United States v. Stein, no. 07-3042-cr (2d Cir. August 28, 2008) (Jacobs, Feinberg, Hall, CJJ)
This case arose from a 2004 investigation into KPMG’s suspected creation and sale of illegal tax shelters. Although KPMG’s counsel recommended a “cooperative approach” in its dealings with the government, the firm still, initially, promised to pay the attorneys' fees of any current or former member of the firm who was under investigation.
In subsequent meetings with Southern District prosecutors, however, the government started putting pressure on KPMG to not pay attorneys' fees. It cited the “Thompson Memorandum,” a directive to federal prosecutors intended to give guidance on when to prosecute business organizations, which instructs prosecutors to consider whether the firm was protecting culpable employees through, inter alia, “the advancing of attorneys fees.” Bowing to this pressure, KPMG’s counsel told the government that it would not pay the fees of employees who failed to “cooperate” with the government or who invoked their Fifth Amendment rights. Later, KPMG amended its fee-payment policy to expressly cover only employees who “cooperated,” and only until the time of indictment.
Over the next year, the government would complain to KPMG when employees refused to proffer, and KPMG would in turn warn them that payment of their attorneys fees would stop unless they cooperated. Those who continued to invoke their Fifth Amendment rights were fired, and the firm stopped paying their attorneys' fees altogether.
KPMG was seeking a non-prosecution agreement, but the government balked. Eventually, by repeatedly touting its commitment to force employees to cooperate by threatening to terminate payment of their attorneys' fees, KPMG avoided indictment, and was permitted to enter into a deferred prosecution agreement. It paid a large fine and agreed to continue cooperating in the future.
The day KPMG executed that agreement, the government indicted several KPMG employees, including the thirteen defendants on this appeal. They moved to dismiss the indictment based on the government’s interference with KPMG’s payment of their attorneys' fees - KPMG admitted that it had been “substantially influenced” by the government to stop paying - and the court granted the motion.
The government appealed, and the circuit affirmed.
First, the court held that the district court’s findings of fact were not clearly erroneous. It specifically upheld - and relied on - the court’s central finding that “[a]bsent the Thompson Memorandum and the actions of the USAO, KPMG would have paid the legal fees and expenses of all of its partners and employees both prior to and after indictment, without regard to cost.”
Next, the court held that, since the government did not cure the violation, dismissal was only remedy that would restore defendants to the position they enjoyed before government’s unconstitutional conduct. The court noted that four defendants were deprived of counsel of their choice because they could not longer afford those attorneys once KPMG stopped paying. The others, who continued with their counsel at their own expense, had to limit their defenses for economic reasons, and would not have been so constrained if KPMG had continued paying.
The supposed “cure” advanced by the government was that, two years later, in court, the government invited KPMG to exercise its “business judgment” in deciding whether to resume paying the attorneys fees. The circuit was unimpressed. This “isolated and ambiguous” statement, made in a proceeding to which KPMG was not a party, did not restore the defendants to the status quo ante. Moreover, when asked whether KPMG’s resuming paying fees would affect the government’s view as to whether KPMG had complied with its deferred prosecution agreement, the government did not answer. In any event, it was simply “unrealistic to expect KPMG to exercise uncoerced judgment in March 2006 as if it had never experienced the government’s pressure in the first place.”
Third, the court agreed with the district court that, with respect to this issue, KPMG was not a private actor. The firm was so deeply influenced by the USAO that its actions were attributable to the government. The relevant legal standard asks whether there is a “close nexus” between the government and the private action. The state is responsible for the private entity’s actions where it exercises coercive power, or even “significant encouragement” over them. Here, “KPMG ‘operate[d] as a willful participant in joint activity’ with the government” and “the USAO ‘significant[ly] encourage[d]’ KPMG to withhold legal fees from defendants upon indictment.”
The circuit thus agreed that the government “forced” KPMG to adopt a constricted fees policy. Indeed, “the prosecutors steered KPMG toward their preferred fee advancement policy and then supervised its application in individual cases.”
Finally, the court agreed that the government, through KPMG, violated the defendants’ Sixth Amendment rights when it ceased paying their attorneys' fees upon indictment. This deprived the defendants both of the counsel of their choosing and the right to use their own funds - they had a property interest in the expectation that KPMG would pay their fees - to mount their defense as they saw fit.
This was true even though much of the government’s misconduct occurred before the defendants were indicted, and thus before the Sixth Amendment attached. The government’s “pre-indictment conduct was of a kind that would have post-indictment effects of Sixth Amendment significance, and did.”
The Sixth Amendment was accordingly violated here because these defendants would have had their fees paid but for the government’s interference. The government is forbidden from interfering with attorney-client financial relationships, and is also also forbidden from interfering with client relationships with any third parties who are paying their attorneys' fees. “In a nutshell, the Sixth Amendment protects against unjustified governmental interference with the right to defend oneself using whatever assets one has or might reasonably and lawfully obtain.”
Here, there was no justification for the government’s interference, such as a need to avoid a conflict of interest. Accordingly, the indictment was properly dismissed against all defendants, both those who could no longer afford their chosen counsel at all, and the rest, who continued with the same counsel, but were forced to limit their defense for economic reasons.
