ON JUNE 27, 2006, JUSTIN weddle was in his office on the sixth floor of One St. Andrew’s Plaza in southern Manhattan when he learned that a judge had called him a liar.
Weddle, an assistant US attorney for the Southern District of New York, read the ruling that had just come down from United States District Judge Lewis A. Kaplan. He had his door closed, thank goodness. He couldn’t face anyone. Was everyone in the entire Southern District reading this decision right now? He was a member of the special club of Southern District criminal prosecutors. Weddle had been there when Jim Comey had given his famous Chickenshit Club speech. He and his colleagues did the right things in the right way for the right reasons. Upstanding, he never even liked practical jokes. He hated April Fools’ Day. He tried not to be self-righteous about it because he understood that nobody could tell the truth all the time, but he had become a lawyer to uphold—okay, this idea was corny, but Weddle believed it—truth and justice. With a ready smile, pug nose, and blond hair, the assistant US attorney looked more like a gregarious schoolboy than one of those prosecutorial cowboys who did what needed to be done to get the bad guys. Nobody would mistake him for a bully.
Yet that’s not the way Judge Kaplan saw it. The judge thought the government had strong-armed people, stripping them of their rights, and coerced cooperation as it investigated the way that the accounting firm KPMG had set up tax shelters for wealthy Americans. Kaplan wrote that the government, including Weddle, had let “its zeal get in the way of its judgment” in pressuring KPMG to stop paying the attorneys’ fees for former KPMG executives under investigation. The company had no choice, the judge believed. It was fighting for its corporate life, negotiating with a “proverbial gun to its head.”1 Judge Kaplan hadn’t wanted to go that far. But he felt Weddle and the other Southern District prosecutors had not only interfered with the executives’ constitutional right to counsel but also misled him. Weddle read on, as Kaplan assailed the prosecutors, writing that they had been “economical with the truth.” He was sitting in his office, experiencing the greatest catastrophe of his professional life.
Weddle had been killing himself on this case. KPMG, prosecutors came to believe, had sold illegal investments, knowingly designing them to help wealthy American clients avoid taxes while allowing them to claim to the IRS that they were investment vehicles. By the government’s reckoning, it was the largest criminal tax case ever brought. KPMG had created at least $11 billion in phony tax losses, which cost the United States at least $2.5 billion in uncollected revenue.2 The degree of difficulty in putting together this case dwarfed anything Weddle had worked on before. The tax shelters were monumentally complex, full of exotic derivatives. The prosecutors believed they were sham transactions with no purpose but to exploit the accounting rules.
But to prove such an assertion beyond a reasonable doubt for a jury was going to be like translating Aramaic into Mandarin and then English. Multiple law firms had signed off on them. They had no whistle-blower. Prosecutors did not have a big internal investigation into KPMG, served up by some top law firm. No employee had flipped or started giving the government evidence. The investigators had no wiretaps. All the charged executives were upstanding citizens in their communities. To bring the perpetrators to justice would take hard work, brilliance, and every good break available. Weddle always knew the case might be hard. It never occurred to him that it might be his undoing.
The KPMG case, which Weddle would say was bigger than Enron, began to implode. The debacle would reach beyond this one case. In its aftermath, US senators readied bills to roll back what they saw as prosecutorial overreach. The Department of Justice rushed to change its policies covering investigations of corporations and their executives. The Arthur Andersen indictment, the post-Nasdaq-bubble prosecutions, and the Thompson memo had generated a backlash that had been building for years. Now KPMG was a further blow. After the case fell apart, defense attorneys could fight investigations more effectively. As a result, the Justice Department had a harder time prosecuting top executives.
The Internal Revenue Service began investigating KPMG’s tax shelters in early 2002 during a season of corporate crime and punishment, when the probes into Enron and Arthur Andersen were just starting. The IRS issued nine summonses to KPMG. The firm did not comply fully. In July 2002 the government had to go to court to enforce them. A few months after that, the Senate’s Permanent Subcommittee on Investigations, under its chairman, Senator Carl Levin of Michigan, started a probe. The PSI held public hearings in November 2003, revealing KPMG’s misdeeds. The firm’s fees were even paid based on the taxes saved, not the investment returns generated. Its executives had come off terribly in front of the Senate, alternatively combative and evasive. In one memorable exchange, a KPMG partner, under attack from Levin, told the senator, “I don’t know how to change my answer.”
