U.S. v. Stein, No. SI 05 Crim. 0888(LAK).

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtKaplan
Citation452 F.Supp.2d 230
Decision Date06 September 2006
Docket NumberNo. SI 05 Crim. 0888(LAK).,No. 06 Civ. 5007(LAK).
PartiesUNITED STATES of America, v. Jeffrey STEIN, et al., Defendants. In re United States of America, v. Jeffrey Stein, et al., Defendants. Jeffrey Stein, et al., Plaintiffs, v. KPMG LLP, Defendant.
452 F.Supp.2d 230
UNITED STATES of America,
v.
Jeffrey STEIN, et al., Defendants.
In re United States of America,
v.
Jeffrey Stein, et al., Defendants.
Jeffrey Stein, et al., Plaintiffs,
v.
KPMG LLP, Defendant.
No. SI 05 Crim. 0888(LAK).
No. 06 Civ. 5007(LAK).
United States District Court, S.D. New York.
September 6, 2006.

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Justin S. Weddle, Kevin M. Downing, Stanley J. Okula, Jr., Margaret Garnett, Assistant United States Attorneys, Michael J. Garcia, United States Attorney, Charles A. Stillman, Stillman Friedman & Schechtman, P.C., Robert S. Bennett,

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Skadden, Arps, Slate, Meagher & Flom LLP, Attorneys for KPMG LLP.

David Spears, Spears & Imes LLP, Attorney for Jeffrey Stein and on, the advancement claim only, John Lanning.

Michael Madigan, Robert H. Hotz, Jr., Christopher T. Schulten, Akin Gump Strauss Hauer & Feld LLP, Attorneys for John Lanning on the indictment.

Robert S. Fink, Caroline Rule, Fran Obeid, Kostelanetz & Fink, LLP, Attorneys for Richard Smith.

Stanley S. Arkin, Joseph V. DiBlasi, Elizabeth A. Fitzwater, Arkin Kaplan Rice LLP, Attorneys for Jeffrey Eischeid.

Ronald E. DePetris, Marion Bachrach, Dana Moskowitz, DePetris & Bachrach, LLP, Attorneys for Philip Wiesner.

Steven M. Bauer, Karli E. Sager, Latham & Watkins, LLP, Attorneys for John Larson on the indictment.

Stephen Willey, Savitt & Bruce, LLP, Attorney for John Larson on the advancement claim.

David C. Scheper, Julio V. Vergara, Overland Borenstein Scheper & Kim LLP, Attorneys for Robert Pfaff.

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

Diana D. Parker, Attorney for Larry DeLap.

John R. Wing, Lankier Siffert & Wohl LLP, Attorney for Larry DeLap on the indictment.

John F. Kaley, Doar Rieck Kaley & Mack, Attorney for Steven Gremminger.

Cristina Arguedas, Ann Moorman, Arguedas, Cassman & Headly, LLP, Michael Horowitz, Michelle Seltzer Cadwalader, Wickersham & Taft LLP, Attorneys for Gregg Ritchie on the indictment.

David Campbell Smith, McNamara, Spira & Smith, Attorney for Gregg Ritchie on the advancement claim.

George D. Niespolo, Duane Morris LLP, Attorney for Randall Bickham on the indictment.

Marc Fenster, Russ August & Kabat, Attorney for Randall Bickham on the advancement claim.

Michael S. Kim, Leif T. Simonson, Kobre & Kim LLP, Attorneys for Mark Watson.

John A. Townsend, Townsend & Jones LLP, Attorney for Carol Warley on the indictment and the advancement claim.

James R. DeVita, Bryan Cave LLP, Attorney for Carol Warley on the indictment.

Russell M. Gioiella, Richard M. Asche, Litman, Asche & Gioiella, LLP, Attorneys for Carl Hasting.

David B. Pitofsky, Richard Mark Strassberg, Goodwin Proctor LLP, Attorneys for David Greenberg on the indictment.

Leonard F. Lesser, Simon Lesser P.C., Attorney for David Greenberg on the advancement claim.

OPINION

KAPLAN, District Judge.


