wired GC also comment on this development.
Although the DOJ attempted to characterize KPMG’s decision to cut off support for a former employee as “voluntary,” it appears that Judge Kaplan has seen that ruse. As a practical matter, few CEO’s or corporate boards will risk becoming the next Arthur Andersen by not cooperating with the DOJ, so the “cooperation” that the DOJ “suggest” under the Thompson Memo is hardly optional. In an earlier hearing in the KPMG case, when Judge Kaplan questioned the fairness of pressuring companies to throw their employees into the grease, the Assistant U.S. Attorney handling the hearing replied that companies are “free to say, ‘We’re not going to cooperate.'” Judge Kaplan replied: “That’s lame.”

Judge Kaplan then asked the prosecutor what legitimate purpose was served by insisting that companies cut their former employees off from legal support. The prosecutor replied that paying the legal fees of former employees charged with crimes amounted to protecting “wrongdoers,” which prompted Judge Kaplan to remind the prosecutor about that little “innocent until proven guilty” principle under American jurisprudence and the Sixth Amendment’s guarantee of the right to counsel. The upcoming hearing could be very interesting.
Meanwhile, Judge Kaplan has also ruled that prosecutors in the case have to declare whether they intend to show at trial that the KPMG tax shelter products were fraudulent in their design. The ruling was in response to defense motions seeking more details about the government’s theory of the case. Judge Kaplan ruled that the indictment offered two distinct theories for the tax shelters’ illegality — that the structures violated tax law and the defendants implemented them fraudulently. Inasmuch as the prosecution has hinted that it was planning to drop the first theory, Judge Kaplan ordered prosecutors to advise the defendants by April 21 whether the government was contending that various tax shelter were fraudulent “as designed as and approved by KPMG and, if so, in what respects?”
The Thompson Memo is symptomatic of the wave of prosecutorial abuses that have engulfed the American business community after the bursting of the late-1990’s stock market bubble. Unfortunately, those abuses have gone largely unchallenged by the judiciary, which is a key check on the enormous prosecutorial power of the executive branch. Here’s hoping that Judge Kaplan changes that.