“Try an honest answer,” Senator Levin replied.3
After the hearings, KPMG decided it needed a new, more conciliatory approach. The firm hired Bob Bennett, the quintessential Washington superlawyer. Bennett had followed a path similar to that taken by Southern District pioneers Peter Fleming, Rusty Wing, and Jed Rakoff, who had gone on to start white-collar practices at major firms. Bennett had been in the US Attorney’s Office for the District of Columbia in the 1970s, and foresaw the coming boom in white-collar work. Corporations didn’t want to hire “Fifth Street Lawyers,” as the low-rent criminal counsels were called. They would be drunk by lunchtime. He left for a boutique firm to do white-collar criminal work. There he built a powerful practice, and in 1990 he jumped to Skadden, Arps, Slate, Meagher & Flom with fourteen others to build up Skadden’s white-collar practice. He represented giant corporations such as Boeing and Northrop Grumman, and marquee individuals such as Reagan’s secretary of defense Caspar Weinberger, during the Iran-Contra arms-for-hostages affair; Clark Clifford, during the Bank of Credit and Commerce International money-laundering and bank secrecy scandal; and served as President Bill Clinton’s private attorney during the Monica Lewinsky scandal. By 2002, Skadden had become the most profitable law firm in the country, ranked tenth by profits per partner.4
Portly and formidable, Bennett presented himself with a casual charm. He advised his new client KPMG to start showing the government it was cooperating; KPMG pushed out three senior executives. Bennett’s initial efforts weren’t enough, however, to prevent the IRS from referring the case to the Justice Department for criminal prosecution in early 2004. Back then, all complex tax cases found their way to Shirah Neiman, chief counsel to the United States attorney in the Southern District of New York. She brought in assistant US attorneys to help, including office veteran Stanley Okula and a young gun, Justin Weddle.
Weddle had grown up in Chappaqua, New York, and gone to Columbia Law. From there he’d worked at Debevoise & Plimpton, one of the top Manhattan firms. But he wanted to conduct trials and put away criminals. A partner he worked for wrote Weddle’s recommendation letter for a position at the Southern District. Weddle got to see the letter. The partner had written to Mary Jo White, then the US attorney: “As you and I discussed, Justin is a star.”
In 1999 he joined the Southern District under White. After a brief stint in Manhattan, he worked out of the suburban office of the Southern District in White Plains, New York, in the general crimes unit. White Plains is a beatdown, where a prosecutor may have seventy cases going at once. When a guy gets arrested, you have to find out what happened, write the complaint, and go to court, all in a matter of about three hours. Day after day, it was exhaustion, but if you screwed up, at least you screwed up small. After a little bit, you moved up to a better class of cases with more sophisticated crimes. In 1999, when Weddle was twenty-nine, he scored his first big one: working on the prosecution of Al Pirro, the husband of the Westchester County district attorney at the time, Jeanine Pirro, for tax fraud. Pirro often attended her husband’s trial, sitting in the front row of the visitors’ gallery.5 Weddle became careful. When he drove through Westchester, he kept to the exact speed limit, heeded all the traffic rules, and kept an eye to the rearview mirror. He did not want to give the local cops any excuse. The government convicted Pirro of thirty-four counts of tax evasion and conspiracy.6
Few prosecutors can master the complexities of tax law. If they were honest about it, most would admit they wouldn’t even want to try. Now Weddle had developed some expertise. Eventually anyone who touched taxes at the Southern District worked with Shirah Neiman.
In early February 2004 Weddle had just finished a long and grueling tax trial. He was about to vacation in Spain with his wife and young child, when Neiman called and told him that the KPMG case had been referred for criminal investigation. He had been following the Senate hearings only casually. “You’re going to be in charge,” she said. Weddle received the full Neiman tornado, as she rattled off the thousand tasks he needed to do.
Soon after, they scheduled a meeting with Bennett and KPMG. Neiman, Okula, Weddle, and some others held a strategy meeting. Neiman was hot to send subpoenas. “We don’t want them destroying documents,” she said. Arthur Andersen had just done that. Neiman turned to Weddle: “What about the attorneys’ fees?”
“Why?” he asked.
“It’s in the Thompson memo.”
The Thompson memo, as had the Holder memo before it, outlined how prosecutors should view corporations paying lawyers’ fees for the executives:
Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys’ fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.7
Many prosecutors did not focus on who was paying for counsel, worried that they were interfering in the relationship between the accused and their counsel. Aggressive prosecutors, however, believe that the practice of firms underwriting legal fees is a form of hush money. Former deputy attorney general Larry Thompson told me, “If you sit there and think these corporations are paying for the employees’ choice of lawyer, and not sometimes simply to keep the employees quiet, then you believe in the tooth fairy.”