TABLE OF CONTENTS
 Facts ........................................................................... 239
                 I. The Advancement Complaint ............................................... 239
                 II. Agreements Between KPMG and Certain of the KPMG Defendants .............. 239
                

Page 237

 A. The Pre-Criminal Referral Agreements Between KPMG and
                 Messrs. Greenberg and Wiesner ....................................... 239
                 B. The Fee Letters ...................................................... 240
                 C. The Post-Fee Letter Agreements ....................................... 241
                 III. The Hasting Action and related Proceedings .............................. 241
                Discussion ........................................................................ 242
                 I. This Court Has Ancillary Jurisdiction to Determine the Claims of the
                 KPMG Defendants for Advancement of Legal Expenses For Defending
                 this Criminal Case ..................................................... 242
                 II. The KPMG Defendants Are Not Obliged to Arbitrate Their Claims for
                 Advancement ............................................................ 246
                 A. Legal Standards ...................................................... 247
                 B. There Is No Evidence that Nine of the KPMG Defendants Are
                 Parties to Any relevant Arbitration Agreement........................ 248
                 C. In Any Case, Agreements Requiring Arbitration of Claims for
                 Advancement of Legal Expenses to Defend this Criminal Case
                 Are Void as Against Public Policy ................................... 253
                 III. The Implied Contract Claim Is Legally Sufficient ........................ 260
                 IV. KPMG's Defenses ......................................................... 263
                 A. The Merger Clause .................................................... 270
                 B. KPMG's Due Process Argument .......................................... 273
                 VI. The KPMG Defendants' Motion to Compel Advancement ....................... 275
                Conclusion ........................................................................ 275
                

This is said to be the largest criminal tax case in our nation's history. The indictment charges nineteen defendants, seventeen of them formerly partners or employees of the giant accounting firm, KPMG, with conspiracy and tax evasion.1

The Court previously held that the government violated the Fifth and Sixth Amendment' rights of the defendants formerly associated with KPMG (the "KPMG Defendants") by causing KPMG.—under threat of indictment and destruction of the firm—to depart from its uniform prior practice of paying the legal expenses of KPMG personnel in all cases in which they were named in consequence of their activities on behalf of the firm. It found that KPMG would have paid those expenses— whether legally obliged to do so or not— but for the government's improper conduct, a finding that is binding as between the defendants and the government. The

Page 238

Court, however, deferred the request of the KPMG Defendants to dismiss the indictment based upon the government's misconduct, reasoning that dismissal might prove inappropriate if KPMG were obligated to advance the defense costs, in which case all or much of the harm caused and still threatened by the government's actions might be remedied or avoided. The Court held that it has ancillary jurisdiction over the claims against KPMG for advancement of defense costs and permitted the assertion of those claims in this case. In addition, it postponed the criminal trial for approximately four months, in part to afford KPMG—which already had participated in the criminal case insofar as the KPMG Defendants sought a remedy from KPMG—a fuller opportunity to defend against those claims.

The KPMG Defendants, as contemplated by the Court's previous opinion ("Stein I"),2 served a summons and complaint on KPMG in the criminal case for advancement of defense costs. KPMG has moved to dismiss for lack of subject matter jurisdiction and on the merits.

KPMG's principal argument is that the complaint should be dismissed because the KPMG Defendants are obliged to arbitrate their claim for advancement of defense costs. But the argument is flawed. Even assuming that arbitration were a possibility where, as here, the dispute arises in a criminal case, KPMG has not established that at least nine of the sixteen KPMG Defendants are parties to any relevant arbitration agreement. In any event, and notwithstanding that courts ordinarily will enforce arbitration clauses, even with respect to claims for indemnification and advancement of legal fees, this is not an ordinary situation. In this context, enforcement of any applicable arbitration clause with respect to the issue of advancement of defense costs would compromise the Court's ability to

• ensure a speedy trial,

• protect the public interest by avoiding possible dismissal of the criminal charges for unconstitutional government interference with the defendants' rights where prompt adjudication of the advancement issue might provide a sufficient remedy,

• safeguard the defendants' rights to a fundamentally fair trial, and

• seek to avoid imposing defense costs on the taxpayers, which is what will occur to the extent that any of the KPMG Defendants go broke trying to defend themselves.

Accordingly, after careful consideration, the Court has concluded that enforcement of any applicable arbitration clause, to the extent that it would require arbitration of claims for advancement of legal expenses in this case, would be against public policy. This Court will resolve the advancement claims on the merits.

KPMG argues also that the advancement claims of a number of the KPMG Defendants are foreclosed by the KPMG partnership agreement and, in any case, have been released. Its partnership agreement argument is without merit. As one of the KPMG Defendants in fact may have released KPMG from any obligation to advance defense costs, however, the motion to dismiss as to him is converted into one for summary judgment on that issue. In a number of other instances, the release issue presents a question of fact for trial. In still others, it is without merit.

