 v. Jeffrey STEIN, et al., Defendants. Page 331 COPYRIGHT MATERIAL OMITTED Page 332 COPYRIGHT MATERIAL OMITTED Page 333 Marc A. Weinstein, Justin S. Weddle, Katherine Polk Failla, Kevin M. Downing, Stanley J. Okula, Jr., Julian J. Moore, Assistant United States Attorneys, Michael J. Garcia, United States Attorney, New York, NY, for U.S. David Spears, Richards Spears Kibbe & Orbe LLP, New York, NY, Craig Margolis, Vinson & Elkins LLP, Washington, DC, for Defendant Jeffrey Stein. Stanley S. Arkin, Arkin Kaplan LLP, New York, NY, Joseph V. DiBlasi, Kew Gardens, NY, Elizabeth A. Fitzwater, Arkin Kaplan LLP, New York, NY, for Defendant Jeffrey Eischeid. Michael S. Kim, Leif T. Simonson, Kobre & Kim LLP, New York, NY, for Defendant Mark Watson. Stuart Abrams, M. Breeze McMennamin, David S. Hammer, Frankel & Abrams, Jack S. Hoffinger, Susan Hoffinger, Hoffinger Stern & Ross, LLP, New York, NY, for Defendant Raymond J. Ruble. Ronald E. DePetris, Marion Bachrach, Dana Moskowitz, DePetris & Bachrach, LLP, New York, NY, for Defendant Philip Wiesner. John F. Kaley, Doar Rieck Kaley & Mack, New York, NY, for Defendant Steven Gremminger. Susan R. Necheles, Hafetz & Necheles, for Defendant Richard Rosenthal. James R. DeVita, Bryan Cave LLP, New York, NY, John A. Townsend, Townsend & Jones LLP, Houston, TX, for Defendant Carol Warley. Michael Madigan, Akin Gump Strauss Hauer & Feld LLP, Washington, DC, Robert H. Hotz, Jr., Christopher T. Schulten, Akin Gump Strauss Hauer & Feld LLP, New York, NY, for Defendant John Lanning. Russell M. Gioiella, Richard M. Asche, Litman, Asche & Gioiella, LLP, New York, NY, for Defendant Carl Hasting. Cristina Arguedas, Ann Moorman, Arguedas, Cassman & Headly, LLP, Berkeley, CA, Michael Horowitz, Michelle Seltzer, Cadwalader, Wickersham & Taft LLP, Washington, DC, for Gregg Ritchie. Gerald B. Lefcourt, Gerald B. Lefcourt, P.C., Jay Philip Lefkowitz, Kirkland & Ellis LLP, New York, NY, for Defendant David Amir Makov. Caroline Rule, Robert S. Fink, Christopher M. Ferguson, Usman Mohammad, Kostelanetz & Fink, LLP, New York, NY, for Defendant Richard Smith. Richard Mark Strassberg, Goodwin Proctor LLP, Washington, DC, for Defendant David Greenberg. George D. Niespolo, Duane Morris LLP, San Francisco, CA, for Defendant Randy Bickham. Steven M. Bauer, Karli E. Sager, Latham & Watkins, LLP, San Francisco, CA, for Defendant John Larson. David C. Scheper, Julio V. Vergara, Overland Borenstein Scheper & Kim LLP, Los Angeles, CA, for Defendant Robert Pfaff. John R. Wing, Diana D. Parker, Lankier, Siffert & Wohl, LLP, New York, NY, for Defendant Larry DeLap. Page 334 Charles A. Stillman, Stillman Friedman & Schechtman, P.C., Carl S. Rauh, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for KPMG LLP. Lewis J. Liman, Stephen M. Rich, Jennifer A. Kennedy, Cleary Gottlieb Steen & Hamilton LLP, Paul B. Bergman, Paul B. Bergman, P.C., for the New York Council of Defense Lawyers as Amicus Curiae. Stephanie Martz, Mark I. Levy, Kilpatrick Stockton LLP, for National Association of Criminal Defense Lawyers as Amicus Curiae. William R. McLucas, Howard M. Shapiro, Jonathan E. Nuechterlein, Christopher Davies, Wilmer Cutler Pickering Hale and Dorr LLP, George R. Kramer, Renee S. Dankner, Marjorie E. Gross, Robin S. Conrad, Amar D. Sarwal, for The Securities Industry Association, The Association of Corporate Counsel, The Bond Market Association and The Chamber of Commerce of the United States of America as Amici Curiae. KAPLAN, District Judge. The issue now before the Court arises at an intersection of three principles of American law. The first principle is that everyone accused of a crime is entitled to a fundamentally fair trial.1 This is a central meaning of the Due Process Clause of the Constitution. The second principle, a corollary of the first, is that everyone charged with a crime is entitled to the assistance of a lawyer.2 A defendant with the financial means has the right to hire the best lawyers money can buy. A poor defendant is guaranteed competent counsel at government expense.3 This is at the heart of the Sixth Amendment. The third principle is not so easily stated, not of constitutional dimension, and not so universal. But it too plays an important role in this case. It is simply this: an employer often must reimburse an employee for legal expenses when the employee is sued, or even charged with a crime, as a result of doing his or her job. Indeed, the employer often must advance legal expenses to an employee up front, although the employee sometimes must pay the employer back if the employee has been guilty of wrongdoing. This third principle is not the stuff of television and movie drama. It does not remotely approach Miranda warnings in popular culture. But it is very much a part of American life. Persons in jobs big and small, private and public, rely on it every day. Bus drivers sued for accidents, cops sued for allegedly wrongful arrests, nurses named in malpractice cases, news reporters sued in libel cases, and corporate chieftains embroiled in securities litigation generally have similar rights to have their employers pay their legal expenses if they are sued as a result of their doing their jobs. This right is as much a part of the bargain between employer and employee as salary or wages.4 Page 336 Most of the defendants in this case worked for KPMG, one of the world's largest accounting firms. KPMG long has paid for the legal defense of its personnel, regardless of the cost and regardless of whether its personnel were charged with crimes. The defendants who formerly worked for KPMG say that it is obligated to do so here. KPMG, however, has refused. If that were all there were to the dispute, it would be a private matter between KPMG and its former personnel. But it is not all there is. These defendants5 (the "KPMG Defendants") claim that KPMG has refused to advance defense costs to which the defendants are entitled because the government pressured KPMG to cut them off. The government, they say, thus violated their rights and threatens their right to a fair trial. Having heard testimony from KPMG's general counsel, some of its outside lawyers, and government prosecutors, the Court concludes that the KPMG Defendants are right. 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. 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. In June 1999, then-U.S. Deputy Attorney General Eric Holder issued a document entitled Federal Prosecution of Corporations (the "Holder Memorandum") 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."6 He took pains to make clear that the factors articulated in the memorandum were not "outcome-determinative" and that "[f]ederal prosecutors [we]re not required to reference these factors in a particular case, nor [we]re they required to document the weight they accorded specific factors in reaching their decision." Nevertheless, the language that plays a central role in the present controversy first was found in the Holder Memorandum. The Holder Memorandum set forth some common sense considerations. Prosecutors, in deciding whether to indict a company, should pay attention to things like the nature and seriousness of the offense, the pervasiveness of wrongdoing within the entity, the company's efforts to remedy past misconduct, the adequacy of other remedies, and the like. It mentioned also: Page 337 "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 protection ..."7 Section VI elaborated on what was meant by cooperation. The general principle was that "[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."8 The memorandum then set out several paragraphs of commentary, the most relevant for present purposes being this: "Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending upon the circumstances, 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 pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation."9 A footnote to the comment concerning the advancing of attorneys' fees read: "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."10 Thus, the Holder Memorandum made clear that advancing of attorneys' fees to personnel of a business entity 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. As noted, the Holder Memorandum was not binding. Federal prosecutors were free to take it into account, or not, as they saw fit. But the corporate scandals of the earlier part of this decade changed that. In late 2001, Enron, Global Crossing, Tyco International, Adelphia Communications and ImClone, among other companies, found themselves in worlds of trouble, much of it apparently of their