An End to "Backseat Driving"? The Thompson Memorandum and Government Tactics in White-Collar Crime Investigation and Prosecution |
"The methods we employ in the enforcement of our criminal law have aptly been
called the measures
by which the quality of our civilization may be judged."
Douglas v. California, 372 U.S. 353, 358 n.2, 83 S.Ct. 814 (1963)
Imagine these scenarios:
- Corporations making their employees available whenever and wherever
prosecutors wished to interview them, without subpoenas;
- Corporations terminating employees who refuse to cooperate with the
government’s investigation;
- Corporations sharing with prosecutors interview memoranda and other materials
generated in their internal investigations, notwithstanding any claim of
privilege they might have;
- Corporations directing professionals working for them, including outside
auditors and counsel, to meet with the government and provide prompt
access to their work papers and other records;
- Corporations unilaterally terminating severance agreements with former
employees for fear that the corporation may be viewed in a negative light by
prosecutors;
- Corporations agreeing to retain attorneys and accountants of the government’s
choosing to evaluate their business practices, and to accept their
recommendations;
- Corporations, at the behest of the government, advising their employees to
meet with the government investigators without aid of an independent counsel;
- Corporations directing their employees to "cooperate" with the federal
prosecutors or risk termination of payment for legal fees and costs.
These scenarios are hardly fictional.1 They represent the "brave new world" of
aggressive investigation and prosecution of white-collar crime in the post-Enron
era. It is difficult to imagine that the federal government’s internal policy
and guidelines could enable federal prosecutors to exploit their virtually
unchecked power to extract and coerce ever greater concessions, including
waivers of attorney-client privileges, the surrender of confidential and
privileged work product between outside counsel and the corporation, and control
over the advancement of legal fees and costs by corporations to their
employees—in short, jeopardize the very nature of the American adversary system.
The Origins of the Thompson Memorandum
Although the concept of corporate criminal liability has been settled since
1909,2 the Justice Department had no uniform policy on corporate prosecution
until June 1999, when then-Deputy Attorney General Eric H. Holder issued a
policy memorandum entitled "Federal Prosecution of Corporations" (the "Holder
Memorandum"). This document attempted to provide "guidance as to what factors
should generally inform a prosecutor in making the decision whether to charge a
corporation in a given case."3 The Holder Memorandum made it clear that the
factors articulated in the memorandum were not "outcome-determinative and [were]
only guidelines" and that "Federal prosecutors are not required to reference
these factors in a particular case, nor are they required to document the weight
they accorded specific factors in reaching their decision."4 However, the
language that is at the heart of the controversy over the Thompson
Memorandum—waiver of attorney-client privilege and advancing of legal fees—was
first found in the Holder Memorandum. The Holder Memorandum, after setting forth
some common sense factors that would assist the prosecutors in deciding whether
to indict a company, stated that prosecutors, in determining whether to bring
charges against a company, should consider: the corporation’s timely and
voluntary disclosure of wrongdoing and its willingness to cooperate in the
investigation of its agents, including, if necessary, the waiver of the
corporate attorney-client and work product privileges.5
The Memorandum also explained what was meant by "cooperation": [i]n gauging the
extent of the corporation’s cooperation, the prosecutor may consider the
corporation’s willingness to identify the culprits within the corporation,
including senior executives, to make witnesses available, to disclose the
complete results of its internal investigation, and to waive attorney-client and
work-product privileges.6 The Memorandum further stated: Another factor to be
weighed by the prosecutor is whether the corporation appears to be protecting
its culpable employees and agents…a corporation’s promise of support to culpable
employees and agents, either through the advancing of attorneys fees, through
retaining the employees without sanction for their misconduct, or through
providing information to the employees about the government’s investigation… may
be considered by the prosecutor in weighing the extent and value of a
corporation’s cooperation.7
Concerning the issue of a corporation advancing attorney fees, the Memorandum
clarified, in a footnote, that: Some states require corporations to pay the
legal fees of officers under investigation prior to a formal determination of
their guilt. Obviously, a corporation’s compliance with governing law should not
be considered a failure to cooperate.8
Thus, the Holder Memorandum sent a clear signal to federal prosecutors that the
advancing of attorneys’ fees to personnel of a corporation under investigation,
except where such advances were required by law, might be viewed by the
government as protection of culpable individuals and might contribute to a
government decision to indict the entity. However, as the Holder Memorandum
stated, it was not binding. Federal prosecutors were free to exercise their
discretion whether to take the Memorandum into account, or not.
The outbreak of corporate scandals in 2001 changed everything. In late 2001,
Enron’s collapse caused increased scrutiny into corporate accounting. Soon,
other corporate scandals came to light—most notably Global Crossing, Healthsouth,
Tyco International, Adelphia Communications, and ImClone. Bankruptcies and
criminal prosecutions ensued including, the indictment of Enron’s auditors,
Arthur Andersen LLP in March 2002—an indictment that resulted in the collapse of
the firm, well before the case was tried.9 Arthur Andersen’s indictment and
prosecution sent a clear message to Corporate America that companies that
deliberately try to block the government from investigating corporate misconduct
will be punished swiftly and severely.