On February 25, 2004, the government and KPMG held a giant meeting in New York. Weddle had gotten back from Spain and was battling jet lag. Everyone wanted to be there: IRS agents from Washington, Justice Department supervisors from New York and DC, and an army of Skadden lawyers, including one former IRS commissioner. The Southern District takes up several floors of One St. Andrew’s Plaza. Most of them are messy, with stacks of books everywhere. The offices have little wooden desks. The conference rooms have hand-me-down, mismatched chairs. The important and formal meetings are held in the eighth-floor library, with leather chairs, elongated wood tables, law books all around, and no windows. This room is where the government met with KPMG.
Bennett had asked for the meeting, as a gesture of goodwill, but he had trepidation. Bennett felt corporate investigations were legalized extortion. He would counsel angry chief executives who wanted to fight: “Rise above principle. If you don’t, you won’t have a company left.”
As everyone settled into their seats, Bennett seemed to indicate he expected the government to start, but Weddle warily invited him to proceed. “This is your meeting, Bob. What would you like to say to us?” The dance began. KPMG and Skadden wanted to figure out how serious the Southern District was, how much it knew, what its plans were, and how amenable it was to negotiating. The prosecutors wanted to give no indication of any of that, while pressuring the company to take the matter as seriously as open-heart surgery and to be as cooperative as a Border collie. Running with Weddle’s invitation, Bennett and the Skadden team laid out the apocalyptic scenario. Pursuing this matter could put KPMG and its eighteen thousand employees out of business.8 Arthur Andersen had upward of twenty-eight thousand. An indictment would not just be bad for the firm, but also could wreak havoc with the capital markets, throwing corporate bookkeeping in disarray as companies scrambled to find other auditors. The standard playbook. The Skadden lawyers urged the prosecutors to promise that they would consult the SEC and other regulators before acting.
The prosecutors emphasized that the investigation was at an early stage. No one had decided what to do yet. Weddle could honestly say he knew little about the KPMG case. The office was just seeking information. But they were stern about expecting cooperation. The prosecutors had reason to be wary: the company had not cooperated with the early IRS investigation, and executives had been confrontational in the senate hearings.
Bennett, seeking to minimize any sanction, emphasized that KPMG had a whole new attitude. Then the two sides had fateful exchanges about whether KPMG would pay the attorneys’ fees for any indicted employees. The prosecutors had received an anonymous tip: KPMG had given its outgoing deputy chairman, Jeffrey Stein, a huge severance package. That was a generous way to treat someone who would be a major focus of the investigation. It contrasted with KPMG’s insistence that it was taking the probe seriously and willing to punish wrongdoers. Neiman warned KPMG and the Skadden lawyers that the firm shouldn’t “reward misconduct.” Weddle and Okula understood the warning in the context of the anonymous tip; KPMG and Skadden took it to mean something else: the prosecutors were warning the company that the government would view KPMG as uncooperative if it continued to lay out the attorney payments for current and former employees.
Weddle asked about the company’s plan regarding fees. A lawyer for Skadden, Saul Pilchen, piped up, “Why do you ask?” According to what Pilchen recorded in his notes, Weddle responded, “if u have discretion re fees—we’ll look at that under a microscope.” For an exchange that would change Weddle’s life, it was barely noticeable. He wouldn’t think anything of it coming out of the meeting and soon forgot all about it.
Combined with Neiman’s admonition not to reward wrongdoers, the microscope comment solidified Bennett’s and KPMG’s sense that the firm had no choice but to cut off the executives under scrutiny. Bennett played cool. “We may have a legal obligation to pay the fees,” he said. It turned out that the company had not indemnified its executives, and therefore the accounting firm was not legally bound to pay their attorneys’ fees. The following month, KPMG took what it considered to be the government’s hint. The firm announced a new policy: it would cap each executive’s attorney’s fees at $400,000, on the condition that the executives cooperated with the government’s investigation. If they were charged, KPMG would cut them off. In reality, the move was in KPMG’s interest: it made the company appear cooperative with the government, helped preserve the institution, and, as a bonus, saved some money.
KPMG’s cooperation continued to be desultory. In an August 2004 meeting with the Southern District, the prosecutors brought up the issue of deputy chairman Stein’s generous severance package. Despite pledges that it was taking the probe seriously, the company was doling out generous golden parachutes to potential malefactors. At that time, KPMG and Skadden knew something even more concerning: the legal fees paid out to Stein had exceeded the $400,000 threshold the company itself had set up. Nobody told the government.
At the beginning of 2005, almost a year after that first meeting, the Southern District began preparing for discussions with Skadden and KPMG to resolve the investigation. US attorney David Kelley was about to leave his job and wanted the corporate aspect of the investigation finished. Kelley made it clear: if KPMG had committed a crime, the Southern District had to bring charges against individuals, too. Weddle put together a memo about what to do. He tried to figure out the contours of resolving the case. What was KPMG going to pay? What was KPMG going to say? What will the charge be? Should they indict or not? The case was moving forward, and his career was on track. His second child, a daughter, had just been born in late 2004.
