Judge Kaplan Has KPMG, Prosecutors, and Thompson Memo Under a Microscope
20 Corporate Crime Reporter 21(13), May 19, 2006

Last week, in a federal courtoom in Manhattan, Judge Lewis Kaplan had KPMG, federal prosecutors, and the Thompson memo under a microscope.

Judge Kaplan was holding an extraordinary three-day hearing on whether or not the Thompson memo – the Justice Department memo that gives guidance to federal prosecutors on whether or not to bring a criminal prosecution against corporations and other entities – infringes on the rights of individual defendants.

The case – KPMG.

Federal prosecutors charged KPMG with engaging in one of the nation’s largest tax shelter frauds.

In August 2005, the big accounting firm admitted criminal wrongdoing – but entered a deferred prosecution agreement and dodged a guilty plea.

In exchange, the firm, represented by Skadden Arps – effectively became an arm of the Department of Justice and cooperated with federal prosecutors investigating crimes by KPMG employees.

Sixteen KPMG employees were indicted.

The individuals sought last week’s hearing before Judge Kaplan on the question of whether or not the Thompson memo factors were unconstitutional.

Judge Kaplan was focusing on the question – would the government have granted KPMG a deferred prosecution agreement if the firm had not cut off the attorney’s fees of the KPMG individuals deemed not to be cooperating with the federal probe?

It was clear from everything that Judge Kaplan said over the three day hearing that his sentiment lies with the individuals and against the government – and against KPMG.

And in terms of relief, he’s apparently looking to force KPMG to pay the legal bills of the individual defendants before him.

Here’s Judge Kaplan at the end of the third day of the hearing – May 10, 2006, speaking to an attorney representing the Justice Department:

“Isn’t it just perfectly obvious from a reading of the Thompson memorandum that it is the position of the United States Department of Justice that a company facing possible prosecution hurts its case for a favorable outcome by advancing defense costs to present and former employees, except where they are legally obligated to do so, and that the natural consequence of that is that some corporations in that position, in furtherance of their enlightened self-interest, will cut off defense costs for individuals, who in the fullness of time will be indicted, and thus be deprived to one degree or another of the means of mounting a defense against the indictment?”

The Justice Department attorney answered “no” and tried to explain himself, but it appears that Judge Kaplan’s mind is made up.

In fact, Judge Kaplan said that he listened to all of the testimony on day two of the hearing and “thought it was all a red herring.”

“The question to me was not – did the cutting off of the fees help KPMG enormously with the U.S. Attorney's office?” he said. “The question to me is – what would the effect have been on KPMG if they hadn't?”

At the hearing, there was some evidence to indicate that had they not cut off the individuals legal fees, KPMG might have been in a heap of trouble.

Skadden Arps lawyer Sol Pilchen took notes of a meeting with Justice Department prosecutor Justin Weedle.

Pilchen quotes Weedle as saying – ''if you have discretion regarding fees, we will look at that under a microscope.''

Pilchen, in his notes, also quotes another federal prosecutor – Shirah Neiman, as saying that “misconduct should not be rewarded.”

The testimony before Judge Kaplan brought into sharp relief the extent of the cooperation of KPMG and its lawyers at Skadden Arps with the government against the individuals.

Here’s federal prosecutor Stanley Okula on Skadden lawyers Bob Bennett and Kenneth Bialkin:

Okula: One comment by a KPMG representative from Skadden that sticks out in my mind is Mr. Bialkin's comment at some point during that topic, something to the effect that KPMG would not be advancing fees for people who did not cooperate during the investigation. That was made in the wake of general comments by both Mr. Bennett and Mr. Bialkin that KPMG as an entity under investigation felt it important to get the information surrounding its partners' activities to us. And so after that general idea was articulated by a number of people, Mr. Bialkin said that, and I think that he invoked – he mentioned the Fifth Amendment, and he said something to the effect that, we wouldn't be advancing fees to people who took the Fifth. I found it curious that there was a – I understand him to be a corporate lawyer, and he was speaking on behalf of these sort of principles on behalf of KPMG. I thought these were things that Mr. Bennett was going to say. It's just an aside that I am making here.
Question: Do you recall that he said something or someone from Skadden said something at the very outset of the meeting about wanting to save KPMG and not the individuals?
Okula: I think Mr. Bennett made quite clear whom he was there representing. That is, he said – we are here for KPMG. We do not represent the individuals. And I thought that comment was consistent with the comments any lawyer representing an entity would make, that is, defining whose interest he is there trying to represent and protect.

Michael Madigan, a former federal prosecutor, is now a partner at Akin Gump Strauss Hauer & Feld in Washington, D.C.

Madigan represents one of the KPMG individual defendants and attended the hearing before Judge Kaplan in New York.

In an interview with Corporate Crime Reporter, Madigan said the wording of the Thompson memo itself was enough to raise constitutional questions.

“I believe it is clearly unconstitutional,” Madigan said. “It deprives individuals of a variety of constitutional rights. It violates both the Fifth and Sixth amendments. It violates the right to due process, the right to counsel and the right against self-incrimination. It has been used by prosecutors to compel people to come in to be interviewed or lose their lawyer. And, it has been used to obtain clearly privileged information. These are core constitutional rights. It is no accident that they appear in the Bill of Rights, which is the very heart of our system of justice.”

“When we were prosecutors, it was unheard of to try to obliterate the attorney client privilege or to try to cripple the ability of an individual under investigation to defend himself or herself,” he said. “There is no reason in legitimate law enforcement to do so.”

Madigan points to the Securities and Exchange Commission’s Seaboard Report – which is analogous to the Justice Department's Thompson Memorandum.

In it, he says, “the SEC doesn't seek to have companies cut off attorneys fees.”

“The SEC’s Enforcement Division correctly believes that it is better, not worse, for subjects under investigation to be properly represented,” Madigan said. “The bottom line here is the Thompson Memorandum is just a highly inappropriate intrusion into our system of justice which we hold up as the best in the world.”

We asked Madigan about something Larry Thompson, the author of the Thompson memo, reportedly told a reporter a couple of years ago – that employees subject to investigation "don't need fancy legal representation" unless they are guilty.

Madigan said this:

“That statement is similar to the unfortunate language in footnote four, I think it is, in the Thompson Memorandum which speaks of payment of fees ‘prior to a formal determination of guilt’ as if it’s a foregone conclusion. Well – guess what? – many of these men and women are actually doing no more than openly carrying out the publicly announced business plan of the company itself. They don’t have a scintilla of criminal intent and are indeed innocent. In short, the government has no business whatsoever in sticking its giant foot on the scales of justice. Ten or fifteen years ago, this was unheard of. The government simply did not do this then and shouldn’t do it now.”

(For a complete transcript of the interview with Madigan, see 20 Corporate Crime Reporter 21(13), May 22, 2006, print edition only.)


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