United States v. Stein
435 F. Supp. 2d 330, 2006 U.S. Dist. LEXIS 42915, 97 A.F.T.R.2d (RIA) 3138 (2006)
Rule of Law:
Government policies and prosecutorial actions that coerce a corporation to cease advancing legal fees and defense costs to its employees, who are under criminal investigation or indictment, violate the employees' Fifth Amendment due process right to a fair trial and Sixth Amendment right to effective assistance of counsel.
Facts:
- From late 2001 through early 2002, a series of corporate scandals (e.g., Enron, Global Crossing, Tyco) led to increased government scrutiny of corporate behavior and efforts to hold companies accountable for misconduct.
- On January 20, 2003, U.S. Deputy Attorney General Larry D. Thompson issued the Thompson Memorandum, a binding policy for federal prosecutors, stating that a corporation's willingness to identify culprits and its decision to advance legal fees to employees could be considered when deciding whether to indict the corporation.
- KPMG had a long-standing voluntary practice of advancing and paying legal fees for its partners and employees in civil, criminal, or regulatory proceedings arising from their job duties, without a preset cap or condition of cooperation with the government.
- In early 2004, the IRS made a criminal referral concerning KPMG-related tax shelters to the U.S. Attorney's Office for the Southern District of New York (USAO), initiating a grand jury investigation.
- On February 25, 2004, during an initial meeting between USAO prosecutors (including Shirah Neiman and AUSA Weddle) and KPMG's outside counsel (Skadden Arps), prosecutors repeatedly pressed the issue of KPMG paying legal fees for individuals, referenced the Thompson Memorandum, and warned that if KPMG had discretion over fee payments, the USAO would look at it "under a microscope."
- In March 2004, under government pressure, KPMG drastically changed its policy to cap individual legal fees at $400,000, condition payments on individuals' full cooperation with the government (including not invoking Fifth Amendment rights), and explicitly stated that all payments would cease immediately upon criminal indictment.
- On May 5, 2005, KPMG unilaterally terminated a consulting agreement and cut off payment of legal fees for Jeffrey Stein, a senior partner, after his fees exceeded the cap, believing this action would improve its position in negotiations with the government.
- On August 29, 2005, KPMG entered into a Deferred Prosecution Agreement (DPA) with the government, agreeing to a $456 million fine, admitting wrongdoing, and cooperating extensively; simultaneously, the government filed an indictment against the KPMG Defendants, and KPMG, true to its altered policy, ceased paying their legal fees.
Procedural Posture:
- In early 2004, the IRS made a criminal referral concerning KPMG to the Department of Justice, which then passed it to the United States Attorney's Office for the Southern District of New York (USAO).
- On August 29, 2005, the government filed an indictment in the United States District Court for the Southern District of New York against former KPMG partners and employees (the "KPMG Defendants").
- On January 19, 2006, the KPMG Defendants moved in the District Court to dismiss the indictment or for other relief, alleging improper government interference with KPMG's advancement of attorneys' fees.
- The District Court ordered an evidentiary hearing and limited discovery to determine if the government, through the Thompson Memorandum or other means, had affected KPMG’s decision regarding legal fee advancements.
- The Court conducted an evidentiary hearing on May 8-10, 2006, regarding the defendants' motion.
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Issue:
Does the government's policy, as embodied in the Thompson Memorandum and as implemented by prosecutors, violate the Fifth Amendment Due Process Clause and Sixth Amendment right to counsel by coercing an employer to stop advancing legal fees and other defense costs to its employees who are under criminal investigation and indictment?
Opinions:
Majority - Kaplan, District Judge
Yes, the government’s policy, as embodied in the Thompson Memorandum and as implemented by its prosecutors, violated the Fifth Amendment Due Process Clause and Sixth Amendment right to counsel by coercing KPMG to stop advancing legal fees and defense costs to its employees under criminal investigation and indictment. The court found that the right to fairness in the criminal process is a fundamental liberty interest under the Fifth Amendment's Due Process Clause, meaning government actions interfering with a criminal defendant's ability to use lawfully available resources for their defense are subject to strict scrutiny. The Thompson Memorandum and the USAO's direct pressure on KPMG, which deliberately or recklessly affected KPMG's decision to cut off fees, failed this strict scrutiny test. While the government has compelling interests in prosecuting crime and preventing obstruction, its policy was overbroad, discouraging all fee advancements rather than targeting only those used for obstruction. The attempt to impose 'economic punishment' on individuals before conviction was deemed an abuse of power and not a legitimate governmental interest. Furthermore, the court held that the Sixth Amendment right to counsel, which includes the right to choose and pay for one's own lawyer, was violated. The government's pre-indictment actions, which were intended or known to have an unconstitutional effect upon indictment, cannot be excused. The defendants had a legitimate expectation of fee payment, which was effectively their property, protected from unwarranted government interference. The court also clarified that, in such cases of fundamental rights deprivation, the defendants are not required to show prejudice under the Strickland standard because the government's interference constitutes a 'structural error' that inherently taints the entire criminal proceeding, akin to a deprivation of counsel of choice, for which prejudice is presumed.
Analysis:
This case significantly impacts the balance of power between prosecutors and corporate defendants, particularly concerning the financing of legal defenses for individual employees. It reinforces the constitutional limits on governmental pressure tactics under policies like the Thompson Memorandum, preventing prosecutors from leveraging the threat of corporate indictment to undermine individual defendants' rights. The ruling safeguards the fundamental right to a fair trial and effective assistance of counsel, asserting that even when defense funds originate from an employer, they are protected interests of the individual once a reasonable expectation of payment exists. This decision forces the Department of Justice to refine its corporate cooperation policies to ensure they do not infringe upon constitutional guarantees, highlighting the judiciary's role in ensuring justice is served fairly, not just won.
