United States v. Stein

07-3042-cr
United States v. Stein

1 UNITED STATES COURT OF APPEALS
2
3 FOR THE SECOND CIRCUIT
4
5 August Term, 2007
6
7
8 (Argued: March 25, 2008 Decided: August 28, 2008)
9
10 Docket No. 07-3042-cr
11
12 - - - - - - - - - - - - - - - - - - - -x
13
14 UNITED STATES OF AMERICA,
15
16 Appellant,
17
18 - v.-
19
20 JEFFREY STEIN, JOHN LANNING, RICHARD
21 SMITH, JEFFREY EISCHEID, PHILIP WIESNER,
22 MARK WATSON, LARRY DELAP, STEVEN
23 GREMMINGER, GREGG RITCHIE, RANDY
24 BICKHAM, CAROL G. WARLEY, CARL HASTING,
25 and RICHARD ROSENTHAL,
26
27 Defendants-Appellees.
28
29 - - - - - - - - - - - - - - - - - - - -x
30
31
32 Before: JACOBS, Chief Judge, FEINBERG and HALL,
33 Circuit Judges.
34

35 The United States appeals from an order of the United

36 States District Court for the Southern District of New York

37 (Kaplan, J.), dismissing an indictment against Defendants-

38 Appellees, thirteen former partners and employees of
1 accounting firm KPMG, LLP. We affirm the district court’s

2 ruling that the government deprived Defendants-Appellees of

3 their right to counsel under the Sixth Amendment by causing

4 KPMG to place conditions on the advancement of legal fees to

5 Defendants-Appellees, and to cap the fees and ultimately end

6 them. Because the government failed to cure the Sixth

7 Amendment violation, and because no other remedy will return

8 Defendants-Appellees to the status quo ante, we affirm the

9 dismissal of the indictment. In a separate summary order

10 filed today, we dismiss as moot the government’s appeal from

11 the order of the district court suppressing proffer

12 statements made by Defendants-Appellees Richard Smith and

13 Mark Watson.

14 KARL METZNER, Assistant United
15 States Attorney (Michael J.
16 Garcia, United States Attorney,
17 Southern District of New York,
18 on the brief; John M.
19 Hillebrecht, Margaret Garnett,
20 Katherine Polk Failla, Assistant
21 United States Attorneys, of
22 counsel), United States
23 Attorney’s Office for the
24 Southern District of New York,
25 New York, New York, for
26 Appellant.
27
28 SETH P. WAXMAN (Paul A.
29 Engelmayer, Danielle Spinelli,
30 Catherine M.A. Carroll, Daniel
31 S. Volchok, on the brief),

2
 1 Wilmer Cutler Pickering Hale and
2 Dorr LLP, Washington, D.C., for
3 Appellees Stein, Lanning, Smith,
4 Bickham and Rosenthal.
5
6 STANLEY S. ARKIN (Sean R.
7 O’Brien, Joseph V. DiBlasi,
8 Elizabeth A. Fitzwater, on the
9 brief), Arkin Kaplan Rice LLP,
10 New York, New York, for Appellee
11 Eischeid.
12
13 JOHN S. MARTIN, JR. (Otto G.
14 Obermaier, on the brief), Martin
15 & Obermaier, LLC, New York, New
16 York; Daniel C. Richman, of
17 counsel, New York, New York, for
18 Appellees DeLap, Gremminger,
19 Warley and Wiesner.
20
21 MICHAEL S. KIM (Leif T.
22 Simonson, on the brief), Kobre &
23 Kim LLP, New York, New York, for
24 Appellee Watson.
25
26 TED W. CASSMAN (Cristina C.
27 Arguedas, Raphael M. Goldman,
28 Michael W. Anderson, on the
29 brief), Arguedas, Cassman &
30 Headley, LLP, Berkeley,
31 California; Ann C. Moorman, Law
32 Offices of Ann C. Moorman, of
33 counsel, Berkeley, California,
34 for Appellee Ritchie.
35
36 RUSSELL M. GIOIELLA (Richard M.
37 Asche, on the brief), Litman,
38 Asche & Gioiella, LLP, New York,
39 New York, for Appellee Hasting.
40
41 MARK I. LEVY (Sean M. Green, on
42 the brief), Kilpatrick Stockton
43 LLP, Washington, D.C., for Amici
44 Curiae Association of Corporate

