White Collar Crime Prof Blog

NACDL's 5th Annual Defending the White Collar Case Seminar - "Choppy Waters - The Ethics of Privilege and Disclosure," Thursday, October 1, 2009

Guest Blogger:  Peter D. Hardy, Post & Schell, P.C. (Philadelphia, PA)

Moderator:  Gerald B. Lefcourt

Panelists:  Robert Cary, Hon. Nancy Gertner, Prof. Bruce Green, Paul Shechtman, Larry Thompson 

Gerald Lefcourt noted that it has been over 46 years since the Brady decision was issued, yet we still have no firm definition of Brady that most federal prosecutors can follow.  There are varying and conflicting practices amongst prosecutors in regards to definitions and the proper time frame for disclosures.  Moreover, incidents of Brady violations or potential violations are not uncommon.

Robert Cary represented Senator Ted Stevens.  The heart of the defense was a note that Senator Stevens had sent to Bill Allen, the key government witness and the builder making improvements on the Senator’s chalet, which stated in part that the Senator wanted to make sure that Allen got fully paid, and that “friendship is one thing, but compliance with these ethics rules is another[.]”  The government responded to this note by eliciting testimony from Allen that the note was just the Senator trying to concoct a cover story.  After the guilty verdict, the second FBI agent on the case filed a self-described whistleblower complaint regarding conduct by the prosecution team.  The Court ordered the government to provide discovery regarding the complaint, and a new prosecution team was put in place.  New discovery contradicted directly the government’s theory and evidence at trial that Allen regarded the note as a mere cover story.  Carey described the Attorney General as a hero for moving to dismiss the case.  All of this happened only after a long trial and post-trial process (as well as Senator Stevens losing his re-election bid).  Judge Sullivan, who oversaw the case, is to be commended for being careful and not simply taking the government’s word.

So, what should be done?  Judge Gertner explained that the solution needs to involve the rules (ethical, court, and criminal procedure).  The case law has slid into an outcome-determinative approach, which makes it very hard for the prosecutor to predict.  The materiality standard is colliding with the harmless error doctrine.  Brady had more to do with a failure to turn over evidence impugning the system, rather than predictions regarding potential outcomes.  The definition of Brady should be re-assessed, and there also should be deadlines set for when information should be turned over:  for example, 28 days before.

Professor Green described how the ABA code of ethics set forth in the 1970s a discovery rule for prosecutors:  you must turn over information that would tend to negate the guilt of the accused.  Everyone had assumed that this rule overlapped with Brady.  But, the rule is not co-extensive with Brady – for example, it does not have a materiality standard.  Rather, it categorically requires the disclosure of favorable information, or information which might lead to favorable evidence.  A materiality test is really directed at post-conviction review, and is not well suited to govern the conduct of prosecutors at the time they are making their discovery decisions.  Defense attorneys also need to know about exculpatory information in order to assess a case and decide whether or not to proceed to trial.

Paul Shechtman described federal plea agreements in New York which require waivers by the defendant of either impeachment and/or all exculpatory information.  These plea waivers apparently run afoul of the rules just described by Professor Green.  Current cases strongly suggest that prosecutors need more education regarding their obligations under Brady, in order to be better able to appreciate the exculpatory value of evidence.  We need to reassess Brady, which has been hijacked by the materiality doctrine.  The burden now is on the defendant to show materiality.  In Brady, Justice Marshall wrote in dissent that the test instead should be harmless error, in which the government has the burden to show that the conviction should not be reversed.  The materiality requirement invites courts to preserve convictions, despite poor decisions and poor decision-making processes by prosecutors.

Larry Thompson described a case in Detroit in which the prosecutor made false statements to the Court, and actually was prosecuted himself.  Judge Gertner noted that part of the problem here is lack of meaningful remedies.  There is professional discipline, but discipline is unlikely.

