Government Pressure on Employers

Named after former Deputy Attorney General Larry Thompson, who issued it in January 2003, the Thompson Memo sets forth the nine factors that federal prosecutors are to consider in deciding whether to indict a corporation. See http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00161.htm. One of those factors ' often the key factor ' is the corporation's cooperation with the investigation. Since the Thompson Memo was issued, prosecutors have been using this section, along with the threat of an entity-destroying indictment ' la Arthur Andersen, to pressure corporations into providing levels of cooperation previously unknown in white-collar cases.

The Thompson Memo states that in gauging the extent of the corporation's cooperation, the prosecutor may consider the corporation's willingness 'to make witnesses available' and 'the completeness of its disclosure.' Judge Kaplan observed that these provisions create a huge incentive for a business entity under investigation, such as KPMG, to do whatever it can 'to induce its personnel to submit to interviews by the government and to disclose whatever they know.' KPMG told the prosecutors that it intended to cooperate fully with the investigation, in the hope of avoiding the fate of its former competitor Arthur Andersen. The government decided to take advantage of KPMG's cooperative posture.

The Pressure on KPMG's Employees

When KPMG contacted the prosecutors to obtain approval of KPMG's planned treatment of those KPMG employees who were subjects of the investigation, the prosecutors structured the plan to maximize the chance that the employees would talk to the government even (according to one prosecutor) if that meant admitting criminal wrongdoing. Under the procedure created by the government:

• KPMG conditioned its payment of attorney's fees on the individual employees 'cooperating fully with the company and the government';
• KPMG's attorneys told the prosecutors to contact them if any current or former KPMG employee refused to meet with the government or otherwise failed to cooperate; and
• When certain KPMG employees balked at being interviewed, the prosecutors contacted KPMG, which then threatened to cease payment of fees and terminate the employees if they did not meet with the government.

Upon return of the indictment, nine KPMG employees who had submitted to interviews under these conditions were named as defendants, and each moved to suppress his statements as coerced in violation of his privilege against self-incrimination under the Fifth Amendment.

Judge Kaplan's Rulings

Judge Kaplan relied on Garrity v. New Jersey, 385 U.S. 493 (1967) ' a case involving police officers who provided interviews under threat of termination ' for the proposition that the government violates the Fifth Amendment when it obtains statements through economic coercion.

The first issue addressed by Judge Kaplan was whether the statements to the government were coerced by KPMG. To establish this proposition, the court required each moving defendant to show that his belief that economic sanction would follow a refusal to speak was both objectively reasonable and subjectively held. The court then denied six of the defense motions on the papers because the defendants had not submitted affidavits or otherwise shown that they subjectively felt coerced. As for the remaining three defendants, Judge Kaplan held an evidentiary hearing, followed by a ruling that statements by two of the defendants were coerced under Garrity.

The court then considered whether KPMG's coercion of these two defendants was attributable to the government. Judge Kaplan held that attribution is proper 'where the state has exercised coercive power [over a private decision] or has provided such significant encouragement, either overt or covert, that that the choice [by the private actor] must in law be deemed to be that of the State.' Given the language of the Thompson Memo and the aggressive actions of the prosecutors in encouraging, approving and taking advantage of KPMG's coercion of its employees, Judge Kaplan had no problem attributing the coercion of KPMG to the government. He suppressed the two defendants' statements to prosecutors as a violation of their Fifth Amendment rights.

Implications for Corporate Counsel

The primary point of this case for corporate counsel is that the attorneys for KPMG did nothing wrong, and that counsel for entities that have decided to provide complete cooperation should stay the course. The Thompson Memo conditions a corporation's receipt of full cooperation credit on the corporation's doing its best to make witnesses available. So long as this is true, a corporation under serious threat of indictment should continue to consider using the entirely lawful powers of persuasion at its disposal ' the discretionary payment of fees and continued employment ' to entice the corporation's employees to act in the corporation's best interest by speaking to the government. And corporate counsel certainly should continue to clear their plans in this regard with the prosecutor ahead of time ' any other course of action would be inadvisably risky. It is up to the government, which drafted the Thompson Memo, to decide what to ask for ' and what not to ask for ' from a corporation seeking to comply with its provisions.

That being said, now that Judge Kaplan has demonstrated that the Thompson Memo potentially creates significant Garrity problems for the government, prosecutors may decide to restrain themselves from taking full advantage of the Thompson Memo's power in this area. They may well tell the corporation not to use economic coercion to get its employees to speak with the government.

