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United States v. Stein

January 8, 2007


The opinion of the court was delivered by: Honorable Lewis A. Kaplan United States District Judge Southern District of New York


Counsel are advised that the Court today is filing in the Court of Appeals the attached response to its invitation by order dated December 13, 2006.


KPMG here challenges the District Court's order denying its motion to dismiss the KPMG Defendants'*fn1 complaint for advancement of the costs of defending this criminal case. It argues that the District Court lacks subject matter jurisdiction. It contends that the District Court in any case should have dismissed in favor of arbitration.

The District Court construes this Court's December 13, 2006 order as inviting comment on (1) whether the merits of the substantive issues should be reached by mandamus and, (2) if so, whether the Circuit should vacate or otherwise disturb the challenged order.


The District Court recognizes that federal courts have only such jurisdiction as is conferred by statute. Even where they have jurisdiction, in the sense of power, to resolve issues involving non-parties in criminal cases, they should do so only in rare circumstances. The questions of power and the propriety of its exercise in this case, however, are not purely academic issues. They arise against a unique background that is important to their determination.

This case has been described as the largest criminal tax case in history. The indictment contains forty-five counts. Eighteen defendants await trial. The issues are complex. The evidence is mountainous. According to the latest account, the government has produced over 22 million pages in discovery,*fn2 much of it in electronic form that may be used effectively only with the assistance of electronic evidence consultants.*fn3 No end to the document production is in sight. In addition, the government has named 68 trial witnesses*fn4 and identified 5,024 trial exhibits amounting to over 128,000pages.*fn5 Estimates of the duration of the trial range from a low of four to a high of eight months or more. The cost of a minimally competent defense quite plainly is beyond the means of all but the wealthiest individuals. The need for funds to defend this case properly therefore is exceptional and perhaps unprecedented.

In prior proceedings, the District Court, after a full evidentiary hearing, held that the government violated the rights of the KPMG Defendants to due process of law and to the assistance of counsel by causing KPMG to depart from its unvarying prior practice of paying the defense costs of employees,*fn6 without limit, whenever employees were sued, investigated, or charged criminally in relation to their employment activities on behalf of KPMG. Absent the prosecution's interference, the District Court found, KPMG would have paid these defendants' defense costs, regardless of whether it was obliged by law to do so.

Rather than dismiss the indictment, as the KPMG Defendants sought, the District Court heeded this Court's admonition not to consider dismissal "unless it is otherwise 'impossible to restore a criminal defendant to the position that he would have occupied' but for the [government's] misconduct."*fn7 Reasoning that the KPMG Defendants might well be "restore[d] . . . to the position that [they] would have occupied" but for the government's actions if they prevailed on their contention that KPMG is obliged legally to advance their defense costs, the District Court held that it had ancillary jurisdiction to entertain the KPMG Defendants' advancement complaint in the criminal action.*fn8 "The genesis of the present dispute [thus] was a . . . hearing, which [was] itself [part of] the underlying criminal action."*fn9 Nor is KPMG a stranger to this case or to the district court. It is an unindicted co-conspirator on Count One here, and it was charged with that conspiracy in a separate information below.*fn10 Accordingly, the District Court elected to exercise its jurisdiction only in these most pressing and unusual circumstances.

The District Court's views with respect to the desirability of interlocutory review are informed by what probably is obvious. When a district court decides an issue that, if decided differently, would dispose of or change significantly the posture of a case, the district court's interest in avoiding any expenditure of time and resources on matters that ultimately might prove to be extraneous usually would be served best by immediate appellate review. So, although the fee advancement claims are not complex and should not involve a substantial commitment of judicial resources, the District Court is not averse to immediate appellate review of the merits of the jurisdiction and arbitration issues if such review would be appropriate. Exceptions to the final judgment rule to permit review of interlocutory orders, however, are confined to exceptional circumstances.

In this case, application of traditional mandamus standards would require denial of a mandamus petition without reaching the merits of the jurisdiction and arbitration issues. The stringencies of traditional mandamus standards, however, do admit of a limited exception for what has been termed "advisory mandamus" -- the use of mandamus to provide guidance on a novel question of general or exceptional importance to the administration of justice that should not await review by appeal from a final judgment.