3
 1 Counsel and Chamber of Commerce
2 of the United States of America.
3
4 WALTER DELLINGER (Pamela Harris,
5 Karl R. Thompson, Brianne J.
6 Gorod, on the brief), O’Melveny
7 & Myers LLP, Washington, D.C.,
8 for Amici Curiae Former
9 Attorneys General and United
10 States Attorneys.
11
12 IRA M. FEINBERG, Hogan & Hartson
13 LLP, New York, New York, for
14 Amici Curiae Former United
15 States Attorneys, First
16 Assistants and Criminal Division
17 Chiefs.
18
19 LEWIS J. LIMAN (Molly M. Lens,
20 on the brief), Cleary Gottlieb
21 Steen & Hamilton LLP, New York,
22 New York; Paul B. Bergman, New
23 York, New York, for Amici Curiae
24 New York Council of Defense
25 Lawyers, New York State Bar
26 Association, and National
27 Association of Criminal Defense
28 Lawyers.
29
30 MARK A. KIRSCH (Kara Morrow,
31 Tamar Bruger, Stephen M.
32 Nickelsburg, on the brief),
33 Clifford Chance U.S. LLP, New
34 York, New York; Ira D.
35 Hammerman, Kevin M. Carroll, for
36 Amicus Curiae Securities
37 Industry and Financial Markets
38 Association.
39
40 MICHAEL J. GILBERT (Steven B.
41 Feirson, on the brief), Dechert
42 LLP, New York, New York; Daniel
43 J. Popeo, for Amicus Curiae
44 Washington Legal Foundation.

4
1 DENNIS JACOBS, Chief Judge:

2 The United States appeals from an order of the United

3 States District Court for the Southern District of New York

4 (Kaplan, J.), dismissing an indictment against thirteen

5 former partners and employees of the accounting firm KPMG,

6 LLP. Judge Kaplan found that, absent pressure from the

7 government, KPMG would have paid defendants’ legal fees and

8 expenses without regard to cost. Based on this and other

9 findings of fact, Judge Kaplan ruled that the government

10 deprived defendants of their right to counsel under the

11 Sixth Amendment by causing KPMG to impose conditions on the

12 advancement of legal fees to defendants, to cap the fees,

13 and ultimately to end payment. See United States v. Stein,

14 435 F. Supp. 2d 330, 367-73 (S.D.N.Y. 2006) (“Stein I”).

15 Judge Kaplan also ruled that the government deprived

16 defendants of their right to substantive due process under

17 the Fifth Amendment.1 Id. at 360-65.

1
In later decisions, Judge Kaplan ruled that defendants
Richard Smith and Mark Watson’s proffer session statements
were obtained in violation of their Fifth Amendment
privilege against self-incrimination, and that their
statements would be suppressed, see United States v. Stein,
440 F. Supp. 2d 315 (S.D.N.Y. 2006) (“Stein II”); that the
court had ancillary jurisdiction over Defendants-Appellees’
civil suit against KPMG for advancement of fees, see United
States v. Stein, 452 F. Supp. 2d 230 (S.D.N.Y. 2006) (“Stein

5
1 We hold that KPMG’s adoption and enforcement of a

2 policy under which it conditioned, capped and ultimately

3 ceased advancing legal fees to defendants followed as a

4 direct consequence of the government’s overwhelming

5 influence, and that KPMG’s conduct therefore amounted to

6 state action. We further hold that the government thus

7 unjustifiably interfered with defendants’ relationship with

8 counsel and their ability to mount a defense, in violation

9 of the Sixth Amendment, and that the government did not cure

10 the violation. Because no other remedy will return

11 defendants to the status quo ante, we affirm the dismissal

12 of the indictment as to all thirteen defendants.2 In light

13 of this disposition, we do not reach the district court’s

14 Fifth Amendment ruling.

15

16

17

III”), vacated, Stein v. KPMG, LLP, 486 F.3d 753 (2d Cir.
2007); and that dismissal of the indictment is the
appropriate remedy for those constitutional violations, see
United States v. Stein, 495 F. Supp. 2d 390 (S.D.N.Y. 2007)
(“Stein IV”).
2
In a separate summary order filed today, we dismiss as
moot the government’s appeal from the order of the district
court suppressing proffer statements made by Defendants-
Appellees Smith and Watson.

