End The Cooperation Credit Loop Hole
The decision in U.S. v. Stein, S 1 05 Crim. 0888 (LAK) (S.D.N.Y.), this week dismissing the indictment against a number of the defendants in the KPMG tax shelter case only serves to underscore the need for Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) to reform their standards on cooperation. In another lengthy opinion, Judge Kaplan details the sad tale of how the government used the threat of prosecution to turn accounting giant KPMG into its pawn, stripping individuals of their right to counsel and a fair trial: “The government threatened to indict, and thus to destroy, the giant accounting firm, KPMG LLP (“KPMG”). It coerced KPMG to limit and then cut off its payment of the legal fees of KPMG employees. KPMG avoided indictment by yielding to government pressures. Many of its personnel did not. They now await trial, four of them deprived of counsel of their choice and most of the others unable to afford the defenses that they would have presented absent the government’s interference.” The prosecutors in Stein, of course, deny that they pressured KPMG to strip individuals under their investigative eye of their rights and the company claimed its actions were voluntary. The court found otherwise.
In this post-Enron era, the fact of the matter is that the Stein story is replicated frequently, but perhaps in a more subtle fashion in DOJ criminal and SEC civil investigations. To be sure, DOJ prosecutors and SEC enforcement officials typically do not direct a company under investigation to not pay legal fees. Likewise prosecutors do not direct the company not to enter into joint defense agreements so that employees will have access to materials necessary for their defense. And, of course prosecutors do not directly ask company officials to waive privilege or any other rights. They do not have to. The standards of prosecution, coupled with the potential consequences of the prosecution, do it for them.
The DOJ and SEC standards for the prosecution of business organizations set forth in the Thompson and McNulty memos and the Seaboard Release, respectively, all have the same key loophole for the government: they offer credit for cooperation if the company voluntarily waives its rights. How much credit and what actions must be taken is not defined. The point is clear however: More cooperation equals more credit. What is more? The list of choices includes the waiver of the attorney client privilege, waiver of work product protection, turning over privileged interview notes from an internal investigation, terminating employees the government might think are guilty, not paying legal fees and avoiding common interest or joint defense agreements under which materials are shared with current and former employees that may be necessary to their defense. For those seeking to avoid prosecution, “more” all too often equals whatever it takes – that is, all of the above.
As in Stein, prosecutors typically label such acts “voluntary” and disclaim any coercion or improper actions. Companies taking these steps echo this theme. In Stein, the Court rejected these claims. In daily practice, these claims are equally hollow. Yet, until the cooperation credit loop hole is closed this game of labeling actions taken under the coercive threat of prosecution as voluntary will continue.
The two bills pending in Congress will not resolve this matter. Senate bill S. 186 and House bill H.R. 3013 are both designed to halt the erosion of fundamental rights that to often occurs in government criminal and civil prosecutions. Both are based on legislative hearings which detail the abuses under the current standards. Both propose welcome and necessary changes to the system. Neither closes the cooperation credit loop hole, because both permit cooperation credit for the waiver of rights. While it may seem appropriate to permit credit for waivers of rights by companies, in truth, the result is anything but appropriate. There is nothing appropriate about law enforcement or company officials being implicated in the erosion of fundamental rights such as the right to counsel or the preparation of a defense, which is what happened in Stein. Rather, the only appropriate course is to close the cooperation loop hole: end cooperation credit for waivers of fundamental rights and end the kind of situations on which Stein is based.