Is the White-Collar Defense Attorney Headed for Extinction?

As a general principle, indemnification and advancement of legal fees and costs are governed by state statute, articles of incorporation, and corporate by-laws and policies. For white-collar practitioners, one of the first steps in any individual representation is review of the indemnification provisions of the corporate articles and by-laws. Every practitioner searches hopefully for the provision that requires advancement and indemnification of legal fees to the maximum extent allowed by applicable law. Prior to the Memorandum, once white-collar counsel found such a provision, he was not unduly concerned with advancement and indemnification.

Prosecutors generally viewed advancement and indemnification as proper: It was not their role to interfere with the company's decision. Indeed, when an FBI agent was indicted in 1997 in connection with the Ruby Ridge killing, the U.S. Department of Justice (DOJ) announced it would pay his legal fees. See DOJ Release No. 97-342 (Aug. 21, 1997). This all changed with the application of the Thompson Memorandum.

Why Corporations Choose Cooperation over Court

As part of 'gauging the extent of the corporation's cooperation,' the Thompson Memorandum advises that a '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 protection,' and that a 'corporation's promise of support to culpable employees and agents, through the advancing of attorneys fees ' may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation.' (Emphasis added).

The Memorandum makes it clear what corporations have to do to be 'cooperators.' Its 'stick' is not just the threat of corporate indictment, but the combined threat of administrative and criminal sanctions that could put the company out of business. Wielding the stick is a joint effort: 'the Department, in conjunction with regulatory agencies and other executive branch departments, encourages corporations, as part of their compliance programs, to conduct internal investigations and to disclose their findings to the appropriate authorities.' The SEC and the Environmental Protection Agency are mentioned by name.

The Memorandum also identifies the 'carrot' of cooperation: 'granting a corporation immunity or amnesty or pretrial diversion' or 'a non prosecution agreement in exchange for cooperation.' The term culprit is instructive. Webster's II New College Dictionary gives two definitions: '1. One charged with an offense or crime; 2. One guilty of a fault or crime.' In a word, it describes the underlying assumption of the Thompson Memorandum ' 'charged' equals 'guilty.'

The Total Weight of Cooperation

'If employees really don't believe they acted with criminal intent, they don't need fancy legal representation,' Larry Thompson was quoted as saying in The Wall Street Journal, 'There are lots of reasonably priced lawyers.' (The Wall Street Journal, June 4, 2004, available on Westlaw at 2004 WL-WSJ 56930988.) In the same article, the DOJ's William Mateja was quoted as saying that it would be 'negligent' if the DOJ 'didn't use the tools at its disposal' to combat corporate crime.

By wielding the carrot and stick, the government is able to conscript an army of company-paid experts to help prosecute 'culprits' in the company. The government often has corporate counsel's interviews, notes, investigative reports, results of document searches, forensic computer work, and witnesses (company employees) that owe their job to the company whose very survival may depend on the government's 'cooperator' designation. Even if an individual defendant is able to scrape together enough money to keep his counsel, few can afford the experts, accountants, investigators and support staff that it takes to sort through (much less, make sense of) the warehouses of material that their 'cooperating' employer gave the government. Meanwhile, the government's almost unlimited resources are often spared this burden because it can enlist the company's legion of attorneys to locate and organize the documents, volunteer and produce potential witnesses, and conduct key financial analysis.

Once the precedent is set, the bar for 'cooperation' just gets higher and higher. A U.S. Attorney in Alabama told The Wall Street Journal, 'Once one prosecutor has gotten cooperation of a certain level, that level becomes what we all now consider cooperation.' Id. However, the government's latest use of the corporate 'cooperator' may just be the one step too far.

KPMG: The Government Imposes Its Will

Against this background, KPMG reached a $456 million deferred-prosecution agreement and agreed to cooperate with government investigators in a matter involving alleged illegal tax shelter schemes. See Deferred Prosecution Agreement, United States v. KPMG LLP, (S.D.N.Y. Aug. 26, 2005), http://www.doj.gov/usao/nys/pressrelease2005.html. The KPMG Case presented the DOJ with an opportunity to impose its will. The agreement contained a long list of KPMG's required cooperation, including:

• Providing requested information;
• Conducting analysis of transactions;
• Volunteering relevant documents, in-formation and potential witnesses;
• Assembling, and organizing all re-quested documents, records, and evidence;
• Waiving any claim of privilege in relation to the government; and
• Making present and former employees available for interviews and testimony.