6
1 BACKGROUND

2 The Thompson Memorandum

3 In January 2003, then-United States Deputy Attorney

4 General Larry D. Thompson promulgated a policy statement,

5 Principles of Federal Prosecution of Business Organizations

6 (the “Thompson Memorandum”), which articulated “principles”

7 to govern the Department’s discretion in bringing

8 prosecutions against business organizations. The Thompson

9 Memorandum was closely based on a predecessor document

10 issued in 1999 by then-U.S. Deputy Attorney General Eric

11 Holder, Federal Prosecution of Corporations. See Stein I,

12 435 F. Supp. 2d at 336-37. Along with the familiar factors

13 governing charging decisions, the Thompson Memorandum

14 identifies nine additional considerations, including the

15 company’s “timely and voluntary disclosure of wrongdoing and

16 its willingness to cooperate in the investigation of its

17 agents.” Mem. from Larry D. Thompson, Deputy Att’y Gen.,

18 U.S. Dep’t of Justice, Principles of Federal Prosecution of

19 Business Organizations (Jan. 20, 2003), at II. The

20 Memorandum explains that prosecutors should inquire

21 whether the corporation appears to be protecting its
22 culpable employees and agents [and that] a
23 corporation’s promise of support to culpable employees
24 and agents, either through the advancing of attorneys

7
1 fees, through retaining the employees without sanction
2 for their misconduct, or through providing information
3 to the employees about the government’s investigation
4 pursuant to a joint defense agreement, may be
5 considered by the prosecutor in weighing the extent and
6 value of a corporation’s cooperation.
7
8 Id. at VI (emphasis added and footnote omitted). A footnote

9 appended to the highlighted phrase explains that because

10 certain states require companies to advance legal fees for

11 their officers, “a corporation’s compliance with governing

12 law should not be considered a failure to cooperate.” Id.

13 at VI n.4. In December 2006--after the events in this

14 prosecution had transpired–-the Department of Justice

15 replaced the Thompson Memorandum with the McNulty

16 Memorandum, under which prosecutors may consider a company’s

17 fee advancement policy only where the circumstances indicate

18 that it is “intended to impede a criminal investigation,”

19 and even then only with the approval of the Deputy Attorney

20 General. Mem. from Paul J. McNulty, Deputy Att’y Gen., U.S.

21 Dep’t of Justice, Principles of Federal Prosecution of

22 Business Organizations (Dec. 12, 2006), at VII n.3.

23 Commencement of the Federal Investigation

24 After Senate subcommittee hearings in 2002 concerning

25 KPMG’s possible involvement in creating and marketing

26 fraudulent tax shelters, KPMG retained Robert S. Bennett of

8
1 the law firm Skadden, Arps, Slate, Meagher & Flom LLP

2 (“Skadden”) to formulate a “cooperative approach” for KPMG

3 to use in dealing with federal authorities. Stein I, 435 F.

4 Supp. 2d at 339. Bennett’s strategy included “a decision to

5 ‘clean house’–-a determination to ask Jeffrey Stein, Richard

6 Smith, and Jeffrey Eischeid, all senior KPMG partners who

7 had testified before the Senate and all now [Defendants-

8 Appellees] here–-to leave their positions as deputy chair

9 and chief operating officer of the firm, vice chair-tax

10 services, and a partner in personal financial planning,

11 respectively.” Id. Smith was transferred and Eischeid was

12 put on administrative leave. Id. at 339 n.22. Stein

13 resigned with arrangements for a three-year $100,000-per-

14 month consultancy, and an agreement that KPMG would pay for

15 Stein’s representation in any actions brought against Stein

16 arising from his activities at the firm. Id. at 339. KPMG

17 negotiated a contract with Smith that included a similar

18 clause; but that agreement was never executed. Stein IV,

19 495 F. Supp. 2d at 408.

20 In February 2004, KPMG officials learned that the firm

21 and 20 to 30 of its top partners and employees were subjects

22 of a grand jury investigation of fraudulent tax shelters.

9
1 Stein I, 435 F. Supp. 2d at 341. On February 18, 2004,

2 KPMG’s CEO announced to all partners that the firm was aware

3 of the United States Attorney’s Office’s (“USAO”)

4 investigation and that “[a]ny present or former members of

5 the firm asked to appear will be represented by competent

6 coun[sel] at the firm’s expense.” Stein IV, 495 F. Supp. 2d

7 at 407 (first alteration in original and internal quotation

8 marks omitted).

9 The February 25, 2004 Meeting

10 In preparation for a meeting with Skadden on February

11 25, 2004, the prosecutors–-including Assistant United States

12 Attorneys (“AUSAs”) Shirah Neiman and Justin Weddle–-decided

13 to ask whether KPMG would advance legal fees to employees

14 under investigation. Stein I, 435 F. Supp. 2d at 341.