own making. Bankruptcies and criminal prosecutions followed including, notably, the indictment of Enron's auditors, Arthur Andersen LLP an indictment that resulted in the collapse of the firm, well before the case was tried.11 And on July 9, 2002, the President issued Executive Order 13271, which established a Corporate Fraud Task Force (the "Task Force") headed by United States Deputy Attorney General Larry D. Thompson. Page 338 On January 20, 2003, Mr. Thompson issued a document entitled Principles of Federal Prosecution of Business Organizations (the "Thompson Memorandum") which, in many respects, was a modest revision of the Holder Memorandum. Indeed, the language concerning cooperation and advancing of legal fees by business entities was carried forward without change. Unlike its predecessor, however, the Thompson Memorandum is binding on all federal prosecutors.12 Thus, all United States Attorneys now are obliged to consider the advancing of legal fees by business entities, except such advances as are required by law, as at least possibly indicative of an attempt to protect culpable employees and as a factor weighing in favor of indictment of the entity.13 KPMG Gets Into Trouble and "Cleans House" While all of this was going on, the Internal Revenue Service ("IRS") began investigating tax shelters, including a number that are subjects of the indictment in this case. In early 2002, it issued nine summonses to KPMG, which was less than fully compliant. Accordingly, on July 9, 2002, the government filed a petition in the United States District Court for the District of Columbia to enforce them.14 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."15 This led to public hearings in November 2003 at which several senior KPMG partners or former partners three of them now defendants here testified.16 The firm's reception at the hearing was not favorable. Senator Coleman, the subcommittee Page 339 chair, for example, opened the hearing by saying that "the ethical standards of the legal and accounting profession have been pushed, prodded, bent and, in some cases, broken, for enormous monetary gain."17 At another point, Senator Levin, the ranking minority member, in obvious exasperation at a KPMG witness, suggested that the witness "try an honest answer."18 Eugene O'Kelly, then KPMG chair,19 was concerned about the Senate hearing and the IRS proceedings.20 He retained Skadden Arps Slate Meagher & Flom ("Skadden"), and particularly Robert S. Bennett, "to come up with a new cooperative approach."21 One aspect of that new approach was a decision to "clean house" a determination to ask Jeffrey Stein, Richard Smith, and Jeffrey Eischeid, all senior KPMG partners who had testified before the Senate and all now defendants here to leave their positions as deputy chair and chief operating officer of the firm, vice chair tax services, and a partner in personal financial planning, respectively.22 Given Mr. Stein's senior position and his relationship with Mr. O'Kelly,23 his departure was cushioned substantially, although many of the facts have come to light only recently. He "retired" from the firm with a $100,000 per month, three-year consulting agreement. He agreed to release the firm and all of its partners, principals, and employees from all claims.24 He and KPMG agreed also 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.25 Despite KPMG's effort to stave off trouble by "cleaning house," 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 for this district ("USAO").26 Page 340 KPMG's policy on Payment of Legal Fees KPMG's policy prior to this matter concerning the payment of legal fees of its partners and employees is clear. While KPMG's partnership agreement and bylaws are silent on the subject, the parties have stipulated as follows: "1. Prior to February 2004, ... it had been the longstanding voluntary practice of KPMG to advance and pay legal fees, without a preset cap or condition of cooperation with the government, for counsel for partners, principals, and employees of the firm in those situations where separate counsel was appropriate to represent the individual 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. "2. This practice was followed without regard to economic costs or considerations with respect to individuals or the firm. "3. With the exception of the instant matter, KPMG is not aware of any current or former partner, principal or employee who has been indicted for conduct arising within the scope of the individual's duties and responsibilities as a KPMG partner, principal, or employee since [two partners] were indicted and convicted of violation of federal criminal law in 1974. Although KPMG has located no documents regarding payment of legal fees in that case, KPMG believes that it did pay pre- and post-indictment legal fees for the individuals in that case." The Court infers and finds that KPMG in fact paid the pre- and post-indictment legal fees for the individuals in the 1974 criminal case. Moreover, the extent to which KPMG has gone is quite remarkable. In one recent situation involving KPMG's relationship with Xerox Corporation, it paid over $20 million to defend four partners in a criminal investigation and related civil litigation brought by the Securities and Exchange Commission.27 The Initial Discussion between the USAO and Skadden 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, a participant in the drafting of the Holder Memorandum, and a very experienced prosecutor28 The Page 341 USAO notified Skadden of the referral, and a meeting was scheduled for February 25, 2004. In the meantime, on February 9, 2004, 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"29 to between 20 and 30 KPMG partners and employees, including all but five of the defendants in this case.30 In preparation for the meeting, Ms. Neiman, Assistant United States Attorneys ("AUSA") Weddle and Okula, and other members of the prosecution team conferred. They decided to ask Skadden whether KPMG was paying the legal fees of individuals under investigation.31 Accordingly, the government prepared a document headed "Skadden Meeting Points" setting forth matters that the government intended to discuss at the meeting.32 The first page of the three-page list contained an item that read:
The meeting was attended by Mr. Bennett, Ms. Neiman, and many others on both sides. Mr. Weddle began by telling Skadden that the government was there to hear what Skadden had to say and that it had a few questions. Mr. Bennett explained that Skadden had been hired in view of Mr. O'Kelly's concern about the controversy with the IRS and the Senate hearings and that KPMG had decided to clean house and change the atmosphere at the firm. He reported that the firm had taken high-level personnel action already, that it would cooperate fully with the government's investigation, and that the object was to save KPMG, not to protect any individuals. In an obvious reference to the fate of Arthur Andersen, he said that an indictment of KPMG would result in the firm going out of business.34 After a discussion of the structure of KPMG and of potential conflicts of interest, Mr. Weddle "got to the subject of legal fees and asked whether KPMG was obligated to pay fees and what their plans were."35 Mr. Bennett tested the waters to see whether KPMG could adhere to its practice of paying its employees'36 legal expenses when litigation loomed. He asked for government's view on the subject.37 Ms. Neiman said that the government would take into account KPMG's legal obligations, if any; to advance legal expenses, but referred specifically to the Thompson Memorandum as a point that had to be considered.38 Page 342 At or about that point, Messrs. Bennett and Bialkin told the USAO that KPMG's "common practice" had been to pay legal fees. They added that the partnership agreement was vague and that Delaware law gave the company the right to do whatever it wished, but said that KPMG still was checking on its legal obligations. It would not, however, 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.39 The conversation then shifted briefly to a discussion of the personnel changes that KPMG had made.40 Mr. Bennett reported that Messrs. Stein, Eischeid, and Smith had been asked to leave, but explained that neither KPMG nor Skadden had done an internal investigation to determine who were "bad guys" or whether any crime had been committed.41 Almost immediately, Mr. Weddle reverted to the subject of attorneys' fees, asking Mr. Bennett to determine KPMG's obligations in that regard.42 Ms. Neiman then said that "misconduct" should not or cannot "be rewarded" and referred to federal guidelines.43 There is no dispute, and the Court finds, that this comment came immediately on the heels of a statement by Mr. Bennett relating to lawyers for KPMG partners.44 There are disputes, however, about precisely what Ms. Neiman said about "guidelines" and what she meant by it.45 The parties have focused in particular on whether Ms. Neiman intended her remark to be directed to the legal fee issue i.e., to be a statement to the effect that payment by KPMG of employee legal fees could be viewed as rewarding misconduct or to be directed instead at any severance arrangements between KPMG and Messrs. Stein, Eischeid, and Smith. Ms. Neiman testified that her intent was the latter.46 But the Court finds it unnecessary Page 343 to decide Ms. Neiman's subjective purpose in making the remark because what is more important is how her comment was understood. As Ms. Neiman's remark came immediately after a statement concerning whether KPMG would be paying for lawyers for its personnel, it would have been quite natural to understand the comment as having been directed at payment of legal fees. And that is exactly what happened:
