The Wall Street Journal has an interesting article (here) about the competition between the U.S. Attorney’s Offices for the Southern and Eastern Districts of New York, aka Manhattan and Brooklyn. Much like the Dodgers of days gone by, the EDNY has been viewed as the second-string team as compared to the SDNY, which some claim means "Sovereign District of New York" for its impervious manner. Brooklyn has come on lately in the options-timing investigations, nearly matching Manhattan for the number of investigations of companies for possible back-dating and filing the second criminal case against a CEO (Kobi Alexander of Comverse Technology). Lost in the shuffle of what the WSJ Law Blog (here) terms the "Legal Subway Series" is the fact that other offices have been equally aggressive in pursuing options-timing cases, such as the Northern District of California, which covers Silicon Valley, and the District of Massachusetts, which is also a leader in health care fraud cases involving medical device and pharmaceutical companies. Not to be left out are the cousins across the Hudson River in New Jersey, which knocked out the CEO of Bristol-Myers Squibb with the equivalent of a glare. As discussed in an earlier post (here), the Department of Justice has formed a Procurement Fraud Task Force, which likely will involve cases with far higher dollar figures than most of the securities fraud cases. From the New Yorker point of view, of course, those other districts hardly exist, and Main Justice is there to be ignored. Does any of this strike one as a bit unseemly? (ph)
Category: Prosecutors
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KPMG signed a deferred prosecution agreement with the government that called for cooperation. In the Stein case (as discussed here, here, here and here) the court held that the Thompson Memo discouraged corporations from adhering to their practice of paying employee attorney fees. Since that decision, KPMG has joined sides with the government in saying it will appeal the court’s decision and even filed seeking compensation against some of the defendants in that case. (See NYTimes here).
It is not surprising to see KPMG fighting alongside the government. For one, they benefited enormously from the deferred prosecution agreement as a prosecution could have been devastating to the company. One need only look at the Arthur Andersen situation to see the ramifications of an indictment. Even though the Andersen conviction was overturned by the Supreme Court, the indictment caused the company to fall.
In the KPMG case there is even a greater reason for the company to side with the government. Paragraph 21 of the deferred prosecution agreement states:
"KPMG has been involved in an engagement to audit the Department of Justice’s financial statements. The Department of Justice’s debarring official has determined that KPMG is currently a responsible contractor. The debarring official has determined that suspension or debarment of KPMG is not warranted because KPMG has agreed to the terms of this Deferred Prosecution Agreement, in which, among other things, KPMG has admitted its involvement in unlawful conduct and has agreed to take steps to ensure that KPMG, it leadership, partners, personnel, and clients will adhere to the highest standards of ethics and compliance with the United States tax laws." (emphasis added)
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After yesterday’s hearing on the Thompson Memo and its inclusion of a waiver provision, waiving the attorney-client privilege, today brings a subcommittee hearing on the "Challenges Facing Today’s Federal Prosecutors" (see here). The witnesses lined up to appear today are:
Mike Battle
Director
Executive Office of U.S. Attorneys
United States Department of Justice
Washington, DCSusan Brooks
U.S. Attorney
Southern District of Indiana
United States Department of Justice
Washington, DCWilliam Shockley
Former President
National Association of Assistant U.S. Attorneys
Lake Ridge, VA(esp) 
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As discussed in an earlier post (here), the Department of Justice has sent a proposed bill to Congress seeking to avoid the effect of the abatement doctrine that would otherwise remove the indictment and conviction of Ken Lay from the record because he died before his first appeal was completed. If adopted, and assuming it is constitutional, the proposed law would permit prosecutors to rely on the jury’s verdict in seeking forfeiture of Lay’s assets. As the Houston Chronicle reports (here), to this point the bill does not have a sponsor, which is necessary for it to move forward in Congress. In a fine show of political conviction, Houston-area Congressman Gene Green stated, "I have dozens of people who have lost all their life savings when they invested in 401(k)s in Enron . . . I don’t like Congress to react to just one case, but in this case, because it is in the Houston area, I would vote for it and support it." No word yet whether Rep. Green will sponsor the legislation, although a lone Democrat on a bill is not a strong signal that it will pass quickly. (ph)
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An earlier post (here) discusses the settlement between federal prosecutors and Schering-Plough related to Medicare and Medicaid fraud in the pricing of certain drugs produced by the company and possible kickbacks paid to doctors. Rather than enter a deferred prosecution agreement, which is more the norm these days, a subsidiary, Schering Sales Corporation, entered a guilty plea to conspiracy to make a false statement to the FDA and will be barred from participating in federal health care programs, a virtual death penalty for a drug provider. While that sounds like a rather draconian collateral consequence from the conviction, I think looks are a bit deceiving here. Only the subsidiary entered the guilty plea, not the parent, and so only Schering Sales will "suffer" the debarment from federal programs. A Wall Street Journal story (here) quotes a spokesman for Schering-Plough stating that the subsidiary "is an entity whose sole purpose is to plead guilty in these matters" — a good thing to have lying around in case you get in trouble, just throw a subsidiary on to the fire. If that’s the case, and Schering-Plough can forge ahead by creating a new sub — a remarkably easy process that can be done in a few minutes over the Internet — to take over Schering Sales’ functions, then the guilty plea and program bar are much less than they appear.
