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The U.S. District Court for the Southern District of New York has dealt a second blow to the Department of Justice’s Principles of Federal Prosecution of Business Organizations (Jan. 30, 2003), available at http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm, known as the “Thompson Memorandum.” In U.S. v. Stein, No. S1 05 Crim. 0888 (LAK) (S.D.N.Y. June 26, 2006) ( Stein I), the court held that pressure exerted by the memorandum and by prosecutors implementing it to induce a company to deny advancement of legal fees to current and former employees under criminal investigation infringed their Fifth Amendment right to due process and their Sixth Amendment right to counsel. In Stein II, issued on July 25, 2006, the same court in the same case held that where the same mechanism of pressure actually coerced employees to make statements to the prosecutors, the statements were obtained in violation of the Fifth Amendment privilege against compelled self-incrimination, and must be suppressed. The Thompson Memorandum includes among the factors to be considered in deciding whether to indict a business organization the organization’s “willingness to cooperate in the investigation of its agents.” Under the memorandum, an organization’s advancement of legal fees to individuals the prosecutors consider culpable may be interpreted as uncooperative. In ‘Stein II,’ nine move to suppress statements In Stein II, nine individual defendants moved to suppress statements they had made to prosecutors during the investigation that had led to their indictment. At the time of the investigation, the nine were employees or former employees of KPMG. The court found that, under pressure from the Thompson Memorandum and prosecutors, the firm adopted a policy that, for each individual employee or former employee, it would advance legal fees only up to $400,000 and only if the individual cooperated fully with prosecutors. When particular individuals refused prosecutors’ requests for proffer statements, the prosecutors reported to the firm, in general terms, that the individuals were not cooperating. The court found that the firm then advised the individuals that such refusals could result in termination of advancement of legal fees and, as to then current employees, discharge. The government contended that the KPMG policy was purely private action not attributable to the prosecutors. The court held to the contrary: the policy was the direct result of the Thompson Memorandum and the actions of the prosecutors. “The Thompson Memorandum . . . made it clear that a company’s failure to ensure that its employees disclose whatever they knew, regardless of their individual rights and concerns, might weigh in favor of indicting the company. The [prosecutors] knew that KPMG would apply additional pressure, beyond the threatened cut-off of legal fees, to ‘uncooperative’ employees. Indeed, it reported them to KPMG in circumstances in which there was no conceivable reason for doing so except to facilitate the firing threats that ensued.” Slip Op. at 31-32. The firm’s actions were the result not merely of a general regulatory scheme, but of direct intervention by the prosecutors in the firm’s decision-making as to specific individuals. The prosecutors “forcefully” drew the Thompson Memorandum to the attention of KPMG’s lawyers “in the context of a discussion concerning KPMG’s intentions with respect to payment of employee legal fees.” Id. at 4. The court found that “the government, both through the Thompson Memorandum and the actions of the [prosecutors], quite deliberately coerced, and in any case significantly encouraged, KPMG to pressure its employees to surrender their Fifth Amendment rights.” Id. at 35. Under that finding, the firm’s actions were fairly attributable to the government. The court noted the tension between the government’s position that KPMG and its lawyers were entirely private parties and its position, in another case, that statements to an organization’s lawyers by the organization’s employees may obstruct justice when the organization and its lawyers are cooperating with prosecutors in a criminal investigation. Id. at 35 n.114. All nine defendants were informed by KPMG of its policy and thereafter made proffers to the prosecutors. Six of the defendants (and a seventh as to her first proffer but not her second) presented no additional evidence that they were left “with no alternative but to speak to the government,” id. at 17-i.e., that the coercive pressure actually coerced them. They argued that the existence of the objectively coercive pressure attributable ultimately to the government sufficed to establish a Fifth Amendment violation. The court rejected that argument. It held that to warrant suppression of an individual’s statements, there must be, beyond the application to that individual of coercive pressure attributable to the government, evidence that the individual’s statements actually resulted from that pressure rather than from voluntary choice (once such evidence is presented, the burden of proof as to voluntariness is on the government). Thus, there must be both governmentally induced objectively coercive pressure and a failure by the government to overcome a prima facie showing of subjective yielding to that pressure. On that basis the court denied the motion to suppress the proffers by the six defendants and the first proffer by the seventh defendant. The court found actual coercion of the proffers by the two remaining defendants, but none as to the second proffer of the seventh defendant. As to one defendant, the court found the evidence of coercion “compelling.” Id. at 23. Defendant Richard Smith, who was a senior executive of KPMG, refused to give a proffer even after being informed of the firm’s policy. The prosecutors reported his lack of cooperation to the firm. Thereafter a conversation occurred between Smith and Eugene O’Kelly, the chairman of KPMG. Smith testified that O’Kelly said “he did not want [Smith] to put [O'Kelly] in a position where he was forced to take action against” him. Smith further testified that he interpreted this comment, in the court’s words, “as meaning that KPMG would fire him if he did not proffer to the government.” Id. at 9. The sole income-earner for his family, he then gave a proffer, contrary to his lawyer’s advice, to keep his job. The court credited his testimony. In arguing that Smith’s proffer was voluntary, the government pointed to statements he had made, as a representative of KPMG, to various government agencies and in Senate testimony. The court found that those statements, made by Smith before he was identified as a subject of the investigation, did not show that his proffer, made after he was so identified and was acting in a personal, not a representative, capacity, was voluntary. Defendant Mark Watson testified as follows. He had limited resources. He made a voluntary proffer to try to persuade the prosecutors not to indict him. He concluded that that effort had failed and “felt sick about it.” Yet he gave two more proffers because, without KPMG’s advancement of legal fees, he could not afford what he considered an adequate defense. The court credited his testimony, and found that he had “no practical choice but to cooperate . . . .[T]he government here coerced KPMG to apply pressure to Mr. Watson and other individual defendants in order to secure waivers of constitutional rights that the government itself could not obtain. That goes beyond the bounds of appropriate government action.” Id. at 28. Defendant Carol Warley (the seventh defendant) met with the prosecutors almost immediately after receiving a letter identifying her as a subject. She testified that she did so “to let them know that [she] was innocent” and “because [she] wanted to cooperate.” Difficulties between her Texas counsel and the prosecutors delayed a second appearance, and her counsel sought conditions on the appearance that the prosecutors rejected. The prosecutors reported Warley to KPMG as uncooperative; the firm advised her that her fees would be terminated and she could be fired if she did not cooperate. Several months later, she met with the prosecutors, but refused to answer certain questions without a subpoena. Thereafter, she was subpoenaed to the grand jury, but invoked her Fifth Amendment privilege. Subsequently, she testified in a civil deposition about matters relevant to the criminal case. The court found the question as to her “a close one,” but concluded that she acted without regard to the KPMG policy, and so was not in fact coerced. Id. at 29-30. The implications for future investigations This carefully reasoned decision (and Stein I) should persuade the Justice Department to rewrite the Thompson Memorandum and to curb coercive investigative tactics that violate the Constitution. Due to the enormous power prosecutors have over organizations that are the subjects of criminal investigations, and to the risk that coercive pressure may continue even if the memorandum is revised, the Justice Department should be explicit that termination of advancement of legal fees shall not be a factor in reaching a charging decision as to an organization, and shall not be requested in any way by prosecutors. The decision also provides obvious guidance as to investigations for prosecutors (avoid even indirect coercion) and defense counsel (where coercion occurs, try to make sure there will be evidence of its actual effect). Richard Cooper is a partner at Williams & Connolly in Washington. He can be reached via e-mail at rcooper@wc.com.

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