On June 27, 2006, U.S. District Judge Lewis Kaplan held, in the KPMG tax shelter prosecution, that portions of the Thompson memo violate the constitutional rights of 16 former KMPG partners who are accused of participating in a fraudulent tax scheme. Judge Kaplan found that KPMG, seeking to show full compliance with the Thompson memo to avoid its own criminal prosecution, withheld advancement of attorneys’ fees from the individual defendants. The Judge said in his 83-page opinion that “KMPG refused to pay because the government held the proverbial gun at its head.” Judge Kaplan found that the government, through the Thompson memo and its own actions, violdated the defendants’ right to due process guaranteed under the Fifth Amendment and their right to counsel guaranteed by the Sixth Amendment. The Judge declined to dismiss the indictments, holding rather that the individual defendants can pursue a civil action against KPMG seeking legal fees or that KPMG can decide on its own to advance the individuals’ defense fees.
The Judge’s lengthy opinion is thoughtful and scholarly, and full of the language of liberty and individual rights. Among other things, the Judge’s opinion states that “[t]he imposition of economic punishment by prosecutors, before anyone has been found guilty of anything, is not a legitimate governmental interest – it is an abuse of power.”
While Judge Kaplan’s ruling is unquestionably a significant event that will impact pending prosecutions across the country, the specific practical consequences outside the KPMG tax shelters case will remain to be seen. His ruling is based on a detailed record of the particular facts and circumstances of that specific case. In addition, as the opinion of a U.S. District Court Judge, the decision has persuasive but not precedential authority. Nevertheless, Judge Kaplan’s opinion is important and will have ramifications, and raises a host of potentially interesting questions in connection with the indictment of the Milberg Weiss law firm, among many other pending cases.
The wsj.com law blog’s comments on Judge Kaplan’s opinion can be found here. The wsj.com law blog’s links to several major newspaper’s stories and editorials about Judge Kaplan’s opinion may be found here.
An interesting comment in the White Collar Crime Prof blog focusing on the legal duties of corporation’s to advance defense costs and on the possible implications of Judge Kaplan’s opinion for the D & O insurance industry can be found here.