While the government gets to count the guilty plea when it compiles statistics regarding corporate and health care prosecutions, and can tout the bar as proof that it will take drastic action against offenders, Schering-Plough is largely unaffected by settlement, except of course for paying out $435 million, including $180 million as a criminal fine. The fine doesn’t help the bottom line, but then that seems to be the least of the company’s worries because its press release noted that it had already set up a reserve for the costs of the settlement. At the end of basketball games when one team is way ahead, some players will take advantage of "garbage time" to pad their stats. Is the government doing the same thing here, making the settlement with Schering-Plough look tougher than it really is? (ph)
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Perhaps emboldened by recent decisions by Judge Kaplan in the KPMG tax shelter prosecution (U.S. v. Stein), the American Bar Association adopted the Report (here) issued by its Task Force on Attorney-Client Privilege that urges the Department of Justice to disavow certain practices related to the determination of whether to charge a corporation with a crime. The Task Force earlier recommended that the Thompson Memo, which sets forth the Department’s basic principles on charging corporations, be amended to eliminate a provision encouraging corporations to waive their attorney-client privilege and work product protections as a sign of the company’s cooperation. The new Report argues that commentary in the Thompson Memo on the payment of attorney’s fees, joint defense agreements, and terminating uncooperative employees is improper and undermines the rights of employees. The Task Force makes four recommendations (text here):
(1) that the organization provided counsel to an employee or agreed to pay an employee’s legal fees and expenses;
(2) that the organization entered into or continues to operate under a joint defense, information sharing and common interest agreement with an employee or other represented party with whom the organization believes it has a common interest in defending against the investigation;
(3) that the organization shared its records or other historical information relating to the matter under investigation with an employee or other represented party; or
(4) that the organization chose to retain or otherwise declined to sanction an employee who exercised his or her Fifth Amendment right against self-incrimination in response to a government request for an interview, testimony, or other information.
None of these issues relate directly to the attorney-client privilege and waiver issues, and perhaps the Task Force should be renamed the Corporate Prosecution Principles Group.
I find the fourth recommendation interesting. If an employee states that he/she will assert the Fifth Amendment in response to an interview request, that is at least some indication of potential wrongdoing, even if the assertion is protective and not a reflection of a view that actual criminal conduct occurred. As an employer, would you continue to employ a person who refused to testify or make a statement because of the potential to incriminate that person, and in many instances the company? Especially if the person is a senior executive, there are serious issues regarding whether a corporation is well-served by having the person remain in office under such a cloud. An assertion of the Fifth Amendment does not mean the person did anything illegal, but it raises a red flag, and a company that professes to be cooperative while retaining the employee/executive in a position of authority is not a very good sign because the government will have legitimate concerns about the integrity of business records and the propriety of transactions. While the first three recommendations by the ABA Task Force do not strike me as particularly controversial, at least if one accepts the proposition that hiring a lawyer is an acceptable response to a government investigation, but the fourth may be a bit far afield. (ph)
On most items, co-blogger Peter Henning and I agree, but this is one time we don’t. So in response to his comment above on the 4th item of the ABA Memo, I would note that I agree with what the ABA has issued, and would respond to Professor Henning with:
1. An assertion of the Fifth Amendment should never be interpreted as an indication of guilt here, especially in a business context where the lines between what are legal and illegal are oftentimes vague.
2. The Fifth Amendment may be taken on a temporary basis until there is an assurance of immunity, even when there has been no criminally culpable conduct. Attorneys usually request immunity for clients, even those that are mere witnesses.
3. A company may have invested time and education into an individual, do they want to throw this all away without knowing first that the person might really have committed criminal acts, or have more commonly been around criminal acts that they failed to report.
