Corporate Legal Defense Fees and “Cooperation”

Sometimes it takes an Article III judge to have the courage to read bylaws and employment agreements and take necessary action.

The New York Times reports that some judges presiding over alleged corporate crime cases are questioning why companies routinely refuse to pay the legal fees and other expenses of executives that are in the crosshairs of the feds.

The Times reports about the KPMG case:

At a hearing late in March, the judge in the KPMG tax-shelter case, Lewis A. Kaplan of the Federal District Court in Manhattan, said that the Thompson memorandum “puts the government’s thumb on the scales” and raises questions about the Sixth Amendment’s constitutional right to legal representation.

“The reality is that you are depriving people of counsel, or least interfering or impairing,” the judge said.

Much of the federal pressure placed upon companies comes from the use of the Thompson Memorandum, drafted by then Deputy AG Larry Thompson in 2003.

The article incisively notes that some of the government’s strategy may rely on a perceived lack of public sympathy for indicted corporate executives, particularly those who have been well-compensated.

But since part of the federal playbook is to lean on lower-level employees to get them to flip, the combination of potentially criminalizing corporate mistakes and pressuring companies to show “cooperation” by cutting off defense fee payments, makes the situation a rather perverse one. Consider this vignette from the KPMG case:

Take Carol Warley, 49, one of the 16 KPMG defendants in the tax-shelter case. Ms. Warley, a former junior partner at KPMG, faces at least 10 years in prison if she is convicted on charges that she and 17 others conspired to defraud the government by making and selling abusive tax shelters to wealthy investors. (All 18 defendants have pleaded not guilty; a former KPMG partner entered a guilty plea last month.)

Ms. Warley has a net worth of a little more than $1 million, including retirement funds, but her lawyers are trying to cut corners on costs at the same time they search for holes in the government’s case.

For most corporate employees facing prosecution, even eventual reimbursement is an empty gesture. The likely result is that they plead, they sing and the prosecutors’ batting average looks good over time.

Bloggers Tom Kirkendall, Larry Ribstein and Peter Henning have covered this ably; me perhaps less so.