Editors Note: Amalie L. Tuffin is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.
RESEARCH TRIANGLE PARK, N.C. – Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York has struck another blow against the Thompson Memorandum.
As I have previously written (see www.localtechwire.com/article.cfm?u=14495 ), the Thompson Memorandum is a document issued by then-Deputy Attorney General Larry D. Thompson on January 20, 2003 called “Principles of Federal Prosecution of Business Organizations.” Federal prosecutors are bound by the principles set forth in the Thompson Memorandum in deciding whether to indict a corporation or other business entity for a crime allegedly committed by one or more of its employees.
Under the Thompson Memorandum, prosecutors must decide whether a corporation is willingly cooperating with the investigation of its employees. There are many factors which prosecutors take into account in determining willing cooperation. One of the most important is whether the corporation is advancing attorneys’ fees for its employees. Unless a corporation is required by law to advance such fees, doing so is considered a sign that the business is not cooperating with the government investigation, which makes the corporation itself a target for prosecution.
KPMG Has Been Sued By Former Employees Fighting To Get Legal Fees
Judge Kaplan is overseeing the trial against 16 former KPMG partners who are accused of tax fraud in connection with the sale of certain tax shelters. KPMG itself is not on trial because entered into a deferred prosecution agreement with KPMG in August 2005, requiring it to pay an enormous fine, and fully cooperate with all government investigations into the conduct of its employees.
Earlier this year, Judge Kaplan ruled that the government pressured KPMG into refusing to advance legal fees on behalf of its employees, and that the government’s conduct violated the employees’ constitutional right to a fair trial. The judge’s decision even suggested that the prosecution advise KPMG to pay its employees’ fees in order to avoid drastic remedies, up to and including dismissal of all of the charges against the former KPMG employees.
KPMG Is Refusing To Pay Even After the Judge’s Decision
Despite the judge’s earlier ruling, KPMG has not agreed to advance legal fees for its former employees. Far from it in fact. The former KPMG employees sued KPMG in an attempt to force the accounting giant to pay their legal fees and KPMG fought back. The lawsuit between the former employees and KPMG is pending and appears as if it will take months or years to resolve.
This is because KPMG wants the suit to go to arbitration and the defendants want Judge Kaplan to hear the claim. The issue of who will ultimately try the case is pending before the Second Circuit Court of Appeals and this issue needs to be resolved before either Judge Kaplan or an arbitrator can decide the real issue involved, which is whether KPMG is obligated to pay the defendants’ legal fees.
Kaplan Reacted By Indefinitely Delaying Criminal Trial
On November 13, Judge Kaplan issued an order delaying the trial of the former KPMG employees pending a resolution of the fee dispute. This is the second time Judge Kaplan felt forced to delay the trial because of this issue; this time he made the delay indefinite, stating “it is impossible now to predict with confidence when the charges in the indictment might be tried.”
In his order, Judge Kaplan indicated why resolving the KPMG issue is so important to the resolution of the underlying case. The judge wrote “[t]his court found . . . that the government violated the rights of the KPMG defendants by inducingwhich otherwise would have advanced defense costs — to cut off payments upon indictment. . . . . If KPMG is obligated to pay, payment could greatly mitigate the impact of the government’s improper actions. This in turn could diminish the advisability of dismissal or other potentially serious sanctions.”
In other words, the judge could, depending on the outcome of the fee dispute, go so far as to choose to dismiss the criminal charges against the defendants because of the government’s improper conduct.
All Employees Should Care About Memorandum, KPMG Case
The KPMG case is the biggest tax fraud case in American history and deciding the merits of the case — the guilt or innocence of the defendants — has now been indefinitely stalled because of a dispute which, at the heart of it, is about how far the government can and should go in trying to obtain information and make its case against corporate employees.
The delay, which is considered to be deeply embarrassing to the government, will only intensify the ongoing debate about the merits of the Thompson Memorandum. While the Thompson Memorandum may seem like an arcane legal issue, it is not. As one journalist wrote in The New York Times, the KPMG case has “become something of a referendum on the prosecutorial tactics adopted in the wake of Enron and other corporate scandals.”
Accordingly, readers should keep an eye on the case and the issues involved in it, as employees of businesses large and small have a vested interest in the question of whether their employer will reimburse them for legal fees incurred in an investigation of (or worse yet, prosecution of) conduct that they undertook on the job and for the benefit, or perceived benefit, of their employer. This is especially true as more and more companies become the subject of government investigations.
Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Amalie L. Tuffin concentrates her practice in the representation of entrepreneurial and technology-based businesses, focusing on corporate, taxation and securities matters. Questions or comments can be sent to atuffin@d2vlaw.com.