Depending upon the proper reading of Garcia v. Teitler,*fn11 the question whether the District Court has ancillary jurisdiction may present a question upon which no court of appeals yet has passed. Nonetheless, it is debatable whether the other criteria for advisory mandamus are satisfied here. It is questionable, for example, that the issue is one of general or exceptional importance to the administration of justice, particularly given the Justice Department's recent abandonment of the policy that created the problem that led the District Court to exercise ancillary jurisdiction here. Furthermore, KPMG would have an adequate remedy by appeal from any adverse final judgment. Hence, use of advisory mandamus here would go beyond any prior use of the doctrine by this Circuit. Nevertheless, this Court may conclude that expansion of the scope of advisory mandamus is appropriate to reach the merits of the ancillary jurisdiction issue.

The arbitration issue seems another matter. The District Court held that (1) the arbitration clauses relied upon as to nine of the KPMG Defendants do not require arbitration of this dispute because the relevant clauses apply only to disputes between Members and the firm, whereas these nine defendants are not Members as that term is defined by the relevant agreements, and (2) any arbitration clauses that otherwise would have required arbitration by any of the KPMG Defendants are unenforceable with respect to the fee advancement claim in the circumstances of this case on the ground that they violate public policy. The first holding presents no novel issue of general or exceptional importance to the administration of justice. And while refusals to enforce arbitration clauses on the ground that enforcement would be against public policy are not frequent, the power of a court to decline enforcement on that basis is grounded in the Federal Arbitration Act and well established in the case law. As the circumstances that prompted the District Court to decline enforcement here are unusual and unlikely to recur, it is doubtful that advisory mandamus would be appropriate.

Assuming that the Court reaches the merits, the District Court submits that its legal determinations were correct and that its exercise of discretion was within permissible bounds.

Garcia, in the District Court's view, holds that a district court has ancillary jurisdiction to decide a dispute between a criminal defendant and a non-party*fn12 where the dispute has its genesis in the criminal case and the resolution of the dispute is important to the district court's ability to perform its function and to do justice. This case fits comfortably within that holding. Indeed, it is a stronger case for the exercise of ancillary jurisdiction than Garcia.

Even if Garcia were not properly read as the District Court reads it, the holding below should stand. Article III of the Constitution and the statutory grant of subject matter jurisdiction over federal criminal cases confer the power to resolve an ancillary dispute where, as here, the ancillary dispute is logically related to the criminal case. The dispositive question therefore is not whether the District Court has power to entertain the advancement complaint. It is whether its exercise of that power exceeds the permissible bounds of its discretion.

As the Supreme Court wrote in Kokkonen v. Guardian Life Insurance Co.,*fn13 a district court may assert ancillary jurisdiction "to enable [it] to function successfully, that is, to manage its proceedings, vindicate its authority, and effectuate its decrees."*fn14 In consequence, the exercise of ancillary jurisdiction, even where it requires the addition of a party, is appropriate where (1) the ancillary dispute arises directly out of events that occurred in the criminal case, (2) its resolution is important to the fair and proper resolution of the criminal charges on the merits, and (3) determination of the ancillary dispute would not substantially predominate over or otherwise interfere materially with the determination of the criminal charges. These criteria are satisfied here. They readily would prevent common use of ancillary jurisdiction as a basis for involving non-parties or extraneous issues in criminal cases. Moreover, the exercise of ancillary jurisdiction is especially appropriate where the additional party, at the time the ancillary proceeding began, was before the district court on a charge identical to one asserted against the parties asserting the ancillary claim.

The District Court's views with respect to the merits of the arbitration issue were set forth fully in its prior opinions.*fn15 It sees no need to comment further on that issue except to the extent that the merits bear on the availability of mandamus.


I. Mandamus

A. The Traditional Mandamus Standard

Mandamus and other prerogative writs "are reserved for really extraordinary causes."*fn16 Mandamus is "not to be used as a substitute for appeal, even though hardship may result from delay and [a] perhaps unnecessary trial."*fn17 Indeed, it often has been said that mandamus is not available unless the petitioner's right to relief is "clear and indisputable"*fn18 and a direct appeal from a final judgment would not be an adequate remedy.*fn19 Moreover, while traditional formulations of the standard have spoken of using the writ to confine a lower court to the exercise of its proper jurisdiction,*fn20 it long has been clear that mandamus will not lie to review a claim of mere error in a lower court jurisdictional determination.*fn21 Indeed, any different view would conflict with the requirement that the petitioner's right to relief be clear and indisputable.