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In sum, Ms. Neiman's comment that "misconduct" cannot or should not "be rewarded" under "federal guidelines," whatever went through her mind when she said it, was understood by both KPMG and government representatives as a reminder 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 firm. And if there were any doubt that this was the message conveyed, the doubt quickly was dispelled by Mr. Weddle. As Mr. Pilchen's notes recorded, he followed up Ms. Neiman's comment by saying:
Thus, while the USAO did not say in so many words that it did not want KPMG to pay legal fees, no one at the meeting could have failed to draw that conclusion.53 Shortly after the February 25, 2004 meeting, Mr. Bennett got back to Mr. Weddle on the legal fee issue. He reported that KPMG did not think it had any binding legal obligation to pay legal fees,54 Page 345 but that "it would be a big problem" not to do so because the firm was a partnership. He said that KPMG was planning on putting a cap, or limit, on fees and conditioning their payment for any given partner or employee on that individual "cooperating fully with the company and the government."55 Apparently satisfied with the government's response, KPMG began to implement the policy. On March 4, 2004, Mr. Pilchen of Skadden spoke to Mr. Townsend, an attorney for defendant Carolyn Warley. He told Townsend that KPMG would pay his fees so long as Ms. Warley cooperated with the government. For example, he said, no fees would be paid if Ms. Warley invoked her privilege against self-incrimination under the Fifth Amendment.56 On March 11, 2004, the Skadden team had a conference call with the USAO. Mr. Bennett assured the USAO that KPMG would be "as cooperative as possible" so that the office would not exercise its discretion to indict the firm. Mr. Weddle urged that KPMG tell its people that they should be "totally open" with the USAO, "even if that [meant admitting] criminal wrongdoing." He commented that this would give him good material for cross-examination,57 a statement that strongly indicates that at least the lead line AUSA on the case expected, even at this stage, to prosecute individuals. The actions of the USAO, coupled with the Thompson Memorandum, had the desired effect. On the same date, Skadden's Mr. Rauh wrote to the USAO, enclosing among other things a form letter that Skadden was sending to counsel for the KPMG Defendants then employed by KPMG who had received subject letters from the government or otherwise appeared to be under suspicion.58 The form letter stated 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."59 Importantly, however, it went even further. It made clear that "payment of ... legal fees and expenses will cease immediately if ... [the recipient] is charged by the government with Page 346 criminal wrongdoing."60 In addition, on March 12, 2004, Joseph Loonan, then KPMG's deputy general counsel, sent an advisory memorandum to a broader audience of KPMG personnel regarding potential contacts by the government.61 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, mentioned some advantages of consultation with counsel, and stated that KPMG had arranged for independent counsel for those who wished to consult them.62 The USAO took no issue with KPMG's announcement that it would cut off payment of legal fees for anyone who was indicted and that it would condition the limited pre-indictment payments on cooperation with the government. The advisory memorandum, on the other hand, upset Mr. Weddle and Kevin Downing, another member of the prosecution team.63 They immediately advised Skadden that it was "disappointed with [its] tone" and allegedly "one-sided presentation of potential issues" and demanded that KPMG send out a supplemental memorandum in a form they proposed.64 The only significant point of difference between the memorandum that the government demanded and Mr. Loonan's original memorandum was the language in the government's proposal italicized below:
In due course, KPMG capitulated to the USAO demand. It put out in "Q & A" format a document containing the following language:
Page 347 This exchange is revealing. No one suggests that either the original KPMG advice or the government's subsequent proposal misstated the law. The difference was one of emphasis. But it is entirely plain 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. The Government Presses Its Advantage The KPMG lawyers met again with the USAO on March 29, 2004. In an effort to demonstrate that KPMG was cooperating, Skadden asked the government to notify it if any current or former KPMG employee refused to meet with prosecutors or otherwise failed to cooperates.67 From that point forward, the government took full advantage. It repeatedly notified Skadden when KPMG personnel failed to comply with government demands.68 In each case, Skadden promptly advised the 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."69 In some cases, the individuals in question relented under pressure of the threats from KPMG and submitted to interviews with the government. In others, they did not, whereupon KPMG terminated their employment and cut off the payment of legal fees.70 The Conclusion of the Investigation, KPMG's Stein Problem and the Deferred Prosecution Agreement As the matter unfolded, meetings between KPMG and its counsel and the USAO continued, with KPMG seeking a resolution short of an indictment of the firm and the government pressing for admissions of extensive wrongdoing, a great deal of money, and changes in KPMG's business. On August 4, 2004, the KPMG executives and lawyers met with Karen Seymour, then chief of the criminal division of the USAO, and other prosecutors. In the course of the meeting, Ms. Seymour said that the government had learned that KPMG had granted rich severance packages to certain executives and that this raised a "troubling issue under the `Thompson Memo.'"71 Mr. Bennett deflected the issue, agreeing that severance packages were "high in one or two cases" but reiterating that KPMG's "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.72 But the Stein severance agreement was not produced. As time went by, KPMG came to view the Stein severance agreement as something of a ticking bomb. For one thing, KPMG had not adhered in Mr. Stein's case to the $400,000 pre-indictment legal fee cap that it had adopted in response to government pressure. It passed that figure by late October 2004,73 and so was at Page 348 odds with its representation to the government.74 For another, it had known since August 2004 that the USAO was unhappy that rich severance packages had been given to senior executives.75 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. In meetings in March 2005 with David N. Kelley, then United States Attorney, however, this approach did not yield the desired result. Indeed, on March 2, 2005, Mr. Kelley interrupted Mr. Bennett's claim that the firm had cooperated by saying, "Let me put it this way. I've seen a lot better from big companies."76 That meeting, in the words of KPMG's Mr. Loonan, was "not particularly encouraging,"77 and a subsequent meeting in New York went no better. With the scene about to shift to Washington and a last-ditch effort to prevent an indictment by an appeal at the highest levels of the Justice Department, KPMG's objective was "to be able to say at the right time with the right audience, we're in full compliance with the Thompson Guidelines."78 It concluded that the Stein situation involved too great a risk. So on May 5, 2005, eight days before KPMG was to meet with U.S. Deputy Attorney General James Comey to plead its case, KPMG unilaterally terminated the consulting services portion of the severance agreement and cut off payment of Mr. Stein's attorneys' fees.79 It did so, as Mr. Loonan candidly admitted, "because [KPMG] thought it would help [the firm] with the government."80 Having dealt, as best it could, with the Stein problem, KPMG turned to attempting to persuade Deputy Attorney General Comey not to indict the firm. The meeting took place on June 13, 2005. Once again, Mr. Bennett relied upon KPMG's cooperation with the government, in addition of course to other arguments. A Skadden memorandum of the meeting recounts some of his remarks as follows: Page 349