15 Bennett started the meeting by announcing that KPMG had

16 resolved to “clean house,” that KPMG “would cooperate fully

17 with the government’s investigation,” and that its goal was

18 not to protect individual employees but rather to save the

19 firm from being indicted. Id. AUSA Weddle inquired about

20 the firm’s plans for advancing fees and about any legal

21 obligation to do so. Id. Later on, AUSA Neiman added that

22 the government would “take into account” the firm’s legal

10
1 obligations to advance fees, but that “the Thompson

2 Memorandum [w]as a point that had to be considered.” Id.

3 Bennett then advised that although KPMG was still

4 investigating its legal obligations to advance fees, its

5 “common practice” was to do so. Id. at 342. However,

6 Bennett explained, KPMG would not pay legal fees for any

7 partner who refused to cooperate or “took the Fifth,” so

8 long as KPMG had the legal authority to do so. Id.

9 Later in the meeting, AUSA Weddle asked Bennett to

10 ascertain KPMG’s legal obligations to advance attorneys’

11 fees. AUSA Neiman added that “misconduct” should not or

12 cannot “be rewarded” under “federal guidelines.” Id. One

13 Skadden attorney’s notes attributed to AUSA Weddle the

14 prediction that, if KPMG had discretion regarding fees, the

15 government would “look at that under a microscope.” Id. at

16 344 (emphasis omitted).

17 Skadden then reported back to KPMG. In notes of the

18 meeting, a KPMG executive wrote the words “[p]aying legal

19 fees” and “[s]everance” next to “not a sign of cooperation.”

20 Stein IV, 495 F. Supp. 2d at 408.

21 Communications Between the Prosecutors and KPMG

22 On March 2, 2004, Bennett told AUSA Weddle that

11
1 although KPMG believed it had no legal obligation to advance

2 fees, “it would be a big problem” for the firm not to do so

3 given its partnership structure. Stein I, 435 F. Supp. 2d

4 at 345 (internal quotation marks omitted). But Bennett

5 disclosed KPMG’s tentative decision to limit the amount of

6 fees and condition them on employees’ cooperation with

7 prosecutors. Id.

8 Two days later, a Skadden lawyer advised counsel for

9 Defendant-Appellee Carol G. Warley (a former KPMG tax

10 partner) that KPMG would advance legal fees if Warley

11 cooperated with the government and declined to invoke her

12 Fifth Amendment privilege against self-incrimination. Id.

13 On a March 11 conference call with Skadden, AUSA Weddle

14 recommended that KPMG tell employees that they should be

15 “totally open” with the USAO, “even if that [meant

16 admitting] criminal wrongdoing,” explaining that this would

17 give him good material for cross-examination. Id.

18 (alteration in original and internal quotation marks

19 omitted). That same day, Skadden wrote to counsel for the

20 KPMG employees who had been identified as subjects of the

21 investigation. Id. The letter set forth KPMG’s new fees

22 policy (“Fees Policy”), pursuant to which advancement of

12
1 fees and expenses would be

2 [i] capped at $400,000 per employee;
3
4 [ii] conditioned on the employee’s cooperation with the
5 government; and
6
7 [iii] terminated when an employee was indicted.
8
9 Id. at 345-46. The government was copied on this

10 correspondence. Id. at 345.

11 On March 12, KPMG sent a memorandum to certain other

12 employees who had not been identified as subjects, urging

13 them to cooperate with the government, advising them that it

14 might be advantageous for them to exercise their right to

15 counsel, and advising that KPMG would cover employees’

16 “reasonable fees.” Id. at 346 n.62.

17 The prosecutors expressed by letter their

18 “disappoint[ment] with [the] tone” of this memorandum and

19 its “one-sided presentation of potential issues,” and

20 “demanded that KPMG send out a supplemental memorandum in a

21 form they proposed.” Id. at 346. The government’s

22 alternative language, premised on the “assum[ption] that

23 KPMG truly is committed to fully cooperating with the

24 Government’s investigation,” Letter of David N. Kelley,

25 United States Attorney, Southern District of New York, March

26 17, 2004, advised employees that they could “meet with

13
1 investigators without the assistance of counsel,” Stein I,

2 435 F. Supp. 2d at 346 (emphasis omitted). KPMG complied,

3 and circulated a memo advising that employees “may deal

4 directly with government representatives without counsel.”