KPMG makes also a number of other arguments. It attacks the subject matter jurisdiction of the Court and the legal sufficiency

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of the advancement complaint. It raises as well a number of procedural contentions. These arguments, however, all fail. The advancement claims will proceed to a prompt trial except perhaps in the case of one KPMG Defendant whose claim may be subject to dismissal on summary judgment.

Facts

The Court assumes familiarity with Stein I and its subsequent opinion, which granted in part the KPMG Defendants' motion to suppress statements made to the government.3 These give the background against which this matter arises.4 It suffices for present purposes to summarize briefly both the KPMG Defendants' complaint for advancement of defense costs and a number of agreements to which KPMG refers in its...

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15 practice notes
  • U.S. v. Rosen, No. 1:05cr225.
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)
    • May 8, 2007
    ...adjourned the criminal trial sine die until the fee matter was resolved. See Stein, 435 F.Supp.2d at 356-82; United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y.2006) (ancillary complaint against KPMG stated cause of action for fee advancement); United States v. Stein, 461 F.Supp.2d 201, 204......
  • U.S. v. Stein, Docket No. 07-3042-cr.
    • United States
    • U.S. Court of Appeals — Second Circuit
    • August 28, 2008
    ...Id. at 377-80, 541 F.3d 142 382. The suit was commenced, and Judge Kaplan denied KPMG's motion to dismiss. United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y.2006) ("Stein III"). However, this Court ruled that the district court lacked ancillary jurisdiction over the action. Stein v. KPMG, ......
  • Scoran v. Overseas Shipholding Group Inc, No. 07 Civ. 10307(DF).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 31, 2010
    ...Reply Mem., at 6; Riggs Reply Aff., Exs. O and P), and, thus, the Court will not consider it here, see, e.g., United States v. Stein, 452 F.Supp.2d 230, 262 n. 126 (S.D.N.Y.2006). 6 The other time record on which Plaintiff relies, the “Crew Work Hours” sheet, was signed by Captain Maznio, a......
  • USA v. Pfaff, Docket Nos. 09-1702-cr(L), 09-1707-cr(CON), 09-1790-cr(CON).
    • United States
    • U.S. Court of Appeals — Second Circuit
    • August 27, 2010
    ...541 F.3d 130 (2d Cir.2008), Stein, 486 F.3d 753, United States v. Stein, 495 F.Supp.2d 390 (S.D.N.Y.2007), United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y.2006), and United States v. Stein, 435 F.Supp.2d 330 (S.D.N.Y.2006). Here, we recite only those facts pertinent to whether the distri......
  • Request a trial to view additional results
15 cases
  • U.S. v. Rosen, No. 1:05cr225.
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)
    • May 8, 2007
    ...adjourned the criminal trial sine die until the fee matter was resolved. See Stein, 435 F.Supp.2d at 356-82; United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y.2006) (ancillary complaint against KPMG stated cause of action for fee advancement); United States v. Stein, 461 F.Supp.2d 201, 204......
  • U.S. v. Stein, Docket No. 07-3042-cr.
    • United States
    • U.S. Court of Appeals — Second Circuit
    • August 28, 2008
    ...Id. at 377-80, 541 F.3d 142 382. The suit was commenced, and Judge Kaplan denied KPMG's motion to dismiss. United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y.2006) ("Stein III"). However, this Court ruled that the district court lacked ancillary jurisdiction over the action. Stein v. KPMG, ......
  • Scoran v. Overseas Shipholding Group Inc, No. 07 Civ. 10307(DF).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 31, 2010
    ...Reply Mem., at 6; Riggs Reply Aff., Exs. O and P), and, thus, the Court will not consider it here, see, e.g., United States v. Stein, 452 F.Supp.2d 230, 262 n. 126 (S.D.N.Y.2006). 6 The other time record on which Plaintiff relies, the “Crew Work Hours” sheet, was signed by Captain Maznio, a......
  • USA v. Pfaff, Docket Nos. 09-1702-cr(L), 09-1707-cr(CON), 09-1790-cr(CON).
    • United States
    • U.S. Court of Appeals — Second Circuit
    • August 27, 2010
    ...541 F.3d 130 (2d Cir.2008), Stein, 486 F.3d 753, United States v. Stein, 495 F.Supp.2d 390 (S.D.N.Y.2007), United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y.2006), and United States v. Stein, 435 F.Supp.2d 330 (S.D.N.Y.2006). Here, we recite only those facts pertinent to whether the distri......
  • Request a trial to view additional results

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