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In two recent rulings, the U.S. District Court for the Southern District of New York determined that aggressive tactics often used in the government’s crusade against corporate crime are unconstitutional. The related rulings, issued in connection with the criminal prosecution of former employees of KPMG accused of selling fraudulent tax shelters, concern the government’s evaluation of corporate cooperation. Specifically, the rulings hold that government interference with corporate decisions to advance legal fees to employees and government efforts to condition such fee advancements on employees’ participation in interviews with investigators are unconstitutional. The rulings mark a significant setback for the Department of Justice. They will encourage challenges to the department’s often-problematic policies and their strong-arm application by front-line prosecutors. CORPORATE COOPERATION In the wake of Enron and other high-profile corporate scandals, the Department of Justice re-evaluated its policies for levying criminal charges against corporations. In January 2003, then-Deputy Attorney General Larry Thompson distributed a memorandum titled “ Principles of Federal Prosecution of Business Organizations.” The Thompson memo established a binding model for prosecutors to use in evaluating corporate conduct when deciding whether to bring charges against an organization. Key factors under this model are the nature and extent of a corporation’s cooperation with government investigations. Corporations perceived as not cooperating fully with a government investigation are more likely to face indictment, prosecution, and potentially crippling criminal sanctions. In evaluating cooperation, the Thompson memo instructs prosecutors to assess whether the corporation “appears to be protecting its culpable employees and agents.” In determining this, prosecutors are instructed to consider (1) whether the corporation is advancing legal fees or otherwise indemnifying its employees, and (2) whether the corporation waives the protections of attorney-client privilege and of attorney work product for materials in any internal investigation, including notes of otherwise-privileged interviews of company personnel. Interference with the advancement of legal fees and the compelled waiver of the attorney-client privilege and the attorney work-product doctrine have come to represent the cutting edge of the government’s sword for piercing through layers of corporate conduct. Company directors and officers owe fiduciary obligations to serve the best interests of their organizations, which often means taking all possible steps to avoid an indictment. Furthermore, individual employees implicated in such investigations often face daunting legal fees beyond their ability to pay. The Thompson memo essentially instructs prosecutors to exploit these vulnerabilities by basing favorable decisions about charges on corporate cooperation. In this context, “cooperation” has come to mean providing access to otherwise-privileged and potentially inculpatory statements that normally would be beyond law enforcement’s reach. It also means minimizing the involvement of defense lawyers in assisting employees and limiting the advancement of legal fees to only those employees who decline to invoke their Fifth Amendment rights or who escape indictment. Not surprisingly, federal authorities contend that information gathered by corporate counsel employing such tactics is obtained free from constitutional protections, especially that of the Fifth Amendment, and can immediately serve as the basis for charging decisions against either the corporation or individual employees. Such government tactics are at the heart of the sharply critical rulings this summer by Judge Lewis Kaplan of the Southern District of New York in United States v. Stein. Stein concerns the corporate criminal investigation and prosecution of 16 former KPMG employees, currently scheduled for trial in January 2007. Early in the government’s investigation, counsel for KPMG met with prosecutors to discuss what KPMG needed to do to avoid an Arthur Andersen-style criminal indictment. At this initial meeting and over the course of several others, prosecutors asserted that they would examine “under a microscope” any decision by KPMG to advance legal fees to employees. The government went so far as to urge KPMG to instruct its employees to be “totally open” with investigators, even if that meant “admitting criminal wrongdoing.” Under this pressure, which Kaplan described as “the proverbial gun to [the] head,” KPMG retreated from its long-standing practice of advancing legal fees. Instead, KPMG agreed to advance legal expenses only so long as its employees “cooperated fully with the company and the government.” It also agreed to cut off legal payments for any employee who refused to be interviewed by investigators or who was indicted. By succumbing to the government’s pressure, KPMG obtained a deferred-prosecution agreement with the government in August 2005. According to the agreement, KPMG itself would not be charged with criminal conduct. But if KPMG failed to continue its cooperation with the ongoing investigations and prosecutions of its employees, the agreement would be void, and the company could be indicted. Shortly after the agreement was finalized, a number of current and former employees were indicted, and KPMG promptly stopped paying their legal bills. AN ABUSE OF POWER In the first of two opinions, Kaplan ruled on June 26 that government interference in the payment of employee legal-defense costs violates the Fifth Amendment right to fairness in the criminal process as well as the Sixth Amendment right to counsel. According to the