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A federal judge’s ruling last week slamming a tactic widely used by the government to induce companies to cooperate with prosecutors could help efforts to beat back other strategies the Justice Department employs that corporations claim are overly coercive. The decision came from Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York, who is overseeing the trial of 16 former employees of the accounting firm KPMG who are accused of selling fraudulent tax shelters. In January the defendants challenged their indictments on the grounds that the government had improperly interfered with the firm’s payment of their legal fees. Kaplan ruled on June 27 that the guidelines in the Justice Department’s so-called Thompson memo that state prosecutors can interpret a company’s willingness to advance legal fees to its employees during a criminal investigation as a sign of lack of cooperation violated employees’ Fifth Amendment right to a fair trial and Sixth Amendment right to legal representation. Defense lawyers in other cases may try to use the opinion’s broad language on prosecutors’ overly aggressive techniques to try to discredit the memo as a whole. The ruling could serve to challenge what the Association of Corporate Counsel and other business groups call a “culture of waiver” that has evolved as a result of the Thompson memo, whereby the government believes it is reasonable for it to expect a company under investigation to waive its attorney-client privilege. Meanwhile, in a riveting example of role reversal, the plaintiffs law firm Milberg Weiss Bershad & Schulman may try to use the opinion to challenge its own indictment. But Andrew Hruska, who served as senior counsel to then-Deputy Attorney General Larry Thompson when the department’s guidelines for corporate prosecutions were being overhauled, downplays the opinion’s significance. The ruling, he says, conflates concerns about the conduct of the prosecutors in the KPMG case with issues regarding the Thompson memo itself. “I’m not sure that this opinion will have widespread effect on the use of the memorandum, because the memorandum . . . is just a set of instructions for prosecutors,” says Hruska, now a partner in the New York office of King & Spalding. “It doesn’t dictate a result.” But Kaplan’s opinion squarely rejects the Justice Department’s long-standing assertion that the memo merely contains guidelines prosecutors should consider in evaluating whether a company is cooperating with an investigation. “Few if any competent defense lawyers would advise a corporate client at risk of indictment that it should feel free to advance legal fees to individuals in the face of the language of the Thompson Memorandum itself,” he wrote. Meanwhile, corporate and defense lawyers cheered the decision. It should restore companies’ ability to determine whether to advance legal fees “without the government’s thumb on the scale,” says Craig Margolis, a partner in Vinson & Elkins‘ Washington office who represents Jeffrey Stein, the lead defendant in the case. IMPLICATIONS DEBATED Lawyers say the ruling will make federal prosecutors think twice about whether to pressure a company on fees, but differ as to whether the case will have broader implications. “Basically, I think the judge’s findings are going to bring to a screeching halt the practice of pressuring a company under the Thompson memo not to advance legal expenses,” says John Coffee, a professor at Columbia University’s law school. “The question is whether Kaplan’s opinion can be extended to other instances in which the government is bargaining for cooperation.” Stephanie Martz, director of the White Collar Crime Project at the National Association of Criminal Defense Lawyers, which filed a friend-of-the-court brief in the case, says she hopes “the opinion helps educate defense lawyers that they can and should push back.” Defense lawyers contend the Thompson memo is used as a tool to scare companies into cooperating with the government during an investigation in an effort to avoid indictment, which companies fear could be a fatal blow to their business, as it was for accounting firm Arthur Andersen in 2002. Perhaps even more controversial than the fees guideline is the provision in the memo that encourages companies to waive attorney-client privilege so that they can share information with prosecutors. Attacks on the attorney-client-privilege issue should increase now that Kaplan has ruled that the fees aspect of the memo is unconstitutional, says David Spears, who also represents Stein and is a partner at New York-based Richards Spears Kibbe & Orbe, noting the widespread “ferment” on the issue. “This is going to embolden people with respect to their criticism of the Thompson memo.” Several lawyers say the opinion could help Milberg Weiss challenge its recent indictment. The firm applauded Kaplan’s decision in a June 28 statement, noting that it hoped the courts would continue to hold the Justice Department accountable for the “overreaching use” of the Thompson memo. “Waiver of privileges, like the withholding of legal fees, is an unreasonable concession for the government to require in the name of cooperation,” the statement said. The firm, which refused to waive its privilege, was indicted May 18. Interestingly, Milberg Weiss serves as lead counsel for the plaintiffs in a class action against KPMG and law firm Sidley Austin for their role in the tax-shelter deals. Lawyers hope the strong criticism of the fees guideline in Kaplan’s opinion will strengthen the skepticism with which courts view other aspects of the memo. Although it only applies to the Southern District of New York, the decision could nonetheless carry a lot of weight outside of Manhattan. Many white-collar criminal cases are tried there, and the district’s opinions tend to be highly influential. “This is the first time that we have a case in which the judge has very clearly said the Thompson memo is forcing corporations into inappropriately coercive measures,” says Susan Hackett, senior vice president and general counsel to the Association of Corporate Counsel, which also filed a friend-of-the-court brief in the case. Both the NACDL and the ACC are part of a coalition that also includes the U.S. Chamber of Commerce, the National Association of Manufacturers, the Business Roundtable, and the Washington Legal Foundation. The coalition is lobbying the Justice Department to modify its guidelines on the waiver of attorney-client privilege. Congressional hearings may also subject the Thompson memo to more scrutiny. Sen. Arlen Specter (R-Pa.), chairman of the Senate Judiciary Committee, will hold hearings on the memo’s effect on the right to counsel in corporate investigations. Hackett notes that members from both sides of the aisle sharply criticized the memo when the House of Representatives held similar hearings in March. But Martz cautions, “We have a way to go before DOJ understands what a problem this is.” APPEAL MAY BE UNLIKELY The Justice Department expressed its disappointment in the ruling and reaffirmed its commitment to the principles in the Thompson memo. “The guidelines balance the interests of the business community and the investing public,” says a department spokeswoman, “and have resulted in an unparalleled period of rooting out corporate misconduct.” But the department has not yet decided whether it intends to appeal the ruling to the U.S. Court of Appeals for the 2nd Circuit. “The question for the Justice Department is whether they dare appeal this,” Coffee says. Several lawyers say they don’t think the DOJ will take the risk that the appellate court could affirm the case. “Right now they have a district court opinion, and maybe out in San Diego they won’t pay attention to it,” Coffee says, “but if they get a 2nd Circuit opinion, I think they are in deeper trouble.” Hruska, the King & Spalding partner, says he doesn’t think the department will appeal, either. “This is not your best case for going up,” he says, “given what appear to be some very rough tactics.” And as a practical matter, the department may not appeal because its interests haven’t really been harmed, he adds. Despite some “strong language” chastising the prosecutors, Kaplan didn’t dismiss the indictments. Rather, the judge gave the KPMG defendants 14 days to file civil lawsuits against KPMG for payment of the fees. Lawyers familiar with the case say that KPMG is unlikely to pay the fees voluntarily.
Alexia Garamfalvi can be contacted at [email protected].

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