KPMG is a partnership, not a corporation, and could not rely upon state indemnification provisions and its bylaws to resist pressure regarding advancement. First, KPMG attached strings to individual advancement ' employees had to cooperate fully with company and government investigators or advancement would be terminated. Then KPMG terminated the advancement of legal fees, as seven of its Partners and one of its Managers were indicted as part of the same tax shelter investigation. See Indictment, US v. Jeffrey Stein et al., No. 05 Crim. 888 (S.D.N.Y.) (http://
www.doj.gov/usao/nys/pressrelease2005.html).

Termination of Advancement: A 'Thumb on the Scale'

In March of this year, Judge Kaplan heard arguments on the defendants' motions to dismiss the indictment and seek relief for what they argued was the Thompson Memorandum's interference with KPMG's advancement of legal fees and costs. The individual defendants argued that this interference amounted to a violation of their right to counsel. According to news reports, during the hearing Judge Kaplan said, 'I find it shameful that the fees haven't been advanced,' and noted that 'the reality is that you are depriving people of counsel, or at least interfering or impairing.' Judge Kaplan suggested that the Thompson Memorandum 'puts the government's thumb on the scales' and raised concerns about potential Sixth Amendment implications. The New York Times, March 31, 2006.

On April 12, 2006, Judge Kaplan issued an Order directing limited discovery, and a hearing on May 8 as to '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 related thereto.'

Judge Kaplan did not accept the government's argument that 'no discovery or hearing is warranted because the prosecution team did not seek to persuade KPMG not to advance expenses.' Rather, Judge Kaplan ordered the hearing even assuming arguendo that the government's account of the discussions with KPMG is accurate. Judge Kaplan thus invited argument that the Thompson Mem-orandum in itself is 'an improper interference with the defendants' rights to obtain counsel of their choice and to mount a defense consistent with their means.' Defendants will also argue that the termination of advancement was improperly influenced by KPMG's desire to avoid prosecution.

Judge Kaplan also pointed out that 'the government's declaration concedes that the lead prosecutor in this case inquired in February 2004 about KPMG's obligations and plans with respect to payment of legal fees' of partners and employees. 'Against the background of the Thompson memorandum,' Judge Kaplan wrote, 'the inquiry itself arguably was a signal to KPMG as to actions that would promote its chances of avoiding prosecution.'

So the May 8 hearing offers a rare opportunity for judicial scrutiny of government pressure on companies under investigation. The white-collar bar will be watching to see if the court can save the defense attorney from extinction.

Conclusion

Without a doubt the Thompson Memorandum has changed the landscape of white-collar defense. Every practitioner, whether representing an individual or a corporation, has to recognize that these 'guidelines' affect every strategy and calculus. However, even the Memorandum itself recognizes that experience 'may lead to additional adjustments,' and Judge Kaplan is not the only authority considering adjustments. On April 5, 2006, the U.S. Sentencing Commission voted unanimously to rescind a prior amendment to the Commentary in Chapter 8 (Organizations) that encouraged prosecutors to require corporations to waive the attorney-client privilege and work product protections in exchange for 'cooperation' credit. See Statement of Michael S. Greco President, American Bar Association, April 6, 2006 (http://www.abanet.org/op/greco/memos/sentencingcommission.shtml).

The Thompson Memorandum concludes: 'I look forward to hearing comments' about the guidelines' 'operation in practice.' Individual defendants in cases like KPMG have started taking the government up on that offer. Whether or not DOJ is listening, at least one federal judge and the U.S. Sentencing Commission are on the lookout.

Laurence A. Urgenson, a member of this newsletter's Board of Editors, is a Partner at Kirkland & Ellis LLP. He has served as Acting Deputy Assistant General, Chief of the Fraud Section, and Executive Director of the Economic Crime Counsel in the Criminal Division of the Department of Justice. Audrey Harris is an Associate at the firm, specializing in white-collar representations.

In the 3 years since Former Deputy Attorney General Larry Thompson's expansion of the Principles of Federal Prosecution of Business Organizations (the 'Thompson Memorandum' or 'Memorandum'), the number of front-page corporate prosecutions and record fines have continued to grow. Prior Business Crimes Bulletin articles have discussed the impact of the Memorandum on the role of defense counsel, including the effects of waiver of corporate attorney-client privilege. However, the privilege is not all that is disappearing.