In these situations, corporate counsel still can provide significant assistance to the prosecutors by arranging for non-coercive interviews of employees whom the prosecutor confirms are witnesses, as opposed to subjects or targets, in the investigation. Model Rule of Professional Conduct 1.7 states that corporate counsel may represent an employee in a government interview unless 'there is a significant risk that the representation ' will be materially limited by the lawyer's responsibilities' to the employer. If such a risk exists, the representation may proceed only if 'the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation' to both clients, and 'each affected client gives informed consent, confirmed in writing.' The primary issue is whether the employee may say something that is detrimental to the employer's interests. Every fact situation is different, but given the possibility that an irremediable conflict might develop, the safest practice is to arrange for these employees to have separate counsel, even if there is no apparent conflict from the outset.

Implications for Individual Counsel

Attorneys for individuals in criminal investigations should do what they can to place their clients in the position of the successful defendants in this case. That means keeping in mind: 1) the economic pressure to speak that was brought to bear on the client; 2) the nature of the government's involvement in that pressure; and 3) the fact that a successful defendant will have to show that he subjectively believed that economic sanctions would follow a refusal to speak, and that his belief was objectively reasonable. Individual counsel also should be aware of the possibility of moving to suppress a client's statements to internal investigators if the same factors exist.

Finally, counsel for an individual defendant who prevails on such a motion to suppress should consider the possibility of seeking to suppress other evidence that is 'fruit of the poisonous tree.' If a defendant makes a statement that is subsequently found to have been coerced, and that statement leads the government to obtain evidence that it otherwise would not have found, then case law suggests that such evidence should also be suppressed.

Conclusion

Judge Kaplan's holding that the Thompson Memo potentially creates serious Garrity problems for the government has significant implications for defense counsel and prosecutors alike. Defense attorneys should be aware of the possible benefits to their clients. Prosecutors need to realize that a less aggressive interpretation of the Thompson Memo may be in their best interests.

Robert W. Kent, Jr. ([email protected]) is a partner in the Chicago office of Baker & McKenzie LLP, specializing in internal investigations and white-collar defense. Until September 2006, he was Chief of the Complex Fraud Section in the Criminal Division of the U.S. Attorney's Office in Chicago.

A white-collar criminal investigation, a business entity seeking to cooperate, and individual employees talking to the prosecutors ' all familiar scenarios to anyone experienced in federal criminal law. Recently, however, these elements combined to produce an unusual result: the suppression of the employees' statements to the government as involuntary under the Fifth Amendment. U.S. District Judge Lewis A. Kaplan issued this ruling in the KPMG tax shelter prosecution, finding that the prosecutors, through their pressure on KPMG, economically coerced the company's employees to speak with the government in violation of their privilege against self-incrimination. United States v. Stein, 440 F.Supp.2d 315 (S.D.N.Y. 2006).

Judge Kaplan rendered this opinion one month after he ruled in the same case that the government had violated the constitutional rights of the defendants by causing KPMG to limit its payment of attorney fees on behalf of its current and former employees. The court's coerced-statement opinion, based on rock-solid constitutional law, has significant implications for defense counsel. Once again, the government's overly aggressive interpretation of the Thompson Memo has come back to haunt it.

The Thompson Memo

Named after former Deputy Attorney General Larry Thompson, who issued it in January 2003, the Thompson Memo sets forth the nine factors that federal prosecutors are to consider in deciding whether to indict a corporation. See http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00161.htm. One of those factors ' often the key factor ' is the corporation's cooperation with the investigation. Since the Thompson Memo was issued, prosecutors have been using this section, along with the threat of an entity-destroying indictment ' la Arthur Andersen, to pressure corporations into providing levels of cooperation previously unknown in white-collar cases.

The Thompson Memo states that in gauging the extent of the corporation's cooperation, the prosecutor may consider the corporation's willingness 'to make witnesses available' and 'the completeness of its disclosure.' Judge Kaplan observed that these provisions create a huge incentive for a business entity under investigation, such as KPMG, to do whatever it can 'to induce its personnel to submit to interviews by the government and to disclose whatever they know.' KPMG told the prosecutors that it intended to cooperate fully with the investigation, in the hope of avoiding the fate of its former competitor Arthur Andersen. The government decided to take advantage of KPMG's cooperative posture.

The Pressure on KPMG's Employees

When KPMG contacted the prosecutors to obtain approval of KPMG's planned treatment of those KPMG employees who were subjects of the investigation, the prosecutors structured the plan to maximize the chance that the employees would talk to the government even (according to one prosecutor) if that meant admitting criminal wrongdoing. Under the procedure created by the government:

• KPMG conditioned its payment of attorney's fees on the individual employees 'cooperating fully with the company and the government';
• KPMG's attorneys told the prosecutors to contact them if any current or former KPMG employee refused to meet with the government or otherwise failed to cooperate; and
• When certain KPMG employees balked at being interviewed, the prosecutors contacted KPMG, which then threatened to cease payment of fees and terminate the employees if they did not meet with the government.