But there were, at least in retrospect, harbingers of what would come. In one conversation during this process, IRS lawyers warned Weddle that KPMG prosecution would run into roadblocks. When he asked why, they told him that the Andersen prosecution had become a political sticking point in Washington. Weddle couldn’t understand what they were talking about; Andersen had nothing at all to do with KPMG, he thought.
From Bennett’s point of view, talks weren’t going well. The Southern District was still sounding bellicose. He wanted the possibility of indictment off the table. In one discussion, Neiman said about KPMG, “Well, maybe they should be put out of business.” On March 2, 2005, KPMG and Skadden met with David Kelley. As Bennett extolled the amount of cooperation his client had offered, Kelley interrupted, “Let me put it this way: I’ve seen a lot better from big companies.”9
Internally at the Southern District, Neiman held the hardest line on how to resolve the case. If they weren’t going to indict KPMG, then they sure should secure a guilty plea. The company had engaged in egregious behavior. It conducted a multiyear, multibillion-dollar fraud on the United States that had been orchestrated and approved at the highest levels of the organization.
Kelley agreed. He sent a letter to Bennett with his final decision: KPMG could plead guilty to one count of conspiracy. There would be no indictment. A few days later, Bennett wrote back. The prosecutors read it over and marveled at its audacity. Bennett took pages to say . . . nothing. He was elegant and gracious. He thanked Kelley for sending the letter and said they looked forward to continuing the negotiation. What? The prosecutors were nonplussed. Kelley was informing the company of a decision, not continuing the conversation. The Southern District had said that if KPMG rejected the deal, it would indict. Kelley sent another letter affirming his decision.
The New York prosecutors didn’t appreciate that Bennett, the Washington power broker, was working hard in the capital. He requested a meeting with James Comey, who had been elevated to deputy attorney general. When Bob Fiske requested a meeting with Larry Thompson on the Andersen matter, Thompson had refused. By contrast, Comey, who not so long ago had talked so tough as a US attorney in the Southern District, agreed to the meeting.
Finally, on May 5, 2005, in anticipation of meeting with Comey, KPMG cut off former chairman Stein’s attorney’s fees. The firm also terminated a consulting agreement it had with Stein under his severance package. Skadden thought it would help with its pitch to the government.
On June 13, 2005, KPMG and Skadden met with Comey.10 Bennett told the officials that KPMG couldn’t afford an indictment or guilty plea. The Justice Department officials didn’t need any reminding about what happened to Arthur Andersen, but Bennett brought it up anyway, pressing his case. “It’s not fair” to indict the company, he said, asking, “Who will do the books and records for all of these major companies?” The American capital markets would be down to three accounting firms. Bennett and the other attorneys pointed out that KPMG audited the financials of the Southern District of New York.
After months of fruitless talks with New York, Bennett’s pleas ripened in Washington. Comey consulted with Attorney General John Ashcroft, and the Department of Justice blinked. Comey asked the Southern District prosecutors to return to the negotiating table.
“Ashcroft can’t be responsible for putting another accounting firm out of business,” Comey told the Southern District prosecutors.
“They are two totally different cases!” Neiman replied. “We would try to help them avoid that.”
This edict removed the Southern District’s leverage. Any further threat was empty, because Skadden understood that Main Justice was too scared to allow a KPMG indictment. There went the Manhattan prosecutors’ ability to indict KPMG or wring out a guilty plea. Neiman fumed.
Judge Kaplan later would accuse the prosecutors of strong-arming KPMG as it begged for its life. Begging? KPMG and Skadden had gone over their heads to the top. On August 29, 2005, the company secured a deferred prosecution agreement with the Southern District.11 The government charged the firm with one count of fraud, but it was deferred, per the agreement. KPMG paid a $456 million fine. Weddle and the team were happy that the agreement included a tough statement of facts detailing the wrongdoing (to which KPMG stipulated). KPMG admitted that its partners “assisted high-net-worth United States citizens to evade United States individual income taxes on billions of dollars in capital gain and ordinary income by developing, promoting and implementing unregistered and fraudulent tax shelters.”12 KPMG further conceded how it worked. Its partners engaged in a two-step: They prepared representations for wealthy clients that mischaracterized the way the shelter deals worked. Then they wrote opinion letters that approved the transactions, based on those false representations.
Judge Kaplan would later regard the agreement as a significant punishment. He wrote that if KPMG did not comply with the terms of the DPA, “it will be open to the risk that the government will declare that KPMG breached the DPA and prosecute the criminal information to verdict.” Kaplan did not know that Comey and the other top Department of Justice officials had no will to carry out such a prosecution. Comey had joined the Chickenshit Club. As KPMG, Skadden, and the Department of Justice understood, the DPA would be the final sanction against the accounting firm.
