By: Cydney Posner

This is a follow-up to my email of 4/18/06, which involved the issue of the propriety of KPMG's refusal to advance fees to employees, under pressure from the DOJ, in the criminal investigation involving tax opinions by KPMG on questionable tax shelters. Apparently, KPMG had a long-standard practice of paying legal fees for employees who faced charges for work done on behalf of the firm, but in this case capped payment for the indicted individuals at $400,000 before they were indicted. The DOJ's pressure has been attributed to the Thompson Guidelines, adopted in 2003, which outline factors that prosecutors can weigh in deciding whether to seek an indictment of a company. Among the factors is whether the company has stopped advancing lawyers' fees to employees caught up in investigations.

Today, according to an article in the WSJ, a federal judge foundthat government prosecutors violated the constitutional rights of 16 former KPMG executives facing criminal charges by pressuring KPMG to cut off their legal fees. However, the court did not dismiss the indictment, but rather stated that the former KPMG employees could file civil claims against the accounting firm to have the fees paid. In its opinion, the court said that 'federal prosecutors 'influenced' KPMG's decision to cap the fees, which interfered with the former employees' right to a fair trial and effective counsel. 'KPMG refused to pay because the government held the proverbial gun to its head,' the judge wrote." According to the article, the assistant U.S. Attorney told KPMG that, "if the firm had any discretion over the fees, the government would 'look at that under a microscope.' " In addition, after counsel to KPMG sent the employees a memo advising them of the investigation and telling them that they had the right to an attorney, the assistant U.S. Attorney suggested that counsel send a supplemental memo advising that employees "weren't required" to have an attorney present when questioned. KPMG obliged. In its opinion, the court observed that the "government was economical with the truth in its early responses to the motion" and "let its zeal get in the way of its judgment. It has violated the Constitution it is sworn to defend."

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