Prisoners are persons whom most of us would rather not think about. Banished from everyday sight, they exist in a shadow world that only dimly enters our awareness. They are members of a "total institution" that controls their daily existence in a way that few of us can imagine. "[P]rison is a complex of physical arrangements and of measures, all wholly governmental, all wholly performed by agents of government, which determine the total existence of certain human beings (except perhaps in the realm of the spirit, and inevitably there as well) from sundown to sundown, sleeping, walking, speaking, silent, working, playing, viewing, eating, voiding, reading, alone, with others. . . ." It is thus easy to think of prisoners as members of a separate netherworld, driven by its own demands, ordered by its own customs, ruled by those whose claim to power rests on raw necessity. -- Justice William Brennan, dissenting in O’Lone v. Estate of Shabazz, 482 U.S. 342, 354-55 (1987).

Tuesday, July 17, 2007

Charges dismissed against KPMG defendants

There was a news story today that most people probably glossed over but is very significant in defining individual rights against the overwhelming power of the federal government in prosecuting white collar crimes.

I will try to summarize the basic details without getting bogged down. A summary of the case can be found on Wikipedia at, but it doesn't include the latest details.

Basically, in 2003, KPMG, one of the largest accounting firms in the country, was accused by the Department of Justice of fraud in marketing abusive tax shelters. I believe this is the largest tax shelter investigation in history.

I want to begin by saying I have no idea whether the defendants are guilty or not. To be honest, I don't care. What I care about is that they have a fair opportunity to defend themselves.

In order for a corporation to avoid a federal indictment (which is basically a death sentence for any company), it must be deemed "cooperative" with the federal government in its investigation. Any public corporation in its right mind will cooperate. .

Thus, "under an agreement, KPMG LLP admitted criminal wrongdoing in creating fraudulent tax shelters to help wealthy clients dodge $2.5 billion in taxes and agreed to pay $456 million in penalties. KPMG LLP will not face criminal prosecution as long as it complies with the terms of its agreement with the government. On January 3, 2007, the criminal conspiracy charges against KPMG were dropped. However, Federal Attorney Michael J. Garcia stated that the charges could be reinstated if KPMG does not continue to submit to continued monitorship through September 2008" [quoted from Wikipedia]

Please understand that KPMG had no choice. They are a public company; their obligation is to their stockholders, not their employees. I don't believe for one second that KPMG honestly believed they were doing anything illegal. I think the government pointed a gun at their head and said "Confess and cooperate, or we pull the trigger." [Arthur Anderson was convicted in conduct related to the Enron scandal and was bankrupted, costing 28,000 people their jobs. Its later vindication by a unanimous Supreme Court was like an executed criminal being exonerated by DNA evidence.... just a little too late.]

What are the terms of cooperation? Well, KMPG was told it would be considered "uncooperative" if it paid the legal fees for its employees, who had been indicted. For KPMG, it was standard policy, as it is for many companies, to pay the defense costs of partners who are indicted for work performed in the course of the firm's business. The government's position is that this policy constituted a "lack of cooperation." According to the government, the indicted employees must pay their own legal fees, likely to be in the millions of dollars. To quote Johnny Cochran, "defendants are not innocent until proven guilty, they are innocent until proven broke." When the government has virtually unlimited resources to prosecute a case, a potentially innocent defendant has almost no chance unless he has the same resources to present his side of the story. Fortunately, a very brave federal judge saw it the same way.

"On 27 June 2006, U.S. District Judge Lewis Kaplan of the United States District Court in Manhattan ruled that by threatening KPMG with indictment unless the firm reneged on its policy of paying the defense costs of partners who were indicted for work performed in the course of the firm's tax shelter business, the Department of Justice violated the constitutional rights of employees. In his opinion, Judge Kaplan agreed with the defendants' contention that KPMG was improperly pressured to pay their legal expenses, 'because the government held the proverbial gun to its head'." [Wikipedia]

The government appealed (naturally).

This is kind of complicated, but basically the judge tried to create a remedy in which the defendants could sue KPMG to have their legal fees paid and allow the government's case to go on. In May, the appeals court ruled that he did not have the authority to create a parallel civil proceeding, basically daring the judge to either dismiss the case or reverse his earlier ruling. To quote Bloomberg:

"The judge said last year that the violations might be remedied if the executives could force KPMG to resume paying, and he ordered the company to stand trial on the matter of whether it owed legal fees. KPMG appealed. In May, a New York- based appeals court said Kaplan lacked the authority to force such a trial. "

The government then asked the judge, effectively, to dismiss the case. This might seem odd, but it is actually very clever. If the judge had allowed the case to go forward, then the government was concerned it might lose the case with this judge. They wanted to appeal the original ruling. The only way to do that was to have the judge impose the most dramatic remedy -- dismissal of all charges. Then the government could appeal the basis for the dismissal. Obviously the government would like to restore their original policy of punishing companies who paid their employees legal fees.

Well, the judge has done just that and dismissed the charge. Now the government will appeal and who knows what the appeals court will decide. This is very high stakes poker.

I understand that few of you will find yourself in this situation, and you may not have much sympathy for corporate "criminals," but surely you believe that every defendant should be able to defend himself on an even playing field.

It is agonizing that I can't give this issue the full treatment it deserves, but I hope you will check out the links I have provided as well as do more internet research to realize how unfair the government has been in this case. You have no idea what these employees have been through in the last 4 years. I know what my trivial case was like and I know what a few other guys have been through so I can't help but be empathetic.


Anonymous said...

I am amazed at how the Govt has a seek and destroy mentality towards corporate and white collar targets. Most of these cases should be civil not criminal but the DOJ has made it it's mission to destroy companies and the lives of thousands of employees when they electrocute such large and small companies. Unfortunately there is no more incentive to do business in the USA, the liability is just way too high. The side effects of such harsh treatment and a fearful environment is bad for business and will impact our country in 10-15 years. White Collar has become a mandate for this administration.

Anonymous said...

Bill: How many poor people in prison? how many poor blacks, whites and hispanics? Yes it's about money which can help you with your defense, just imagine how many poor people are in federal prison? No access to high powered attorneys or firms, just a public defender who looks at your plea deal before sentencing and advices you take it or face the wrath of the Govt. But then there is cronie who is treated differently...why such disparity. Edwards explains:

John Edwards released this statement regarding the Libby commutation.

"Only a president clinically incapable of understanding that mistakes have consequences could take the action he did today. President Bush has just sent exactly the wrong signal to the country and the world. In George Bush's America, it is apparently okay to misuse intelligence for political gain, mislead prosecutors and lie to the FBI. George Bush and his cronies think they are above the law and the rest of us live with the consequences. The cause of equal justice in America took a serious blow today."

Edwards: "George Bush And His Cronies Think They Are Above The Law"

Bill Bailey said...

For prison statistics of all kinds, I would refer you to the Bureau of Justice Statistics website.

I already expressed my views on the Libby Commutation at the time.

I think part of the issue is that it is easy to defend federal sentencing in the abstract but when it suddently affects someone close to you (or even yourself), it suddenly seems much harsher than you realized. And not just the sentence itself, but the whole process and how tilted it is in favor of the prosecution.

George Bush, like most politicians, is in favor of being "tough on crime" as an abstract idea. When he witnessed first hand the toll of the process on his good friend along with the harshness of the sentence, it is not just an abstration anymore.

I just wish he would take some leadership on reconsidering the whole federal sentencing structure for the rest of us but that is probably a little too much to expect given his current standing in the polls and virtual lame-duck status.