The KPMG settlement may have been unsatisfactory, but the Southern District prioritized bringing culpable individuals to justice. On the same day that it announced the deferred prosecution agreement, the government indicted nine people involved in the KPMG tax shelters—eight of them former KPMG executives. Later, the figure would rise to eighteen individuals, including seventeen ex-KPMG executives.
By the spring of 2006, KPMG defense attorneys began to argue that the government had violated the indicted executives’ Sixth Amendment rights (which grant the accused the right to a lawyer and fair treatment in court) by pressuring KPMG to stop paying their legal fees. In April 2006 the Wall Street Journal editorial page attacked the prosecution, singling out Weddle by name.13 Stung, he brought it to the new Southern District US attorney, Michael Garcia, first thing in the morning, not wanting the US attorney to read it himself. Garcia just laughed. “That’s awesome. Frame it,” he said.
Prosecutors weren’t worried initially. Judge Kaplan seemed to think the fee issue unimportant. A Clinton appointee, he had never been a prosecutor, but the government considered him a friendly judge. Kaplan felt comfortable overseeing complicated litigation. He had been brought in as a mediator on complex insurance disputes surrounding the September 11, 2001, terrorist attacks on the Twin Towers. He presided over the litigation over the diabetes drug Rezulin, which had contributed to patient deaths. Prosecutors in the KPMG case began to worry, however. In May 2006 Kaplan held a hearing to discuss the issue, and it didn’t go well for the government. Kaplan seemed sympathetic to the accused.
Kaplan had been at the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison for twenty-four years before his judicial appointment. He kept close friendships with its lawyers, once serving as a character witness for a retired partner who had been disbarred for pilfering more than $500,000 from a family trust.14 Another fellow partner, Mark Belnick, underwent a terrible ordeal at the hands of the government. Prosecutors indicted Belnick, who had left Paul, Weiss to become the general counsel of the conglomerate Tyco International, for stealing millions in unauthorized bonuses and loans from the company. Belnick won acquittal, but not before his reputation had been ruined.
On June 27, 2006, Judge Kaplan put out his decision in the United States v. Stein case. Weddle sat in his office at One St. Andrew’s Plaza, oblivious to what would soon happen. Shirah Neiman saw Kaplan’s wife in the gallery and worried, thinking it was a sign that the judge thought what he was about to do was noteworthy. Sure enough, Kaplan’s ruling excoriated the government. Kaplan concluded, “The government’s assertion that the legal fee decision was made without ‘coercion’ or ‘bullying’ by the government can be justified only by tortured definitions of those terms.” He ruled that prosecutors violated the rights of the KPMG case defendants. He assailed the tenets of the Thompson memo and what he saw as prosecutorial overreach. “The government let its zeal get in the way of its judgment,” he wrote.
Many employees have an expectation that they will be indemnified against legal fees incurred during investigations of work-related activities. A reporter in a libel case almost always does. Kaplan pointed out that cops sued in wrongful-arrest cases and nurses in malpractice cases do as well. But a reporter accused of murder or a nurse accused of theft does not have that expectation or right.
Kaplan expanded this notion, ruling that KPMG violated the employees’ constitutional right to counsel: “Everyone charged with a crime is entitled to the assistance of a lawyer. 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. This is at the heart of the Sixth Amendment.” Changing the argument from a question of tax evasion to a matter of constitutional principles turned out to be a brilliant strategy.
The judge ended his opinion with a note of restrained fury at what he perceived as the misbehavior of Weddle, Neiman, and others in the Southern District. “The government was economical with the truth in its early responses to this motion. It is difficult to defend even the literal truth of the position it took in its first memorandum of law.” The government, he wrote, had not come clean about what it had said about the fees and when it had said it. He called out Weddle for a response to the court that “was far from the whole story.” Kaplan believed Weddle made the “under a microscope” comment. The statement confirmed to the judge that the prosecutors were pressuring the firm to cut off the accused executives. (Skadden’s Saul Pilchen had conceded that his notes weren’t necessarily verbatim. Weddle never thought he had said it. He and his colleagues said they had no recollection of the phrase.)
In explaining her actions, Neiman had told the court that her “rewarding misconduct” comment referred to federal sentencing guidelines, not specifically to KPMG’s payment of its executives’ lawyer bills. Kaplan dismissed this assertion as implausible. He felt what they had said to him was “misleading.” The judge warned, “There should be no recurrence.”
