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United States v. Stein

July 25, 2006

UNITED STATES OF AMERICA,
v.
JEFFREY STEIN, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Lewis A. Kaplan, District Judge

OPINION

TABLE OF CONTENTS

Fact. . . . . 3

The Thompson Memorandum . . . . . . 3

The February 25, 2004 Meeting Between the KPMG and the USAO . . . . . 4

KPMG Gets the Message . . . . . 5

The Proffers . . . . . 7

KMPG's Claims that It Successfully Pressured Employees to Talk . . . . . 11

Analysis . . . . . 12

I. As the Failure to Make this Motion Earlier Was a Product of Excusable Neglect, the Court On Its Own Motion Extends the Time Within Which to Make It to the Date of its Filing . . . . . 12

II. The Voluntariness of the Statements . . . . . 16

A. Messrs. Bickham, DeLap, Gremminger, Hasting, Rosenthal, and Wiesner and, With Respect to Her First Proffer, Ms. Warley, Did Not Offer Evidence that, If Credited, Would Be Sufficient to Warrant a Finding that Those Statements Were Coerced. Their Motions With Respect to These Statements Are Denied . . . . . 16

B. The Proffer Statements Made by Messrs. Smith and Watson Were Coerced. Those Made By Ms. Warley In Her Second Proffer Were Not. . . . . 23

1. Mr. Smith . . . . . 23

2. Mr. Watson . . . . . 26

3. Ms. Warley . . . . . 28

III. The Actions of KPMG in Coercing these Statements Are Attributable to the Government. . . . . 30

Conclusion . . . . . 36

Our forefathers adopted an adversary system of justice -- one in which no person may be convicted of a crime unless the government sustains its burden of convincing a jury beyond a reasonable doubt of a defendant's guilt. Part and parcel of that system is the principle that no one may be compelled, in a criminal case, to be a witness against one's self.

KPMG, the accounting giant, and many of its personnel found themselves under criminal investigation for their role in allegedly abusive tax shelters. An indictment, regardless of whether KPMG was guilty of anything, almost certainly would have meant the demise of the firm -- the fate met by its competitor, Arthur Andersen & Co., when it was indicted in the Enron scandal.

Although KPMG long had paid legal fees for any of its employees*fn1 who were sued or charged with crimes as a result of doing their jobs, the government threatened to consider such payments as a factor weighing in favor of indicting the firm. It threatened also to consider any failure by KPMG to cause its employees to make full disclosure to the government as favoring indictment. So KPMG changed its practice regarding legal fees. It informed employees that it would pay fees, up to $400,000, but only on the condition that they cooperate with the prosecutors. In other words, KPMG told its personnel that it would cut off payment of legal expenses of any employee who refused to talk to the government or who invoked the Fifth Amendment. And it made crystal clear that it would cut off any payments of legal fees to anyone who was indicted.

The government took full advantage. It sought interviews with many KPMG employees and encouraged KPMG to press the employees to cooperate. Indeed, it urged KPMG to tell employees to disclose any personal criminal wrongdoing. When individuals balked, the prosecutors told KPMG. In each case, KPMG reiterated its threat to cut off payment of legal fees unless the government were satisfied with the individual's cooperation. In some cases, it told the employees to cooperate with prosecutors or be fired.

The government obtained statements, commonly known as proffers, from nine KPMG employees who now are defendants here (the "Moving Defendants").*fn2 The Moving Defendants*fn3 contend that their statements were coerced in violation of their Fifth Amendment privilege against self-incrimination. They move to preclude the government from using the statements or any evidence derived therefrom.

Having considered the evidence, the Court is persuaded that the government is responsible for the pressure that KPMG put on its employees. It threatened KPMG with the corporate equivalent of capital punishment. KPMG took the only course open to it. In the words of its chief legal officer, KPMG did everything it could "to be able to say at the right time and with the right audience, we're in full compliance with the Thompson Memorandum."*fn4 It exerted substantial pressure on its employees to waive their constitutional rights.

In this case, not all of the statements made by the Moving Defendants to the government were coerced. Those that were, however, must be suppressed.

Facts

In Stein I,*fn5 the Court granted in part the motion of the KPMG Defendants for relief based on their contention that the provision of the Thompson Memorandum dealing with advancement of legal fees by corporate employers, both alone and coupled with the actions of the United States Attorney's office (the "USAO"), violated their Fifth and Sixth Amendments rights because it caused KPMG to cut off the payment of legal fees upon indictment. The present dispute concerns events prior to the indictment, but it arises out of much the same events. Accordingly, the Court assumes familiarity with Stein I, relies on the evidence adduced in the evidentiary hearing and the findings made on that motion, and elaborates on the prior findings only to the extent that additional findings are necessary. The Court has had the benefit also of a further evidentiary hearing on the present motion.