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Verdicts in KPMG Related Case

The KPMG related case has had a history like none other (for background see here).  Although nineteen individuals were initially accused, Hon. Lewis Kaplan issued an opinion that dismissed many because of government conduct that placed pressure on the company to withhold payment of attorney fees for employees charged with criminal conduct, when the company's past practice was to pay these fees. This decision was upheld by the Second Circuit Court of Appeals (see here). Two defendants had initially plead guilty, which left four for trial.  The trial of these four individuals has now concluded and press reports on the verdicts are below:

See Ashby Jones, WSJ, Breaking: Jury Convicts Two Ex-KPMGers, One Lawyer on Tax Charges; Mark Hamblett, NYL.J., Former Attorney, Two Others Convicted of KPMG Tax Shelter Charges; Lynnley Browning, NYTimes, 3 Convicted in KPMG Tax Shelter Case.

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Addendum - Martha Graybow, Reuters, Guardian UK - U.S. jury convicts three in tax shelter trial

The Other Four in the Stein-KPMG Related Case

Defendants are not always successful in KPMG related cases before Judge Kaplan.  The four remaining defendants in the case found that out this past week when their claims of due process violations were denied.

The issue is a fascinating one, and one previously seen in cases such as Scrushy and Stringer - the sharing of information in a parallel proceeding. The court held that "[i]t is well-established that as a general rule, '[t]he prosecution may use evidence acquired in a civil action in a subsequent criminal proceeding unless the defendant demonstrates that such use would violate his constitutional rights or depart from the proper administration of criminal justice.'"

In denying the defense motion to dismiss the case, the court held that a reliance on other cases was "misplaced" in that in each of the cases cited by the defense, "the court emphasized that (1) there was no bona fide civil investigation, and (2) the defendant was deceived by the government during the civil investigation." With "no such allegations in this case" the court denied the defense motion to dismiss.

Memorandum and Order - Download 20080910_order_re_6103_tj252.pdf

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What Others Are Saying About the Stein (KPMG Related) Decision

The decision is here.

Commentary can be found here.

What others are saying:

Anthony Lin, New York Law Journal, 2nd Circuit Affirms Dismissal of Criminal Charges Against KPMG Staffers

Dan Slater, WSJ Blog, 2nd Circuit Upholds Judge Kaplan’s Dismissal of KPMG Indictments

New York Times (AP), Court Upholds Dismissal of Tax Case Against 13

Doug Berman, Sentencing Law & Policy, here

Christine Hurt, Conglomerate, here

Martha Graybow, Reuters, Court upholds dismissal of charges in KPMG case

Richard Janus, CATO, Deputizing Company Counsel as Agents of the Federal Government

Second Circuit Blog, Gimme Shelter

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Commentary on Stein (KPMG)

Chief Judge Jacobs of the Second Circuit authored the 68 page opinion that affirms Judge Kaplan's prior ruling (see here and here) in the KPMG related matter.  The lower court had dismissed the defendants' indictments.  In affirming the lower court opinion, the Second Circuit states -

"We hold that KPMG’s adoption and enforcement of a policy under which it conditioned, capped and ultimately ceased advancing legal fees to defendants followed as a direct consequence of the government’s overwhelming influence, and that KPMG’s conduct therefore amounted to state action. We further hold that the government thus unjustifiably interfered with defendants’ relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment, and that the government did not cure the violation. Because no other remedy will return defendants to the status quo ante, we affirm the dismissal of the indictment as to all thirteen defendants." (footnotes omitted)

The Second Circuit stated that the Sixth Amendment right to counsel held that the amendment "protects against unjustified governmental interference with the right to defend oneself using whatever assets one has or might reasonably and lawfully obtain."  The court noted that-

"Defendants were indicted based on a fairly novel theory of criminal liability; they faced substantial penalties; the relevant facts are scattered throughout over 22 million documents regarding the doings of scores of people,; the subject matter is "extremely complex,"; technical expertise is needed to figure out and explain what happened; and trial was expected to last between six and eight months, As Judge Kaplan found, these defendants "have been forced to limit their defenses . . . for economic reasons and . . . they would not have been so constrained if KPMG paid their expenses." We therefore hold that these defendants were also deprived of their right to counsel under the Sixth Amendment. (citations and footnote omitted)

The best line from the case - "But if it is in the government’s interest that every defendant receive the best possible representation, it cannot also be in the government’s interest to leave defendants naked to their enemies."

