U.S. v. Stein

• Decision Date: 26 June 2006
• Docket Number: No. S1 05 Crim. 0888(LAK).,S1 05 Crim. 0888(LAK).
• Parties: UNITED STATES of America, v. Jeffrey STEIN, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

435 F.Supp.2d 330

UNITED STATES of America, v. Jeffrey STEIN, et al., Defendants.

No. S1 05 Crim. 0888(LAK).

United States District Court, S.D. New York.

June 26, 2006.

COPYRIGHT MATERIAL OMITTED

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Marc A. Weinstein, Justin S. Weddle, Katherine Polk Failla, Kevin M. Downing, Stanley J. Okula, Jr., Julian J. Moore, Assistant United States Attorneys, Michael J. Garcia, United States Attorney, New York, NY, for U.S.

David Spears, Richards Spears Kibbe & Orbe LLP, New York, NY, Craig Margolis, Vinson & Elkins LLP, Washington, DC, for Defendant Jeffrey Stein.

Stanley S. Arkin, Arkin Kaplan LLP, New York, NY, Joseph V. DiBlasi, Kew Gardens, NY, Elizabeth A. Fitzwater, Arkin Kaplan LLP, New York, NY, for Defendant Jeffrey Eischeid.

Michael S. Kim, Leif T. Simonson, Kobre & Kim LLP, New York, NY, for Defendant Mark Watson.

Stuart Abrams, M. Breeze McMennamin, David S. Hammer, Frankel & Abrams, Jack S. Hoffinger, Susan Hoffinger, Hoffinger Stern & Ross, LLP, New York, NY, for Defendant Raymond J. Ruble.

Ronald E. DePetris, Marion Bachrach, Dana Moskowitz, DePetris & Bachrach, LLP, New York, NY, for Defendant Philip Wiesner.

John F. Kaley, Doar Rieck Kaley & Mack, New York, NY, for Defendant Steven Gremminger.

Susan R. Necheles, Hafetz & Necheles, for Defendant Richard Rosenthal.

James R. DeVita, Bryan Cave LLP, New York, NY, John A. Townsend, Townsend & Jones LLP, Houston, TX, for Defendant Carol Warley.

Michael Madigan, Akin Gump Strauss Hauer & Feld LLP, Washington, DC, Robert H. Hotz, Jr., Christopher T. Schulten, Akin Gump Strauss Hauer & Feld LLP, New York, NY, for Defendant John Lanning.

Russell M. Gioiella, Richard M. Asche, Litman, Asche & Gioiella, LLP, New York, NY, for Defendant Carl Hasting.

Cristina Arguedas, Ann Moorman, Arguedas, Cassman & Headly, LLP, Berkeley, CA, Michael Horowitz, Michelle Seltzer, Cadwalader, Wickersham & Taft LLP, Washington, DC, for Gregg Ritchie.

Gerald B. Lefcourt, Gerald B. Lefcourt, P.C., Jay Philip Lefkowitz, Kirkland & Ellis LLP, New York, NY, for Defendant David Amir Makov.

Caroline Rule, Robert S. Fink, Christopher M. Ferguson, Usman Mohammad, Kostelanetz & Fink, LLP, New York, NY, for Defendant Richard Smith.

Richard Mark Strassberg, Goodwin Proctor LLP, Washington, DC, for Defendant David Greenberg.

George D. Niespolo, Duane Morris LLP, San Francisco, CA, for Defendant Randy Bickham.

Steven M. Bauer, Karli E. Sager, Latham & Watkins, LLP, San Francisco, CA, for Defendant John Larson.

David C. Scheper, Julio V. Vergara, Overland Borenstein Scheper & Kim LLP, Los Angeles, CA, for Defendant Robert Pfaff.

John R. Wing, Diana D. Parker, Lankier, Siffert & Wohl, LLP, New York, NY, for Defendant Larry DeLap.

Charles A. Stillman, Stillman Friedman & Schechtman, P.C., Carl S. Rauh, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for KPMG LLP.

Lewis J. Liman, Stephen M. Rich, Jennifer A. Kennedy, Cleary Gottlieb Steen & Hamilton LLP, Paul B. Bergman, Paul B. Bergman, P.C., for the New York Council of Defense Lawyers as Amicus Curiae.

Stephanie Martz, Mark I. Levy, Kilpatrick Stockton LLP, for National Association of Criminal Defense Lawyers as Amicus Curiae.

William R. McLucas, Howard M. Shapiro, Jonathan E. Nuechterlein, Christopher Davies, Wilmer Cutler Pickering Hale and Dorr LLP, George R. Kramer, Renee S. Dankner, Marjorie E. Gross, Robin S. Conrad, Amar D. Sarwal, for The Securities Industry Association, The Association of Corporate Counsel, The Bond Market Association and The Chamber of Commerce of the United States of America as Amici Curiae.