The Thompson Memorandum
On July 9, 2002, President Bush issued Executive Order 13271, which established
a Corporate Fraud Task Force (the "Task Force") headed by United States Deputy
Attorney General Larry D. Thompson.10 On January 20, 2003, Mr. Thompson issued a
document entitled Principles of Federal Prosecution of Business Organizations
(the "Thompson Memorandum"), which practically was a revision of the Holder
Memorandum. In fact, the language concerning "cooperation" and advancing of
legal fees by business entities was carried forward without change. Nonetheless,
the Memorandum drastically altered the focus of prosecutors in making a
determination to charging a corporate entity. The Memorandum stated that "[t]he
main focus of [its] revisions is increased emphasis on and scrutiny of the
authenticity of a corporation’s cooperation" with government investigations.11
The revised guidelines instruct prosecutors to consider whether a company,
"while purporting to cooperate with a Department investigation," has in fact
been engaging in conduct that "impede[s] the quick and effective exposure of the
complete scope of wrongdoing under investigation."12
The Thompson Memorandum appeared to encourage federal prosecutors to evaluate a
corporation’s "cooperation" in an investigation and to judge whether the
cooperation was authentic. Further, unlike its predecessor, the Thompson
Memorandum was binding on all federal prosecutors.13 Accordingly, United States
attorneys were now required to consider the advancing of legal fees by business
entities, except where such advances were required by law, as indicative of a
corporation’s attempt to protect culpable employees and as a factor weighing in
favor of indictment.
On the one hand, Mr. Thompson exhorted federal prosecutors, "I cannot stress
strongly enough that the prosecution of guilty individuals should always take
precedence over the prosecution of entities."14 While during this same period,
he made the public comments that "they [the employees] don’t need fancy legal
representation"15 if they did not believe that they acted with criminal intent.
Surely it cannot be legal naiveté that could have led the Deputy Attorney
General to make this comment. After all, it is well known that a white-collar
criminal defense in a case arising out of a complex business environment
requires special skills, business sophistication, and resources that are
generally more expensive than those in less complex criminal matters. Moreover,
the need to review and analyze frequently voluminous documentary evidence
greatly increases the amount of attorney time required for, and, the cost of a
competent defense.16
The mandate of the Thompson Memorandum and the overzealous investigations and
prosecutions of corporations and their personnel by federal prosecutors in wake
of the recent corporate scandals were bound to conflict with the constitutional
rights of the criminal defendant. These factors came to a head-on conflict and
were brought to light in the KPMG case. In June 2006, Hon. Lewis A. Kaplan, a
federal judge in Manhattan, issued an 83-page rebuke of the Justice Department’s
white-collar prosecution tactics in an opinion for a case involving former
partners of troubled accounting firm, KPMG. Judge Kaplan’s opinion offered a
searing criticism of the Thompson Memorandum. To understand the tactics of the
U.S. attorneys, which have led to concerns from the defense bar and civil
liberties associations, it is imperative to analyze the KPMG case.
The KPMG Case: The Anatomy of a White-Collar Criminal Investigation17
At or around the time of the Enron, Global Crossing, Tyco International,
Adelphia Communications, and ImClone debacles, the Internal Revenue Service
(IRS) began investigating KPMG for creating and advocating allegedly abusive tax
shelters. A few months later, the Permanent Subcommittee on Investigations of
the Senate Committee on Governmental Affairs "began an investigation into the
development, marketing and implementation of abusive tax shelters by
accountants, lawyers, financial advisors, and bankers."18
This led to public hearings in November 2003 at which several senior KPMG
partners or former partners—three of whom were later indicted—testified. KPMG’s
reception at the hearing was not favorable.19
This led the late Eugene O’Kelly, then KPMG chair, to retain Robert S. Bennett
of Skadden Arps Slate Meagher & Flom ("Skadden"), "to come up with a new
cooperative approach."20 One aspect of that new approach was KPMG’s decision to
ask its senior partners, who had testified before the Senate and who were later
indicted, to leave. One of the partners who was asked to leave was deputy chair
Jeffrey Stein. Given Mr. Stein’s senior position and his relationship with Mr.
O’Kelly, his departure was cushioned substantially.21
However, KPMG’s efforts to stave off trouble by "cleaning house," came too late—
much damage already had been done. In the early part of 2004, the IRS made a
criminal referral to the Department of Justice (DOJ), which in turn passed it on
to the United States Attorney’s Office (USAO).
KPMG’s policy prior to this investigation concerning the payment of legal fees
of its partners and employees was clear. KPMG had always advanced and paid legal
fees, without a preset cap or condition of cooperation with the government.
These fees covered counsel for partners, principals, and employees of the firm
in any civil, criminal, or regulatory proceeding involving activities arising
within the scope of the individual’s duties and responsibilities as a KPMG
partner, principal, or employee.
When the referral reached the USAO on February 5, 2004, it came under the
supervision of Shirah Neiman, who was chief counsel to the United States
Attorney, the USAO’s liaison to the IRS and a participant in the drafting of the
Holder Memorandum. The USAO notified Skadden of the referral, and an initial
meeting was scheduled for February 25, 2004.