Measured by these standards, there is no basis for treating the appeal as a petition for mandamus in order to reach the merits of the issues tendered. KPMG has an adequate remedy for any error by appeal from any final judgment that may be entered against it. The fact that it may have to try the advancement claim first is not a sufficient basis, under traditional mandamus standards, to warrant any departure from the final judgment rule.*fn22

B. Supervisory and Advisory Mandamus

In La Buy v. Howes Leather Co.*fn23 and Schlagenhauf v. Holder,*fn24 the Supreme Court "departed in some degree" from the traditional mandamus standards to countenance the use of the writ for, respectively, supervisory and advisory purposes.*fn25 "[W]hat is unclear is how far" it departed.*fn26

Supervisory mandamus appears to have no proper role in this case. In La Buy, the district court, notwithstanding prior admonitions by the Seventh Circuit against excessive use of special masters, referred two antitrust cases to special masters on the ground that its docket was too congested. It did so in line with a prior practice of too frequent references to special masters*fn27 that the Supreme Court characterized as "little less than an abdication of the judicial function."*fn28 In those circumstances, the Court held that mandamus was appropriate in furtherance of the "supervisory control of the District Courts by the Courts of Appeals."*fn29

The case therefore appears to authorize "supervisory" mandamus "when a plausible case could be made for the danger of frequent recurrence" of a "probably erroneous practice."*fn30 No such claim has been made here.

Advisory mandamus differs. In Schlagenhauf, the Court appeared to hold that mandamus may be used to settle important questions of first impression where there is a "substantial allegation of usurpation of power" by the district court.*fn31 Thus, courts of appeals seem to have some scope for use of mandamus to settle novel questions. On the other hand, as this Court has written, "[n]o one could reasonably suppose that the [Supreme] Court has now subscribed . . . to a doctrine that any non-frivolous claim of error in a decision is a claim of 'usurpation of power' on the theory that courts are bound to decide all issues correctly."*fn32

The Second Circuit's decisions subsequent to La Buy and Schlagenhauf do not resolve entirely the uncertainty as to the criteria dividing appropriate from inappropriate uses of advisory mandamus.

In American Express Warehousing, Ltd. v. Transamerica Insurance Co.,*fn33 the Circuit, although it denied mandamus, read Schlagenhauf as creating an "escape hatch" from the finality rule "[w]hen a discovery question is of extraordinary significance or there is extreme need for reversal of the district court's mandate before the case goes to judgment."*fn34 "[T]he touchstones . . . of review by mandamus are usurpation of power, clear abuse of discretion and the presence of an issue of first impression."*fn35

Some subsequent discovery cases have invoked this standard, sometimes along with reference to more traditional criteria.*fn36

More recently, the Circuit has said essentially the same thing, albeit without specific characterization of review in such circumstances as "advisory." It has written that it "will entertain a petition for a writ of mandamus . . . to cure a defective pretrial discovery order if the petitioner demonstrates '(1) the presence of a novel and significant question of law; (2) the inadequacy of other available remedies; and (3) the presence of a legal issue whose resolution will aid in the administration of justice.'"*fn37

These cases establish that mandamus sometimes may be granted to reverse an erroneous discovery ruling where the ruling orders discovery that could not be undone on appeal from a final judgment because the allegedly undiscoverable information will have been disclosed. One case holds also that an order finding the Attorney General of the United States in contempt for failing to produce allegedly privileged documents is "of extraordinary significance" and reviewable on mandamus.*fn38 But the discovery mandamus cases shed little light on the appropriate course in this case, in part because KPMG, unlike the holder of an alleged privilege or other protection against discovery, could suffer no cognizable harm if review were denied unless and until there is a final judgment against it.

Nor do most of the Circuit's post-Schlagenhauf mandamus cases in non-discovery contexts bear strongly on the facts at bar, although several contain expressions that cut against mandamus in this case.*fn39 The cases arguably most relevant here, although they did not explicitly frame the question in terms of advisory mandamus, are In re International Business Machines Corp.*fn40 and United States v. Amante.*fn41

In IBM, the Circuit granted mandamus to halt Judge Edelstein's consideration of whether the Tunney Act provision requiring judicial approval of consent decrees in government antitrust cases*fn42 applied to stipulations of dismissal under Federal Rule of Civil Procedure 41(a)(1).*fn43 It did so, however, not simply because it disagreed with the district court's retention of jurisdiction to consider the issue, but for three other reasons. First, both parties were united in their desire that the case be dismissed outright.*fn44 Second, the case already had gone on for thirteen years, tying up "one of the nation's largest industrial concerns," during which time "many of the underlying products [had become] commercially outmoded."*fn45 Finally, there was no ...

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