The Southern District was outraged, particularly bitter that Kaplan had singled out prosecutors. After he read the opinion, Weddle went to meet Michael Garcia. All the top people had gathered to decide what to do. The Kaplan ruling was a problem for the case and the Southern District. Weddle wasn’t quite listening to the discussion. When he did speak up, he concentrated on not letting his voice break. Garcia insisted he wanted to make a statement. He backed his prosecutors and took the rare and bold move of writing a letter to Kaplan protesting his decision. He also wrote a response, correcting what he perceived as factual errors and asking Kaplan to take out the names of the prosecutors and his criticisms of them. Weddle felt relieved and grateful. But Kaplan rejected the request.
The next year, in the summer of 2007, the KPMG fiasco reached its peak. Kaplan, with what he wrote was “only with the greatest reluctance,” threw out the cases against thirteen of the sixteen indicted KPMG executives. He wrote that the prosecutorial misconduct “shocks the conscience,” going on to say that prosecutors “deliberately or callously prevented many of these defendants from obtaining funds for their defense that they lawfully would have had . . . This is intolerable in a society that holds itself out to the world as a paragon of justice.”15 In August 2008 a three-judge panel of the Second Circuit Court of Appeals upheld Kaplan.16 “The government’s threat of indictment was easily sufficient to convert its adversary into its agent. KPMG was not in a position to consider coolly the risk of indictment, weigh the potential significance of the other enumerated factors in the Thompson memorandum, and decide for itself how to proceed,” wrote the court.17
After Judge Kaplan’s ruling in the Stein case, the Justice Department, already on the defensive over the Thompson memo and its perceived overreach on Arthur Andersen, entered a furious rearguard action. The judge had attacked the Thompson memo. Three distinct and nuanced issues—an aggressive prosecution that helped put Arthur Andersen out of business; attorney-client privilege; and rights of accused executives to the payment of their attorneys’ fees—became one: prosecutors were out of control. The usual corporate defenders, such as the Wall Street Journal editorial page and the US Chamber of Commerce, seized on the KPMG case to deliver their kicks to the vulnerable department over all three issues. Congress listened.
In the fall of 2006, the Senate Judiciary Committee held hearings on the Thompson memo and prosecutorial abuse, featuring the supposed victimization of KPMG.18 Senators Patrick Leahy, Democrat of Vermont, and Arlen Specter, then still a Republican from Pennsylvania, thought that the Justice Department abused corporations. Leahy wanted the Justice Department to change voluntarily, reluctant to meddle with the executive branch through legislation. Specter was more aggressive. In December he introduced a bill that reversed Thompson memo policies. Specter’s legislation called for prohibiting prosecutors from demanding waivers of attorney-client privilege or from using the information about whether companies were paying for employees’ legal fees in making charging determinations.19
The new deputy attorney general, Paul McNulty, and his colleagues saw the bill as a dangerous incursion of the legislative branch on its powers. He understood that he had to act before Congress did. Five days after Specter introduced the Senate bill, McNulty issued a new memo about corporate prosecutions. Under the new rules, if a federal prosecutor wanted to ask a corporation to waive its privilege, it would have to get permission from higher-ups at the Justice Department.
Critics weren’t mollified. McNulty hadn’t gone far enough. In August 2008 his replacement, Mark Filip, pulled back prosecutorial powers further. Today the new post-KPMG, post–defense bar revolt Justice Department standards prohibit prosecutors from even asking companies to waive their attorney-client privilege. Inquiring about who is paying fees is forbidden. The Thompson memo has been buried.
• • •
Corporations and the defense bar routinely argue that government investigations are tantamount to extortion exercises. Once an investigation commences, the company has no choice but to give in. Employees might fear that their corporation will turn them over to law enforcement. If the government also nudges companies to strip them of their livelihoods and stop paying legal fees, isn’t that an abuse of people who are presumed innocent? Kaplan’s ruling can check corporate abuse of its employees, even top executives.
But the Supreme Court has ruled more than once that the constitution does not provide a right to the best defense money can buy, as Kaplan held. People have a right to competent and effective counsel. In two similar cases in 1989, United States v. Monsanto20 and Caplin & Drysdale, Chartered v. United States,21 the court ruled that the government can seize assets from an accused criminal, even if those funds were earmarked to pay for legal fees. In the Caplin case, a law firm had been paid by an accused drug dealer. A lower court forbade the drug dealer from transferring any assets that the government would potentially seize, but the drug dealer, before he was indicted, did so anyway. The law firm brought a case arguing that its payments should be exempt from the seizures. The court ruled against the law firm, saying that the forfeiture did not violate the drug dealer’s Sixth Amendment rights.