In the meantime, the USAO prepared "subject" letters—letters advising the
recipient that he or she is a person whose conduct is within the scope of a
grand jury’s investigation— to between twenty and thirty KPMG partners and
employees. In preparation for the meeting, Ms. Neiman and other members of the
prosecution team conferred. At the outset, the prosecutors decided to ask Skadden whether KPMG was paying the legal fees of individuals under
investigation. The meeting was attended by Mr. Bennett, Ms. Neiman, and many
others on both sides. Mr. Bennett informed the government attorneys that KPMG
had decided to clean house and had already taken high-level personnel action;
further, it would cooperate fully with the government’s investigation. It was
made clear to the government attorneys that KPMG’s objective was to save itself,
not to protect any individuals. In an obvious reference to the fate of Arthur
Andersen, Mr. Bennett remarked that an indictment of KPMG would result in the firm going out of business.
The U.S. attorneys immediately focused on the subject of legal fees and made a
specific reference to the Thompson Memorandum. KPMG’s counsel informed the U.S.
attorneys that KPMG’s common practice had been to pay legal fees. However,
counsel added that KPMG would not pay legal fees for employees who declined to
cooperate with the government, or who took the Fifth Amendment, as long as it
had discretion to take that position. Ms. Neiman responded by remarking that
"misconduct" should not "be rewarded" and referred to "federal guidelines."22
KPMG understood this remark to mean that payment of legal fees by KPMG, beyond
any that it might legally be obligated to pay, could well count against KPMG in
the government’s decision whether to indict the fi rm. Any doubt that this was
the message conveyed was dispelled by an assistant U.S. attorney’s comment that
the government will look at KPMG’s discretion regarding payment of legal fees
"under a microscope."23
Shortly after the February 25, 2004 meeting, Skadden reported to the U.S.
attorneys that KPMG was planning on putting a cap on legal fees and making the
payment conditional for any given partner or employee on that individual’s
"cooperating fully with the company and the government."24 KPMG assured the USAO
that it would be "as cooperative as possible" so that the USAO would not
exercise its discretion to indict the firm. The USAO urged that KPMG tell its
people that they should be "totally open" with the USAO, "even if that [meant
admitting] criminal wrongdoing."25
The actions of the USAO, coupled with the mandate of the Thompson Memorandum,
had the desired effect. KPMG’s counsel informed counsel for the partners and/or
employees who were the focus of the government investigation that KPMG would pay
an individual’s legal fees and expenses, up to a maximum of $400,000, on the
condition that the individual "cooperate with the government and...be prompt,
complete, and truthful."26 Importantly, KPMG further made clear that
"payment of...legal fees and expenses will cease immediately if... [the
recipient] is charged by the government with criminal wrongdoing."27 In addition, KPMG sent an
advisory memorandum to a broader audience of KPMG personnel regarding potential
contacts by the government. The memorandum urged full cooperation with the
investigation, but it advised also that recipients had a right to be represented
by counsel if they were contacted by the government. The Memorandum also
mentioned some advantages of consultation with counsel, and stated that KPMG had
arranged for independent counsel for those who wished to consult them.
The advisory memorandum upset the USAO. They immediately advised Skadden that
they were "disappointed with [its] tone" and demanded that KPMG send out a
supplemental memorandum in a form that the USAO proposed.28 The only significant
point of difference between the memorandum that the government demanded and
KPMG’s original memorandum was an insertion of language that an employee was not
required to utilize services of independent counsel before speaking with the
government’s investigators and that an employee "was free to deal directly
with the investigators without counsel."29 It was evident that the government’s
purpose in demanding the supplement was to increase the chances that KPMG
employees would agree to interviews without consulting or being represented by
counsel, whether provided by KPMG or otherwise.
Eager to demonstrate that KPMG was cooperating, Skadden asked the government to
notify it if any current or former KPMG employee failed to "cooperate." As was
to be expected, the government took full advantage of this offer. It repeatedly
notified Skadden when KPMG personnel failed to comply with government demands.
In each case, Skadden promptly advised the individual or attorney for the
individual in question that the payment of legal fees would be terminated
"[a]bsent an indication from the government within the next ten business days
that your client no longer refuses to participate in an interview with the
government."30 In some cases, the individuals in question relented and submitted
to interviews with the government. Others did not, whereupon KPMG terminated
their employment and cut off the payment of legal fees.
As the investigation continued, KPMG was desperately seeking a resolution short
of an indictment of the firm. On the other side, the government was aggressively
pressing for admissions of extensive wrongdoing, a great deal of money, and
changes in KPMG’s business. The USAO informed KPMG that it had issues with
KPMG’s grant of rich severance packages to certain executives. KPMG tried to
deflect the issue by agreeing that severance packages were "high in one or two
cases" but reiterating that its "expectation" was that legal fees of individuals
would be paid only up to $400,000 and only on condition that recipients
cooperated with the government.31 Notwithstanding this problem, KPMG repeatedly
tried to convince the USAO not to indict the firm, touting its cooperation with
the investigation and its limitation of attorneys’ fees for individuals.
However, in meetings in March 2005 with David N. Kelley, then United States
Attorney, this approach did not yield the desired result. On March 2, 2005, Mr.
Kelley interrupted Mr. Bennett’s claim that the fi rm had cooperated by saying,
"Let me put it this way. I’ve seen a lot better from big companies."32 With a
last-ditch effort to prevent an indictment, KPMG unilaterally terminated the
consulting services portion of the Stein severance agreement and cut off payment
of Mr. Stein’s attorneys’ fees. It did so, "because [KPMG] thought
it would help [the firm] with the government."33
Having dealt, as best it could, with the Stein problem, KPMG now attempted to
persuade Deputy Attorney General James Comey not to indict the firm. The
meeting took place on June 13, 2005. Skadden, in avoiding indictment, relied
upon KPMG’s "never heard of before" cooperation with the government, in addition
of course to other arguments.34
This time, KPMG was more successful.
