Alert September 02, 2008

Federal Second Circuit Court of Appeals Affirms Dismissal of Federal Prosecution of Firm’s Employees on Grounds That Government Pressure Caused Firm to Place Conditions on Advancement of Legal Fees in Violation of Sixth Amendment

The U.S. Court of Appeals for the Second Circuit (the “Court”) affirmed a district court’s ruling that the federal government deprived the employees of a firm that was under investigation by the Department of Justice of their right to counsel under the Sixth Amendment to the U.S. Constitution by causing the firm to place conditions on its advancement of legal fees to the employees, cap the amount advanced and ultimately cease advancing legal fees.  The Court also affirmed the district court’s dismissal of its indictment against the employees because the government failed to cure its Sixth Amendment violation and because no other remedy would place the employees in the condition that would have existed absent the government’s unconstitutional acts.  The firm’s past practice had been to advance legal fees for employees facing regulatory, civil and criminal investigation without condition or limitation.  After the commencement of a federal grand jury investigation of the firm, the firm’s CEO announced that all partners of the firm asked to appear in the course of the investigation would be represented by competent counsel at the firm’s expense.   In the course of the investigation, the firm’s counsel met with the U.S. Attorney’s Office (the “USAO”) and discussed the firm’s advancement of legal fees in light of the Thompson Memorandum’s criteria bearing on the degree of cooperation provided by the target of an investigation.  The Thompson Memorandum was a January 2003 policy statement by then United States Deputy Attorney General Larry D. Thompson that articulated principles governing the Department of Justice’s discretion in bringing prosecutions against business organizations.  (After the events in this case, the Thompson Memorandum was superseded by the McNulty Memorandum, under which prosecutors could consider a company’s fee advancement policy only where the circumstances indicated that it was “intended to impede a criminal investigation,” and even then only with the approval of the Deputy Attorney General.  See the preceding story in this issue on the Department of Justice’s adoption of revised policies governing cooperation credit.)

As a result of displeasure expressed by the USAO regarding the firm’s advancement of fees to its employees being interviewed by the USAO as part of its investigation, the firm subsequently adopted a policy that capped fees, conditioned their advancement on an employee’s cooperation with the government and ceased advancement upon an employee’s indictment.  The letter advising employees of the policy was also sent to the USAO.  In response to government pressure, the firm also revised a memorandum it had sent to employees advising them, among other things, that it might be advantageous for them to exercise their right to counsel if they became the subjects of the investigation.  The revised memorandum reflected a change urged by the USAO that employees be told that they could meet with investigators without counsel.  In response to a request from the firm’s counsel, the USAO informed the firm’s counsel whenever an employee refused to cooperate fully.  The firm’s counsel informed the employees’ lawyers that fee advancement would cease unless the employees cooperated; employees who did not cooperate were fired, and the firm ceased advancing their fees.  At the conclusion of the USAO’s investigation, the firm entered into a deferred prosecution agreement, paid a $46 million fine and agreed to cooperate in any future government investigation or prosecution.