Legal Fees in Criminal Cases

In United States v. Stein, et al., the government charged some 17 KPMG employees with federal conspiracy and tax evasion. A reasonable estimate of the defense costs to be incurred by each individual defendant could easily exceed $1 million. Before suit was filed, as a part of its agreement with the government, KPMG made a commitment that it would cease paying the attorney fees of certain employees who were considered culpable by the government. The individual defendants whose fees were no longer paid filed motions seeking to have the court order the payment of their fees, or, in the alternative dismiss the claims against them.

Judge Lewis Kaplan of the Southern District of New York has taken these motions in the Stein case quite seriously, and is of the opinion that, by coercing KPMG into not paying the attorney fees of these defendants, the government violated their constitutional rights to effective counsel under the Sixth Amendment and denied them due process of law in violation of the Fifth Amendment. In his initial ruling on the motions, Judge Kaplan attempted to conduct a summary proceeding to determine KPMG's legal liability for such fees; the Second Circuit, however, found this to be beyond his power. On remand, Judge Kaplan invited the defendants to renew their motions, and then dismissed the indictments against 13 of the defendants. The government has appealed and the case is again before the Second Circuit.

In his order dismissing these defendants, Judge Kaplan focused on the government's assertion of a broad right to consider, in deciding whether to indict a business entity, the degree to the entity had 'cooperated' with government's investigation. In 2005, when KPMG was negotiating its agreement with the government, Justice Department prosecutors worked under the authority
of the controversial 'Thompson Memorandum,' which made it clear that the advancement of attorney fees to employees whom the government thought to be criminally culpable might well be considered a 'promise of support' for such persons, which could lead to an indictment of the employing organization.

The McNulty Memorandum

On Dec. 12, 2006, after hearings before the Senate Judiciary Committee conducted in the fall of 2006 prompted a movement within Congress to rescind the Thompson Memorandum legislatively, then Deputy Attorney General Paul McNulty issued a
revised version of the Thompson Memorandum, which became known as the 'McNulty Memorandum,' placing new limits on a prosecutor's right to demand cooperation in exchange for not indicting a company.

The McNulty Memorandum states that, in deciding whether to indict, prosecutors 'generally should not take into account whether a corporation is advancing attorney fees to employees or agents under investigation or indictment.' In addition, the revised Memorandum states that, except in 'extremely rare cases,' a corporation's payment of legal fees in compliance with 'state law,' or with the company's 'contractual obligations,' is not to considered a 'failure or cooperate' in deciding whether to indict.

Nevertheless, the ambiguous language of the revised Memorandum plainly leaves the door open for prosecutors who wish to put pressure on company that is inclined to help its employees under investigation. One loophole in the language is that the Department reserves the right to insist on a denial of legal support if, taking into account the 'totality of circumstances,' such support would tend to show that the company was acting with an 'intent to impede' the government's prosecution. The Memorandum adds that indictment may be considered when the payment of employees' legal fees along with other 'telling facts' convinces the prosecutor that the company is trying to 'shield itself and its culpable employees from government scrutiny.' Another major ambiguity in the language of the McNulty Memorandum is that it appears to be completely silent as to whether prosecutors should be restrained from considering the payment of legal fees when the corporation does not have a contractual obligation to do so.

Proposed Legislation

Although the McNulty Memorandum is certainly more favorable to corporate defendants than its predecessor, it was not as well received by Congress, the Bar and the public as might have been expected, and remains highly controversial.

In January 2007, Sen. Arlen Spector (R-PA) introduced Senate Bill 186, the 'Attorney-Client Privilege Protection Act of 2007' ('S. 186'). If enacted, S. 186 would straightforwardly 'prohibit' U.S. Attorneys from conditioning any civil or criminal charge decision upon, or use in deciding whether an organization is 'cooperating' with the government, 'the provision of counsel to, or contribution to the legal defense fees or expenses of, an employee of that organization.' In July 2007, Rep. Robert C. Scott (D-VA) introduced House Bill 3013 ('H.R. 3013'), a virtually identical bill (and bearing the same name) in the House. (The Senate has held hearings on S. 186, but no votes are scheduled in either body on either bill.)

Bar organizations have strongly supported these legislative efforts to negate the McNulty Memorandum legislatively. The American Bar Association in particular has urged its members to offer such support in repeated appeals from President Karen Mathis. Public interest groups as far apart on the political spectrum as the American Civil Liberties
Union ('ACLU') and The Heritage Foundation have likewise supported these legislative efforts. In the press, numerous editorials and op-ed pieces supporting the decision of Judge Kaplan to dismiss the KPMG defendants and/or the pending legislation in Congress to overturn the McNulty Memorandum have been published in major mainstream publications such as The New York Times, The Wall Street Journal and The Los Angeles Times.