On August 29, 2005, KPMG and the government entered into a Deferred Prosecution
Agreement (DPA). KPMG agreed, among other things, to waive indictment, to be
charged in one-count information, to admit extensive wrongdoing, to pay a $456
million fine, and to accept considerable restrictions on its practice. The
government agreed that it would seek dismissal of the information if KPMG
complied with its obligations. Further, the DPA obliged KPMG to cooperate
extensively with the government, both in general and in the government’s
prosecution of its partners and employees. This meant that anything the
government regarded as "a failure to cooperate" almost certainly would result in
the criminal conviction that KPMG labored so mightily to avoid. Clearly, the
admissions that KPMG was forced to adopt foreclosed a successful defense.
At about the same time, the government filed the indictment against the
individual KPMG defendants in the U.S. District Court for the Southern District
of New York. As promised by KPMG, it immediately cut off payments of legal fees
and expenses to the defendants.
On January 19, 2006, the KPMG defendants moved to dismiss the indictment on the
ground that the government had interfered improperly with the advancement of
attorneys’ fees by KPMG in violation of their constitutional and other rights.
The government, in an attempt to avoid an evidentiary hearing, took the position
that it had "no objection whatsoever to KPMG exercising its free and independent
business judgment as to whether to advance defense costs . . . and that if it
were to elect to do so the government would not in any way consider that in
determining whether [KPMG] had complied with the DPA."35 However, to resolve
this issue, the court granted limited discovery and conducted an evidentiary
hearing that was held on May 8-10, 2006.
Following the evidentiary hearing, the court made the following factual
findings:36
First, the Thompson Memorandum caused KPMG to consider departing from its
long-standing policy of paying legal fees and expenses of its personnel in all
cases and investigations.
Second, the USAO reinforced the threat inherent in the Thompson Memorandum. It
raised the issue and then repeatedly focused on KPMG’s obligation to advance
defense costs, implying that anything more than compliance with demonstrable
legal obligations could be held against the firm. U.S. attorneys’ statements
that misconduct should not be rewarded and that the USAO would look at any
discretionary payment of fees by KPMG "under a microscope" drove the point home.
Third, the government conducted itself in a manner that evidenced a desire to
minimize the involvement of defense attorneys.
Fourth, KPMG’s decision to cut off all payments of legal fees and expenses to
anyone who was indicted and to limit and to make a condition of such payments
prior to indictment upon cooperation with the government was the direct
consequence of the pressure applied by the Thompson Memorandum and the USAO.
United States’ Attorneys’ Conduct Pursuant to the Thompson Memorandum
Violated the KPMG Defendants’ Fifth and Sixth Amendments Rights
The Fifth Amendment Due Process Violation The United States Supreme Court has
long protected a defendant’s right to fairness in the criminal process. It has
grounded this protection primarily in the Due Process Clause37 as well as more
specific provisions of the Bill of Rights, including the Confrontation and
Assistance of Counsel Clauses of the Sixth Amendment.38 The Supreme Court
consistently has held that criminal defendants are entitled to be treated fairly
throughout the process.39 Proper respect for the individual prevents the
government from interfering with the manner in "which the individual wishes to
present a defense."40 This means that the government may not both prosecute a
defendant and then seek to influence the manner in which he or she defends the
case.41 As Judge Kaplan put it succinctly: "fairness in criminal proceedings
requires that the defendant be firmly in the driver’s seat and that the
prosecution not be a backseat driver."42
The Due Process Clause has been interpreted to provide not only procedural
protection for deprivations of life, liberty, and property, but also substantive
protection for fundamental rights—those that are so essential to individual
liberty that they cannot be infringed by the government unless the infringement
is narrowly tailored to serve a compelling state interest.43 Even though the
United States Supreme Court has not explicitly characterized the right to
fairness in criminal proceedings as a "fundamental" right,44 the high court’s
repeated recognition of the constitutional mandate of fairness in criminal
proceedings strongly suggests that this right is "fundamental" for substantive
due process purposes, at least in some circumstances. 45
However, a criminal defendant’s right to obtain and use resources lawfully
available to him or her to prepare a defense, free of knowing or reckless
government interference, is a right that is basic to the American concept of
justice and fair play. It can be said with a fair degree of certainty that this
right is fundamental.46
Judge Kaplan reasoned that the evidentiary hearing clearly demonstrated that the
Thompson Memorandum and the USAO pressure on KPMG to deny or cut off defendants’
attorney fees impinged on the KPMG Defendants’ ability to defend themselves. The
Thompson Memorandum and the USAO’s actions, therefore, were subject to strict
scrutiny and accordingly must have been narrowly tailored to achieve a
compelling government interest.47
There is no denying that one of the objectives of the Thompson Memorandum and
the USAO’s actions pursuant to the memo— investigating and fairly prosecuting
crime— was compelling. However, the Thompson Memorandum did not say that payment
of legal fees may be viewed in favor of indictment only if they are used as a
means to obstruct an investigation.48 The court found that this aspect of the
Thompson Memorandum was not narrowly tailored to achieve a compelling objective.