The Thompson Memorandum's call for 'increased emphasis on and scrutiny of the authenticity of a corporation's cooperation' threatens to shrink another mainstay of white-collar defense: advancement of legal fees. Will demand for corporate 'cooperation' make the defense attorney obsolete? This troubling question arose most recently and forcefully in the KPMG tax shelter case, where U.S. District Judge Lewis Kaplan ordered a hearing on whether the government and the Memorandum affected KPMG's determination to terminate advancement of legal fees for its former employees, now criminal defendants. The case shows how company-advanced attorneys' fees, long the fuel for vigorous defense by indicted employees, are threatened with extinction.

Advancement and Indemnification Before the Memorandum

As a general principle, indemnification and advancement of legal fees and costs are governed by state statute, articles of incorporation, and corporate by-laws and policies. For white-collar practitioners, one of the first steps in any individual representation is review of the indemnification provisions of the corporate articles and by-laws. Every practitioner searches hopefully for the provision that requires advancement and indemnification of legal fees to the maximum extent allowed by applicable law. Prior to the Memorandum, once white-collar counsel found such a provision, he was not unduly concerned with advancement and indemnification.

Prosecutors generally viewed advancement and indemnification as proper: It was not their role to interfere with the company's decision. Indeed, when an FBI agent was indicted in 1997 in connection with the Ruby Ridge killing, the U.S. Department of Justice (DOJ) announced it would pay his legal fees. See DOJ Release No. 97-342 (Aug. 21, 1997). This all changed with the application of the Thompson Memorandum.

Why Corporations Choose Cooperation over Court

As part of 'gauging the extent of the corporation's cooperation,' the Thompson Memorandum advises that a '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 protection,' and that a 'corporation's promise of support to culpable employees and agents, through the advancing of attorneys fees ' may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation.' (Emphasis added).

The Memorandum makes it clear what corporations have to do to be 'cooperators.' Its 'stick' is not just the threat of corporate indictment, but the combined threat of administrative and criminal sanctions that could put the company out of business. Wielding the stick is a joint effort: 'the Department, in conjunction with regulatory agencies and other executive branch departments, encourages corporations, as part of their compliance programs, to conduct internal investigations and to disclose their findings to the appropriate authorities.' The SEC and the Environmental Protection Agency are mentioned by name.

The Memorandum also identifies the 'carrot' of cooperation: 'granting a corporation immunity or amnesty or pretrial diversion' or 'a non prosecution agreement in exchange for cooperation.' The term culprit is instructive. Webster's II New College Dictionary gives two definitions: '1. One charged with an offense or crime; 2. One guilty of a fault or crime.' In a word, it describes the underlying assumption of the Thompson Memorandum ' 'charged' equals 'guilty.'

The Total Weight of Cooperation

'If employees really don't believe they acted with criminal intent, they don't need fancy legal representation,' Larry Thompson was quoted as saying in The Wall Street Journal, 'There are lots of reasonably priced lawyers.' (The Wall Street Journal, June 4, 2004, available on Westlaw at 2004 WL-WSJ 56930988.) In the same article, the DOJ's William Mateja was quoted as saying that it would be 'negligent' if the DOJ 'didn't use the tools at its disposal' to combat corporate crime.

By wielding the carrot and stick, the government is able to conscript an army of company-paid experts to help prosecute 'culprits' in the company. The government often has corporate counsel's interviews, notes, investigative reports, results of document searches, forensic computer work, and witnesses (company employees) that owe their job to the company whose very survival may depend on the government's 'cooperator' designation. Even if an individual defendant is able to scrape together enough money to keep his counsel, few can afford the experts, accountants, investigators and support staff that it takes to sort through (much less, make sense of) the warehouses of material that their 'cooperating' employer gave the government. Meanwhile, the government's almost unlimited resources are often spared this burden because it can enlist the company's legion of attorneys to locate and organize the documents, volunteer and produce potential witnesses, and conduct key financial analysis.

Once the precedent is set, the bar for 'cooperation' just gets higher and higher. A U.S. Attorney in Alabama told The Wall Street Journal, 'Once one prosecutor has gotten cooperation of a certain level, that level becomes what we all now consider cooperation.' Id. However, the government's latest use of the corporate 'cooperator' may just be the one step too far.

