Constitutional Law

Appeals Court Upholds Dismissal of KPMG Indictments Due to Prosecutor Tactics

  •  
  •  
  •  
  • Print

Updated: A federal appeals court has upheld a judge’s dismissal of indictments against 13 accounting firm employees because the government pressured their employer to cut off their legal fees.

The 2nd U.S. Circuit Court of Appeals ruled today that prosecutors had violated the employees’ Sixth Amendment right to counsel by causing accounting firm KPMG to condition payment of fees on cooperation and then to end the fees upon their indictment.

U.S. District Judge Lewis Kaplan of New York had ruled last year that the employees’ constitutional rights were violated because of federal prosecutors’ actions. He found that, absent pressure from the government, KPMG would have paid the defendants’ legal fees and expenses, and dismissal was the only way to remedy the constitutional violation.

The Wall Street Journal Law Blog posted the decision and news of the outcome. It comes on the same day that the Justice Department announced new guidelines for prosecutors that will ease pressure on corporations to quit paying employees’ legal fees and waive attorney-client privilege.

The KPMG employees had been indicted in a tax shelter fraud case. Prosecutors who exerted pressure over fees were guided by the so-called Thompson memorandum issued by the Justice Department in 2003, the court said. The guidelines allowed prosecutors to treat companies more leniently if they cooperate, and allowed them to consider whether the companies are paying attorney fees of employees in assessing cooperation.

After the KPMG prosecution the Justice Department revised its guidelines in the new McNulty memorandum. It said prosecutors may consider advancement of fees only if the circumstances indicate it is intended to impede a criminal investigation, and only with the approval of the deputy attorney general. But critics said the memo didn’t go far enough and legislation was introduced to override it.

The new policy announced today will judge cooperation by the extent that companies disclose relevant information to the government rather than by waiver of attorney-client privilege or a cut off of legal fees.

Updated throughout the morning to add details from the opinion and at 1 p.m. to reflect that the Justice Department has unveiled its new prosecutor guidelines.

Give us feedback, share a story tip or update, or report an error.