It discouraged and, as a practical matter, often prevented companies from
providing employees and former employees with the financial means to exercise
their constitutional rights to defend themselves. Further, the USAO knew that the threat inherent in the Thompson
Memorandum, coupled with its own reinforcement of that threat, was likely to
lead corporate defendants to cut off the payment of legal fees for any employees
or former employees who were indicted and to limit and condition their payment
during the investigative stage. The court ruled that the memo and the USAO’s
actions were not narrowly tailored to serve compelling governmental interests
and, therefore, violated the Due Process Clause.49
The Sixth Amendment Right to Counsel Violation
Apart from the Due Process violation, Judge Kaplan found that the Thompson
Memorandum and its aggressive implementation by the government infringed the
KPMG defendants’ Sixth Amendment right to counsel.50 The Sixth Amendment
guarantees more than the mere presence of a lawyer at a criminal trial. It
protects, among other things, an individual’s right to choose the lawyer or
lawyers he or she desires and to use one’s own funds to mount the defense that
one wishes to present.51 The KPMG defendants demonstrated that the government’s
implementation of the Thompson Memorandum impinged on their Sixth Amendment
rights to counsel and to present a complete defense. Interference with these
rights was improper if the government’s actions were "wrongfully motivated
or without adequate justification."52 The court held that the Thompson Memorandum,
by discouraging companies from providing their employees with the financial
means to exercise their constitutional rights, undermines the proper functioning
of the American adversary process of determining guilt or innocence in criminal
cases.53 The fact that advancement of legal fees occasionally might be part of
an obstruction scheme is insufficient to justify the government’s interference
with the right of individual criminal defendants to obtain resources lawfully
available to them in order to defend themselves.54 Further, the court held that
the KPMG defendants’ deprivation of their right to counsel of their choice was
"complete" when they were erroneously prevented from being represented by the
lawyer they wanted, regardless of the quality of the representation they
received.55 The defendants were not required to show prejudice. Finally, to
remedy the constitutional violations suffered by the KPMG defendants, the court
attempted to restore the defendants to the position they would have occupied but
for the government’s constitutional violation (i.e., pay the defendants their
defense costs already incurred and yet to be incurred).56 Sovereign immunity
from monetary claims prevented the court from sanctioning the government.57
Instead, Judge Kaplan assumed "ancillary jurisdiction" over defendants’ claim
that KPMG should resume making payments to employees and opened a civil docket
number for the claims of the KPMG defendants against KPMG.58
A month later, Judge Kaplan issued a second major decision in the case, holding
that the government was responsible for indirectly pressuring two former KPMG
partners to provide statements in violation of their Fifth Amendment privilege
against compelled self-incrimination.59 The court found that the individuals’
statements were economically coerced by KPMG by its threat to stop paying their
legal fees or terminating their employment, or both, if they did not cooperate
with the government. The court concluded that the firm undertook this action at
the government’s behest and as an attempt to curry favor with the prosecutors.60
The court held that the statements were inadmissible.61
The Stick and Carrot Approach of the Thompson Memorandum and Its Consequences
on Individual Rights
In the KPMG case, the government brandished a "big stick"—it threatened to
indict KPMG. And it held out a very large carrot. It offered KPMG the hope of
avoiding the fate of Arthur Andersen if KPMG could deliver to the USAO employees
who would talk, notwithstanding their constitutional right to remain silent, and
strip those employees of economic means of defending themselves."62 Zealous
enforcement of the Thompson Memorandum strains the relationship between
corporations and their individual employees. Corporations eager to earn
recognition for "authentic" cooperation are more likely to "find" employee
misconduct and share those employees’ inculpatory "admissions" made during the
companies’ internal investigation interviews. The unsuspecting employees may not
even be aware that they are not talking to their lawyer and that their
statements could be offered to prosecutors. Eager to curry favor with
prosecutors, corporations may further try to distance themselves from their
allegedly culpable employees, painting them as "rogue" managers whose conduct,
the corporations may argue, should not fairly be attributed to the entity
itself.63 Corporations may hesitate or, as occurred in the KPMG case, may be
manipulated or coerced into not advancing attorneys’ fees to individual
employee-defendants for fear of appearing to be "protecting its culpable
employees and agents."64 The combination of these factors creates certain
tension, if not outright dangers:
There is a very real question as to whether the exchange will significantly
increase the unsavory practice of ‘scapegoating,’ in which corporations find and
offer up to prosecutors lower echelon officials in order to save the firm.
Middle managers find, to their surprise, their rights eroded and their futures
clouded by their prominence in the press. To their dismay, both prosecutors and
their own employer have a huge stake in their public humiliation and
incarceration. The prosecutor seeks to relieve public pressure generated by
financial scandals; the firm seeks to survive.65
This desire to appease federal prosecutors motivates companies to quickly
interview, terminate, and incriminate as many employees as possible—even where
careful consideration of the facts would not otherwise warrant it. It is
shocking that little attention, if at all, is paid to the inherent conflict
between the two interests—the interests of companies who are eager to
demonstrate genuine cooperation and the interests of individual employees,
including the right against compelled self-incrimination. More often than not, a
government investigation leads outside counsel and the boards or audit
committees to pursue a strategy of aggressively "selling management up the
river."66
For companies’ in-house and external counsel, a nuanced understanding of the
Thompson Memo and its successor, the McNulty Memo, is essential. It enables them
to view these guidelines not as a potential minefield, but rather as a roadmap
of opportunities for effective advocacy and protection of companies’ long-term
interests.67 At the same time, for criminal defense attorneys defending
individuals accused of white-collar crimes, these guidelines call for vigilance
against a serious threat that may undercut the constitutional rights of the
individual defendant.