4.Is this not pitting the individual and company against each other, and is this really good for the shareholders who have invested in this company?
5. I thought we lived in a country that is founded on "innocent until proven guilty" and that a person should not be compelled to testify against themselves. If you lose your job because of maintaining that innocence and asserting constitutional rights that accompany that innocence are we losing sight of the basic principles that founded this country? More importantly, when the Government is the one asking or giving a benefit to a company that discards the rights of the individual, the power of the government is entering into private contractual arrangements in the employer-employee context, and most importantly interfering with an individual’s constitutional rights. (Note- this latter point is not in reponse to what is stated by Professor Peter Henning, as I know we both agree on these principles).
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The Stein case (KPMG related) has been a subject of a good number of posts on this blog. (e.g., here and here). Here is one to add to this collection, as Joan Rogers has an extremely thorough and thoughtful article in the ABA/BNA Lawyers’ Manual on Professional Conduct. The ABA and BNA have been kind enough to allow this blog to provide direct access to this article. (Download PDFArtic.pdf)
The article dissects Hon. Lewis Kaplan’s decision and provides extensive commentary on the decision. It also places it in context with happenings on this issue in the ABA and the New York State Bar Association.
The Wall Street Jrl reports here of other happenings on this case.
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Do prosecutors need a Gideon-like decision to assist them in obtaining more funding for government prosecutions? Or has DOJ mismanaged money resulting in a shortfall?
Irrespective of why the money to prosecute is low, it is certain that two representatives Henry Waxman and John Conyors Jr. have had enough of the situation. In a letter dated July 24, 2006 to AG Alberto Gonzales, asking for some answers, they state in part:
" We are writing to express our concern that U.S. Attorney offices across the nation are suffering from staffing shortages and lack of funds. The consequences appear to be severe. According to Assistant U.S. Attorneys, the lack of staff and resources force federal prosecutors to forego prosecutions in some important cases and to reach plea bargains in others. In some offices, there are shortages of even basic office supplies, like binder clips and envelopes."
But the letter also notes that:
"According to budget information from the Department of Justice, appropriations for the U.S. Attorneys account have increased from $1.349 billion in fiscal year 2001 to $1.588 billion in fiscal 2006. This is an increase of 15%, representing an increase in real dollars even after inflation is taken into account. The disparity between increased funding for U.S. Attorneys overall and drastic shortages in staff and supplies in individual offices raises questions about Justice Department management."
And what about all the money obtained from forfeitures, especially the enormous amounts paid in the recent white collar crime prosecutions? You mean it doesn’t go to them? (See Washington Post here)
So how do we handle this – a special prosecutor to investigate possible fraud and abuse at DOJ? a deferred prosecution agreement with DOJ requiring them to waive the attorney-client privilege so that someone can go after individuals in the "company"? does DOJ have an "effective" corporate compliance program? perhaps Congress needs to step in to investigate this situation? The bottom line is that when U.S. Attorneys force "indigent defendants to pay for access to potentially exculpatory evidence," this is unacceptable.
Letter – Download usao_ltr_final.pdf
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Assistant United States Attorneys have come in for criticism in two recent opinions regarding the veracity of their statements to courts. In United States v. Stein, the prosecution of 16 former KPMG partners and employees, U.S. District Judge Lewis Kaplan criticized the government’s assertions regarding pressure it put on KPMG to cut off attorney’s fee payments for the defendants despite a long-standing firm policy to pay such expenses. In addition to finding the application of the Department of Justice’s Thompson Memo resulted in a constitutional violation, Judge Kaplan also noted that the prosecutors were "economical with the truth" in their filings and testimony. While not calling them liars, the judge clearly implied that their statements were not fully truthful and misleading in several places.
U.S. Attorney Michael Garcia responded by sending a letter to the court (available below), dated only four days after the opinion, asking the court to withdraw the statement regarding being "economical with the truth," change the characterization of the testimony of prosecutors, and withdraw references to the prosecutors by name. Garcia’s letter states, "The Government’s stance in connection with this matter was an Office position, and the Government’s submissions were approved by layers of supervisors. If the Court continues to find fault with those submissions, the fault should not be attributed to individual prosecutors." That raises an interesting question about the responsibility of individual lawyers for statements made on behalf of the government. The professional responsibility rules govern individual lawyers, not law firms or government offices, and while a submission on behalf of the United States is not that of an individual lawyer, there are people behind the statements. Should judges avoid naming names when they observe misconduct? Garcia’s letter raises fair questions about Judge Kaplan’s interpretation of the evidence, but that is more appropriately advanced in a motion for reconsideration. The question of keeping a prosecutor’s name out of a judicial opinion, if the person is found to have been "economical with the truth," is a much tougher one, I think, because if only "the Office" is responsible then perhaps no one really is held accountable.
