U.S. v. Stein

495 F.Supp.2d 390

UNITED STATES of America, v. Jeffrey STEIN, et al., Defendants.

No. S1 05 Crim. 0888(LAK).

United States District Court, S.D. New York.

July 16, 2007.

John M. Hillebrecht, Rita M. Glavin, Kevin M. Downing, Margaret Garnett, Assistant United States Attorneys, Michael J. Garcia, United States Attorney, David Spears, Spears & Imes LLP, Craig D. Margolis, Vinson & Elkins LLP, for Defendant Jeffrey Stein.

Michael J. Madigan, Robert H. Hotz, Jr., Akin Gump Strauss Hauer & Feld LLP, for Defendant John Lanning.

Robert S. Fink, Caroline Rule, Fran Obeid, Kostelanetz & Fink, LLP, for Defendant Richard Smith.

Stanley S. Arkin, Joseph V. DiBlasi, Elizabeth A. Fitzwater, Arkin Kaplan Rice LLP, for Defendant Jeffrey Eischeid.

Ronald E. DePetris, Marion Bachrach, DePetris & Bachrach, LLP, for Defendant Philip Wiesner.

Steven M. Bauer, Karli E. Sager, Latham & Watkins, LLP, for Defendant John Larson.

David C. Scheper, Overland Borenstein Scheper & Kim LLP, for Defendant Robert Pfaff.

John R. Wing, Lankier Siffert & Wohl LLP, Diana D. Parker, Law Offices of Diana D. Parker, for Defendant Larry DeLap.

John F. Kaley, Doar Rieck Kaley & Mack, for Defendant Steven Gremminger.

Cristina C. Arguedas, Ted W. Cassman, Michael W. Anderson, Arguedas, Cassman & Headley, LLP, Ann C. Moorman, Law Offices of Ann C. Moorman, for Gregg Ritchie.

George D. Niespolo, Stephen H. Sutro, Duane Morris LLP, for Defendant Randy Bickham.

Michael S. Kim, Leif T. Simonson, Kobre & Kim LLP, Attorneys for Defendant Mark Watson.

James R. DeVita, Bryan Cave LLP, John A. Townsend, Townsend & Jones LLP, for Defendant Carol Warley.

Russell M. Gioiella, Richard M. Asche, Litman, Asche & Gioiella, LLP, for Defendant Carl Hasting.

Susan R. Necheles, Hafetz & Necheles, for Defendant Richard Rosenthal.

Richard M. Strassberg, David B. Pitofsky, Goodwin Procter LLP, for Defendant David Greenberg.

OPINION

KAPLAN, District Judge.

Table of Contents
  I.  Introduction .........................................................394
 II.  The Factual Bases of the Court's Constitutional Holdings .............394
      A.  The Thompson Memorandum ...........................................395
          1.  The Text .......................................................396
          2.  The Bar's Understanding of the Thompson Memorandum .............397
              (a) Former U.S. Attorney General Edwin Meese III ...............397
              (b) KPMG Lead Counsel Robert Bennett ...........................398
              (c) ABA President Karen J. Mathis ..............................398
              (d) The American College of Trial Lawyers ......................398
              (e) The United States Chamber of Commerce: .....................399
              (f) Law Review Articles ........................................399
      B.  The Thompson Memorandum and the USAO's Actions Caused KPMG to
           Limit and-Then Cut Off Payment of Fees ..........................400
          1.  The Thompson Memorandum Influenced KPMG Even Before the
               February 25, 2004 Meeting Took Place .........................400
          2.  KPMG Made No Decisions Until After the February 25, 2004
               Meeting ......................................................401
              (a) KPMG Made No Decisions Before the Meeting Even as to Costs
                   of Representing Employees During the Investigation .......401
              (b) The Decision Not to Pay the Defense Costs of Any Employees
                   Who Were Indicted Came Even Later ........................403