Upon return of the indictment, nine KPMG employees who had submitted to interviews under these conditions were named as defendants, and each moved to suppress his statements as coerced in violation of his privilege against self-incrimination under the Fifth Amendment.

Judge Kaplan's Rulings

Judge Kaplan relied on Garrity v. New Jersey, 385 U.S. 493 (1967) ' a case involving police officers who provided interviews under threat of termination ' for the proposition that the government violates the Fifth Amendment when it obtains statements through economic coercion.

The first issue addressed by Judge Kaplan was whether the statements to the government were coerced by KPMG. To establish this proposition, the court required each moving defendant to show that his belief that economic sanction would follow a refusal to speak was both objectively reasonable and subjectively held. The court then denied six of the defense motions on the papers because the defendants had not submitted affidavits or otherwise shown that they subjectively felt coerced. As for the remaining three defendants, Judge Kaplan held an evidentiary hearing, followed by a ruling that statements by two of the defendants were coerced under Garrity.

The court then considered whether KPMG's coercion of these two defendants was attributable to the government. Judge Kaplan held that attribution is proper 'where the state has exercised coercive power [over a private decision] or has provided such significant encouragement, either overt or covert, that that the choice [by the private actor] must in law be deemed to be that of the State.' Given the language of the Thompson Memo and the aggressive actions of the prosecutors in encouraging, approving and taking advantage of KPMG's coercion of its employees, Judge Kaplan had no problem attributing the coercion of KPMG to the government. He suppressed the two defendants' statements to prosecutors as a violation of their Fifth Amendment rights.

Implications for Corporate Counsel

The primary point of this case for corporate counsel is that the attorneys for KPMG did nothing wrong, and that counsel for entities that have decided to provide complete cooperation should stay the course. The Thompson Memo conditions a corporation's receipt of full cooperation credit on the corporation's doing its best to make witnesses available. So long as this is true, a corporation under serious threat of indictment should continue to consider using the entirely lawful powers of persuasion at its disposal ' the discretionary payment of fees and continued employment ' to entice the corporation's employees to act in the corporation's best interest by speaking to the government. And corporate counsel certainly should continue to clear their plans in this regard with the prosecutor ahead of time ' any other course of action would be inadvisably risky. It is up to the government, which drafted the Thompson Memo, to decide what to ask for ' and what not to ask for ' from a corporation seeking to comply with its provisions.

That being said, now that Judge Kaplan has demonstrated that the Thompson Memo potentially creates significant Garrity problems for the government, prosecutors may decide to restrain themselves from taking full advantage of the Thompson Memo's power in this area. They may well tell the corporation not to use economic coercion to get its employees to speak with the government.

In these situations, corporate counsel still can provide significant assistance to the prosecutors by arranging for non-coercive interviews of employees whom the prosecutor confirms are witnesses, as opposed to subjects or targets, in the investigation. Model Rule of Professional Conduct 1.7 states that corporate counsel may represent an employee in a government interview unless 'there is a significant risk that the representation ' will be materially limited by the lawyer's responsibilities' to the employer. If such a risk exists, the representation may proceed only if 'the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation' to both clients, and 'each affected client gives informed consent, confirmed in writing.' The primary issue is whether the employee may say something that is detrimental to the employer's interests. Every fact situation is different, but given the possibility that an irremediable conflict might develop, the safest practice is to arrange for these employees to have separate counsel, even if there is no apparent conflict from the outset.

Implications for Individual Counsel

Attorneys for individuals in criminal investigations should do what they can to place their clients in the position of the successful defendants in this case. That means keeping in mind: 1) the economic pressure to speak that was brought to bear on the client; 2) the nature of the government's involvement in that pressure; and 3) the fact that a successful defendant will have to show that he subjectively believed that economic sanctions would follow a refusal to speak, and that his belief was objectively reasonable. Individual counsel also should be aware of the possibility of moving to suppress a client's statements to internal investigators if the same factors exist.

Finally, counsel for an individual defendant who prevails on such a motion to suppress should consider the possibility of seeking to suppress other evidence that is 'fruit of the poisonous tree.' If a defendant makes a statement that is subsequently found to have been coerced, and that statement leads the government to obtain evidence that it otherwise would not have found, then case law suggests that such evidence should also be suppressed.

Conclusion

Judge Kaplan's holding that the Thompson Memo potentially creates serious Garrity problems for the government has significant implications for defense counsel and prosecutors alike. Defense attorneys should be aware of the possible benefits to their clients. Prosecutors need to realize that a less aggressive interpretation of the Thompson Memo may be in their best interests.

Robert W. Kent, Jr. ([email protected]) is a partner in the Chicago office of Baker & McKenzie LLP, specializing in internal investigations and white-collar defense. Until September 2006, he was Chief of the Complex Fraud Section in the Criminal Division of the U.S. Attorney's Office in Chicago.