In United States v. Clark (here), Ninth Circuit Judge Alex Kozinski wrote a concurring opinion asserting that the AUSA arguing the case tried to mislead the court about record support for a judicial finding relevant to a sentencing enhancement. While the majority held that the lawyer’s reference to a sentence fragment in the record was not intended to be misleading and could be interpreted as supporting the goverment’s argument, Judge Kozinski found otherwise, stating:
I don’t believe that quoting portions of a sentence while leaving out key qualifiers is reasonable conduct for an attorney of this court. I don’t believe that making assertions in a brief regarding disputed factual points, without providing a citation to the record, amounts to reasonable attorney conduct. I don’t believe that ignoring the context of statements in the record — the timing, circumstances and purpose — amounts to reasonable conduct. In short, I don’t believe that it is appropriate or reasonable for a lawyer to pluck a few words from the middle of a sentence and pretend that they say something very different from what they mean in context. This is true of every lawyer who appears before us, but it goes doubly for lawyers who represent the government in criminal cases. See United States v. Kojayan, 8 F.3d 1315 (9th Cir. 1993), ("Prosecutors are subject to constraints and responsibilities that don’t apply to other lawyers. While lawyers representing private parties may—indeed, must—do everything ethically permissible to advance their clients’ interests, lawyers representing the government in criminal cases serve truth and justice first.").
The cite to Kojayan is interesting because in that case, the slip opinion identified by name the AUSAs responsible for misstatements to the court, but the opinion in the bound volume had the names removed. Similarly, while Judge Kozinski’s concurrence in Clark finds that the AUSA’s conduct was unreasonable, there is no mention of the person’s name. Is this another situation where "the Office" takes the responsibility but not the individual? Clark involves a concurring opinion, so it is more appropriate to keep the lawyer’s name out of the reported decision. As lawyers subject to the same professional responsibility rules as other lawyers, I think a good argument can be made that there is a need for some individual accountability when a prosecutor misstates the record or is "economical with the truth." If identifying the AUSA by name is not the best vehicle, then something else should be used to make it clear to the public that such conduct is a violation of the rules of the profession. (ph)
Download kpmg_us_attorney_letter_june_30_2006.pdf
UPDATE: The Wall Street Journal Law Blog reports (here) that Judge Kaplan denied the U.S. Attorney’s request to modify the opinion, including refusing to remove the names of the AUSAs. It will probably be a few more weeks before a decision is made on appealing the decision, assuming the government can appeal under the collateral order doctrine. KPMG is not a party to the case, so it’s hard to see how it has standing to seek review. (ph)
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The KPMG Order provides the clear realization that some white collar cases can be costly to defend. Judge Lewis Kaplan states:
"This is by no means a garden-variety criminal case. It has been described as the largest tax fraud case in United States history. The government thus far has produced in discovery, in electronic or paper form, at least 5 million to 6 million pages of documents plus transcripts of 335 depositions and 195 income tax returns. The briefs on pretrial motions passed the 1,000-page mark some time ago. The government expects its case in chief to last three months, while defendants expect theirs to be lengthy as well. To prepare for and try a case of such length requires substantial resources. Yet the government has interfered with the ability of the KPMG Defendants to obtain resources they otherwise would have had. Unless remedied, this interference almost certainly will affect what these defendants can afford to permit their counsel to do. This would impact the defendants’ ability to present the defense they wish to present by limiting the means lawfully available to them. The Thompson Memorandum and the USAO’s actions therefore are subject to strict scrutiny."
White Collar defendants have felt the pressure of trying to defend themselves against a government accusation. But in many instances they cannot because of the cost involved in presenting this defense. This is in no way meant to diminish the importance of others having the ability to defend themselves, as indigent defense is clearly in a state of crisis in many parts of the United States. But the court’s recognition of this high cost in a white collar case, and the particularly high cost in this white collar case is an important message. If the system is to operate with a presumption of innocence, than it is important to remember that everyone needs to have access to lawyers in order to properly present their defense.
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Addendum – See
David Hoffman, Concurring Opinions here
MattBray.net 