OPINION

KAPLAN, District Judge.

                                                       TABLE OF CONTENTS
                Facts ...................................................................................336
                     The Thompson Memorandum ............................................................336
                     KPMG Gets Into Trouble and "Cleans House" ..........................................338
                     KPMG's Policy on Payment of Legal Fees .............................................340
                     The Initial Discussion between the USAO and Skadden ................................340
                     KPMG Gets the Message ..............................................................344
                     The Government Presses Its Advantage ...............................................347
                     The Conclusion of the Investigation, KPMG's Stein Problem and the Deferred
                       Prosecution Agreement ............................................................347
                     The Deferred Prosecution Agreement and the Indictment in This Case .................349
                     The Present Motion .................................................................350
                          The Government's Initial Response .............................................350
                          Prehearing Proceedings ........................................................352
                          The Hearing ...................................................................352
                     Ultimate Factual Conclusions .......................................................352
                Discussion ..............................................................................353
                        I.  The Relationship Between KPMG and its Personnel With Respect to
                              Advancement of Legal Fees and Defense Costs ...............................353
                            A.  Indemnification and Advancement Generally ...............................353
                            B.  KPMG ....................................................................355
                       II.  The Government Violated the Fifth and Sixth Amendments by Causing
                              KPMG to Cut Off Payment of Legal Fees and Other Defense Costs
                              Upon Indictment ...........................................................356
                            A.  The Right to Fairness in the Criminal Process ...........................356
                                1.  Nature of the Right .................................................356
                                2.  The Right to Fairness in the Criminal Process Is a Fundamental
                                      Liberty Interest Entitled to Substantive Due Process
                                      Protection Where, As Here, the Government Coerces a Third
                                      Party to Withhold Funds Lawfully Available to a Criminal
                                      Defendant .........................................................360
                                3.  The Government's Actions Violated the Substantive Due Process
                                       Right to Fairness in the Criminal Process ........................362
                            B.  The Sixth Amendment Right to Counsel ....................................365
                                1.  The Nature and Scope of the Right to Counsel ........................365
                                    a.  Attachment of Sixth Amendment Rights .......................366
                                    b.  "Other People's Money" .....................................367
                

                                2.  The Thompson Memorandum and the Government's Implementation
                                      Violated the KPMG Defendants' Sixth Amendment
                                      Right to Counsel ..................................................367
                                3.  The KPMG Defendants Are Not Obliged to Establish
                                      Prejudice, Which in Any Case Would Be Presumed Here ...............369
                      III.  It is Premature to Consider the Government's Actions With Respect to
                              Payment of Legal Expenses Incurred Before Indictment ......................373
                       IV.  The Remedy ..................................................................373
                            A.  Monetary Relief Against the Government Is Precluded by
                                  Sovereign Immunity ....................................................374
                            B.  Monetary Relief May Be Available Against KPMG ...........................377
                                1.  This Court Has Subject Matter Jurisdiction ..........................377
                                2.  Personal Jurisdiction, Even If It Does Not Already Exist, May
                                      Be Obtained Over KPMG .............................................378
                            C.  Possible Dismissal and Other Remedies ...................................380
                        V.  Some of the Actions of the USAO in Response to the Motion Were Not
                              Appropriate ...............................................................380
                Conclusion ..............................................................................381
                

The issue now before the Court arises at an intersection of three principles of American law.

The first principle is that everyone accused of a crime is entitled to a fundamentally fair trial.¹ This is a central meaning of the Due Process Clause of the Constitution.

The second principle, a corollary of the first, is that everyone charged with a crime is entitled to the assistance of a lawyer.² A defendant with the financial means has the right to hire the best lawyers money can buy. A poor defendant is guaranteed competent counsel at government expense.³ This is at the heart of the Sixth Amendment.

The third principle is not so easily stated, not of constitutional dimension, and not so universal. But it too plays an important role in this case. It is simply this: an employer often must reimburse an employee for legal expenses when the employee is sued, or even charged with a crime, as a result of doing his or her job. Indeed, the employer often must advance legal expenses to an employee up front, although the employee sometimes must pay the employer back if the employee has been guilty of wrongdoing.

This third principle is not the stuff of television and movie drama. It does not remotely approach Miranda warnings in popular culture. But it is very much a part of American life. Persons in jobs big and small, private and public, rely on it every day. Bus drivers sued for accidents, cops sued for allegedly wrongful arrests, nurses named in malpractice cases, news reporters sued in libel cases, and corporate...