Tactical Considerations

Even after the Stein decision and the McNulty Memorandum, continued concern about whether to advance fees to employees in criminal cases is certainly justified. When faced with the decision of whether to pay the fees of employees under governmental investigation, corporate counsel may feel that it is necessary to read the mind of the prosecutor to predict what the government's reaction will be if such support is provided.

Competing interests are at play in these circumstances. Company counsel may have no reason to believe that wrongdoing has in fact been committed by an accused employee, and consider it extremely unfair for the government to force an employee into a choice between pleading guilty and financial ruin. On the other hand, counsel may not know all that the prosecutor knows, and may not be in a position to judge accurately whether particular employees are truly culpable. Moreover, whether a corporation's motives for paying the legal fees of its employees are benign or malign may be in the eye of the beholder. From the corporation's standpoint, the payment of such fees may be an effort to ensure that one of its own is not being unfairly railroaded or bankrupted. The government, however, may see the same conduct as evidence that the corporation is implicitly (or explicitly) trying to buy silence and/or a recollection of events that is favorable to the company when the employee testifies.

Undoubtedly, both government prosecutors and corporate defendants are capable of acting with good motives, with more questionable motives, or, in more cases than either might want to admit, mixed motives. A prosecutor, quite appropriately, will want to discourage the payment of fees to employees to ensure that the company is not shielding itself while protecting truly culpable individuals, while at the same time not being unaware that mounting liability for legal fees in a complex case places enormous pressure liability upon an individual defendant to plead guilty and testify against other defendants. Similarly, while a corporation's principals may feel an entirely legitimate desire to support loyal and valued employees, they may also sense, even if only unconsciously, that testimony that is potentially damaging to the organization is less likely to come out if their employees are represented by highly motivated and expert counsel who are being paid by the company.

Unfortunately, the legal guidance available to assist counsel in making this decision is limited. Judge Kaplan of the Southern District of New York obviously considers the issue to be one of constitutional importance requiring intervention by the courts; whether his view will prevail in the appellate courts remains in doubt, however. If Congress passes the Attorney-Client Privilege Protection Act of 2007, or its equivalent, the issue would be resolved more or less definitively, of course, but there appears to be no immediate legislative focus on the issue. And while the language of the NcNulty Memorandum is certainly preferable (from the standpoint of the corporation) to that of the Thompson Memorandum, serious doubts remain as to how the Justice Department will interpret it in given cases.

Weighing the Risks

In the current legal landscape, given the ambiguity of the McNulty Memorandum, the uncertainty of whether Judge Kaplan's decision in the Stein case will be sustained, and an apparent stall of the proposed legislation introduced in Congress, the best a corporate counselor can do is to weigh the risks of paying fees in the specific circumstances in which the company finds itself.

If the corporation has an obligation to pay fees under applicable state law, or has a clear contractual obligation to pay fees, the risk of displeasing the government by paying the fees of employees is certainly far less. Even then, however, in-house counsel must evaluate whether the government will consider the 'totality of circumstances' to suggest that such payment evidences an 'intent to impede' its investigation. (If there is joint defense agreement involving the corporation and the employee, for example, this may well be looked upon negatively by the prosecutor.)

Also to be considered is whether there is justifiable reason to believe that an indictment of the corporation is inevitable, regardless of whether the fees of individual employees are paid. If an indictment of the corporation is almost certain to occur, then it would seem that there is little to be lost by hiring qualified counsel for the accused employees. In that circumstance, dire as it may be for the future of the company, there may be considerable tactical advantage in presenting a coordinated joint defense with experienced counsel representing all parties.

Conclusion

Perhaps the most important factor for in-house corporate counsel to consider is whether there is any reason to believe that the government suspects that senior corporate officials of the company who are not yet under investigation may have been aware of and/or have condoned the alleged criminal conduct which is under investigation. If the government does not trust the company's key decision makers, paying the fees of corporate employees who are already under investigation can only heighten their suspicion that the organization itself is corrupt and should be made to pay the ultimate price.

John Gamble is a partner with Fisher & Phillips LLP, a national labor and employment law firm representing employers. He can be reached at [email protected].

Although a corporation obviously cannot be put in prison, saber-rattling by the government concerning a possible indictment is indeed a draconian threat, as Arthur Andersen learned in 2002, when it was charged with obstruction of justice for its role with the Enron scandal. The firm was indicted in March 2002, convicted by a jury in June 2002, and by August of that year had ceased to exist as a going professional concern. By the time its conviction was overturned on appeal by the Fifth Circuit in 2005, the damage was long since done, with the partnership dissolved, the employees dismissed, and the value of the Arthur Andersen name irreparably lost.