This time, KPMG was more successful. The Deferred Prosecution Agreement and the Indictment in This Case 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 a one-count information, to admit extensive wrongdoing, to pay a $456 million fine, and to accept restrictions on its practice. The government agreed that it will seek dismissal of the information if KPMG complies with its obligations.82 In a nutshell, KPMG stands to avoid a criminal conviction if it lives up to its part of the bargain. One additional aspect of the DPA is noteworthy in the present context. The DPA obliges KPMG to cooperate extensively with the government, both in general and in the government's prosecution of this indictment. It provides in part:
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The cooperation provisions of the DPA thus require KPMG to comply with demands by the USAO in connection with this prosecution, with little or no regard to cost. If it does not comply, it will be open to the risk that the government will declare that KPMG breached the DPA and prosecute the criminal information to verdict. Anything the government regards as a failure to cooperate, in other words, almost certainly will result in the criminal conviction that KPMG has labored so mightily to avoid, as the admissions that KPMG now has made would foreclose a successful defense. At about the same time, the government filed the initial indictment in this case. True to its word, KPMG cut off payments to the defendants of legal fees and expenses. The Government's Initial Response On January 19, 2006, the KPMG Defendants moved to dismiss the indictment or for other relief 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 filed its memorandum in opposition to this and other motions on March 3, 2006.84 It represented:
Page 351 The motion was heard on March 30, 2006. In the course of the argument, the government, for the first time, 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."86 Nevertheless, the Court expressed concern about the impact of the Thompson Memorandum on KPMG's decision with respect to the payment of legal fees and ultimately invited the defendants to make a written submission as to the precise factual issue(s) as to which they sought an evidentiary hearing.87 The government sought to avoid a hearing. It responded to the defendants' submission with a declaration by Mr. Weddle and a letter brief. Mr. Weddle's declaration stated in relevant part:
The letter brief89 stated:
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On April 12, 2006, the Court ordered an evidentiary hearing and limited discovery on the motion and, particularly, on "whether the government, through the Thompson Memorandum or otherwise, affected KPMG's determination(s) with respect to the advancement of legal fees and other defense costs to present or former partners and employees with respect to the investigation and prosecution of this case and such subsidiary issues as relate thereto."91 91 The order granted the KPMG Defendants leave to serve a Rule 17(c) subpoena on KPMG for documents. Without getting into unnecessary detail, it is fair to say that KPMG's participation from that point on was more extensive than simply responding to the subpoena. It sought to block or, at least, delay issuance of the subpoena while it tried to broker stipulations between defendants and the government in an effort to limit the scope of discovery from KPMG and testimony by its personnel.92 It sought and obtained, for its own convenience, a delay of the hearing.93 And it obtained leave for its counsel appear not only for the purpose of responding to the subpoena "in this matter," but "for any purposes relating to this matter that the Court may so [sic] order."94 The Court conducted an evidentiary hearing on May 8-10, 2006. Counsel for KPMG were present throughout. At the conclusion of argument by other counsel, the Court addressed counsel for KPMG: "You certainly have notice that a remedy is being sought against your client, and I'm now making it clear in words of one syllable. You will have a chance to be heard if you want it."95 It went on to emphasize that it would welcome any submission on behalf of KPMG and that KPMG could "make whatever reservation of rights [it wished] in submitting."96 KPMG ultimately submitted a memorandum of law. It did not seek to offer any evidence, to question any witnesses, or to make any offer of proof. Several broad conclusions follow from the foregoing. 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 even before it first met with the USAO. As a direct result of the threat to the firm inherent in the Thompson Memorandum, it sought an indication from the USAO that payment of fees in accordance with its settled practice would not be held against it. Second, the USAO did not give KPMG the comfort it sought. To the contrary, it deliberately, and consistent with DOJ policy, reinforced the threat inherent in the Thompson Memorandum. It placed the issue of payment of legal fees high on its agenda for its first meeting with KPMG counsel, which emphasized the prosecutors' concern with the issue. Mr. Weddle raised the issue and then repeatedly focused on KPMG's "obligations," thus clearly Page 353 implying consistent with the language of the Thompson Memorandum that compliance with legal obligations would be countenanced, but that anything more than compliance with demonstrable legal obligations could be held against the firm. Ms. Neiman's statement, in response to a comment about payment of legal fees by KPMG, that misconduct should not be rewarded quite reasonably was understood in the same vein, whatever its intent. And Mr. Weddle's colorful warning 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. This objective arguably is inherent, to some degree, in the Thompson Memorandum itself. But there is considerably more proof, specific to this case, here. The contretemps with KPMG over its Advisory Memorandum demonstrated the government's desire, wherever possible, to interview KPMG witnesses without their being represented by lawyers. The USAO's ready acceptance of KPMG's offer to cut off payment of legal fees for anyone who was indicted speaks for itself. It speaks even more eloquently when one considers that the USAO accepted KPMG's assurance that it had no legal obligation to pay legal fees, knowing that (1) KPMG's "common practice" had been to make such payments, (2) KPMG was extremely anxious to curry favor with the USAO by demonstrating how cooperative it could be, and (3) KPMG had an obvious conflict of interest with its present and former personnel on the question whether it had a legal obligation to pay fees. Had the government been less concerned with punishing those it deemed culpable right from the outset, it would not have accepted KPMG's word on this point. Fourth, KPMG's decision to cut off all payments of legal fees and expenses to anyone who was indicted and to limit and to condition 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. Absent the Thompson Memorandum and the actions of the USAO, KPMG would have paid the legal fees and expenses of all of its partners and employees both prior to and after indictment, without regard to cost.97 I. The Relationship Between KPMG and its Personnel With Respect to Advancement of Legal Fees and Defense Costs A. Indemnification and Advancement Generally The issue of employer payment of legal expenses incurred by their employees as a result of doing their jobs arises in a context that dates back many years. In the nineteenth century, Justice Story stated what already