5 Id. (emphasis omitted).

6 At a meeting in late March, Skadden asked the

7 prosecutors to notify Skadden in the event any KPMG employee

8 refused to cooperate. Id. at 347. Over the following year,

9 the prosecutors regularly informed Skadden whenever a KPMG

10 employee refused to cooperate fully, such as by refusing to

11 proffer or by proffering incompletely (in the government’s

12 view). Id. Skadden, in turn, informed the employees’

13 lawyers that fee advancement would cease unless the

14 employees cooperated. Id. The employees either knuckled

15 under and submitted to interviews, or they were fired and

16 KPMG ceased advancing their fees. For example, Watson and

17 Smith attended proffer sessions after receiving KPMG’s March

18 11 letter announcing the Fees Policy, and after Skadden

19 reiterated to them that fees would be terminated absent

20 cooperation. They did so because (they said, and the

21 district court found) they feared that KPMG would stop

22 advancing attorneys fees–-although Watson concedes he

14
1 attended a first session voluntarily.3 See United States v.

2 Stein, 440 F. Supp. 2d 315, 330-33 (S.D.N.Y. 2006) (“Stein

3 II”). As Bennett later assured AUSA Weddle: “Whenever your

4 Office has notified us that individuals have not . . .

5 cooperat[ed], KPMG has promptly and without question

6 encouraged them to cooperate and threatened to cease payment

7 of their attorney fees and . . . to take personnel action,

8 including termination.” Letter of Robert Bennett to United

9 States Attorney’s Office, November 2, 2004; see, e.g., Stein

10 II, 440 F. Supp. 2d at 323 (describing KPMG’s termination of

11 Defendant-Appellant Warley after she invoked her Fifth

12 Amendment privilege against self-incrimination).

13 KPMG Avoids Indictment

14 In an early-March 2005 meeting, then-U.S. Attorney

15 David Kelley told Skadden and top KPMG executives that a

16 non-prosecution agreement was unlikely and that he had

17 reservations about KPMG’s level of cooperation: “I’ve seen

18 a lot better from big companies.” Bennett reminded Kelley

3
As discussed above, in a decision that is the subject
of the summary order filed today, the district court held
that Defendants-Appellees Smith and Watson’s proffer
statements were obtained in violation of their Fifth
Amendment privilege against self-incrimination and that
their statements would be suppressed. Id. at 337-38.

15
1 how KPMG had capped and conditioned its advancement of legal

2 fees. Kelley remained unconvinced.

3 KPMG moved up the Justice Department’s chain of

4 command. At a June 13, 2005 meeting with U.S. Deputy

5 Attorney General James Comey, Bennett stressed KPMG’s

6 pressure on employees to cooperate by conditioning legal

7 fees on cooperation; it was, he said, “precedent[]setting.”

8 Stein I, 435 F. Supp. 2d at 349 (internal quotation marks

9 omitted). KPMG’s entreaties were ultimately successful: on

10 August 29, 2005, the firm entered into a deferred

11 prosecution agreement (the “DPA”) under which KPMG admitted

12 extensive wrongdoing, paid a $456 million fine, and

13 committed itself to cooperation in any future government

14 investigation or prosecution. Id. at 349-50.

15 Indictment of Individual Employees

16 On August 29, 2005–-the same day KPMG executed the

17 DPA–-the government indicted six of the Defendants-Appellees

18 (along with three other KPMG employees): Jeffrey Stein;

19 Richard Smith; Jeffrey Eischeid; John Lanning, Vice Chairman

20 of Tax Services; Philip Wiesner, a former tax partner; and

21 Mark Watson, a tax partner. A superseding indictment filed

22 on October 17, 2005 named ten additional employees,

16
1 including seven of the Defendants-Appellees: Larry DeLap, a

2 former tax partner in charge of professional practice;

3 Steven Gremminger, a former partner and associate general

4 counsel; former tax partners Gregg Ritchie, Randy Bickham

5 and Carl Hasting; Carol G. Warley; and Richard Rosenthal, a

6 former tax partner and Chief Financial Officer of KPMG.4

7 Pursuant to the Fees Policy, KPMG promptly stopped advancing

8 legal fees to the indicted employees who were still

9 receiving them. Id. at 350.

