Second Circuit Upholds Dismissal of Case Against Former KPMG Employees

September 10, 2008

In United States v. Stein, the United States Court of Appeals for the Second Circuit recently upheld a lower court’s decision to dismiss charges against former employees of KPMG on the basis that the prosecutors interfered with the employees’ constitutional right to counsel. 

Ex-employees of KPMG, a large accounting firm, were indicted after the Department of Justice (“DOJ”) investigated KPMG’s role in devising and marketing allegedly fraudulent tax shelters.  KPMG had initially advanced the ex-employees their legal fees but stopped after the government threatened KPMG that paying the legal fees would be used against the company in the investigation.  KPMG then stopped paying the legal fees.   

In January 2006, the ex-employees moved to have the indictments dismissed on the basis that the government had interfered with KPMG’s willingness to pay their legal fees.  The lower court found that but for the government’s interference, KPMG would have paid the employees’ legal fees and that the government’s conduct interfered with the employees’ Sixth Amendment rights. 

In July 2007, the lower court dismissed the indictment against the ex-KPMG employees.  On review, the Second Circuit has now held that KPMG stopped paying the ex-employees’ legal fees due to government pressure and therefore KPMG’s conduct “amounted to state action.”  The court also held that the government interfered with the defendants’ right to counsel in violation of the Sixth Amendment.  As a result, the Second Circuit upheld the dismissals. 


Coincidentally, the decision in Stein occurred on the very day the DOJ issued new guidelines for prosecuting corporate crimes.  In particular, the guidelines states that “credit for cooperation will not depend on the corporation’s waiver of attorney-client privilege or work product protection, but rather on the disclosure of relevant facts.”  The guidelines further state that when evaluating cooperativeness, prosecutors should not consider whether a corporation advanced attorney’s fees to employees.  In addition, participation in a joint defense agreement “will not render a corporation ineligible for cooperation credit” and prosecutors “may not consider whether a corporation has sanctioned or retained culpable employees in evaluating whether to assign cooperation credit to the corporation.” 

By Susan J. Matthees

Categories: Enforcement