was an established proposition: "if an agent has, without his own default, incurred losses or damages in the course of transacting the business of his agency, or in following the instructions Page 354 of his principal, he will be entitled to full compensation therefor" from the employer.98 The modern common law rule is the same. And it extends to payment of expenses incurred by an employee or other agent in defending a lawsuit on a claim with respect to which the employee is entitled to indemnity.99 The success of the corporation as a business form brought growing pains. Lawsuits against corporate directors became ever more common. By the early part of the last century, the situation had become what one commentator described as "open season on directors."100 The question whether directors who successfully defended such suits were entitled to be reimbursed for the expenses of defending such suits despite the fact that they often were not employees began to arise. At least one early decision favored reimbursement, commonly called indemnification.101 In the 1930s, however, courts in Ohio and New York came to the opposite conclusion.102 These decisions gave rise to a "not unnatural cry for legislation."103 Taking the view that [i]ndemnification encourages corporate service by capable individuals by protecting their personal financial resources from depletion [as a result of] ... litigation that results by reason of that service,"104 legislatures all over the country responded. Today, all states have statutes addressing the indemnification of corporate directors, officers, employees, and other agents.105 Many have adopted also statutes providing for indemnification of members and employees of partnerships as well as of members, officers, and agents of newer forms of business organization such as limited partnerships and limited liability companies.106 Still others also protect employees with statutes relating specifically to the employment relationship.107 These statutes take different forms. Some require indemnification. Some permit indemnification where the corporation or other business entity elects to provide it.108 A few provide the exclusive vehicle Page 355 for indemnification while most permit indemnification as a matter of contract or otherwise as well as pursuant to statute.109 Many provide for indemnification, at least in some circumstances, for the cost of defending employment-related criminal charges."110 All or virtually all, however, share an additional characteristic. As the Delaware Supreme Court recently put it, "the right to indemnification cannot be established ... until after the defense to legal proceedings has been `successful on the merits or otherwise.'"111 This has been viewed as a problem. Persons who are sued can be subjected to "the personal out-of-pocket financial burden of paying the significant ongoing expenses inevitably involved with investigations and legal proceedings."112 In consequence, many states authorize business entities to advance defense costs to their personnel, subject to the recipients' obligation to repay the money in the event it ultimately is determined that they are not entitled to indemnity.113 This has been described as "an especially important corollary to indemnification as an inducement for attracting capable individuals into corporate service."114 Advancement "fills the gap ... so the [entity] may shoulder ... interim costs," and its value "is that it is granted or denied while the underlying action is pending."115 As Judge Haight has written, it protects the "ability [of the employee] to mount ... a defense ... by safeguarding his ability to meet his expenses at the time they arise, and to secure counsel on the basis of such an assurance."116 Against this background, we turn to KPMG's relationship with the KPMG Defendants. B. KPMG The statute that governs KPMG gives it the authority "to indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever."117 This includes the authority to advance defense costs prior to final judgment.118 KPMG had an Page 356 unbroken track record of paying the legal expenses of its partners and employees incurred as a result of their jobs, without regard to cost. All of the KPMG Defendants therefore had, at a minimum, every reason to expect that KPMG would pay their legal expenses in connection with the government's investigation and, if they were indicted, defending against any charges that arose out of their employment by KPMG. Indeed, it appears quite possible that all had contractual and other legal rights to indemnification and advancement of defense costs,119 although the Court declines to decide that in this ruling. II. The Government Violated the Fifth and Sixth Amendments by Causing KPMG to Cut Off Payment of Legal Fees and Other Defense Costs Upon Indictment A. The Right to Fairness in the Criminal Process 1. Nature of the Right "`No general respect for, nor adherence to, the law as a whole can well be expected without judicial recognition of the paramount need for prompt, eminently fair and sober criminal law procedures. 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.'"120 Page 357 The Supreme Court long has protected a defendant's right to fairness in the criminal process. It has grounded this protection primarily in the Due Process Clause121 as well as more specific provisions of the Bill of Rights, including the Confrontation and Assistance of Counsel Clauses of the Sixth Amendment.122 Whatever the textual source, however, the Court consistently has held that criminal defendants are entitled to be treated fairly throughout the process. In everyday language, they are entitled to a fair shake. This concern for the fairness of criminal proceedings runs throughout many of the Court's decisions regarding fair trials and access to the courts. For example, in Powell v. Alabama,123 in which the Court first held that a defendant in a capital case has the right to the aid of counsel, it reasoned that if a tribunal were "arbitrarily to refuse to hear a party by counsel[,] it reasonably may not be doubted that such a refusal would be a denial of a hearing, and, therefore, of due process in the constitutional sense."124 In other words, without counsel for the defense, a capital prosecution is presumptively unfair and therefore violates due process. The implied converse is that due process requires fair proceedings. One aspect of the required fairness protects the autonomy of the criminal defendant. It rests on the common-sense truth that, at the end of the day, it is the defendant "who suffers the consequences if the defense fails."125 So proper respect for the individual prevents the government from interfering with the manner in "which the individual wishes to present a defense."126 The underlying theme is that the government may not both prosecute a defendant and then seek to influence the manner in which he or she defends the case. A defendant's right to control the manner and substance of the defense has several aspects. The defendant has the right to represent him or herself,127 even if such a decision objectively may appear to be unwise.128 A defendant is guaranteed also "the right to be represented by an otherwise qualified attorney whom that defendant can afford to hire"129 in other words, to use his or her own assets to defend the case, free of government regulation. Nor may the government interfere at will with a defendant's choice of counsel, as the Constitution "protect[s] ... the defendant's free choice independent of concern for the objective fairness of the proceedings."130 Similarly, a defendant is generally free, within the procedural constraints that govern trials generally, to adduce evidence without unjustified restrictions131 Page 358 and may choose which witnesses to present or cross-examine.132 In short, fairness in criminal proceedings requires that the defendant be firmly in the driver's seat, and that the prosecution not be a backseat driver.133 The constitutional requirement of fairness in criminal proceedings not only prevents the prosecution from interfering actively with the defense, but also from passively hampering the defendant's efforts. As the Court put it in California v. Trombetta,134 "Under the Due Process Clause ..., criminal prosecutions must comport with prevailing notions of fundamental fairness. We have long interpreted this standard of fairness to require that criminal defendants be afforded a meaningful opportunity to present a complete defense. To safeguard that right, the Court has developed what might loosely be called