In the context of street criminals and the indigent, courts have deemed an astonishing array of circumstances not violations of the Sixth Amendment. As Berkeley Law professors Charles Weisselberg and Su Li point out, the courts have upheld a variety of circumstances that interfered with indigent and street criminals’ ability to secure competent counsel. The court has ruled it does not violate the rights of the accused if his court-appointed attorney is an alcoholic who drinks heavily at trial and is arrested for driving under the influence on his way to court. The high court has deemed that a cap of $1,000 for an appointed lawyer’s out-of-court work doesn’t violate the Constitution, even in a death penalty case. The court has written that no violation has occurred if one court-appointed lawyer replaces another, even when the client is unable to form a “meaningful relationship” with her new lawyer. Though there may be a legal argument for Kaplan’s ruling in the KPMG case, Weisselberg writes, “To people steeped in ordinary criminal cases, Stein is downright odd, if not otherworldly.”
The government forces accuse drug dealers and mobsters to forfeit money that might otherwise go to their defense. In many racketeering cases, in which defendants are accused of participating in a conspiracy, the government can seize or freeze assets, even if the action renders the accused so poor that they cannot afford their own lawyer. Courts have held that such seizures don’t violate the constitutional rights of the accused. Such crimes are often as sophisticated and complicated as corporate white-collar cases.
The Justice Department defended its actions by arguing that KPMG’s executives have no right to use “other people’s money” for their defense. Kaplan rejected the argument. He contended it was an unstated expectation of their employment. Kaplan wrote in those drug and Mafia cases, that the government was seizing ill-gotten gains. But an executive’s gain may be just as ill gotten, and an accused drug dealer may be as innocent as an accused executive. Even many experienced white-collar crime experts, including judges and prosecutors, persist in seeing differences between the two classes of criminal. Many believe that such defendants are entitled to a defense attorney from a certain echelon. Top executives receive representation from the finest firms. The courts and the legal system show no inclination to protect the indigent’s right to counsel.
Even if Judge Kaplan’s ruling was correct, did he have to throw out the prosecution, preventing the Southern District from trying to prove its case? Due to his ruling, the accused KPMG executives now had access to the lawyers of their choice—some of the best and most expensive lawyers—whose bills would be footed by their former employer. Any harm from the government’s meddling would have been undone, but the cases could have gone forward in court.
The KPMG case, Weisselberg argues, can be perceived as a victory of a company against the unfair pressure and power brought to bear by the government, a justified reassertion of Sixth Amendment rights. It could be interpreted as an example of how the government is outdueled and outgunned in court. Or, he suggests, it could be read as a fight, predominantly by major law firms, “to preserve a funding stream for a lucrative and growing area of practice—in essence, protecting the ability of law firms to receive compensation through indemnification and advancement.”22
The fight over privilege waivers and the rights to counsel for corporate executives was a seminal white-collar battle of the mid-2000s. The Kaplan decision and the rollback of the Thompson memo, justified or not, hurt the government’s ability to investigate and prosecute corporate cases. Prosecutors could no longer try to pressure companies into waiving privilege, to stop paying for attorneys’ fees for accused executives, or to forego joint defense agreements, where lawyers representing different clients share information. The information highway from defense attorney to defense attorney reveals the prosecutorial strategy, allows the defense to prepare and coordinate, and gives time for executives to get their stories straight.
In 2005 the Supreme Court took up United States v. Booker, a case that challenged mandatory sentencing guidelines, which gave judges strict rules that bound them to assign specific sentences to the guilty. A federal jury had convicted a drug dealer of a crime that came with a set sentence of ten years to life. But at sentencing, the judge decided to increase the sentence to thirty years to life, based on a preponderance of evidence that the defendant possessed even more crack and had obstructed justice. The high court affirmed the ruling, and in so doing, restored judges’ discretion over sentences. Some judges now assign lighter white-collar sentences than before. When prosecutors negotiate with midlevel executives, the executives are more inclined to take their chances than to plead guilty or plea bargain, prosecutors say. While mandatory sentences were pernicious, and judicial discretion is generally a good thing, one unintended result is that corporate executives are now harder to flip.
The courts took other useful weapons against corporate fraud away from prosecutors through the decade. In a 2010 ruling involving the Jeff Skilling case, the Supreme Court narrowed a law that prosecutors used to get the Enron executive, called the honest-services fraud statute. The court restricted the use of the provision to only the most egregious forms of fraud, such as bribery and kickbacks, disallowing the charge for grayer types of corporate malfeasance.23 After the Wall Street Journal broke a story in 2006 about widespread corporate stock-option backdating—revealing that executives had enriched themselves by backdating stock-option grants to have lower, more favorable prices—the SEC and the Justice Department investigated more than a hundred companies. The San Francisco office started a Stock Options Backdating Task Force. Dozens of companies restated their books and scores of executives lost their jobs. The prosecutions mostly fizzled. One of the biggest criminal stock-option backdating cases, against the co-CEO of Broadcom Corp., collapsed amid prosecutorial misconduct. Several other cases were dropped after the Skilling Supreme Court ruling.