This case arose from a 2004 investigation into KPMG’s suspected creation and sale of illegal tax shelters. Although KPMG’s counsel recommended a “cooperative approach” in its dealings with the government, the firm still, initially, promised to pay the attorneys' fees of any current or former member of the firm who was under investigation.
In subsequent meetings with Southern District prosecutors, however, the government started putting pressure on KPMG to not pay attorneys' fees. It cited the “Thompson Memorandum,” a directive to federal prosecutors intended to give guidance on when to prosecute business organizations, which instructs prosecutors to consider whether the firm was protecting culpable employees through, inter alia, “the advancing of attorneys fees.” Bowing to this pressure, KPMG’s counsel told the government that it would not pay the fees of employees who failed to “cooperate” with the government or who invoked their Fifth Amendment rights. Later, KPMG amended its fee-payment policy to expressly cover only employees who “cooperated,” and only until the time of indictment.
Over the next year, the government would complain to KPMG when employees refused to proffer, and KPMG would in turn warn them that payment of their attorneys fees would stop unless they cooperated. Those who continued to invoke their Fifth Amendment rights were fired, and the firm stopped paying their attorneys' fees altogether.
KPMG was seeking a non-prosecution agreement, but the government balked. Eventually, by repeatedly touting its commitment to force employees to cooperate by threatening to terminate payment of their attorneys' fees, KPMG avoided indictment, and was permitted to enter into a deferred prosecution agreement. It paid a large fine and agreed to continue cooperating in the future.
The day KPMG executed that agreement, the government indicted several KPMG employees, including the thirteen defendants on this appeal. They moved to dismiss the indictment based on the government’s interference with KPMG’s payment of their attorneys' fees - KPMG admitted that it had been “substantially influenced” by the government to stop paying - and the court granted the motion.
The government appealed, and the circuit affirmed.
First, the court held that the district court’s findings of fact were not clearly erroneous. It specifically upheld - and relied on - the court’s central finding that “[a]bsent the Thompson Memorandum and the actions of the USAO, KPMG would have paid the legal fees and expenses of all of its partners and employees both prior to and after indictment, without regard to cost.”
Next, the court held that, since the government did not cure the violation, dismissal was only remedy that would restore defendants to the position they enjoyed before government’s unconstitutional conduct. The court noted that four defendants were deprived of counsel of their choice because they could not longer afford those attorneys once KPMG stopped paying. The others, who continued with their counsel at their own expense, had to limit their defenses for economic reasons, and would not have been so constrained if KPMG had continued paying.
The supposed “cure” advanced by the government was that, two years later, in court, the government invited KPMG to exercise its “business judgment” in deciding whether to resume paying the attorneys fees. The circuit was unimpressed. This “isolated and ambiguous” statement, made in a proceeding to which KPMG was not a party, did not restore the defendants to the status quo ante. Moreover, when asked whether KPMG’s resuming paying fees would affect the government’s view as to whether KPMG had complied with its deferred prosecution agreement, the government did not answer. In any event, it was simply “unrealistic to expect KPMG to exercise uncoerced judgment in March 2006 as if it had never experienced the government’s pressure in the first place.”
Third, the court agreed with the district court that, with respect to this issue, KPMG was not a private actor. The firm was so deeply influenced by the USAO that its actions were attributable to the government. The relevant legal standard asks whether there is a “close nexus” between the government and the private action. The state is responsible for the private entity’s actions where it exercises coercive power, or even “significant encouragement” over them. Here, “KPMG ‘operate[d] as a willful participant in joint activity’ with the government” and “the USAO ‘significant[ly] encourage[d]’ KPMG to withhold legal fees from defendants upon indictment.”
The circuit thus agreed that the government “forced” KPMG to adopt a constricted fees policy. Indeed, “the prosecutors steered KPMG toward their preferred fee advancement policy and then supervised its application in individual cases.”
Finally, the court agreed that the government, through KPMG, violated the defendants’ Sixth Amendment rights when it ceased paying their attorneys' fees upon indictment. This deprived the defendants both of the counsel of their choosing and the right to use their own funds - they had a property interest in the expectation that KPMG would pay their fees - to mount their defense as they saw fit.
This was true even though much of the government’s misconduct occurred before the defendants were indicted, and thus before the Sixth Amendment attached. The government’s “pre-indictment conduct was of a kind that would have post-indictment effects of Sixth Amendment significance, and did.”
The Sixth Amendment was accordingly violated here because these defendants would have had their fees paid but for the government’s interference. The government is forbidden from interfering with attorney-client financial relationships, and is also also forbidden from interfering with client relationships with any third parties who are paying their attorneys' fees. “In a nutshell, the Sixth Amendment protects against unjustified governmental interference with the right to defend oneself using whatever assets one has or might reasonably and lawfully obtain.”
Here, there was no justification for the government’s interference, such as a need to avoid a conflict of interest. Accordingly, the indictment was properly dismissed against all defendants, both those who could no longer afford their chosen counsel at all, and the rest, who continued with the same counsel, but were forced to limit their defense for economic reasons.