10 Procedural History

11 On January 12, 2006, the thirteen defendants (among

12 others) moved to dismiss the indictment based on the

13 government’s interference with KPMG’s advancement of fees.5

14 In a submission to the district court, KPMG represented that

15 the Thompson memorandum in conjunction with the
16 government’s statements relating to payment of legal
17 fees affected KPMG’s determination(s) with respect to
18 the advancement of legal fees and other defense costs
19 to present or former partners and employees . . . . In

4
The superseding indictment filed on October 17, 2005
charged 19 defendants in 46 counts for conspiring to defraud
the United States and the IRS, tax evasion and obstruction
of the internal revenue laws (although not every individual
was charged with every offense).
5
According to the district court, “[a]ll defendants
previously employed by KPMG joined in the motion.” Id. at
336 n.5.

17
1 fact, KPMG is prepared to state that the Thompson
2 memorandum substantially influenced KPMG’s decisions
3 with respect to legal fees . . . .

4 Stein IV, 495 F. Supp. 2d at 405 (internal quotation marks

5 and emphasis omitted).

6 At a hearing on March 30, 2006, Judge Kaplan asked the

7 government whether it was “prepared at this point to commit

8 that [it] has no objection whatsoever to KPMG exercising its

9 free and independent business judgment as to whether to

10 advance defense costs to these defendants and that if it

11 were to elect to do so the government would not in any way

12 consider that in determining whether it had complied with

13 the DPA?” The AUSA responded: “That’s always been the case,

14 your Honor. That’s fine. We have no objection to that . .

15 . . They can always exercise their business judgment. As

16 you described it, your Honor, that’s always been the case.

17 It’s the case today, your Honor.”

18 Judge Kaplan ordered discovery and held a three-day

19 evidentiary hearing in May 2006 to ascertain whether the

20 government had contributed to KPMG’s adoption of the Fees

21 Policy. The court heard testimony from two prosecutors, one

22 IRS agent, three Skadden attorneys, and one lawyer from

23 KPMG’s Office of General Counsel, among others. Numerous

18
1 documents produced in discovery by both sides were admitted

2 into evidence.

3 Stein I

4 Judge Kaplan’s opinion and order of June 26, 2006

5 noted, as the parties had stipulated, that KPMG’s past

6 practice was to advance legal fees for employees facing

7 regulatory, civil and criminal investigations without

8 condition or cap. See Stein I, 435 F. Supp. 2d at 340.

9 Starting from that baseline, Judge Kaplan made the following

10 findings of fact. At the February 25, 2004 meeting, Bennett

11 began by “test[ing] the waters to see whether KPMG could

12 adhere to its practice of paying its employees’ legal

13 expenses when litigation loomed [by asking] for [the]

14 government’s view on the subject.” Id. at 341 (footnote

15 omitted). It is not clear what AUSA Neiman intended to

16 convey when she said that “misconduct” should not or cannot

17 “be rewarded” under “federal guidelines”; but her statement

18 “was understood by both KPMG and government representatives

19 as a reminder that payment of legal fees by KPMG, beyond any

20 that it might legally be obligated to pay, could well count

21 against KPMG in the government’s decision whether to indict

22 the firm.” Id. at 344 (internal quotation marks omitted).

19
1 “[W]hile the USAO did not say in so many words that it did

2 not want KPMG to pay legal fees, no one at the meeting could

3 have failed to draw that conclusion.” Id.

4 Based on those findings, Judge Kaplan arrived at the

5 following ultimate findings of fact, all of which the

6 government contests on appeal:

7 [1] “the Thompson Memorandum caused KPMG to consider
8 departing from its long-standing policy of paying legal
9 fees and expenses of its personnel in all cases and
10 investigations even before it first met with the USAO”
11 and induced KPMG to seek “an indication from the USAO
12 that payment of fees in accordance with its settled
13 practice would not be held against it”;
14
15 [2] the government made repeated references to the
16 Thompson Memo in an effort to “reinforce[] the threat
17 inherent in the Thompson Memorandum”;
18
19 [3] “the government conducted itself in a manner that
20 evidenced a desire to minimize the involvement of
21 defense attorneys”; and
22
23 [4] but for the Thompson Memorandum and the
24 prosecutors’ conduct, KPMG would have paid defendants’
25 legal fees and expenses without consideration of cost.
26
27 Id. at 352-53.

28 Against that background, Judge Kaplan ruled that a

29 defendant has a fundamental right under the Fifth Amendment

30 to fairness in the criminal process, including the ability

31 to get and deploy in defense all “resources lawfully

32 available to him or her, free of knowing or reckless

20
1 government interference,” id. at 361, and that the

2 government’s reasons for infringing that right in this case

3 could not withstand strict scrutiny, id. at 362-65. Judge

4 Kaplan also ruled that the same conduct deprived each

5 defendant of the Sixth Amendment right “to choose the lawyer

6 or lawyers he or she desires and to use one’s own funds to

7 mount the defense that one wishes to present.” Id. at 366

8 (footnote omitted). He reasoned that “the government’s law

9 enforcement interests in taking the specific actions in

10 question [do not] sufficiently outweigh the interests of the

11 KPMG Defendants in having the resources needed to defend as

12 they think proper against these charges.” Id. at 368.

