U.S. v. Stein, __ F.3d __, 2008 WL 3982104 (2nd Cir. 2008)

Brief Summary
The Second Circuit dismissed the indictments of several KPMG employees because federal prosecutors had interfered with KPMG’s practice of paying employee legal fees, thereby violating the Sixth Amendment right to counsel.

Complete Summary
In February 2004 KPMG learned that several of its employees were subjects of a grand jury investigation. The firm’s CEO announced that KPMG would pay for counsel to represent any present or former employees who were asked to appear. Paying employees’ legal fees was common practice at KPMG. Nevertheless, during a meeting with KPMG’s own counsel, two Assistant United States Attorneys made clear that KPMG’s payment of such legal fees would be a factor in assessing whether the firm itself would be indicted. The prosecutors cited a Department of Justice memorandum that mentioned advancing attorney fees to employees as a factor to be considered in the Department’s discretion in prosecuting business organizations.

Due to pressure from the U.S. attorneys, KPMG’s policy of paying attorney fees became weighted down by contingencies. Employees were required not to invoke the Fifth Amendment privilege against self-incrimination. KPMG also capped the total attorney fees it would pay and resolved to cease payment when an employee was indicted. The prosecutors also encouraged KPMG to advise its employees that they could deal with the government without counsel, and KPMG complied. Once the investigation was fully under way, the prosecutors began informing KPMG’s counsel when employees were not sufficiently cooperative, and KPMG adopted a policy of discouraging such non-cooperation by threatening to cease payment of legal fees or terminate the employees.

In August 2005, KPMG entered a deferred prosecution agreement, thereby admitting extensive wrongdoing and paying a $456 million fine. On that same day, six KPMG employees were indicted. These employees (and others who were later indicted) subsequently moved to dismiss the indictment based on the government’s interference with KPMG’s payment of attorney fees. In response, the prosecution stated in court that KPMG was free to advance attorney fees. The district court nevertheless held that the prosecutors’ actions violated the fundamental right to fairness in the criminal process implicit in the Fifth Amendment as well as the Sixth Amendment right to counsel. The district court dismissed the indictments and the United States appealed.

The Second Circuit upheld dismissal of the indictments under the Sixth Amendment. The court reached this holding after assessing (1) the trial court’s factual findings, (2) whether the government had cured any purported Sixth Amendment violation by telling the court that KPMG was free to advance fees, (3) whether, in context, KPMG’s fee policy amounted to state action, and (4) whether the prosecutors’ conduct violated the Sixth Amendment.

The government argued that the trial court had erred in finding that but for the prosecutors’ conduct, KPMG would unconditionally have advanced legal fees. The Second Circuit held that the trial court’s findings were not clearly erroneous because substantial evidence weighed in favor of this finding—most notably KPMG’s longstanding practice of paying such fees.

The government further argued that any purported Sixth Amendment violation could be cured by allowing KPMG to recommence payment of attorneys fees rather than by dismissing the indictments, which should be a remedy of last resort. The Second Circuit held that due to the lingering effects of the prosecutors’ coercive conduct, as well as KPMG’s $456 million fine, the firm would not likely be as willing to pay attorneys fees as it would have been absent such circumstances. Therefore dismissal of the indictments was the only feasible remedy.

The court next addressed whether the adoption of KPMG’s fee policy amounted to state action. The court held that “KPMG’s adoption and enforcement of the Fees Policy amounted to state action because KPMG operated as a willful participant in joint activity with the government, and because the [prosecutors] significantly encouraged KPMG to withhold legal fees from defendants upon indictment.” Id. at *13 (internal quotations omitted). The court focused particularly on the fact that KPMG was not free to define “cooperation,” but instead was forced to rely on the prosecutors’ definition. The court also addressed how KPMG could be considered the government’s agent despite the apparent adversity between the two sides, noting: “The threat of [ruinous indictment] brings significant pressure to bear on corporations, and that threat ‘provides a sufficient nexus’ between a private entity’s employment decision at the government’s behest and the government itself.” Id. at *16 (alteration in original) (citing Lisa Kern Griffin, Compelled Cooperation and the New Corporate Criminal Procedure, 82 N.Y.U. L. Rev. 311, 367 (2007)).

The court also addressed the government’s Sixth Amendment violation. The court first noted that because KPMG employees reasonably expected to receive legal fees from their employer, such fees constituted the employees’ own money for Sixth Amendment purposes. Therefore the prosecutors’ conduct infringed the fundamental right to use one’s own funds to secure counsel of one’s choice, a right protected by the Sixth Amendment.

The court further noted that, although most of the prosecutors’ conduct occurred pre-indictment and the Sixth Amendment doesn’t attach until indictment, it was proper to consider the government’s pre-indictment actions in finding a Sixth Amendment violation. The court reached this conclusion because the government’s pre-indictment conduct was targeted at achieving a post-indictment result--namely forcing KPMG to cut off payment of attorneys fees. Lastly the court held that a Sixth Amendment violation need not involve proof of actual prejudice to a client. Thus, even the employees who were able to afford the same counsel after KPMG ceased paying fees suffered a violation of the Sixth Amendment. This holding was influenced by the fact that such employees, once dropped by KPMG, were nonetheless forced to limit the scope of their representation for economic reasons.

Significance of Opinion
The Second Circuit’s decision has broad policy implications. Whether or not the indictment of KPMG’s employees was valid, the government must limit the exercise of its extraordinary and sometimes highly coercive powers.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.

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