The managing principals of another accounting giant, KMPG LLP, no doubt had reason to recall the fate of Arthur Andersen when deciding, in 2005, whether to cooperate with the U.S. Office ('USAO') for the Southern District of New York. KPMG was facing a possible indictment for using fraudulent tax shelters to deprive the federal Treasury of over $2 billion in revenues. In an apparent effort to avoid Arthur Andersen's fate, KPMG entered into a Deferred Prosecution Agreement with the USAO whereby prosecution of the firm was deferred while it cooperated with the government's investigation. KPMG says that part of the price it had to pay for the government's forbearance included an agreement to stop paying the massive attorney fees that were being incurred by its employees who were under investigation.

The Stein Case

In United States v. Stein, et al., the government charged some 17 KPMG employees with federal conspiracy and tax evasion. A reasonable estimate of the defense costs to be incurred by each individual defendant could easily exceed $1 million. Before suit was filed, as a part of its agreement with the government, KPMG made a commitment that it would cease paying the attorney fees of certain employees who were considered culpable by the government. The individual defendants whose fees were no longer paid filed motions seeking to have the court order the payment of their fees, or, in the alternative dismiss the claims against them.

Judge Lewis Kaplan of the Southern District of New York has taken these motions in the Stein case quite seriously, and is of the opinion that, by coercing KPMG into not paying the attorney fees of these defendants, the government violated their constitutional rights to effective counsel under the Sixth Amendment and denied them due process of law in violation of the Fifth Amendment. In his initial ruling on the motions, Judge Kaplan attempted to conduct a summary proceeding to determine KPMG's legal liability for such fees; the Second Circuit, however, found this to be beyond his power. On remand, Judge Kaplan invited the defendants to renew their motions, and then dismissed the indictments against 13 of the defendants. The government has appealed and the case is again before the Second Circuit.

In his order dismissing these defendants, Judge Kaplan focused on the government's assertion of a broad right to consider, in deciding whether to indict a business entity, the degree to the entity had 'cooperated' with government's investigation. In 2005, when KPMG was negotiating its agreement with the government, Justice Department prosecutors worked under the authority
of the controversial 'Thompson Memorandum,' which made it clear that the advancement of attorney fees to employees whom the government thought to be criminally culpable might well be considered a 'promise of support' for such persons, which could lead to an indictment of the employing organization.

The McNulty Memorandum

On Dec. 12, 2006, after hearings before the Senate Judiciary Committee conducted in the fall of 2006 prompted a movement within Congress to rescind the Thompson Memorandum legislatively, then Deputy Attorney General Paul McNulty issued a
revised version of the Thompson Memorandum, which became known as the 'McNulty Memorandum,' placing new limits on a prosecutor's right to demand cooperation in exchange for not indicting a company.

The McNulty Memorandum states that, in deciding whether to indict, prosecutors 'generally should not take into account whether a corporation is advancing attorney fees to employees or agents under investigation or indictment.' In addition, the revised Memorandum states that, except in 'extremely rare cases,' a corporation's payment of legal fees in compliance with 'state law,' or with the company's 'contractual obligations,' is not to considered a 'failure or cooperate' in deciding whether to indict.

Nevertheless, the ambiguous language of the revised Memorandum plainly leaves the door open for prosecutors who wish to put pressure on company that is inclined to help its employees under investigation. One loophole in the language is that the Department reserves the right to insist on a denial of legal support if, taking into account the 'totality of circumstances,' such support would tend to show that the company was acting with an 'intent to impede' the government's prosecution. The Memorandum adds that indictment may be considered when the payment of employees' legal fees along with other 'telling facts' convinces the prosecutor that the company is trying to 'shield itself and its culpable employees from government scrutiny.' Another major ambiguity in the language of the McNulty Memorandum is that it appears to be completely silent as to whether prosecutors should be restrained from considering the payment of legal fees when the corporation does not have a contractual obligation to do so.

Proposed Legislation

Although the McNulty Memorandum is certainly more favorable to corporate defendants than its predecessor, it was not as well received by Congress, the Bar and the public as might have been expected, and remains highly controversial.

In January 2007, Sen. Arlen Spector (R-PA) introduced Senate Bill 186, the 'Attorney-Client Privilege Protection Act of 2007' ('S. 186'). If enacted, S. 186 would straightforwardly 'prohibit' U.S. Attorneys from conditioning any civil or criminal charge decision upon, or use in deciding whether an organization is 'cooperating' with the government, 'the provision of counsel to, or contribution to the legal defense fees or expenses of, an employee of that organization.' In July 2007, Rep. Robert C. Scott (D-VA) introduced House Bill 3013 ('H.R. 3013'), a virtually identical bill (and bearing the same name) in the House. (The Senate has held hearings on S. 186, but no votes are scheduled in either body on either bill.)