the area of constitutionally guaranteed access to evidence. Taken together, this group of constitutional privileges delivers exculpatory evidence into the hands of the accused, thereby protecting the innocent from erroneous conviction and ensuring the integrity of our criminal justice system."135 Hence, the prosecution may not conceal exculpatory evidence or plea agreements with key government witnesses.136 In some instances, it may be required to disclose Page 359 the identity of its undercover informants in possession of evidence critical to the defense.137 Prosecutors are required also by the Due Process Clause to conduct themselves fairly. They may not delay intentionally indictments to prejudice defendants.138 They may not obstruct defendants' access to a potential witness unless that is necessary to protect the witness's safety.139 Nor may they knowingly offer perjured or false evidence.140 Entrapment by prosecutors and law enforcement officers is proscribed by the Due Process Clause.141 While prosecutors appropriately are given great latitude in the arguments they make to juries, they cross into unconstitutional territory when they "infect[ ] the trial with unfairness."142 Finally, the requirement of fairness in criminal proceedings applies to the structure and conduct of the entire criminal justice system. For example, the Court held that Dr. Sam Sheppard's due process rights were violated when the trial court failed to protect him from the firestorm of prejudicial publicity surrounding his trial.143 It has recognized also the right to trial before an unbiased tribunal. In Ward v. Village of Monroeville,144 for example, it held that a defendant was denied due process when he was tried for traffic offenses before the village mayor, who was responsible for village finances and whose court provided a substantial portion of village funds through fines, forfeitures, costs, and fees. Similarly, in Tumey v. Ohio,145 the Court reversed a conviction because the judge was paid from fines levied in his court and therefore received payment only upon conviction. The Court said that such a system "deprives a defendant ... of due Page 360 process of law to subject his liberty or property to the judgment of a court, the judge of which has a direct, personal, substantial pecuniary interest in reaching a conclusion against him in his case."146 The Court's jurisprudence thus makes clear that defendants have the right, under the Due Process Clause, to fundamental fairness throughout the criminal process. 2. The Right to Fairness in the Criminal Process Is a Fundamental Liberty Interest Entitled to Substantive Due Process Protection Where, As Here, the Government Coerces a Third Party to Withhold Funds Lawfully Available to a Criminal Defendant 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.147 "Only fundamental rights and liberties which are deeply rooted in this Nation's history and tradition and implicit in the concept of ordered liberty qualify for such protection."148 The right to fairness in criminal proceedings has not been explicitly so characterized by the Court.149 The question here, then, is whether and to what extent it properly is regarded as fundamental for purposes of requiring strict scrutiny of alleged impingements. A number of guides point the way. To begin with, many of the Supreme Court's criminal due process decisions described above can be understood in modern terms most readily in the substantive due process and strict scrutiny framework. The requirement of an unbiased tribunal, for example, is not found in the explicit language of the Constitution. It rests in: stead on the proposition that a fair tribunal is "implicit in the concept of ordered liberty."150 The state's legitimate interest in, for example, saving money by having the same person both run a town's finances and levy traffic fines is insufficient to justify infringing upon the right to a fair Page 361 trial. Thus, the Supreme 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. Indeed, it would be difficult to conclude otherwise. Our concern with protection of the individual against the unfair use of the great power of the government is "deeply rooted in this Nation's history and tradition."151 "[N]either liberty nor justice would exist" if fairness to criminal defendants were sacrificed.152 Indeed, as one court put it, "What can be more basic to the scheme of constitutional rights precious to us all than the right to fairness throughout the proceedings in a criminal case?"153 These considerations have led the Second Circuit154 and several other courts (often in dicta),155 as well as respected commentators.156 to conclude that the right to fairness in criminal proceedings is a fundamental liberty interest subject to substantive due process protection. But it is not necessary or, in this Court's view, appropriate, to go that far in order to decide this case. It is a venerable maxim of constitutional construction that courts should decide no more than is necessary.157 And the only question now before the Court is whether a criminal defendant has a right to obtain and use in order to prepare a defense resources lawfully available to him or her, free of knowing or reckless government interference.158 Given all that Page 362 has been said above, this Court concludes that such a right is basic to our concepts of justice and fair play. It is fundamental.159 3. The Government's Actions Violated the Substantive Due Process Right to Fairness in the Criminal Process a. The Effect on the KPMG Defendants The Thompson Memorandum and the USAO pressure on KPMG to deny or cut off defendants' attorneys' fees necessarily impinge upon the KPMG Defendants' ability to defend themselves. This is by no means a garden-variety criminal case. It has been described as the largest tax fraud case in United States history. The government thus far has produced in discovery, in electronic or paper form, at least 5 million to 6 million pages of documents plus transcripts of 335 depositions and 195 income tax returns.160 The briefs on pretrial motions passed the 1,000-page mark some time ago.161 The government expects its case in chief to last three months, while defendants expect theirs to be lengthy as well.162 To prepare for and try a case of such length requires substantial resources.163 Yet the government has interfered with the ability of the KPMG Defendants to obtain resources they otherwise would have had. Unless remedied, this interference almost certainly will affect what these defendants can afford to permit their counsel to do. This would impact the defendants' ability to present the defense they wish to present by limiting the means lawfully available to them. The Thompson Memorandum and the USAO's actions therefore are subject to strict scrutiny. b. The Thompson Memorandum and the USAO's Actions Fail the Strict Scrutiny Test To survive strict scrutiny, government action must be narrowly tailored to achieve a compelling government interest.164 Page 363 The portion of the Thompson Memorandum at issue here the language that states that payment of legal fees for employees and former employees may be viewed as protection of culpable employees and thus cut in favor of indicting the entity purportedly serves three goals. First, it is intended to facilitate just charging decisions concerning business entities by focusing on a consideration pertinent to gauging their degrees of cooperation. Second, it seeks to strengthen the government's ability to investigate and prosecute corporate crime by encouraging companies to pressure their employees to aid the government recall Mr. Weddle's urging KPMG to tell its people to be "totally open" with the USAO, "even if that [meant admitting] criminal wrongdoing." Finally, it seeks to punish those whom prosecutors deem culpable it attempts to justify depriving employees of corporate aid by characterizing it as "protecting ... culpable employees and agents." The final justification may be disposed of quickly. The job of prosecutors is to make the government's best case to a jury and to let the jury decide guilt or innocence. Punishment is imposed by judges subject to statute. 