13 “[T]he fact that advancement of legal fees occasionally

14 might be part of an obstruction scheme or indicate a lack of

15 full cooperation by a prospective defendant is insufficient

16 to justify the government’s interference with the right of

17 individual criminal defendants to obtain resources lawfully

18 available to them in order to defend themselves . . . .”

19 Id. at 369.

20 Judge Kaplan rejected the government’s position that

21 defendants have no right to spend “other people’s money” on

22 high-priced defense counsel: “[T]he KPMG Defendants had at

21
1 least an expectation that their expenses in defending any

2 claims or charges brought against them by reason of their

3 employment by KPMG would be paid by the firm,” and “any

4 benefits that would have flowed from that expectation--the

5 legal fees at issue now--were, in every material sense,

6 their property, not that of a third party.” Id. at 367. He

7 further determined that defendants need not show how their

8 defense was impaired: the government’s interference with

9 their Sixth Amendment “right to be represented as they

10 choose,” “like a deprivation of the right to counsel of

11 their choice, is complete irrespective of the quality of the

12 representation they receive.” Id. at 369.

13 As to remedy, Judge Kaplan conceded that dismissal of

14 the indictment would be inappropriate unless other avenues

15 for obtaining fees from KPMG were first exhausted. Id. at

16 373-80. To that end, Judge Kaplan invited defendants to

17 file a civil suit against KPMG under the district court’s

18 ancillary jurisdiction. Id. at 377-80, 382. The suit was

19 commenced, and Judge Kaplan denied KPMG’s motion to dismiss.

20 United States v. Stein, 452 F. Supp. 2d 230 (S.D.N.Y. 2006)

21 (“Stein III”). However, this Court ruled that the district

22 court lacked ancillary jurisdiction over the action. Stein

22
1 v. KPMG, LLP, 486 F.3d 753 (2d Cir. 2007).

2 Stein IV

3 Judge Kaplan dismissed the indictment against the

4 thirteen defendants on July 16, 2007. Stein IV, 495 F.

5 Supp. 2d at 427. He reinforced the ruling in Stein I that

6 the government violated defendants’ right to substantive due

7 process by holding that the prosecutors’ conduct also

8 “independently shock[s] the conscience.” Id. at 412-15.

9 Judge Kaplan concluded that no remedy other than dismissal

10 of the indictment would put defendants in the position they

11 would have occupied absent the government’s misconduct. Id.

12 at 419-28.

13 The government appeals the dismissal of the indictment.

14

15 DISCUSSION

16 We review first [I] the government’s challenges to the

17 district court’s factual findings, including its finding

18 that but for the Thompson Memorandum and the prosecutors’

19 conduct KPMG would have paid employees’ legal fees–-pre-

20 indictment and post-indictment–-without regard to cost.

21 Next, because we are hesitant to resolve constitutional

22 questions unnecessarily, [II] we inquire whether the

23
1 government cured the purported Sixth Amendment violation by

2 the AUSA’s in-court statement on March 30, 2006 that KPMG

3 was free to decide whether to advance fees. Since we

4 conclude that this statement did not return defendants to

5 the status quo ante, [III] we decide whether the

6 promulgation and enforcement of KPMG’s Fees Policy amounted

7 to state action under the Constitution and [IV] whether the

8 government deprived defendants of their Sixth Amendment

9 right to counsel.

10

11 I

12 The government challenges certain factual findings of

13 the district court. We review those findings for clear

14 error, viewing the evidence in the light most favorable to

15 defendants and asking whether we are left “with the definite

16 and firm conviction that a mistake has been committed.”

17 Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)

18 (internal quotation marks omitted).

19 The government points out that the Thompson Memorandum

20 lists “fees advancement” as just one of many considerations

21 in a complex charging decision, and thus argues that Judge

22 Kaplan overread the Thompson Memorandum as a threat that

24
1 KPMG would be indicted unless it ceased advancing legal fees

2 to its employees.

