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A federal judge in New York City issued an opinion on June 27 that criticizes prosecutors for pressuring accounting firm KPMG to cut off legal defense payments to former partners and employees who were under investigation, along with the firm, for allegedly selling unlawful tax shelters. U.S. District Judge Lewis Kaplan of New York City says that government pressure, which stems from government reliance on the so-called Thompson Memo, violated the constitutional rights of the KPMG personnel. He wrote that portions of the Thompson Memo violate the Fifth and Sixth Amendments of the U.S. Constitution. The Thompson Memo, issued in 2003 by former U.S. Deputy Attorney General Larry D. Thompson, obligates all federal prosecutors to consider the advance of legal defense costs by businesses to employees as an attempt to protect possibly culpable employees, and as a factor to consider when deciding whether to indict businesses. In an 83-page opinion in United States v. Jeffrey Stein, et al., Kaplan wrote that everyone accused of a crime in the United States is entitled to a fair trial, everyone charged with a crime is entitled to the assistance of a lawyer, and an employee charged with a crime or sued as a result of doing his job is entitled to reimbursement of legal expenses by his employer. KPMG had a policy to advance legal defense costs to its employees, Kaplan said. Kaplan wrote that the defense cost principle does not remotely approach Miranda warnings in popular culture, but it is “very much a part of American life” and as much of the bargain between employer and employee as salary or wages. According to Kaplan, the defendants in Stein allege that KPMG has refused to pay the defendants’ legal costs because the government pressured the company. Kaplan concluded that the former KPMG employees are correct in their argument that the government violated their constitutional rights and threatened their right to a fair trial. “KPMG refused to pay because the government held the proverbial gun to its head. Had that pressure not been brought to bear, KPMG would have paid these defendants’ legal expenses,” Kaplan wrote. “Those who commit crimes — regardless of whether they wear white or blue collars — must be brought to justice. The government, however, has let its zeal get in the way of its judgment. It has violated the Constitution it is sworn to defend,” Kaplan wrote. In a statement, Michael J. Garcia, U.S. attorney for the Southern District of New York, says, “We are disappointed in Judge Kaplan’s opinion today in U.S. v. Stein, which we respectfully believe is unsupported by the factual record and the applicable law. The actions of the government were entirely consistent with appropriate Department of Justice policy and we believe that the prosecutors acted ethically and properly throughout this case.” An attorney for KPMG, Charles Stillman, a shareholder in Stillman Friedman & Schechtman in New York, says he’s still trying to figure out the implications of the opinion. “The jury is out as to what people are going to do. The next move is up to the former partners, so to speak,” Stillman says. Craig Margolis, counsel at Vinson & Elkins in Washington, D.C., who represents defendant Stein, could not immediately be reached for comment. But he says in a written statement that the opinion is “likely to have a tremendous impact on the Justice Department’s efforts in white collar criminal investigation and prosecutions.” Margolis notes that even though Kaplan’s decision applies only to the KPMG case, his opinion may affect prosecutorial policy nationwide. “In every corporate prosecution in which there is a question as to whether the company should advance fees to its employees, the government must now think twice before interfering with that decision,” Margolis says. In 2005, KPMG negotiated a deferred prosecution agreement with the government. In that deal, the firm admitted wrongdoing, agreed to pay a $456 million fine and accepted restrictions on its practice. In return the government agreed to seek dismissal of a criminal information if KPMG complies. Kaplan invited the defendants in Stein to seek defense costs reimbursement from KPMG and said the government shall find that acceptable.

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