          3.  There Was Ample Evidence that KPMG Would Have Paid the Fees
               of Most of these Defendants Absent Government Interference ...405
          4.  New Evidence that KPMG Would Have Paid Absent Government
               Interference .................................................407
III.  The Due Process Arguments ............................................409
      A.  The KPMG Defendants' Pattern Argument .............................410
      B.  The Legal Standard ................................................411
      C.  The Actions of the USAO "Shock the Conscience" ....................412
 IV.  The Impact on the KPMG Defendants ....................................415
      A.  Deprivation of Counsel of Choice ..................................415
      B.  The Other Practical Consequences ..................................416
          1.  The Scope and Nature of this Case ..............................416
              (a) Discovery ..................................................416
              (b) Motion Practice ............................................418
              (c) Trial ......................................................418
              (d) Subject Matter .............................................418
          2.  The Limitations on the Defense .................................418
  V.  Remedy ...............................................................419
      A.  The Government's CJA Argument .....................................419
      B.  Defendants Deprived of Counsel of Choice ..........................421
      C.  The KPMG Defendants as to Whom the Government Concedes Dismissal...423
      D.  The Defendants as to Whom the Government Resists Dismissal ........425
          1.  Defendants Pfaff and Larson ....................................425
          2.  Defendant Greenberg ............................................426
 VI.  Conclusion ...........................................................427

The government threatened to indict, and thus to destroy, the giant accounting firm, KPMG LLP ("KPMG"). It coerced KPMG to limit and then cut off its payment of the legal fees of KPMG employees. KPMG avoided indictment by yielding to government pressure. Many of its personnel did not. They now await trial, four of them deprived of counsel of their choice and most of the others unable to afford the defenses that they would have presented absent the government's interference.

This Court previously held that the government's interference with KPMG's payment of the legal fees of its employees and former employees violated the employees' constitutional rights. The government now concedes that thirteen of the sixteen individuals formerly employed by KPMG (the "KPMG Defendants") are entitled to dismissal, assuming that this Court's previous ruling was correct. But the government does not concede the correctness of that ruling.¹ Accordingly, the Court has reconsidered Stein I carefully in light of the government's arguments. It remains convinced that the ruling was correct. Indeed, additional evidence not previously considered strongly supports the Court's decision. The government, however, now has focused for the first time on the specific circumstances of certain of these defendants. The Court concludes that three of the defendants have not established that KPMG would have paid their defense costs even if the government had left KPMG to its own devices. The indictment therefore will be dismissed as to thirteen of the sixteen KPMG Defendants. The case will proceed to trial on the charges against the other three as well as two additional defendants who never were employed by KPMG and whose rights therefore were not violated.

I. Introduction

The indictment charges nineteen defendants, seventeen of them formerly partners or employees of KPMG, with conspiracy and tax evasion.² It asserts also that KPMG, which entered into a deferred prosecution agreement with the government, was an unindicted co-conspirator.

This Court held in Stein I³ that the government violated the Fifth and Sixth Amendment rights of the KPMG Defendants by causing KPMG to depart from its prior practice of paying the legal expenses of KPMG personnel in all cases in which they were sued in consequence of their activities on behalf of the firm. It found that KPMG would have paid those expenses — whether legally obliged to do so or not — but for the government's improper actions. The Court, however, deferred the request of the KPMG Defendants to dismiss the indictment, reasoning that dismissal might prove inappropriate if KPMG were obligated to advance the defense costs. In that case, all or much of the harm caused and still threatened by the government's actions might be remedied or avoided. The Court held that it had ancillary jurisdiction over the KPMG Defendants' claims against KPMG for advancement of defense costs and permitted the assertion of those claims in this case.⁴ The Court of Appeals, however, recently held that this Court lacks ancillary jurisdiction with respect to the fee advancement claims against KPMG.⁵ Other efforts to resolve this question have failed.⁶ In consequence, the matter is before the Court on the renewed applications of the KPMG Defendants to dismiss the indictment on the basis of the government's violations of their constitutional rights. Before proceeding to the question of remedy, however, the Court first addresses the government's principal attack on Stein I, its claim that the decision rests on clearly erroneous findings of fact.

II. The Factual Bases of the Court's Constitutional Holdings

The government challenges three pivotal factual findings upon which Stein I rests, viz.:

• "[T]he Thompson Memorandum caused KPMG to consider departing from its long-standing policy of paying legal fees and expenses of its personnel in all cases and investigations even before it first met with the [United States Attorney's Office ("USAO")]. As a direct result of the threat to the firm inherent in the Thompson Memorandum, it sought an indication from the USAO that payment of fees in accordance with its settled practice would not be held against it.⁷

• "[T]he USAO did not give KPMG the comfort it sought. To the contrary, it deliberately ... reinforced the threat inherent in the Thompson...