Last week, in United States v. Stein, Judge Kaplan found a portion of the DOJ guidelines, followed to assess cooperation contained in the Thompson Memorandum, unconstitutional. No. S1 05 Crim. 0888 (LAK) (S.D.N.Y. June 26, 2006), http://www.nysd.uscourts.gov/rulings/05CR888_6272006_0835TS.pdf. Specifically, the court found that “so much of the Thompson Memorandum and the activities of the USAO as threatened to take into account, in deciding whether to indict KPMG, whether KPMG would advance attorneys’ fees to present or former employees in the event they were indicted for activities undertaken in the course of their employment interfered with the rights of such employees to a fair trial and to the effective assistance of counsel and therefore violated the Fifth and Sixth Amendments to the Constitution.” Id. at *82-83.
While the court declined the defendants’ request to dismiss the case, it directed the government to adhere to its representation to not consider KPMG’s payment of defense fees in assessing compliance with the deferred prosecution agreement (DPA). The court also directed the clerk of the court to open a civil docket number for the filing of appropriate claims against KPMG. This ruling follows the recent action of the United States Sentencing Commission, which amended its guidelines to delete comments that had previously permitted courts to consider whether a corporate defendant had waived the attorney-client privilege in assessing cooperation and acceptance of responsibility for assessing whether a downward departure should be made. http://www.ussc.gov/PRESS/rel0406.htm
The ruling by Judge Kaplan and the action of the Sentencing Commission are welcome and long overdue steps in reforming the standards on cooperation. The actions of the SEC and DOJ have put extreme pressure on companies to waive the attorney-client privilege to try and build up “cooperation points” to avoid harsh sanctions. This has caused serious erosion to the attorney-client privilege and, in the long run, can only serve to undermine the quality of the legal advice given to companies, thereby undermining the goals of law enforcement. Similarly, government review of whether defense fees are paid has placed companies under extreme pressure to breach long-standing arrangements as Judge Kaplan found in his ruling. Again, such action by the government can only erode effective enforcement of the law — the government cannot enforce the law by trampling on people’s rights. When that type of action is taken, there can be no doubt that we all lose.
Hopefully, in light of Judge Kaplan’s ruling and the Sentencing Commission’s recent amendment of its guidelines, both the SEC and DOJ will rethink their approach to cooperation and refashion it in a manner that will foster good law enforcement and respect for the rights of those under investigation.