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A federal judge in New York had some strong words for a prosecutor last week as he wrapped up a hearing on whether the government coerced KPMG LLP into threatening to cut off legal fees for employees and partners who refused to cooperate with an investigation into allegedly illegal tax shelters. When Assistant U.S. Attorney Marc Weinstein insisted that KPMG capped or cut off legal fees to noncooperators on its own, Judge Lewis Kaplan indicated that he did not believe it, and that the evidence showed the government used a whiphand to influence legal fee policy at an accounting firm that was doing everything it could to avoid indictment. Defense attorneys have asked Kaplan for injunctive relief and to order the government to pay their clients’ legal bills from the $456 million in fines paid by the company. If that is not possible, the attorneys want the indictment dismissed. One issue before the court on May 10, on the third day of Kaplan’s probe into the matter, was the effect of the Thompson Memorandum, a Justice Department policy statement that instructs prosecutors to consider several factors in deciding whether to charge a company criminally: whether the company waives the attorney-client privilege; whether it has protected culpable employees by retaining them and advancing their legal fees; and whether it shares the results of its internal investigation. [See story, Page 1.] The second issue was whether Southern District of New York prosecutors actually interfered with the representation of subject employees and partners at the accounting firm. Kaplan wondered how KPMG could have reached any other conclusion from the Thompson memo than that its decision to cap or cut off legal fees would please the government and help it win the deferred prosecution agreement the company ultimately received. Weinstein said he disagreed with the judge that the memo could have “in and of itself” dictated KPMG’s decision. “If that is true,” Kaplan shot back, then the people at the Justice Department were “lousy drafters” and they should “start all over again.” And, Kaplan said, if that was true, then “that is certainly not what they have said to the defense bar of America.” On the second issue, the actions of the prosecutors, Weinstein said that it was not their intent to influence KPMG’s decision to pay fees or not, and it “was not their intention to have that be a factor” in charging KPMG criminally. February meeting When Weinstein said government pressure did not result in the cutting off of legal fees, the judge said that was the wrong question. The real question, he said, “would be what the effect would have been if they had not.” In other words, did KPMG’s fear of being charged criminally and the government focus on the legal fee issue at a key February 2004 meeting and beyond have the effect of interfering with the employees’ legal representation? The Feb. 25 meeting was attended by KPMG’s lawyers from Skadden, Arps, Slate, Meagher & Flom of New York, prosecutors and investigators. At that meeting-defense lawyers charge but the government disputes-prosecutor Shirah Neiman invoked the Thompson memo in the context of legal fees and said “misconduct” would not be “rewarded” by the government. Neiman and others insist she was not referring to the fee issue when she made that statement. Also at the February meeting, a second prosecutor inquired as to KPMG’s “obligation” to advance legal fees, and, according to one person’s notes from the meeting, ominously implied that, should the accounting firm have discretion on whether or not to pay fees, prosecutors would examine that under a “microscope.” Kaplan has asked the parties to submit briefs over the next two weeks on a host of legal issues, including the possible violation of the defendants’ Sixth Amendment right to counsel and possible substantive and procedural due process problems under the Fifth Amendment. The judge also wants both sides to explore whether there are “liberty or property interests at issue here,” including the severance contract signed by former Deputy Chairman Jeffrey Stein, who left KPMG under a deal that included advancement of legal fees-fees that were later cut off by the accounting firm, allegedly out of fear the government would learn of the arrangement.

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