Bar organizations have strongly supported these legislative efforts to negate the McNulty Memorandum legislatively. The American Bar Association in particular has urged its members to offer such support in repeated appeals from President Karen Mathis. Public interest groups as far apart on the political spectrum as the American Civil Liberties
Union ('ACLU') and The Heritage Foundation have likewise supported these legislative efforts. In the press, numerous editorials and op-ed pieces supporting the decision of Judge Kaplan to dismiss the KPMG defendants and/or the pending legislation in Congress to overturn the McNulty Memorandum have been published in major mainstream publications such as The New York Times, The Wall Street Journal and The Los Angeles Times.

Tactical Considerations

Even after the Stein decision and the McNulty Memorandum, continued concern about whether to advance fees to employees in criminal cases is certainly justified. When faced with the decision of whether to pay the fees of employees under governmental investigation, corporate counsel may feel that it is necessary to read the mind of the prosecutor to predict what the government's reaction will be if such support is provided.

Competing interests are at play in these circumstances. Company counsel may have no reason to believe that wrongdoing has in fact been committed by an accused employee, and consider it extremely unfair for the government to force an employee into a choice between pleading guilty and financial ruin. On the other hand, counsel may not know all that the prosecutor knows, and may not be in a position to judge accurately whether particular employees are truly culpable. Moreover, whether a corporation's motives for paying the legal fees of its employees are benign or malign may be in the eye of the beholder. From the corporation's standpoint, the payment of such fees may be an effort to ensure that one of its own is not being unfairly railroaded or bankrupted. The government, however, may see the same conduct as evidence that the corporation is implicitly (or explicitly) trying to buy silence and/or a recollection of events that is favorable to the company when the employee testifies.

Undoubtedly, both government prosecutors and corporate defendants are capable of acting with good motives, with more questionable motives, or, in more cases than either might want to admit, mixed motives. A prosecutor, quite appropriately, will want to discourage the payment of fees to employees to ensure that the company is not shielding itself while protecting truly culpable individuals, while at the same time not being unaware that mounting liability for legal fees in a complex case places enormous pressure liability upon an individual defendant to plead guilty and testify against other defendants. Similarly, while a corporation's principals may feel an entirely legitimate desire to support loyal and valued employees, they may also sense, even if only unconsciously, that testimony that is potentially damaging to the organization is less likely to come out if their employees are represented by highly motivated and expert counsel who are being paid by the company.

Unfortunately, the legal guidance available to assist counsel in making this decision is limited. Judge Kaplan of the Southern District of New York obviously considers the issue to be one of constitutional importance requiring intervention by the courts; whether his view will prevail in the appellate courts remains in doubt, however. If Congress passes the Attorney-Client Privilege Protection Act of 2007, or its equivalent, the issue would be resolved more or less definitively, of course, but there appears to be no immediate legislative focus on the issue. And while the language of the NcNulty Memorandum is certainly preferable (from the standpoint of the corporation) to that of the Thompson Memorandum, serious doubts remain as to how the Justice Department will interpret it in given cases.

Weighing the Risks

In the current legal landscape, given the ambiguity of the McNulty Memorandum, the uncertainty of whether Judge Kaplan's decision in the Stein case will be sustained, and an apparent stall of the proposed legislation introduced in Congress, the best a corporate counselor can do is to weigh the risks of paying fees in the specific circumstances in which the company finds itself.

If the corporation has an obligation to pay fees under applicable state law, or has a clear contractual obligation to pay fees, the risk of displeasing the government by paying the fees of employees is certainly far less. Even then, however, in-house counsel must evaluate whether the government will consider the 'totality of circumstances' to suggest that such payment evidences an 'intent to impede' its investigation. (If there is joint defense agreement involving the corporation and the employee, for example, this may well be looked upon negatively by the prosecutor.)

Also to be considered is whether there is justifiable reason to believe that an indictment of the corporation is inevitable, regardless of whether the fees of individual employees are paid. If an indictment of the corporation is almost certain to occur, then it would seem that there is little to be lost by hiring qualified counsel for the accused employees. In that circumstance, dire as it may be for the future of the company, there may be considerable tactical advantage in presenting a coordinated joint defense with experienced counsel representing all parties.

Conclusion

Perhaps the most important factor for in-house corporate counsel to consider is whether there is any reason to believe that the government suspects that senior corporate officials of the company who are not yet under investigation may have been aware of and/or have condoned the alleged criminal conduct which is under investigation. If the government does not trust the company's key decision makers, paying the fees of corporate employees who are already under investigation can only heighten their suspicion that the organization itself is corrupt and should be made to pay the ultimate price.

John Gamble is a partner with Fisher & Phillips LLP, a national labor and employment law firm representing employers. He can be reached at [email protected].