Federal prosecutors’ efforts to prevent entities from making corporate funds available to employees and others to pay legal counsel to defend themselves in white collar criminal cases suffered a blow this week. Southern District of New York Judge Lewis A. Kaplan dismissed indictments against former KPMG executives accused of selling and marketing illegal tax shelters, because of prosecutors’ undue pressure on the defendants’ former employer not to pay their defense costs.
The judge stated that he had no alternative but to dismiss the criminal indictments because prosecutors violated the former executives’ Fifth and Sixth Amendment rights to counsel and to remain silent by putting undue pressure on KPMG not to pay the executives’ defense costs following their indictment and to condition pre-indictment counsel fees on the executives’ cooperation with the government. Prosecutors contended that they played no role in KPMG's decision to cut off payment of the defendants' legal fees. Judge Kaplan, however, found the prosecutors’ arguments disingenuous and held that KPMG refused to pay the fees "because the government held the proverbial gun to its head."

The KPMG prosecutors relied on the Department of Justice’s Thompson memorandum to support their acts. The Thompson memorandum stated that an entity under investigation could avoid indictment if it cooperated with the government, among other conditions. In response to an earlier ruling in this case and widespread complaints from the defense bar, the Department of Justice, in December 2006, repudiated the Thompson memorandum. Under the Thompson memorandum, one factor weighed by prosecutors to determine cooperation was whether the entity was protecting its culpable employees and agents. Under the Thompson memorandum, advancing attorneys’ fees to personnel under investigation, except where such advances were required by law, “might” be viewed by the government as protection of culpable individuals and would weigh in favor of a government decision to indict the entity. Under the current McNulty memorandum, the Department of Justice now allows corporations to advance attorneys’ fees to personnel under investigation based upon corporate policies.

Prosecutors are expected to appeal the dismissals because they significantly tip the scales back in favor of white collar defendants in dealing with prosecutors.

Charges were not dismissed against five other indicted individuals. In one case a KPMG executive waived any right to legal fees and released KPMG in connection with an employment separation agreement. Therefore, the Court held he suffered no harm because KPMG would not have indemnified him based upon the circumstances of his departure. Needless to say, the result in this case points out that indemnity issues should be carefully considered in drafting separation agreements. Charges against the remaining four defendants remained in place since those defendants likewise had no indemnity rights against KPMG and suffered no harm from the government’s actions.