The government did not lose this case, as some might say.  In fact, they won.  When justice is done for all, as is reflected in this opinion -- the prosecution, defense, and society wins. 

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Second Circuit Affirms in Stein (KPMG) Case

Opinion - Download 07-3042-cr_opn.pdf

Commentary to follow

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KPMG (Stein) Case Argued in the Second Circuit

The Second Circuit Court of Appeals heard oral arguments on the KPMG related case (Stein).  Amir Efrati of the Wall Street Journal provides a detailed description of this hearing in an article titled KPMG Prosecutors Come Under Scrutiny.  For some of the background, briefs, and more see the entries in this index here and the government's brief can be found here.

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New KPMG Related Indictment

The former KPMG partner is charged with "participating in a conspiracy to defraud the IRS by [allegedly] concealing fee income received by [the accused] and his co-conspirators from tax shelter transactions."  He is "also charged for [allegedly] conspiring to defraud a company located in Saipan .... of the right to the honest services of its employees, by sharing tax shelter fee income with officers of that company who failed to disclose those secret payments to the Saipan Company's Board of Directors."

This individual, according to the government, "is currently awaiting trial before Judge Lewis A. Kaplan on charges relating to other tax shelters not at issue in today's indictment."

Some questions that are likely to arise are: Why is the government filing a separate action when there already is a case pending against this defendant? Did the prosecutors know of this alleged activity at the time of the filing of the initial charges, and only chose to file this action now in order to secure a prosecutorial advantage? Is this a case of the government trying to separate the accused from others charged with him, so that the government receives the benefit of moving ahead on trial on this individual alone?  Is this a situation of the government hoping to convict the individual so that he can be offered immunity and forced to testify against other actors?  There are clearly a good number of unanswered questions here, and one has to think that motions made by defense counsel will bring to light some of the answers to these questions.  For more see Business Week here.

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Indictment of KPMG Related Individual

An indictment was issued today to a former "partner or 'member' of the accounting firm KPMG."  More details will follow, but for now, the Indictment and forfeiture claim are below.

Indictment - Download pfaff_indictment.pdf

Forfeiture - Download pfaff_civil_forfeiture_complaint.pdf

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Reply Brief in KPMG Related Case

We have seen the different briefs filed by the parties in the government's appeal of the dismissal of charges against the thirteen former KPMG partners and employees by U.S. District Judge Lewis Kaplan.  There was the government's initial brief here, followed by several briefs of the appellees (here, here, here, here, and here) and some amici briefs (here).  Now filed is the government's reply brief - a brief that totals 70 pages.  The following is an outline of the arguments:

POINT I—The Government Cured Any Sixth Amendment Violation

A. The Government Did Not Waive The Cure Argument

B. Dismissal Was Not The Most Narrowly- Tailored Remedy To Address Any Sixth Amendment Violation

POINT II—KPMG’s Decision Not To Pay The Defendants’ Attorneys Fees Was Not State Action

A. The Government Did Not Waive The State Action And Coercion Arguments

B. The State Action Doctrine Applies To The Defendants’ Claims

C. KPMG’s Decision Cannot Be Imputed To The Government

1. The Government Did Not Compel KPMG Not To Pay Fees

2. The Government Did Not Significantly Encourage KPMG’s Decision

3. The Government Did Not Participate In KPMG’s Decisionmaking Or Become Entwined In KPMG’s Management

POINT III—KPMG’s Decision To Terminate Fee Payments For Indicted Defendants Did Not Violate The Sixth Amendment

A. Standard Of Review

B. Discussion

1 . Caplin & Drysdale Controls This Issue

2. The Defendants’ Restatement Of Their Argument And Recitation Of Unrelated Sixth Amendment Authorities Do Not Change The Result

3. The Government Did Not Violate The Right To Counsel Of Choice

POINT IV—The Government Did Not Violate The Defendants’ Due Process Rights

A. The Defendants’ Claim Arises Under The Sixth Amendment And Is Barred By Graham

B. The Defendants’ Claim Does Not Implicate Fundamental Right

C. The Government’s Conduct Did Not “Shock The Conscience”

POINT V—The District Court’s Dismissal Of The Indictment Cannot Be Sustained Under The Federal

Courts’ Supervisory Powers

CONCLUSION

The Reply Brief -  Download 073042cr_u.S. v. Stein Reply Brief.pdf

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Onto the Amici Briefs in the KPMG case

After a long list of briefs by many of the individuals in the KPMG related matter, things are now turning to the briefs of the amici.  We have three to report on here:

1) Brief of Amici Former Attorney General and U.S. Attorneys in Support of Affirmance.