KPMG: The Government Imposes Its Will

Against this background, KPMG reached a $456 million deferred-prosecution agreement and agreed to cooperate with government investigators in a matter involving alleged illegal tax shelter schemes. See Deferred Prosecution Agreement, United States v. KPMG LLP, (S.D.N.Y. Aug. 26, 2005), http://www.doj.gov/usao/nys/pressrelease2005.html. The KPMG Case presented the DOJ with an opportunity to impose its will. The agreement contained a long list of KPMG's required cooperation, including:

• Providing requested information;
• Conducting analysis of transactions;
• Volunteering relevant documents, in-formation and potential witnesses;
• Assembling, and organizing all re-quested documents, records, and evidence;
• Waiving any claim of privilege in relation to the government; and
• Making present and former employees available for interviews and testimony.

KPMG is a partnership, not a corporation, and could not rely upon state indemnification provisions and its bylaws to resist pressure regarding advancement. First, KPMG attached strings to individual advancement ' employees had to cooperate fully with company and government investigators or advancement would be terminated. Then KPMG terminated the advancement of legal fees, as seven of its Partners and one of its Managers were indicted as part of the same tax shelter investigation. See Indictment, US v. Jeffrey Stein et al., No. 05 Crim. 888 (S.D.N.Y.) (http://
www.doj.gov/usao/nys/pressrelease2005.html).

Termination of Advancement: A 'Thumb on the Scale'

In March of this year, Judge Kaplan heard arguments on the defendants' motions to dismiss the indictment and seek relief for what they argued was the Thompson Memorandum's interference with KPMG's advancement of legal fees and costs. The individual defendants argued that this interference amounted to a violation of their right to counsel. According to news reports, during the hearing Judge Kaplan said, 'I find it shameful that the fees haven't been advanced,' and noted that 'the reality is that you are depriving people of counsel, or at least interfering or impairing.' Judge Kaplan suggested that the Thompson Memorandum 'puts the government's thumb on the scales' and raised concerns about potential Sixth Amendment implications. The New York Times, March 31, 2006.

On April 12, 2006, Judge Kaplan issued an Order directing limited discovery, and a hearing on May 8 as to '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 related thereto.'

Judge Kaplan did not accept the government's argument that 'no discovery or hearing is warranted because the prosecution team did not seek to persuade KPMG not to advance expenses.' Rather, Judge Kaplan ordered the hearing even assuming arguendo that the government's account of the discussions with KPMG is accurate. Judge Kaplan thus invited argument that the Thompson Mem-orandum in itself is 'an improper interference with the defendants' rights to obtain counsel of their choice and to mount a defense consistent with their means.' Defendants will also argue that the termination of advancement was improperly influenced by KPMG's desire to avoid prosecution.

Judge Kaplan also pointed out that 'the government's declaration concedes that the lead prosecutor in this case inquired in February 2004 about KPMG's obligations and plans with respect to payment of legal fees' of partners and employees. 'Against the background of the Thompson memorandum,' Judge Kaplan wrote, 'the inquiry itself arguably was a signal to KPMG as to actions that would promote its chances of avoiding prosecution.'

So the May 8 hearing offers a rare opportunity for judicial scrutiny of government pressure on companies under investigation. The white-collar bar will be watching to see if the court can save the defense attorney from extinction.

Conclusion

Without a doubt the Thompson Memorandum has changed the landscape of white-collar defense. Every practitioner, whether representing an individual or a corporation, has to recognize that these 'guidelines' affect every strategy and calculus. However, even the Memorandum itself recognizes that experience 'may lead to additional adjustments,' and Judge Kaplan is not the only authority considering adjustments. On April 5, 2006, the U.S. Sentencing Commission voted unanimously to rescind a prior amendment to the Commentary in Chapter 8 (Organizations) that encouraged prosecutors to require corporations to waive the attorney-client privilege and work product protections in exchange for 'cooperation' credit. See Statement of Michael S. Greco President, American Bar Association, April 6, 2006 (http://www.abanet.org/op/greco/memos/sentencingcommission.shtml).

The Thompson Memorandum concludes: 'I look forward to hearing comments' about the guidelines' 'operation in practice.' Individual defendants in cases like KPMG have started taking the government up on that offer. Whether or not DOJ is listening, at least one federal judge and the U.S. Sentencing Commission are on the lookout.

Laurence A. Urgenson, a member of this newsletter's Board of Editors, is a Partner at Kirkland & Ellis LLP. He has served as Acting Deputy Assistant General, Chief of the Fraud Section, and Executive Director of the Economic Crime Counsel in the Criminal Division of the Department of Justice. Audrey Harris is an Associate at the firm, specializing in white-collar representations.