Former Department of Justice attorneys’ comments on the Thompson Memo are
instructive.68 They describe the approach to law enforcement embodied in the
Thompson Memorandum "as moving the process governing the American system away
from the form the Founders expressly meant it to take—an accusatorial system—and
toward something they feared—an inquisitorial system." The Thompson Memorandum
shifted the power politics: it shifted power from courts and juries to the
Department of Justice and the U.S. Attorneys who work for it.69
The Aftermath: The McNulty Memorandum—A Strategic Retreat By the Government
Several weeks after the court’s ruling, the Senate Judiciary Committee conducted
hearings regarding the policies underlying the Thompson Memorandum. Vigorous
efforts of the anti-attorney-client waiver lobbying groups had resulted in a
widespread awareness of the coercive tactics of federal prosecutors.70 This
helped persuade Senate Judiciary Chairman Arlen Specter (R-Penn.) to hold a
Senate hearing on the waiver issue in September 2006. Just before the hearing, a
bipartisan group of ten former senior Justice Department offi cials released a
letter condemning the DOJ’s waiver policy.71 The lobbying efforts paid off.
Senator Specter threatened to introduce legislation of his own if the DOJ didn’t
change its policy. On December 7, 2006, on the second-to-last day of the
Senate’s session, he followed through.72
Five days later, the Justice Department responded. On December 12, 2006, U.S.
Deputy Attorney General Paul J. McNulty announced that he was releasing revised
corporate charging guidelines for federal prosecutors throughout the country.73
The new guidance supersedes and replaces the Thompson Memorandum. The new memo
creates new approval requirements that federal prosecutors must comply with
before they can pressure corporations to waive attorney-client privilege and
work-product protections. It also limits prosecutors’ ability to consider a
refusal to provide such material when making the decision whether to charge a
corporation with criminal misconduct.
Further, as a direct response to the KPMG decision, the new guidance also
instructs prosecutors that they generally cannot consider a corporation’s
advancement of attorneys’ fees to employees when making a decision whether to
charge the corporation. A rare exception is created for those extraordinary
instances where the advancement of fees, combined with other significant facts,
shows that such a step was intended to impede the government’s investigation. In
those limited circumstances, fee advancement may be considered only if
authorized by the Deputy Attorney General.
At this time, it is somewhat premature to offer criticisms of the McNulty
Memorandum. Nonetheless, the following "flaws" have been observed by legal
scholars, defense attorneys, and civil liberties groups:74
- The guidelines are internal policy, unenforceable at law, and there is no
remedy per se if a prosecutor fails to follow them;
- The pressure to waive privilege is unabated under the guidelines because
although they prohibit prosecutors making charging decisions from considering a
corporation’s refusal to provide sensitive attorney-client information, they do
allow favorable consideration when a company agrees;
- Prosecutors in making a decision to bring charges, may not consider a
corporation’s advancement of attorney fees to employees, except when it was done
to impede the government’s investigation—a standard that is open to
interpretation and that in reality, may be too easy to meet. For example, fees
combined with joint defense agreements or failure to terminate employees who
refuse to cooperate, could be sufficient for prosecutors to use the exception;
- The guidelines continue to allow prosecutors weighing a corporation’s
cooperation to consider joint defense agreements, information-sharing between a
corporation and employees about a government investigation, or a corporation’s
retention or failure to sanction employees who assert Fifth Amendment rights.
As a unanimous Supreme Court wrote long ago, the interest of the government "in
a criminal prosecution is not that it shall win a case, but that justice shall
be done."75 Justice is not done when the government uses the threat of
indictment—a matter of life and death to many companies—to coerce companies into
depriving their present and even former employees of the means of defending
themselves against criminal charges.76 The determination of guilt or innocence
must be made fairly—not in a proceeding in which the government has obtained an
unfair advantage long before the trial even has begun. As Judge Kaplan put it,
criminal defendants are "entitled to a fair shake."77
More importantly, a criminal defendant’s exercise of his constitutional rights
should not be feared or avoided by the government: No system worth preserving
should have to fear that if an accused is permitted to consult with a lawyer, he
will become aware of, and exercise those rights. If the exercise of
constitutional rights will thwart the effectiveness of a system of law
enforcement, there is something very wrong with that system.78
NOTES
| 1 |
See Wray, C., "Corporate Criminal
Prosecution In A Post-Enron World: The Thompson Memo In Theory And
Practice," 43 Am. Crim. L. Rev. 1095, 1136. |
| 2 |
See New York Cent. & Hudson R.R. Co. v.
United States, 212 U.S. 481, 495 (1909) (holding that corporations are
criminally liable for any act committed by an employee in the course of
such person’s employment that is intended to benefit the corporation).
|
| 3 |
http://www.usdoj.gov/criminal/fraud/policy/Chargingcorps.html
(last visited January 2, 2007). |
| 4 |
Id. |
| 5 |
Id. at § II, ¶ 4. |
| 6 |
Id. at § VI, ¶ A. |
| 7 |
Id. at ¶ B. |
| 8 |
Id. at ¶ B, n. 3. |
| 9 |
United States v. Stein, 435 F.Supp.2d
330, 337 (2006) citing Ken Brown, et al., "Called to Account: Indictment
of Andersen in Shredding Case Puts Its Future in Question," Wall. St.