The Thompson Memorandum

The nature and background of the Thompson Memorandum have been explained previously.*fn6 We are concerned here, however, not only with its provision concerning advancement of legal fees to employees of business entities, which was described in detail in Stein I, but with another provision as well.

One of the guiding principles set forth in the Thompson Memorandum is that "[i]n gauging the extent of the corporation's cooperation [for purposes of determining whether it should be indicted], the prosecutor may consider the corporation's willingness to identify the culprits within the corporation, including senior executives, to make witnesses available, to disclose the complete results of its internal investigation, and to waive attorney-client and work-product privileges."*fn7 The commentary goes on to elaborate on the meaning of cooperation in relevant part by stating: "One factor the prosecutor may weigh in assessing the adequacy of a corporation's cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections . . ."*fn8 Thus, the Thompson Memorandum makes clear that the failure of a business organization facing possible indictment to induce its personnel to submit to interviews by the government and to disclose whatever they know may be a factor weighing in favor of indictment of the entity.

The February 25, 2004 Meeting Between the KPMG and the USAO

We may pass briefly over the initial interactions between KPMG and the USAO, as the Court's findings concerning them are set forth in Stein I. Suffice it to say for present purposes that the prosecutors and KPMG attorneys met on February 25, 2004. The KPMG lawyers were well aware of the Thompson Memorandum. In any case, it was drawn forcefully to their attention by the USAO early in the meeting, in the context of a discussion concerning KPMG's intentions with respect to payment of employee legal fees, by the senior prosecutor present.

The KPMG lawyers made clear to prosecutors that KPMG believed that an indictment would be fatal to the organization. They said that KPMG intended to cooperate in order to save the firm and that it would not protect individual employees. Later in the meeting, Robert Bennett and Kenneth Bialkin of Skadden, Arps, Slate, Meagher & Flom, the senior lawyers representing KPMG, told the USAO that KPMG's "common practice" had been to pay legal fees for employees in connection with legal matters arising out of their doing their jobs. Although KPMG still was checking on its legal obligations, they said, it would not pay legal fees for employees who declined to cooperate with the government, or who took the Fifth Amendment, as long as it had discretion to take that position.*fn9 Mr. Bennett made clear also that KPMG would recommend to individual employees "lawyers who understand cooperation is the best way to go in this type of case." He expressed also the view that "it [wa]s in the best interests of KPMG for its people to get attorneys that will cooperate with" the government.*fn10

KPMG Gets the Message

Shortly after the February 25, 2004 meeting, Mr. Bennett got back to Justin Weddle, one of the prosecutors, on the legal fee issue. He reported that KPMG did not think it had any binding legal obligation to pay employee legal fees,*fn11 but that "it would be a big problem" not to do so because the firm was a partnership. He said that KPMG was planning on putting a cap, or limit, on fees and conditioning their payment for any given partner or employee on that individual "cooperating fully with the company and the government."*fn12 Apparently satisfied with the government's response, KPMG began to implement the policy.

On March 4, 2004, Mr. Pilchen of Skadden spoke to Mr. Townsend, an attorney for defendant Carol Warley. He told Townsend that KPMG wanted to pay Ms. Warley's attorneys' fees but that the government did not want it to do so.*fn13 In consequence, KPMG was "doing a balancing act" -- it would "advance something . . . provided that Ms. Warley cooperated . . . with the government."*fn14 He made clear that no fees would be paid if Ms. Warley invoked her Fifth Amendment privilege.

On March 11, 2004, the Skadden team had a conference call with the USAO. Mr. Bennett assured the USAO that KPMG would be "as cooperative as possible" so that the office would not exercise its discretion to indict the firm. Mr. Weddle urged that KPMG tell its people to be "totally open" with the USAO, "even if [that meant admitting] criminal wrongdoing." He commented that this would give him good material for cross-examination.*fn15

The Thompson Memorandum and the actions of the USAO had the desired effect. On the same date, Skadden's Mr. Rauh wrote to the USAO, enclosing among other things a form letter that Skadden was sending to counsel for the KPMG Defendants then employed by KPMG who had received subject letters from the government or otherwise appeared to be under suspicion.*fn16 The form letter stated that KPMG would pay an individual's legal fees and expenses, up to a maximum of ...


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