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. The government's other points, however, are far more substantial. Any government's interest in investigating and fairly prosecuting crime is compelling. The consequences for civilization of another government's failure to accomplish that basic end are on view on the evening news every day. In order properly to accomplish that task, the government must have the ability to make just charging decisions and to prevent obstruction of its investigations. Hence, no one disputes the proposition that a willingness to cooperate with the government is an appropriate consideration in deciding whether to charge an entity. Nor does anyone suggest that an entity's obstruction of a government investigation what the government has called "circling the wagons"165 should be ignored in a charging decision. Many remember the Watergate case, in which the legal fees of individuals who broke into the offices of the Democratic National Committee were paid, along with other "hush money," to buy the silence of the burglars and to protect higher-ups.166 Corporate equivalents no doubt occur. But the devil, as always, is in the details. The first difficulty is that the Thompson Memorandum does not say that payment of legal fees may cut in favor of indictment only if it is used as a means to obstruct an investigation. Indeed, the text strongly suggests that advancement of defenses costs weighs against an organization independent of whether there is any "circling of the wagons."167 Page 364 The USAO, possibly concerned with the breadth of the Thompson Memorandum, seeks to deal with this by asserting that, in practice, it considers the payment of legal fees as a negative factor only when payments are used to impede.168 Perhaps so. But whatever the government may do in the privacy of U.S. Attorneys' offices and in the DOJ's Criminal Division is not what defense lawyers see. They see the Thompson Memorandum. Few if any competent defense lawyers would advise a corporate client at risk of indictment that it should feel free to advance legal fees to individuals in the face of the language of the Thompson Memorandum itself. It would be irresponsible to take the chance that prosecutors might view it as "protecting ... culpable employees and agents." As KPMG's new chief legal officer, former U.S. District Judge Sven Erik Holmes, testified, he thought it indispensable (as would any defense lawyer) "to be able to say at the right time with the right audience, we're in full compliance with the Thompson Memorandum."169 The bottom line is plain enough. If the government means to take the payment of legal fees into account in making charging decisions only where the payments are part of an obstruction scheme and thereby narrowly tailor its means to its ends it would be easy enough to say so. But that is not what the Thompson Memorandum says. The concerns do not end here. The argument that payment of legal fees to employees and former employees is relevant to gauging the extent of a company's cooperation also is problematic. There is no necessary inconsistency between an entity cooperating with the government and, at the same time, paying defense costs of individual employees and former employees. An entity may pay out of a judgment that extending this benefit will aid it in keeping and hiring competent and honest employees. It may pay in recognition that an employee caught up in an investigation, or even charged with a crime, because the employee did his or her job for the company has at least some claim to assistance, even in the absence of a legal right. In either case, however, a company may pay at the same time that it does its best to bare its corporate soul, stands at the government's beck and call to provide information and witnesses, and does a myriad of other things to aid the government and clean the corporate house. So it simply cannot be said that payment of legal fees for the benefit of employees and former employees necessarily or even usually is indicative of an unwillingness to cooperate fully. This is especially unlikely after employees have been indicted and fired, as is the situation here. For these reasons, this aspect of the Thompson Memorandum is not narrowly tailored to achieve a compelling objective. It discourages and, as a practical matter, often prevents companies from providing employees and former employees with the financial means to exercise their constitutional rights to defend themselves. It does so in the face of state indemnification statutes that expressly permit businesses entities to provide those means because the states have determined that legitimate public interests may be served. It does so even where companies obstruct nothing and, to the contrary, do everything within their power to make a clean breast of the facts to the government and to take responsibility for any offenses they may have committed. It therefore burdens excessively the constitutional rights of the individuals whose ability to defend themselves it impairs and, accordingly, fails strict Page 365 scrutiny. The legal fee advancement provision violates the Due Process Clause.170 c. The Actions of the USAO The actions of the USAO in this case compounded the problem that the Thompson Memorandum created. The Thompson Memorandum says that the payment of legal fees (beyond any legal obligation) may be held against a business entity if the government views the payments as protection of "culpable employees" or as evidence of a lack of full and complete cooperation. The USAO took advantage of that uncertainty by emphasizing the threat. Within days of receiving the criminal referral on February 5, 2004, the USAO put the payment of employee legal fees near the top of the government's agenda for the very first meeting with KPMG's lawyers. On February 25, 2004, Mr. Bennett reported that KPMG had cleaned house and pledged full cooperation with the government. But Mr. Weddle immediately raised the legal fee issue. When Mr. Bennett sought to elicit the USAO's view on that subject, the response was a reference to the Thompson Memorandum. This was followed later in the meeting by Ms. Neiman's statement, on the heels of a reference to payment of employee legal expenses, that misconduct should not be rewarded and Mr. Weddle's threat that the government would look at the payment of legal fees that KPMG was not legally obliged to pay "under a microscope." And it did all this despite the fact that it does not claim that KPMG obstructed its investigation, least of all by using the payment of legal fees to prevent employees or former employees from talking to the government or telling it the truth. The individual prosecutors in the USAO acted pursuant to the established policy of the DOJ as expressed in the Thompson Memorandum. They understood, however, that the threat inherent in the Thompson Memorandum, coupled with their own reinforcement of that threat, was likely to produce exactly the result that occurred-KPMG's determination 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. Their actions cannot withstand strict scrutiny under the Due Process Clause because they too were not narrowly tailored to serving compelling governmental interests. B. The Sixth Amendment Right to Counsel 1. The Nature and Scope of the Right to Counsel Quite apart from the due process analysis, the KPMG Defendants argue that the Thompson Memorandum and its implementation by the government infringed Page 366 their Sixth Amendment right to counsel. They are correct. The Sixth Amendment provides that "Mil all criminal prosecutions, the accused shall enjoy the right to ... have the Assistance of Counsel for his defence."171 As already has been demonstrated, however, this 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 desires172 and to use one's own funds to mount the defense that one wishes to present.173 Moreover, a defendant's exercise of his Sixth Amendment right to counsel is not to 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."174 The government nevertheless argues that the KPMG Defendants have no Sixth Amendment rights at stake here for two principal reasons. a. Attachment of Sixth Amendment Rights The government first argues that the Sixth Amendment right to counsel attaches only upon the initiation of a criminal proceeding. As the Thompson Memorandum was adopted and the USAO did its handiwork before the KPMG Defendants were indicted, it contends, there was no Sixth Amendment violation. It is true, of course, that the Sixth Amendment right to counsel typically attaches at the initiation of adversarial proceedings at an arraignment, indictment, preliminary hearing, and so on.175 But the analysis can not end there. 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. Even if this was not among the conscious motives, the Memorandum was adopted and the USAO acted in circumstances in which that result was known to be exceptionally likely. 