The Government Tries to Play Hardball With KPMG
posted by Elizabeth Nowicki
First things first: Thank you, Dan & Co., for inviting me to guest blog. I am very excited to be here, and I look forward to an interesting visit.
Second thing second:
In theory, my first post out of the starting gate here should be strong, hard-hitting, and compelling, in the hopes of impressing the audience. That was my plan, anyway. But, as I took a break from drafting the hard-hitting and compelling post, I surfed WSJ.com, and I found an article that just baffled me. Stumped me. So much for the hard-charging start. (Just to be clear, I read the words in the article, and I understood their meaning, but I have been waffling for the past half hour on where I come out on the substance of the article. I am baffled about the “right” side of the argument at issue. )
The article, titled KPMG Case Sets Up Key Ruling on Legal Fees, notes an interesting and likely significant issue currently before Judge Kaplan (SDNY).
Summary: The government is prosecuting 16 former KPMG executives who are accused of marketing fraudulent tax shelters. Defense lawyers for the executives are complaining that the federal prosecutors are pressuring KPMG to cut off legal support for the 16 former executives, presumably to make the 16 defendants cave (my phrasing). It appears (to the defense lawyers) that the prosecutors on the case are hoping that KPMG will cut off support to the executives to curry favor with the prosecutors (or at least be viewed as “cooperating with the government”) and thereby avoid prosecution itself. It seems to the defense lawyers (as best I can tell) that the prosecutors are trying unscrupulously to get KPMG to basically “give up” its former employees in order to save themselves.
While the article was short on details, there was mention that AUSA Justin Weddle might have “leaned on” KPMG to be stingy with defense money for the defendants:
Attorneys for the defendants pointed to a meeting prosecutors had with KPMG in February 2004 after the firm learned a number of employees were subjects of a grand-jury investigation. Notes from that meeting show that Assistant U.S. Attorney Justin Weddle told KPMG if the firm had any discretion over the fees, the government would “look at that under a microscope.”
Indeed, it appears that federal prosecutors have been encouraged, at least since 2003, to consider fees advanced to employees or former employees when evaluating whether the firm at issue has “cooperated” with the government:
Authorities were bolstered by a controversial 2003 memo by then-Deputy Attorney General Larry Thompson that told federal prosecutors to factor in the level of cooperation by executives and directors when deciding whether to bring a criminal indictment against a company. That memo also said a firm’s willingness to advance legal fees to “culpable employees” may signal a lack of cooperation.
Issue
Today’s WSJ article presented the question : Should cooperation extend to companies cutting off legal support for employees suspected of wrongdoing?
Now, the normal Nowicki response would be something along the lines of “Yes, cooperation should extend to cutting off legal support, at least after an indictment. If an employee doesn’t want to be crushed with legal fees, he/she should avoid doing things that lead to an indictment. And good for the government for playing hardball. The ‘cooperation’ game is the government’s game, so they get to make all the rules. If a person or entity does not like the ‘cooperation game’ rules, they do not have to play the cooperation game.”
The Troubling Point
But the facts presented in the WSJ article also involved KPMG employees who had not been indicted, and that is where I am mired:
KPMG attorneys began sending letters to employees who were the subject of the grand-jury investigation that said the firm “had no obligation” to pay their legal fees [before indictment] but would do so provided they cooperated with the government, adding that the fees would be capped at $400,000. The KPMG attorneys also sent those employees a memo advising them of the investigation and telling them that they had the right to an attorney.
The corporate lawyer in me wonders about the propriety of:
** not paying the legal fees of employees at the grand-jury level, prior to indictment
** intimating (threatening?) that the failure to cooperate with the government might result in the non-payment of legal fees (when it is not clear to me that KPMG, as principal, can 100% with certainty do that to an employee qua agent)
** essentially forcing the employees to give up their right to say nothing, particularly in the sensitive grand jury situation
Normally, I have minimal sympathy for corporate “accuseds.” But, for some reason, I cannot muster my usual hard-line response on these facts. Maybe if I ruminate more on the situation, and reflect on the fact that folks are not usually hauled before a grand jury unless they have bad smell about them. ….
(Just to give you more information about where I generally come out in situations such as these, you should know that I absolutely thought Martha Stewart committed securities fraud several years ago when she told a bunch of analysts at a meeting that she did not commit insider trading (paraphrasing). Judge Cedarbaum’s opinion dismissing that securities fraud claim (“Count 9”) is just inexplicableto me. The notion put out by some folks that Martha’s 5th Amendment (?) rights would have been impaired had she been forced to risk committing securities fraud by defending herself (or, alternatively, risk incriminating herself by telling the truth in order to avoid committing securities fraud) struck me as almost laughable. When talking about securities, either tell the truth or be quiet. It doesn’t matter to me if you are speaking to proclaim your innocence to analysts or speaking to break down last quarter’s results for the analysts: Tell the truth or be quiet. If that puts you in a tough position if you are a CEO who breaks the law, then find a job that does not require you to regularly speak to the public.)
June 5, 2006 at 2:35 pm
Posted in: Legal Ethics
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Responses (1)
Ted McClure - June 5, 2006 at 6:48 pm
I suggest there are three legal issues.
Does this employer have a contractual obligation to defend its employees from criminal charges? I include obligations created by corporate governance documents under this heading. Often, corporate bylaws and executive employment contracts include terms obligating the corporation to defend those in certain positions acting on behalf of the corporation.
Does the employer have an agency obligation to defend its employees from criminal charges? This may vary from jurisdiction to jurisdiction, but if my memory serves me correctly an agent committing a crime is considered to have been on a “frolic or detour” even if purporting to act on behalf of the principal unless the principal subsequently ratifies the criminal act. If the corporation ratified the agent’s acts, then agency principles may require the principal to stand by its agent. (Probably not.)
Absent a contractual or agency obligation, where would an obligation to defend arise?
There is, however, a potential fiduciary issue. What are the expectations of the corporation’s other employees? If they see these defendants being cut loose for doing something they would have done in similar circumstances, destruction of morale may cripple the company more surely than government action. If I expected the corporation to stand by me if I pushed the envelope and got caught, and then the corporation failed to defend other hard chargers, I would be sending out resumes real fast. Were enough experience and energy to bail out, the loss of value to stockholders might be considered attributable to the decision to hang the accused employees out to dry. Boom – derivative suit.
In choosing between these two evils, thank goodness for the business judgment rule.
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