Federal judges and prosecutors often have a cozy relationship. So, it was not particularly surprising that Southern District of New York U.S. Attorney Michael Garcia requested that U.S. District Judge Lewis Kaplan delete the names of federal prosecutors and his sharp criticism of those prosecutors in his June 26 opinion in the KPMG tax shelter case, which found that prosecutors had improperly pressured KPMG to abrogate its long-standing policy of paying the defense costs of over a dozen KPMG former partners charged in the case. While Judge Kaplan responded professionally to US Attorney Garcia’s request, he firmly denied it and included the following language in his ruling on the request:

[The Court] views the actions of the U.S. Attorney’s office that evoked criticism more as a disappointment borne of the ordinarily exceptional performance of the office that this Court has come to expect than as anything else. The Department of Justice policy that the office dutifully carried out, on the other hand, is more than a disappointment — it is unconstitutional.

Meanwhile, Larry Ribstein lucidly analyzes Judge Kaplan’s decision in this TCS Daily op-ed and sums up the underlying importance of Judge Kaplan’s decision:

This case isn’t going to solve all of the problems of corporate criminal liability. The government retains considerable leverage in prosecuting corporations and their employees. This problem is inherent in cases involving common business practices such as the structuring and sale of tax shelters, where the very criminality of the conduct is an extremely complex issue. The problem is compounded in this case by the haziness of the line between merely wrong and criminal interpretations of the tax code. The court must determine whether the tax shelters in this case were illegal rather than simply aggressive and ultimately unsuccessful tax planning that was not sharply distinguishable from what tax advisers do everyday. [. . .]
Real relief from undue burdens of criminal prosecution will come only when courts face up to these underlying problems of corporate criminal liability. Judge Kaplan’s opinion is important for its recognition that fundamental fairness in a criminal trial may turn on the parties’ contract and property rights, as well as on business realities. It is to be hoped other courts will follow the principle Judge Kaplan has established to restore balance in white collar crime cases.

Interestingly, the importance of Judge Kaplan’s opinion in the KPMG case is readily apparent in the Enron-related Nigerian Barge case. In the barge case, the government threatened Merrill Lynch with an indictment, ultimately resulting in a settlement in which Merrill tossed four of its executives to the wolves in return for a non-prosecution agreement for the firm. Inasmuch as that deal was cut relatively early in the current trend of federal corporate crime prosecutions, the government did not require as a part of the non-prosecution agreement that Merrill abrogate its policy of paying the defense costs of the four former executives. Although rumors circulated in legal circles after the executives were convicted that the government was “suggesting” to Merrill that the firm should not pay the legal cost of the executives’ appeals, Merrill has continued to pay those costs, which are certainly in the several million dollar range by now.
As this earlier series of posts reflects, the Nigerian Barge case involves a particularly odious prosecution in which the Enron Task Force effectively prosecuted the four former Merrill executives for doing their jobs in connection with Enron’s sale of an asset for which Enron may have improperly accounted, although even that issue was never proven at trial. Given the adverse climate in Houston for anyone that has had anything to do with the social pariah Enron, the Task Force was able to obtain convictions of the Merrill Four, although at least three out of the four convictions are now unraveling and will almost certainly be reversed (see here and here). But for Merrill’s payment of the defense costs of its former executives, it is doubtful that these out-of-work executives and their families would have been able to afford the extraordinary cost of attempting to correct the stark injustice of their convictions on appeal.
Finally, if you want to see what happens when a company sacrifices a former executive in connection with cutting a deal with prosecutors and then does not pay that executive’s legal defense costs, then read this.