court, “The imposition of economic punishment by prosecutors, before anyone has been found guilty of anything, is not a legitimate governmental interest — it is an abuse of power.” Kaplan noted that if KPMG had determined on its own to withhold or condition legal expenses, no constitutional issue could have arisen. But when KPMG would have paid those fees (as was its regular practice) absent the threat of prosecution, it was unconstitutional for prosecutors to pressure the company to withhold or otherwise condition payment. Specifically, Kaplan ruled that the prosecution’s threats against KPMG impinged on the individual defendants’ ability to defend themselves, and this violated their Fifth Amendment right to fairness in criminal proceedings. It also violated their Sixth Amendment right to counsel by interfering in their choice of counsel and improperly limiting their access to funds to finance their defenses. In fashioning a remedy, Kaplan limited his opinion to the impact of the government’s conduct on the defendants’ rights to control their defense after indictment. Rather than dismissing the indictment on grounds of prosecutorial misconduct, the court determined that the injury and prejudice caused by the government’s actions could be substantially mitigated by KPMG advancing defense costs or, should KPMG refuse to do so, by permitting the individual defendants to obtain advancement of legal fees through summary proceedings before the court. The defendants subsequently filed a civil suit, now pending, to compel KPMG to pay for their defense. �COERCED’ STATEMENTS A month later, on July 25, Kaplan determined that prosecutors’ instructions to KPMG to base continued employment and advancement of legal fees upon cooperation with investigators had compelled two defendants to provide statements to investigators that would not have been made in the absence of the government’s economic coercion. The court relied on Garrity v. New Jersey (1967) — a case involving efforts to threaten police officers with termination if they did not answer questions subjecting them to criminal prosecution — for the proposition that use of economic coercion to secure a waiver of the privilege against self-incrimination violates the Fifth Amendment. To establish that statements were coerced, Kaplan held that each moving defendant must establish that (1) they subjectively believed that they had no real choice but to speak to investigators, and (2) a reasonable person in their position would have felt the same way. It was not enough for the defendants to show merely that they had made proffers after KPMG threatened termination or conditioned legal fees on cooperation. Kaplan determined that of the nine defendants seeking to suppress statements, statements from two were compelled through economic coercion in violation of the Fifth Amendment. Accordingly, Kaplan suppressed the use of the coerced statements at trial. To date, the government has not indicated whether it intends to appeal Kaplan’s rulings to the U.S. Court of Appeals for the 2nd Circuit. In light of the aggressive nature of the prosecution’s tactics, this may not be the ideal test case for the government. Moreover, a defeat in the 2nd Circuit would greatly enhance the opinions’ influence and their impact on the Justice Department’s policies. Consequently, it would not be at all surprising if the government simply let the opinions stand or decided to re-evaluate and revise its policies rather than defend them in court. If the constitutionality of the Thompson memo is litigated on appeal, it is not entirely clear how Kaplan’s rulings will be interpreted and where the constitutional lines ultimately will be drawn. Broadly construed, Kaplan’s rulings render certain provisions of the Thompson memo unconstitutional on their face. Such an interpretation would make it improper for the government, when evaluating corporate cooperation, to influence or consider the advancement of attorney fees and possibly the waiver of attorney-client privilege and work-product protection. This conclusion has much to recommend it. As recent experience has shown, the Thompson memo has been used to coerce corporations to exert pressure on employees that the government cannot apply directly. This effectively allows the government to circumvent constitutional protections. As long as prosecutors are permitted to consider a corporation’s payment of legal fees or assertion of privilege in assessing cooperation, corporations will face pressure to appease prosecutors at the expense of individual employees. It does not matter whether the government’s demands arise from a memo outlining policy or are presented as overt threats from prosecutors. The impact on individual employees’ rights is the same. In light of the significant ramifications of such a broad interpretation, however, reviewing courts may simply overrule Kaplan outright or limit his holdings by divorcing the Thompson memo from the aggressive implementation of its provisions. Nevertheless, Kaplan’s sharply critical opinions mark a significant defeat for the Department of Justice and, in particular, the Thompson memo. Although the opinions’ legal authority is currently limited to the Southern District of New York, this court is an important venue for corporate and white-collar prosecutions, and its pronouncements always have been highly influential. Accordingly, Judge Kaplan’s rulings will embolden defense counsel to challenge the Thompson memo and contest similar strong-arm tactics that front-line prosecutors use.
William M. Sullivan Jr. and Kevin M. King are partners in the D.C. office of Winston & Strawn, where they concentrate in corporate internal investigations and white-collar defense.

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