J., Mar. 15, 2002, at A1. |
| 10 |
Id. |
| 11 |
See The Thompson Memorandum, preface
(http://www.usdoj.gov/dag/cftf/corporate_guidelines. htm) (last visited
January 2, 2007) (emphasis added). |
| 12 |
Id. (emphasis added). |
| 13 |
Id. at 338; also see U.S. Department of
Justice, Criminal Resource Manual § 163 (2005) ("The Thompson Memorandum
sets forth nine factors that federal prosecutors must consider in
determining whether to charge a corporation or other business
organization."). Further, on December 12, 2006, U.S. Deputy Attorney
General Paul J. McNulty released a revised memorandum that superseded
and replaced the Thompson Memorandum. The McNulty Memorandum is
discussed at the end of this article. |
| 14 |
Larry D. Thompson, Deputy Attorney
General, Remarks at the Corporate Fraud Task Force Conference AN END TO
"BACKSEAT DRIVING"? 45 (Sept. 26, 2002), available at http:// www.usdoj.gov/ dag/speech/2002/092602dagremarks.htm (last visited
January 2, 2007). |
| 15 |
Laurie P. Cohen, "In the
Crossfire: Prosecutors’ Tough New Tactics Turn Firms Against Employees,"
Wall. St. J., June 4, 2004, A1. Mr. Thompson’s comments remind me of the
legendary trial lawyer Edward Bennett Williams’ retort, when told that
criminal defendants were not entitled to him – an expensive and "fancy"
lawyer. Williams’ reply: "You mean they’re entitled to a defense, but
not the best defense?" Thomas, Evan (1991), The Man To See, Simon and
Schuster publication, pg. 2. |
| 16 |
See Judge Kaplan’s comments in United
States v. Stein at 338-339. |
| 17 |
The facts narrated in this section have
been taken from Judge Lewis A. Kaplan’s July 26, 2006 Opinion in
United States v. Stein, 435 F.Supp.2d 330, 339 (2006). |
| 18 |
Staff of the Permanent Subcomm. on
Investigations of the S. Comm. on Homeland Security and Governmental
Affairs, "The Role of Prof. Firms in the U.S. Tax Shelter Indus. 1"
(Comm. Print 2005) ("Senate Report"). |
| 19 |
"U.S. Tax Shelter Industry: The Role of
Accountants, Lawyers, and Financial Professionals, Hearings Before the
Permanent Subcomm. on Investigation of the S. Comm. on Governmental
Affairs," 108th Cong. 2 (2003). |
| 20 |
United States v. Stein, 435 F.Supp.2d
330, 339 (2006). |
| 21 |
Mr. Stein retired from the firm with a
$100,000 per month, three-year consulting agreement. In turn, he agreed
to release the firm and all of its partners, principals, and employees
from all claims. Further, Mr. Stein and KPMG agreed that Mr. Stein would
be represented, at KPMG’s expense, in any suits brought against KPMG or
its personnel and himself, by counsel acceptable to both him and the firm or, if joint representation were inappropriate or if Mr. Stein were
the only party to a proceeding, by counsel reasonably acceptable to Mr.
Stein. |
| 22 |
United States v. Stein,
supra at 342. |
| 23 |
Id. at 344. |
| 24 |
Id. at 345. |
| 25 |
Id. |
| 26 |
Id. |
| 27 |
Id. at 345-346. |
| 28 |
Id. at 346. |
| 29 |
Id. |
| 30 |
Id. at 347. |
| 31 |
Id. |
| 32 |
Id. at 348. |
| 33 |
Id. |
| 34 |
Id. at 349. |
| 35 |
Id. at 351. |
| 36 |
Id. at 352-353. |
| 37 |
U.S. Const. amend. V, XIV. |
| 38 |
Id. amend. VI. |
| 39 |
Powell v. Alabama, 287 U.S. 45, 53 S.Ct.
55, 77 L.Ed. 158 (1932); Faretta v. California, 422 U.S. 806, 820, 95
S.Ct. 2525, 45 L.Ed.2d 562 (1975). |
| 40 |
Martinez v. Court of Appeal of Cal., 528
U.S. 152, 165, 120 S.Ct. 684 (2000) (Scalia, J., concurring).
|
| 41 |
United States v. Stein, supra at 357. |
| 42 |
Id. at 358. |
| 43 |
See, e.g. Washington v. Glucksberg, 521
U.S. 702, 721, 117 S.Ct. 2258, 138 L.Ed.2d 772 (1997). |
| 44 |
United States v. Stein, supra at 360.
|
| 45 |
Moore v. City of East Cleveland, 431
U.S. 494, 503, 97 S.Ct. 1932, 52 L.Ed.2d 531 (1977) (plurality opinion);
United States v. Curran, 724 F.Supp. 1239, 1241 (C.D.Ill.1989), rev’d on
other grounds, United States v. Spears, 965 F.2d 262 (7th Cir. 1992),
cert. denied, 506 U.S. 989, 113 S.Ct. 502, 121 L.Ed.2d 438 (1992).
|
| 46 |
United States v. Stein, supra at 362.
