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.