When the News Corporation announced it would stop paying the legal fees for Glenn Mulcaire, the private investigator at the center of Britain’s tabloid phone hacking scandal, the consequences were swift. Mr. Mulcaire could obviously shed light on who at the News Corporation knew about the phone hacking and efforts to conceal it.
After four years of silence, and just hours after the News Corporation said it would stop paying, he stepped before television cameras outside his home to say, “I have no further comment to make at this stage.” He added, “This may change.” Mr. Mulcaire is said to employ a lawyer full time as well as several more part time, an arrangement he surely can’t afford for long on a private investigator’s income.
In Parliament, the Labour member Paul Farrelly asked James Murdoch, who heads the company’s international operations, if he understood why people might interpret paying those legal fees as an effort to buy the private investigator’s cooperation or silence.
Mr. Murdoch murmured his agreement, saying his lawyers had told him “it’s important and customary” to pay such fees. “I’ve asked for those things to cease.”
After the company cut Mr. Mulcaire loose, two former executives came forward to accuse Mr. Murdoch of being “mistaken” in his testimony to Parliament about his knowledge of phone hacking. Now Mr. Murdoch is under investigation for potentially misleading Parliament.
As Mr. Farrelly put it, “It now seems to be everyone for themselves. The edifice is cracking. They’re all fighting like rats in a sack.”
However controversial in Britain, the practice of companies’ paying their officers and employees’ legal expenses in criminal investigations is not only routine in America but has been elevated by some to the status of a constitutional right. A little-discussed but open secret among defense lawyers and prosecutors alike is that who pays the legal fees often decides the outcome of an investigation.
As John C. Coffee Jr., Berle professor of law at Columbia, told me: “Someone whose legal fees are not paid may have a strong and urgent need to cooperate with the government. The employee, if he can’t afford to defend himself, has to cut a deal, and he might, shall we say, color his testimony. Who’s going to get the benefit of that, the company or the government? Lawyers know very well how to coach witnesses on what to say without telling them to lie.”
Confronted in the 1990s with an unprecedented wave of white-collar crime at major corporations like Enron and WorldCom, Justice Department prosecutors grew exasperated with companies that made public pledges to cooperate with investigators only to unleash a phalanx of defense lawyers bent on anything but.
In 2003, when he was chief of the Justice Department’s criminal division, Larry Thompson wrote that a factor in whether a company, as opposed to individuals, would be charged with a crime would be the extent of its cooperation, one measure of which “is whether the corporation appears to be protecting its culpable employees and agents,” among other things, “through the advancing of attorneys fees.” Mr. Thompson might well have added lavish severance packages and other forms of hush money to the list.
In 2005, the accounting firm KPMG admitted to creating fraudulent tax shelters that enabled wealthy clients to evade $2.5 billion in federal taxes, and six former partners, including the firm’s former deputy chairman, were indicted. KPMG, as it had in the past, paid their legal bills. All pleaded not guilty and declined to cooperate with the government.
As an accounting firm dependent on public trust, KPMG recognized that its survival depended on the firm’s escaping criminal charges. At a meeting with prosecutors, the firm’s lawyer, Robert Bennett, emphasized that KPMG “had decided to change course and cooperate fully.” The prosecutors zeroed in on the issue of legal fees, with one saying that “misconduct should not be rewarded” and another warning that with respect to legal fees, “we’ll look at that under a microscope,” according to notes taken at the meeting.
KPMG subsequently said it would pay legal fees up to $400,000 as long as employees cooperated and did not invoke the Fifth Amendment but would cease altogether for anyone indicted, including the six former partners already indicted.
Two years later, United States District Judge Lewis A. Kaplan took the drastic step of dismissing the indictments and harshly criticized both the Thompson memo and the prosecutors’ use of it to cow KPMG into terminating the fees to its former partners.
He suggested that this violated the Sixth Amendment right to counsel and ruled that the Justice Department “deliberately or callously prevented many of these defendants from obtaining funds for their defense that they lawfully would have had absent the government’s interference. They thereby foreclosed these defendants from presenting defenses they wished to present and, in some cases, even deprived them of counsel of their choice. This is intolerable in a society that holds itself out to the world as a paragon of justice.”
In reaching his decision, Judge Kaplan asked the defense lawyers what it would cost to defend the case. Their estimates ranged from $7 million to $24 million per defendant.
In the wake of Judge Kaplan’s broadside (subsequently upheld by the Second Circuit Court of Appeals), the Justice Department discarded the Thompson memo. While still giving credit for cooperation, Justice Department policy now states flatly that “prosecutors should not take into account whether a corporation is advancing or reimbursing attorneys’ fees or providing counsel to employees,” unless the fees are part of an effort to obstruct justice, such as making their payment conditioned on supporting “a false version of events.”
Today, “99 percent of all publicly held U.S. companies have indemnification agreements with their senior management and directors” to pay legal expenses, Mr. Coffee noted. “Their bylaws state that they will indemnify to the full extent permitted by law.”
He noted that in litigious America, this is sound public policy in order to attract qualified officers, directors and employees, who otherwise might face ruinous costs of defending themselves against what are often frivolous lawsuits.
Still, not everyone is enamored of either Judge Kaplan’s opinion or the outcome of the KPMG case. The six former partners had their indictments dismissed, but other defendants were found guilty at trial. Both a federal judge and a prominent defense lawyer I spoke to said they doubted that the Supreme Court would elevate a corporation’s payment of legal fees to a constitutional right. “It’s a leap, to put it mildly,” the lawyer said. “Just because you can’t afford the most expensive lawyers or have an unlimited budget doesn’t mean your constitutional rights have been violated.”
The right to counsel is far less established in English law, and Parliament may have been well within its rights to pressure the Murdochs on the subject of legal fees. But the News Corporation is incorporated in Delaware with headquarters in New York. If I were Rupert Murdoch, I’d wrap myself in the American flag and Constitution, and pay everyone’s lawyers. However heinous Mr. Mulcaire’s investigative techniques, he’s entitled to due process, which in America would be the best, most expensive defense lawyers the News Corporation’s money can buy.