Policy on Legal Fees Excessive, Judge Says

By Carrie Johnson
Washington Post Staff Writer
Wednesday, June 28, 2006

A Justice Department policy that warns companies against paying legal bills for employees under investigation violated the workers' constitutional rights, a federal judge ruled, as he blasted the government for letting "its zeal get in the way of its judgment."

U.S. District Judge Lewis A. Kaplan criticized the federal government for holding "the proverbial gun" to the head of accounting firm KPMG LLP and advising the firm not to pay full fees to lawyers defending more than a dozen former partners on fraud charges.

The policy "interfered" with the executives' ability to fight criminal charges in a case that has been called the largest tax fraud in history, the judge wrote. He said the government "evidenced a desire to minimize the involvement of the defense attorneys" and added that "the government's proper concern is not with obtaining convictions."

Kaplan's harshly worded 83-page decision handed a potent symbolic victory to defense lawyers and business groups, who have for years complained that the government is overreaching in its attempt to weed out fraud after the Enron Corp. and WorldCom Inc. scandals.

An unusual coalition of trade organizations, including the U.S. Chamber of Commerce, the Securities Industry Association and the National Association of Criminal Defense Lawyers, banded together to fight the policy and submitted court briefs in the KPMG case.

"This decision is a big step in curbing abuse of the significant power that prosecutors enjoy," said Michael J. Madigan, a lawyer at Akin Gump LLP in the District who is defending John Lanning, one of the former KPMG executives. "Hopefully, the decision will be read carefully by U.S. attorneys around the country."

E. Lawrence Barcella Jr., a lawyer at Paul Hastings LLP in the District who represents former KPMG partner Larry DeLap, said he hoped the decision would signal an end to prosecutors using a "litmus test for cooperation that undermined employees' constitutional rights."

Michael J. Garcia, the U.S. Attorney for the Southern District of New York, said he was "disappointed by the ruling . . . which we respectfully believe is unsupported by the factual record and the applicable law."

The prosecutor added, in a prepared statement: "The actions of the Government were entirely consistent with appropriate Department of Justice policy, and we believe that the prosecutors acted ethically and properly throughout this case."

At issue is a three-year-old document known as the Thompson memo, named after former U.S. deputy attorney general Larry D. Thompson. The memo, which binds federal prosecutors across the nation, sets out factors for the government to consider when deciding whether to indict a corporation. Central to the analysis is how much companies have cooperated with prosecutors, including such things as handing over documents, making available witnesses, waiving attorney-client privilege and not aiding employees who are suspected of wrongdoing by paying severance or their legal bills.

Last month, prosecutors in California indicted the law firm Milberg Weiss LLP, in part based on the argument that the firm had failed to waive its legal privilege and help the government investigate payments to third parties in exchange for serving as plaintiffs in securities cases.

The government policy has long vexed defense lawyers, who claim it violates clients' rights to a fair trial and to be represented by attorneys, a position with which Kaplan agreed after holding an unusual three-day hearing where prosecutors testified under oath about their conversations with KPMG.

But the immediate practical implications of the decision are less clear.

The judge rejected outright a bid by defense lawyers to dismiss the criminal charges against their clients. He did, however, invite them to file a related lawsuit against KPMG for the fees within two weeks' time. He also urged KPMG to pay the fees of its own accord and encouraged prosecutors to lean on the accounting firm to do so.

George Ledwith, a spokesman for KPMG, said the firm was reviewing the decision. But in court papers lodged this year, KPMG said the former executives could not sue because they were subject to mandatory arbitration clauses in their partnership agreements. Kaplan said in a footnote to his opinion that if such arguments are raised in front of him, he will consider whether they stand in the face of "public policy."

KPMG of New York already has paid $456 million under an August deal with federal prosecutors that allowed the firm to survive and avoid criminal charges over its sale and marketing of abusive tax shelters in the 1990s. A similar indictment killed rival Arthur Andersen LLP four years ago.

Eager to cooperate with the government and avoid Andersen's fate, KPMG capped lawyer fees at $400,000 per employee and required employees to pick up any additional fees. The firm has advanced more than $10 million in fees for its current and former partners.

The criminal case against the former partners and other advisers, set for trial Sept., 11, could yet be postponed. Kaplan has called for a hearing next month on another defense motion, this one related to a dispute over the exchange of more than 6 million documents in the complex case. In one exhibit, defense lawyers offered a picture of documents nibbled by rats in a Queens, N.Y., warehouse.

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