Across the country, districts geared up to address the rampant stock-option backdating scandal. Over the next several years, various US Attorney’s Offices brought myriad cases. Some prosecutors had success, but most cases fizzled. Several were overturned on appeal. Prosecutors were even reprimanded for abuse.
And there were cultural changes, which pushed prosecutors to settle rather than go after individuals. The Southern District of New York believed in prosecuting individuals, not settling with corporations. The case harmed Neiman’s, Okula’s, and Weddle’s careers. The risk of going after individuals in complex corporate cases was already high. Now it became stratospheric. The KPMG case gave prosecutors one more incentive to seek a corporate settlement rather than risk prosecuting individuals.
In the post–Thompson memo world, giant companies press their advantages in settlement negotiations. When necessary, corporations and their counsel reach into the corridors of power to be heard and win results. Defense lawyers fight evidence discovery requests, using liberal claims of attorney-client privilege. Courts rarely hear about these battles, and the media hardly covers them. At the least, these fights slow down investigations. Delays are defendants’ friends.
The Justice Department failed to grasp the implications of the decade’s legal changes. No single modification in the law or policy was momentous, and some have restored defendants’ rights. Together, however, they have added up to a significant—and largely unrecognized—blunting and removal of prosecutorial tools in white-collar corporate investigations. These fights exposed how much the government depends on corporate cooperation to conduct its investigations. But cooperation flows from pressure and leverage. The Justice Department’s defeats and retreats have shifted the balance of power to defense lawyers.
The KPMG case scarred the Southern District prosecutors. Shortly after the Judge Kaplan opinion, Jed Rakoff took Shirah Neiman to lunch at Antica Roma in Chinatown. She was livid at Judge Kaplan, her vituperation the verbal equivalent of a clenched fist, Rakoff felt. Kaplan had attacked her integrity. Neiman was unpopular within the office, so her colleagues had mixed feelings about her slapdown. To the extent that they saw anyone making a mistake or being too aggressive, they blamed her and not Weddle. As a prosecutor’s prosecutor, she never had many friends on the defense side. Her former boss turned star defense attorney, Robert Morvillo, decrying a white-collar criminal system that had become overly harsh, told American Lawyer magazine that she had become “more and more rigid.” Another legend, Stanley Arkin, went further, telling the publication that Neiman was “the exact opposite of what you want in a career prosecutor.”24
Stan Okula, Weddle’s KPMG colleague, continued to work at the Southern District, but he struggled to preserve his reputation. Judges would later accuse him of lying to them as well, further damaging his reputation.
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By the fall of 2007, the KPMG case was still going on, even though most of the indictments had been thrown out. Kaplan put off the trial for the remaining defendants. Weddle just couldn’t take it anymore. It’s not uncommon for prosecutors to hand off cases after a couple of years. He had held on longer than usual to seek vindication, but now he was done, exhausted and shattered. His boss understood and acceded to his request to get off the case. The Wall Street Journal initially reported that he had been removed from the case, mortifying him.25 The paper ran a correction six weeks later to say he’d left voluntarily.26 In all the tax shelter cases, the Southern District had gotten $1.3 billion in criminal penalties and dozens of felony convictions. Weddle could argue that the government had scored a victory. All the major professional services firms had been helping the richest Americans dodge taxes. The Department of Justice had put a stop to these techniques. But the accused firms and defendants had come after him and his fellow prosecutors, and they had scored a hit.
Weddle put himself on the market. He still thought as a Southern District prosecutor that he would land a job rapidly. He had not grasped the ramifications of Kaplan’s ruling. Firms, including his old firm Debevoise & Plimpton, said they had no positions available. The legal world took its revenge.
One day he saw a job listing to be a Department of Justice resident legal advisor in Romania. For some reason, the opportunity jumped out at him. He could go there, thousands of miles from New York, to build back his career. It might be exile or banishment, but so what? He went to Bucharest to become a diplomat, helping coordinate law enforcement cooperation in Southern Europe. After more than two happy years, a friend at a big law firm called about a job. The firm flew him back. He made it through several interviews. Then the talks stopped mysteriously. He had no word and no idea what happened. It turned out that a lawyer for a bank that had been subject to some of Weddle’s tax shelter investigations called up the firm and told them not to hire him. Finally, in 2014 he landed a white-collar defense job at a firm in New York.27 The KPMG case still weighs on him. Even a decade later, discussing the case could leave him visibly hurt and breaking down.