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. This conduct, unless justified, violated the Sixth Amendment.176 The government argues that this conclusion will open the door for future defendants to argue that all sorts of pre-indictment actions violate the Sixth Amendment and thus hamstring every investigation and prosecution. This is singularly unpersuasive. The government here acted with the purpose of minimizing these defendants' access to resources necessary to mount their defenses or, at least, in reckless disregard that this would be the likely Page 367 result of its actions. In these circumstances, it is not unfair to hold it accountable. b. "Other People's Money" The government next argues that the KPMG Defendants have no right, under the Sixth Amendment or otherwise, to spend "other people's money" on expensive defense counsel. The rhetoric is appealing, but the characterization of the issue and therefore the conclusion are wrong. The argument is based on Caplin & Drysdale, Chartered v. United States177 and United States v. Monsanto,178 which held that the Sixth Amendment does not creates a right for those in possession of property forfeitable to the United States to spend that Money on their legal defense. That is hardly surprising the money belongs to the government. But that is not the issue here. Caplin & Drysdale recognized that the Sixth Amendment does protect a defendant's right to spend his own money on a defense.179 Here, 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. The law protects such interests against unjustified and improper interference.180 Thus, both the expectation and any benefits that would have flowed from that expectation the legal fees at issue now were, in every material sense, their property, not that of a third party. The government's contention that the defendants seek to spend "other people's money" is thus incorrect. 2. The Thompson Memorandum and the Government's Implementation Violated the KPMG Defendants' Sixth Amendment Right to Counsel The KPMG Defendants have established 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 is improper if the government's actions are "wrongfully motivated or without adequate justification."181 The remaining question, then, is whether justification exists. There is not much case law on the standard to be applied in making this determination. In comparable circumstances, federal courts often have looked to the common law of torts to "enrich the [federal] jurisprudence"182 and to provide "an Page 368 appropriate starting point,"183 always keeping in mind that we do so to inform our construction of the Constitution, not to apply state tort law.184 The common law tort of interference with prospective economic advantage necessarily deals with the issue whether a private actor is justified in interfering in the economic relations of another. In assessing claims of justification in private settings, courts look to a series of factors including the relative importance of the interests served by the plaintiff and the defendant.185 Making appropriate adjustments for the fact that this analysis involves the public sector, the dispositive question is whether the government's law enforcement interests in taking the specific actions in question sufficiently outweigh the interests of the KPMG Defendants in having the resources needed to defend as they think proper against these charges. Our nation made a deliberate choice more than two centuries ago. We determined that a person charged with a crime has "the right in an adversary criminal trial to make a defense as we know it."186 That choice rests on the premise that "partisan advocacy on both sides of a case will best promote the ultimate objective that the guilty be convicted and the innocent go free."187 The Thompson Memorandum discourages and, as a practical matter, often prevents companies from providing employees and former employees with the financial means to exercise their constitutional rights to defend themselves. This is so even where companies obstruct nothing and, to the contrary, do everything within their power to make a clean breast of the facts to the government and to take responsibility for any offenses they may have committed. It undermines the proper functioning of the adversary process that the Constitution adopted as the mode of Page 369 determining guilt or innocence in criminal cases. The actions of prosecutors who implement it can make matters even worse, as occurred here. The Court holds that the fact that advancement of legal fees occasionally might be part of an obstruction scheme or indicate a lack of full cooperation by a prospective defendant 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, regardless of the legal standard of scrutiny applied. 3. The KPMG Defendants Are Not Obliged to Establish Prejudice, Which in Any Case Would Be Presumed Here The government argues the KPMG Defendants' motion nevertheless should be denied because they have not shown prejudice under Strickland v. Washington,188 which requires a defendant seeking to overturn his or her conviction based on ineffective assistance of counsel to show "a reasonable probability that, but for counsel's unprofessional errors, the result of the proceeding would have been different."189 But the government is mistaken. This conclusion follows from United States v. Gonzalez-Lopez,190 a case involving a deprivation of the defendant's right to counsel of his choice. The Court there held that Strickland did not require a showing of prejudice in such a case because: "Deprivation of the right [to counsel of choice] is `complete' when the defendant is erroneously prevented from being represented by the lawyer he wants, regardless of the quality of the representation he received. To argue otherwise is to confuse the right to counsel of choice which is the right to a particular lawyer regardless of comparative effectiveness with the right to effective counsel which imposes a baseline requirement of competence on whatever lawyer is chosen or appointed."191 Here, the violation is analogous to that at issue in Gonzalez-Lopez. The government has interfered with the KPMG Defendants' right to be represented as they choose, subject to the constraints imposed by the resources lawfully available to them. This violation, like a deprivation of the right to counsel of their choice, is complete irrespective of the quality of the representation they receive. Thus, Strickland has no bearing here.192 This result is consistent with common sense. Improper government conduct has created a significant risk that the KPMG Defendants' ability to present the defense they choose has been compromised. Corrective action now may well prevent that. Page 370 There is, in consequence, a countervailing interest in not going blindly forward with a lengthy trial, which will consume vast judicial and party resources, without dealing with the issue. No one would set out to drive across a desert with half a tank of gas, knowing that one might run out before reaching the other side, without pausing first to fill up the tank. The prudent course is to avoid the problem at the outset not to take a chance on being stranded and then having to try to figure out what to do about it. The approach to cases involving criminal defense counsel burdened by conflicts of interest supports this conclusion. A district court that learns before trial of a possible conflict of interest between a defense attorney and a client is obliged to protect the defendant's Sixth Amendment right to unconflicted legal representation by immediately investigating the conflict and, if necessary, either obtaining a knowing and intelligent waiver from the defendant or disqualifying the conflicted attorney.193 The rationale for doing so is simple. Prejudice is likely in conflict situations, and "such circumstances involve impairments of the Sixth Amendment right that are easy to identify and, for that reason and because the prosecution is directly responsible, easy for the government to prevent."194 That rationale is fully applicable here. Even if prejudice were relevant at this stage of the proceedings, however, the government's argument still would fail. Although Strickland generally requires convicted defendants to demonstrate that the result of the trial probably would have been different but for the ineffective assistance of counsel, this requirement does not apply where a violation resulted in a "structural defect[ ] in the constitution of the trial mechanism" |
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