August 29, 2008
US v Stein: The Second Circuit Weighs In With a Terrible Opinion
The Second Circuit has affirmed, in a 3-0 decision, Judge Kaplan's dismissal of criminal indictments against 13 KPMG employees on the grounds that the Justice Department violated their right to counsel. Consider how hard the court had to stretch to make the ruling: 1) State Action? The government's prosecution guidelines in the Thompson memo induced a private actor to cap paying attorney's fees. 2) Causation? KPMG would have paid attorney fees if not for the government policy. 3) Sixth Amendment? a) It applies to pre-indictment payment of attorney fees (which were capped at $400,000 and conditioned on cooperation with the government and no persona indictment) if the payments would affect post-indictment selection of attorneys. b) It applies to a right to payment of attorney fees from a third party, KPMG, of millions even though the defendants themselves have net assets of between 1 and 4 million dollars. The Wall Street Journal editorial page, the defense bar, and company executives everywhere were delighted. Company executives can once again get free access to the corporate treasury to defend themselves from charges of severe mismanagement. There is no comment from an unrepresented public - the Justice Department can certainly say little critical of a Second Circuit decision.
Two comments: First one has to be careful to separate the policy debate -- should the government consider payment of attorney fees to executives in deciding whether to prosecute the company itself? -- from the constitutional argument. The first question is difficult, I am of two minds on it. The second question is not--there should be no constitutional violation if a company decides not to pay.
Consider the effect of the holding: The Second Circuit never talked about the corporate law behind KPMG's decision. It matters folks. A quick and dirty summary: Most companies reserve the option to pay attorney fees of employees under standards articulated in corporate codes and corporate law. Payments are business decisions and affirmative decisions required a finding of good faith on the part of the executives under investigation. Some companies bind themselves to pay "to the maximum extend allowed by law " ahead of time. This means only that any payment must be contingent on a board finding of "good faith" and the board agrees to make the decision at the time of payment. If the defendants win, companies must pay. If the defendants lose, company can pay based on a finding of good faith. Advancements of expenses must depend on a promise to repay if the board later cannot find good faith if the defendant loses. Judge Kaplan held that executives had an "expectation" and therefore a property right to attorneys fees unaffected by government action. This is bunk and the Second Circuit bought it -- hook, line and sinker. Now, after the opinion, any time a board decides not to pay attorney fees of executives under investigation, for whatever reasons -- based on business reasons (if the company has not pre-committed) or based on a finding of a lack of good faith -- it will create a sixth amendment defense (and potential exoneration with a required payment of fees!!!) if a government prosecutor smiles at or otherwise approves of the decision. What a mess!! Time after time judges in constitutional settings ignore the corporate rights that set up the constitutional analysis. KPMG is now required to pay all the attorney fees (millions of dollars to the most expensive attorneys in the country) of the 13 defendants -- they won!. One can only hope the Supreme Court will take this case and clean the mess up.
August 29, 2008 | Permalink
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The bigger problem is that the feds should have indicted KPMG, but cannot because shrinking the Big 4 to the Big 3 would be a huge problem.
Posted by: save_the_rustbelt | Aug 31, 2008 6:24:27 AM
100% agree. Fantastic analysis.
Posted by: DTH | Sep 8, 2008 9:18:42 PM