|
| 47 |
Id. |
| 48 |
Id. 48. Id. at 363. This instruction has
been now been incorporated in the McNulty Memorandum. |
| 49 |
Id. at 364. The court also observed that
"it makes no difference that the Thompson Memorandum is a policy of the
DOJ and implemented by the USAO rather than legislation enacted by
Congress. Due process requires that government action ‘through any of
its agencies must be consistent with the fundamental principles of
liberty and justice which lie at the base of our civil and political
institutions, which not infrequently are designated as ‘the law of the
land.’’… The government cannot avoid strict scrutiny of actions that
impinge upon the fundamental right of fairness in the criminal process
simply by acting through DOJ policy rather than by statute or formal
regulation." Id. |
| 50 |
Id. at 365. |
| 51 |
See, e.g., Wheat v. U.S., 486 U.S. 153,
164, 108 S.Ct. 1692 (1988); Caplin & Drysdale, Chartered, 491 U.S. at
624, 109 S.Ct. 2646. Further, in Stein, the government first argued that
the Sixth Amendment right to counsel attaches only upon the initiation
of a criminal proceeding. The court held that the Thompson Memorandum on
its face and the USAO’s actions were parts of an effort to limit
defendants’ access to funds for their defense. The fact that events were
set in motion prior to indictment with the object of having, or with
knowledge that they were likely to have, an unconstitutional effect upon
indictment cannot save the government. The government then argued that
the KPMG Defendants have no right, under the Sixth Amendment or
otherwise, to spend "other people’s money" on expensive defense counsel.
The court disagreed and held that the KPMG Defendants had at least an
expectation that their expenses in defending any claims or charges
brought against them by reason of their employment by KPMG would be paid
by the firm. This expectation was the defendants’ property, not that of
a third party’s. See United States v. Stein, supra at 366-367.
|
| 52 |
United States v. Stein, supra at 367
citing Via v. Cliff, 470 F.2d 271, 274-75 (3d Cir.1972); accord, United
States v. Morrison, 602 F.2d 529, 531 (3d Cir. 1979), rev’d on other
grounds, 449 U.S. 361, 101 S.Ct. 665, 66 L.Ed.2d 564 (1981).
|
| 53 |
Id. at 368-369. |
| 54 |
Id. at 369. |
| 55 |
Id. |
| 56 |
Id. at 374. |
| 57 |
Id. at 374-375. |
| 58 |
Id. at 378. |
| 59 |
United States v. Stein, --- F.Supp.2d
----, 2006 WL 2060430 (S.D.N.Y.) |
| 60 |
Id. |
| 61 |
Id. |
| 62 |
Id. at *17. |
| 63 |
Wray, C., "Corporate Criminal
Prosecution In A Post-Enron World: The Thompson Memo In Theory And
Practice," 43 Am. Crim. L. Rev. 1095, 1181-1182. |
| 64 |
Thompson Memorandum at Part VI.
|
| 65 |
Wray, C., supra at 1182 quoting Dale A.
Oesterle, "Early Observations on the Prosecutions of the Business
Scandals of 2003-03:. On Sideshow Prosecutions, Spitzer’s Clash With
Donaldson Over Turf, the Choice of Civil or Criminal Actions, and the
Tough Tactic of Coerced Cooperation," 1 Ohio St. J. Crim. L. 443, 480
(Spring 2004); also see Laufer, W. Legal Issues and Sociolegal
Consequences of the Federal Sentencing Guidelines: Corporate
Prosecution, Cooperation, and the Trading of Favors, 87 Iowa L. Rev.
643, 663-68 (2002). |
| 66 |
Id. |
| 67 |
Wray, C., "Corporate Criminal
Prosecution In A Post-Enron World: The Thompson Memo In Theory And
Practice," 43 Am. Crim. L. Rev. 1095, 1098. |
| 68 |
Id. at 1095. |
| 69 |
Id. |
| 70 |
McLure, J. "The Life and Death of
Thompson Memo," Legal Times, Dec. 18, 2006. |
| 71 |
Id. Signatories included former
Attorneys General Dick Thornburgh and Griffin Bell, as well as other
officials from the Reagan, George H.W. Bush, and Clinton eras. |
| 72 |
Id. |
| 73 |
http://www.usdoj.gov/dag/speech/2006/mcnulty_
memo.pdf (last visited on January 2, 2007). |
| 74 |
See Coyle, M., "The McNulty Memo: Real
Change or Retreat?," The National Law Journal, Dec. 20th, 2006. |
| 75 |
Berger v. United States, 295 U.S.
78, 88, 55 S.Ct. 629, 79 L.Ed. 1314 (1935); see also, e.g., Brady v.
Maryland, 373 U.S. 83, 87, 83 S.Ct. 1194 (1963) ("Society wins not only
when the guilty are convicted but when criminal trials are fair; our
system of the administration of justice suffers when any accused is
treated unfairly. An inscription on the walls of the Department of
Justice states the proposition candidly under the federal domain: ‘The
United States wins a point whenever justice is done its citizens in the
courts.’") |
| 76 |
United States v. Stein, 435 F.Supp.2d
330, 382 (2006). |
| 77 |
Id. at 357. |
| 78 |
Escobedo v. Illinois, 378 U.S. 478, 490,
84 S.Ct. 1758, 12 L.Ed.2d 977 (1964). |
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