New York Federal Criminal Practice Blog
August 30, 2008

Second Circuit Affirms SDNY Judge Kaplan's Dismissal of Indictment Against Thirteen Defendants in KPMG Tax Shelter Fraud Case

The Second Circuit has affirmed SDNY Judge Kaplan’s stunning dismissal of an indictment against thirteen defendants in the largest tax fraud prosecution in history (discussed previously here) because of the government’s interference with their Sixth Amendment right to counsel through its efforts to cause KPMG to limit, cap and ultimately end their advancement of legal fees.  

United States v. Stein, 07-3042-cr, 2008 WL 3982104 (2d Cir. August 28, 2008), arose out of the notorious “Thompson Memorandum” which provided that advancing legal fees was a factor prosecutors could consider in assessing the extent of a corporation’s cooperation in an investigation of misconduct.  That memo has been superseded more than once, most recently by the Filip Memorandum, also issued on August 28, 2008, which now instructs U.S. Attorneys and line prosecutors not to treat the attorney-client and work product privileges or payment of corporate employees’ attorneys’ fees as obstructions of justice – thus effectively mooting the main thrust of the Stein decision.  

While the government is no doubt dismayed by the Court’s ruling, it can at least take comfort in the Court’s failure to rely on Judge Kaplan’s reasoning – that the government had behaved in conduct that “shocked the conscience.”

The case provides much food for thought on the right to counsel, the right to counsel of choice, and what represents counsel of quality.  As the White Collar Crime Blog notes,

The best line from the case - "But if it is in the government’s interest that every defendant receive the best possible representation, it cannot also be in the government’s interest to leave defendants naked to their enemies."


The holding of the case is summarized here and here.  Essentially, the Court held:

We hold that KPMG's adoption and enforcement of a policy under which it conditioned, capped and ultimately ceased advancing legal fees to defendants followed as a direct consequence of the government's overwhelming influence, and that KPMG's conduct therefore amounted to state action. We further hold that the government thus unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment, and that the government did not cure the violation. Because no other remedy will return defendants to the status quo ante, we affirm the dismissal of the indictment as to all thirteen defendants.


Yes – a great (if ultimately mooted) victory for the right to counsel.  

What I find most intriguing about this decision is the subtext – that quality representation in document-intensive white collar cases equates with expensive representation.  In some cases, that is true.  But one should not lose sight of the issue at the heart of criminal cases: what did the individual defendant know and when did he know it?  There may be twenty million documents in the KPMG prosecution, but the ones that matter for each defendant are the ones they wrote, or that mention them, or they received – a subset that the government can be easily required to provide, and are usually significantly less than the entirety of the government’s production.  Moreover, the key documents in this subset will be an even tinier subset – and an experienced lawyer can sift through many of the irrelevant ones very rapidly (or hire a smart law student at $30 an hour to do the same) -- leading to a final selection that might take a day or a week to review.  Even at $700 - $1,000 per hour, such a process takes significantly less than the millions in defense fees cited in Stein.  

The key in criminal prosecutions, including white collar prosecutions, is defense counsel who are experienced and intelligent, who offer advice grounded in experience, empathy and (that rare commodity) judgment – which an intransigent defendant is free to disregard, but which, one presumes, is ultimately what the defendant pays those big bucks for.  In the famed prosecution of Frank Quattrone – where the issue was his intent about a sole e-mail to staff regarding a document destruction policy – it was his testimony in the first trial that contributed to the hung jury rather than an acquittal, and it was the introduction of that testimony in his second trial that contributed to the conviction (ultimately reversed).  In other words, the critical advice in the case turned on whether or not to testify, and while that advice is of course based on a certain amount of document review, it also hinges on a gut, practical assessment of the defendant’s quality as a witness and the quality of the government’s case, something that stems from great genetic instinct and years of experience, but can hardly be reduced to immediate “lawyer time.”  And its value hinges on the defendant listening to it.  Similarly, in the prosecution of Martha Stewart, she lost her case when she voluntarily proffered to the government, and made statements that conflicted with a tiny number of key documents.  Again, the key to her salvation lay in judgment (her own and that of her lawyers) not expensive lawyer time.

As a former federal defender, who still believes that the best trial lawyers I have ever met are state and federal public defenders, I find it amusing and troubling that so many people think that in the context of criminal defense, you get what you pay for. 

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