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The 2nd Circuit U.S. Court of Appeals’ dramatic opinion in the KPMG LLP case, U.S. v. Stein, on Aug. 28, upholding the district court’s dismissal of all 13 defendants, is a clear demonstration of the widening gap between traditional prosecutorial attitudes and the nontraditional world of white-collar investigations. The government saw its efforts to prevent KPMG from paying for counsel for its employees under investigation as preventing the firm from “circling the wagons,” or worse. The court saw it as “abuse of power.” Time for some attitude adjustment. The issue for the prosecutors goes back to “omerta,” the old Mafia code of silence. As a prosecutor in the U.S. Department of Justice’s Organized Crime Strike Force years ago, I learned the realities of omerta: a system enforced by clear rewards and punishments. The punishments included death for those who ratted out. The rewards included a “consigliere”: house counsel for the mob sent out whenever someone was questioned or arrested, whose true loyalties were to the organization, and whose true mission was to keep anyone from talking — regardless of the consequences to them. Skip 25 years forward, and DOJ has faced a new wave of crime — corporate fraud — also difficult to penetrate and prosecute. Despite the passage of time, to many prosecutors, any sign of joint effort on the other side — payment of legal fees, assertions of privilege, joint defense agreements — raises visions of omerta. That paranoia leads to harsh reactions — and overreactions. DOJ’s criminal investigation of KPMG, for a series of complex tax shelters, began in early 2004, less than two years after the disastrous indictment of Arthur Andersen. At the time, the compelling lesson of that case was that an indictment, no matter how unsupported, is a likely death sentence to any company — no matter how large and well-established. With that lesson in mind, KPMG set out to do whatever it could to convince DOJ that it was cooperating and should not be indicted. Like many companies, KPMG had a longstanding practice of paying legal fees for employees who sought counsel in matters arising out of their employment. An appropriate policy. However, with the government holding a gun to KPMG’s head, that policy was among the first to go. In writing — including DOJ’s now-famous Thompson Memorandum — and in repeated oral statements, DOJ made clear that KPMG should pressure its employees to help DOJ, “even if that meant admitting criminal wrongdoing,” and punish those who did not. KPMG obeyed, and cut off legal fees to any employee that DOJ said was not cooperating to its liking. DOJ made a deal with KPMG, in which the company avoided indictment, but DOJ then indicted 13 individuals. U.S. District Judge Lewis Kaplan found that DOJ “let its zeal get in the way of its judgment.” Its pressure on KPMG to block payment of legal fees amounted to state action, that action violated the defendants’ Sixth Amendment rights to counsel and the process had gone on so long that the only adequate remedy was dismissal. DOJ vigorously objected, and appealed. NO LONGER THE WORLD OF OMERTA What the government failed to understand is that this is no longer the world of omerta. The differences are as simple and profound as the classic questions, “Who, what, when, why?” • Who: These are not bookies and hitmen, connected only by the illegal scheme. These are employees and partners of a legitimate business, and that relationship brings legal and moral obligations. An agreement to pay legal fees is a reasonable expectation of that relationship. • What: This is not the consigliere showing up at the police station late at night before the gang member has a chance to consider his options. These are long, complex investigations. Few individuals can afford to take on the government alone in that kind of case. • When: Here, long before any indictment, the government was unilaterally picking out those it believed culpable and punishing them through KPMG. • Why: This is not a joint effort to protect an illegal organization. These are individuals who had not been charged and needed legal advice. In its actions, the government ignored these basic differences. The KPMG case has helped reverse what had been a dangerous trend by prosecutors, and the 2nd Circuit’s opinion should provide further impetus for change. But changes in policy need to be matched by changes in perceptions. There are profound differences between traditional prosecutions and such complex corporate investigations. More important, all concerned have to regain that “respect” for the attorney-client relationship that the court spoke of. Kaplan found that DOJ “violated the Constitution it is sworn to defend.” Despite the government’s protestations, the 2nd Circuit has now agreed. Sobering words. Time for an attitude adjustment. Dan Small is a partner and trial attorney in the Boston and Miami offices of Holland & Knight. A former federal prosecutor, his practice focuses on white-collar defense, witness preparation and complex civil litigation. He is the author of several ABA books on litigation, including “Preparing Witnesses,” and is a frequent CLE speaker and media commentator.

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