Clearly this is an extremely strong brief.   Having Walter Dellinger as counsel of record and names like --Dick Thornburgh, Edwin Meese III, William Weld, and Stuart Gerson -- as some of the amici, certainly doesn't hurt.  This brief is also powerful in its content.  A sampling of the brief can be seen in this passage below:

"First, based on their experience in the Department, amici believe the prosecutors’ conduct in this case, in addition to violating the Fifth and Sixth Amendments of the Constitution, was inconsistent with the high standards of conduct that should be expected of lawyers at the DOJ. Department lawyers of course should not use tactics that deprive defendants of their constitutional rights. Nor should they seek to gain litigation advantage by attempting to undermine a defendant’s legal representation."

The amici show their disagreement with DOJ's tactic here:

"the tactics at issue in this case, in addition to being inappropriate, are wholly unnecessary to the prosecution of corporate crime."

See Brief here -

Download 20080123_former_ag_amici_brief_tj252.pdf

2) Brief of the Washington Legal Foundation.

If anyone had any question as to whether an alleged error here might have been harmless, they need only read this brief. The brief advocates for the dismissal granted in this case.

See Brief here -

Download 20080123_wlf_amicus_brief_tj252.pdf

3) Brief of the Securities Industry & Financial Markets Association -

This brief was submitted "to address the principles supporting the common practice of companies advancing attorneys' fees to their officers, directors, and employees."

See Brief here -

Download 073042cr_usa_v. Stein, et.pdf

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Yet another Brief in the KPMG Case

We have been collecting the briefs in the KPMG related case - Stein, et. al. see here, here, and here, and now have a new one to add to the collection.  The brief of Appellee Ritchee is one of the longer separate briefs, although like the others it joins the main brief on many of the arguments.  This brief focuses on the appellee's "Sixth Amendment right to be represented by counsel of his choice."  Appellee states that "[c]ontrary to the government’s argument, the validity of the district court’s ruling does not turn on whether the government 'coerced' KPMG’s decision. The district court found that the USAO deliberately caused the deprivation of Ritchie’s constitutional right."

This brief also refutes the government use of forfeiture literature to support its position.  The appellee response here is:

"Finally, the government’s reliance on Supreme Court forfeiture decisions for the proposition that the USAO may lawfully block funding that would otherwise be available to the defense is misplaced. The forfeiture cases are inapposite. Those decisions hold only that a criminal defendant has no Sixth Amendment right to use forfeitable assets — that is, property that belongs to the government — to fund his defense. The forfeiture cases do not hold that the government may obstruct a defendant’s access to lawfully available resources; and other cases make clear that such interference with the freedom to retain counsel of one’s choice violates the Sixth Amendment."

But perhaps the most ironic aspect of the brief is found near the beginning when the appellee argues waiver by the government.  One so often finds the government claiming that defense counsel has waived an issue on appeal by failing to properly preserve the issue or properly present it in the opening brief.  With the tables turned in this case - and the government being on the defensive - it will be fascinating to see how the government handles a claim of waiver when they are in the shoes of an appellant, a position the government seldom holds on appeal.  The waiver claim is:

"The government does not directly challenge the district court’s finding that the USAO violated Ritchie’s Sixth Amendment rights by depriving him of the ability to proceed with counsel of his choice. Indeed, the government’s brief scarcely mentions that ground for dismissal. Issues not sufficiently argued in an appellant’s opening brief are deemed waived."

