Involves individual defendants in KPMG tax shelter case

• Criminal charges that KPMG partners
  promoted abusive tax shelters

• Largest tax fraud case in United States history

• Defendants moved to dismiss charges on grounds that
  their constitutional rights had been violated

• KPMG refused to advance costs for the defense of its partners because the government pressured KPMG
  to cut them off
• KPMG feared that it would be indicted if it didn't
  fully co-operate with the government
• A KPMG indictment would cause the firm to fail
  (Arthur Andersen's fate)

SDNY found that US violated 5^th and 6^th Amendments

• Violated due process clause by interfering with the defense
• Violated defendants' right to counsel

• Findings applied to application of DOJ's Thompson Memo
• Also applied to implied threats made by US attorneys

Remedy: Court pressured US to pressure KPMG to pay up

• Court had difficulty crafting a remedy

• KPMG's policy was to advance expenses, but -
  with one exception - wasn't strictly obligated to do so
• KPMG would have advanced expenses but for US pressure
• Defendants had already been prejudiced
• But dismissing charges is an extreme remedy
• Sovereign immunity bars ordering US to pay

• Court asserts jurisdiction over KPMG

• For purposes of defendants bringing advancement claims against KPMG

• Court strongly suggests that US use its influence over KPMG

• To get KPMG to advance expenses
• Lest the Court dismiss charges outright

Court criticizes actions of assistant US attorneys

• Over their characterization of implied threats made to KPMG

• Were "economical with the truth"
• "Omissions rendered the declaration and the brief that accompanied it misleading."

Prior developments

• KPMG settles criminal case 8.29.05

• Pays $456 million
• Agrees to a deferred prosecution

• KPMG individuals indicted 10.17.05

• 19 individuals indicted

Later developments

• Judge refused to alter his opinion to remove
  critical references about Assistant US attorneys
• As suggested by the opinion, defendants have brought an action against KPMG demanding an advancement of their expenses
• Government urges dismissal of charges as only remedy

• Surprising turnabout
• Government's brief  6.23.07

Charges dismissed against 13 former KPMG partners

• Opinion 7.16.07

News - Commentary

• Bloomberg News

Opinion by US District Judge Lewis Kaplan

435 F Supp2d 330

Hyperlinked index of opinion

Introduction

Facts

• Thompson Memorandum A
• KPMG gets into trouble and "cleans house" B
• KPMGs policy on payment of legal fees C
• Initial discussion between the USAO and Skadden D
• KPMG gets the message E
• Government presses its advantage F
• Conclusion of the investigation G
• Deferred prosecution agreement - Indictment H
• The present motion I
• Governments initial response J
• Prehearing proceedings K
• Hearing L
• Ultimate factual conclusions M

Discussion

• Relationship between KPMG and its personnel I

• Indemnification and advancement of legal fees I.A
• KPMG I.B

• Government violated 5^th and 6^th Amendments II

• Right to fairness in the criminal process II.A
  ◊ Nature of the right II.A.1
  ◊ Entitled to substantive due process protection II.A.2
  ◊ Governments actions violated this right II.A.3
• Right to counsel II.B
  ◊ Nature of the right II.B.1
  ◊ Government violated this right II.B.2
  ◊ KPMG defendants need not establish prejudice II.B.3

• Premature to consider the Governments actions re
  payment of legal expenses incurred before indictment III
• Remedy IV

• Monetary relief against the Government is precluded by sovereign immunity IV.A
•  Monetary relief may be available against KPMG IV.B
  ◊ Court has subject matter jurisdiction IV.B.1
  ◊ Personal jurisdiction over KPMG IV.B.2

• Possible dismissal and other remedies IV.C

• USAO actions were not appropriate V

Conclusion

Government violated 5^th Amendment rightsII.A

• See Opinion II.A
• Violated due process clause by interfering with the defense

• "fairness in criminal proceedings requires that the defendant be firmly in the drivers seat, and that the prosecution not be a backseat driver"

• A fundamental liberty interest entitled to substantive due process protection
• Thompson Memo and prosecutor pressure impinged upon KPMG Defendants ability to defend themselves

• By forcing KPMG to deny or cut off defendants'
  attorneys fees
• Thompson Memo fails to satisfy strict scrutiny
• Compounded by implied threats from US attorneys

Government violated 6^th Amendment rights

• See Opinion II.B
• US violated defendants' right to counsel

• Dismissed government's argument that right to counsel doesn't apply to pre-indictment proceedings
• Dismissed government's argument that right doesn't apply when spending "other people's money"

• Did so without adequate justification
• Defendants need not establish prejudice

• Presumed, in any event

But premature to assess pre-indictment prejudice to defendants

• See Opinion III

Rejects government's position

• See Opinion IV
• That KPMG be left free to decide whether it wishes to advance expenses
• Monetary relied against US is barred by sovereign immunity
• Institutes a summary advancement proceeding
  against KPMG

• Court has subject matter jurisdiction
• Has or can get personal jurisdiction

Suggests US should persuade KPMG to advance expenses

• Else bear the risk that Court will dismiss charges against the Defendants

Thompson Memo 1.20.03

• Included at DOJ Criminal Resource Manual §161

• Principles of Federal Prosecution of Business Organizations
• Body of memo at DOJ Criminal Resource Manual §162

• DOJ policy lists the factors that federal prosecutors must consider in determining whether to bring criminal charges against a corporation

• Revised the Holder Memo
• Unlike the Holder Memo, the Thompson Memo is binding on all federal prosecutors

• Language concerning cooperation and advancing of
  legal fees by business entities was carried forward from Holder Memo without change

• Prosecutors can consider a corporation uncooperative if it appears to be protecting its culpable employees and agents . . . through the advancing of attorneys fees

Holder Memo 1.16.99

• Text

• Bringing Criminal Charges Against Corporations

• Provided guidance as to what factors should generally inform a prosecutor in making the decision whether to charge a corporation in a given case"

Court orders

• Order 4.13.06

• In response to a motion to dismiss, SDNY orders
  hearing 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"
• Over government's objection that "no discovery or hearing is warranted because the prosecution team did not seek to persuade KPMG not to advance expenses"

Briefs

• US brief 4.27.06
• Defendants' brief 5.07.06
• US brief 5.22.06
• Defendant's brief 6.01.06 
• California defendant's brief 5.22.06

Amicus briefs

• Securities Industry Association
  (SIA, BMA, Chamber of Commerce)

• Supplement

• New York Council of Defense Lawyers

Law firms

• Pillsbury Winthrop  7.20.06
• Morgan Lewis  July 2006
• Wachtell Lipton  6.30.06
• Covington & Burling  6.29.06
• Fried Frank  5.11.06