Download ritchie_final_brief_11108.pdf

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Another Brief in the KPMG Appeal

We've been collecting the briefs in the government's appeal of the dismissal of charges against the thirteen former KPMG partners and employees by U.S. District Judge Lewis Kaplan.  Below is the appellee brief filed on behalf of Larry DeLap (tax partner), Steven Gremminger (associate general counsel), Carol Warley (tax partner), and Philip Wiesner (tax partner).  Similar to the briefs of the other appellees in the case, they argue that the government overstepped its bounds when it pressured KPMG into not paying the attorney's fees for former employees and partners:

The essential question here is whether the government could constitutionally use the threat of indictment to prevent one of the nation’s largest accounting firms from paying the legal fees of several of its professional employees, not because there would have been anything improper about the payment of the fees but simply because it served the government’s purposes to reduce or eliminate the ability of those employees to retain independent counsel and to defend themselves. The net effect of the prosecution’s conduct was to deprive the 13 defendant-appellees of their ability to defend against their indictment in what is claimed to be the largest tax fraud prosecution in the nation’s history.

The case for these four will be argued by John S. Martin, Jr., former U.S. Attorney for the Southern District of New York (he was Rudy Giuliani's predecessor) and former U.S. District Court Judge for thirteen years before leaving the bench in 2003 to set up shop with another former U.S. Attorney, Otto Obermaier.  The heavy hitters are appearing in this case, which pretty much guarantees the Second Circuit will have the best legal arguments available in deciding the case. (ph)

Download us_v_stein_appelle_brief_delap_et_al_jan_11_2007.pdf

Another Brief of An Appellee in the KPMG Related Case

In this post  one finds the main brief of appellees and the Hastings appellee brief in the Stein, et. al. case.  These briefs support the court's dismissal of the government's case against individual defendant's related to KPMG. Below is the brief of appellee Eischeid.  This appellee presents specific facts in support of a claim against the government's conduct in securing cooperation to the detriment of this appellee. Appellee states, "[t]he Government's conduct in this case is, and has been 'conscience-shocking,' downright dishonest and mean-spirited." 

Brief of Eischeid - 

Download 20904_arkin.pdf

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KPMG - Appellee Brief Filed

The Appellee Brief in Jeffrey Stein et. al. - the KPMG related case - was filed late this past week. And as anticipated by the fact that the appellees requested that the court permit them to file an oversized brief of 25,690 words -- it's long.  The filed brief comes in at 25,604 words, which is slightly less than the 25,690 words filed by the government (see here). 

The opening words of this brief capture the essence of the argument - "may prosecutors, without justification, deprive a criminal defendant of funds that otherwise would lawfully be available for his defense?"  At the heart of this case are alleged violations of the Fifth and Sixth Amendments. The brief notes that KPMG for 30 years had "an unbroken practice of advancing, and indemnifying employees against, legal fees incurred in defending actions arising out of their employment."  That practice was not followed in this case with questions raised about the prosecutor's use of the Thompson Memo.

The Brief of Appellees questions the deprivation of attorney fee funds for these defendants, with the issues presented as to whether there was a Sixth Amendment deprivation of the right to the assistance of counsel and a Fifth Amendment right to due process.  Claimed here is that the government "interfer[ed] with the criminal defendants’ access to resources that would otherwise be lawfully available to finance their defense." 

When the government starts interfering with the accused's right to secure legal counsel, it is a serious deprivation. An individual brief is filed by one appellee to emphasize the unique circumstances in his case - the deprivation of counsel of choice. The predicament this individual was placed in by being told that his failure to cooperate with the government would cause legal fees to cease stresses the importance of what is before the appellate tribunal.   

Many of the issues raised in this case were resolved by the trial court, as they are factual issues.  This is important as the trial court's factual findings have a strong chance of being adhered to by the appellate tribunal. One issue that presents discussion is whether the appropriate remedy for a violation is dismissal.

And yes,  it was good to see a reference to my co-blogger, Peter Henning's 2005 law review article, Targeting Legal Advice, 54 Am. U. L. Rev. 669 in the main brief.

Brief of Appellees - Download us_v_stein_defense_reply_bried_jan_11_2008.pdf

Brief of Hastings - Download hasting_brief_11108.pdf

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