3 Judge Kaplan’s finding withstands scrutiny. KPMG was

4 faced with the fatal prospect of indictment; it could be

5 expected to do all it could, assisted by sophisticated

6 counsel, to placate and appease the government. As Judge

7 Kaplan noted, KPMG’s chief legal officer, Sven Erik Holmes,

8 testified that he considered it crucial “to be able to say

9 at the right time with the right audience, we’re in full

10 compliance with the Thompson Memorandum.” Stein I, 435 F.

11 Supp. 2d at 364 (emphasis added and internal quotation marks

12 omitted). Moreover, KPMG’s management and counsel had

13 reason to consider the impact of the firm’s indictment on

14 the interests of the firm’s partners, employees, clients,

15 creditors and retirees.

16 The government reads the Thompson Memorandum to say

17 that fees advancement is to be considered as a negative

18 factor only when it is part of a campaign to “circle the

19 wagons,” i.e., to protect culpable employees and obstruct

20 investigators. And it is true that the Thompson Memorandum

21 instructs a prosecutor to ask “whether the corporation

22 appears to be protecting its culpable employees and agents.”

25
1 But even if the government’s reading is plausible, the

2 wording nevertheless empowers prosecutors to determine which

3 employees will be deprived of company-sponsored counsel:

4 prosecutors may reasonably foresee that employees they

5 identify as “culpable” will be cut off from fees.

6 The government also takes issue with Judge Kaplan’s

7 finding that the prosecutors (acting under DOJ policy)

8 deliberately reinforced the threat inherent in the Thompson

9 Memorandum. Id. at 352-53. It protests that KPMG

10 considered conditioning legal fees on cooperation even

11 before the February 25, 2004 meeting and that KPMG adopted

12 its Fees Policy free from government influence. However,

13 Judge Kaplan’s interpretation of the meeting is supported by

14 the following record evidence. Because withholding of fees

15 would be problematic for a partnership like KPMG, Bennett

16 began by attempting to “sound out” the government’s position

17 on the issue. Stein IV, 495 F. Supp. 2d at 402. The

18 prosecutors declined to sign off on KPMG’s prior

19 arrangement. Instead they asked KPMG to ascertain whether

20 it had a legal obligation to advance fees. KPMG responded

21 with its fallback position: conditioning fees on

22 cooperation. Id. In Judge Kaplan’s view, this was not an

26
1 official policy announcement, but rather a proposal: Skadden

2 lawyers repeatedly emphasized to the prosecutors that no

3 final decision had been made. One available inference from

4 all this is that the prosecutors’ inquiry about KPMG’s legal

5 obligations was a routine check for conflicts of interest;

6 but on this record, Judge Kaplan was entitled to see things

7 differently.6

8 Nor can we disturb Judge Kaplan’s finding that “the

9 government conducted itself in a manner that

10 evidenced a desire to minimize the involvement of defense

11 attorneys.” Stein I, 435 F. Supp. 2d at 353. During the

12 March 11 phone call between the prosecutors and Skadden,

13 AUSA Weddle demanded that KPMG tell its employees to be

14 “totally open” with the USAO, “even if that [meant

15 admitting] criminal wrongdoing,” so that he could gather

16 material for cross-examination. Id. at 345 (alterations in

17 original and internal quotation marks omitted). On March

18 12, the prosecutors prevailed upon KPMG to supplement its

6
It is unnecessary for us to determine the import of
AUSA Neiman’s statement that misconduct should not or cannot
be rewarded or to decide whether AUSA Weddle actually said
that the government would look at discretionary fee
advancement “under a microscope.” Stein I, 435 F. Supp. 2d
at 344.

27
1 first advisory letter with another, which clarified that

2 employees could meet with the government without counsel.

3 In addition, prosecutors repeatedly used Skadden to threaten

4 to withhold legal fees from employees who refused to

5 proffer–-even if defense counsel had recommended that an

6 employee invoke the Fifth Amendment privilege. Judge Kaplan

7 could reasonably reject the government’s version of these

8 events.

9 Finally, we cannot say that the district court’s

10 ultimate finding of fact–-that absent the Thompson

11 Memorandum and the prosecutors’ conduct KPMG would have

12 advanced fees without condition or cap–-was clearly

13 erroneous. The government itself stipulated in Stein I that

14 KPMG had a “longstanding voluntary practice” of advancing

15 and paying employees’ legal fees “without regard to economic

16 costs or considerations” and “without a preset cap or

17 condition of cooperation with the government . . . in any

18 civil, criminal or regulatory proceeding” arising from

19 activities within the scope of employment. Id. at 340

20 (internal quotation marks omitted). Although it “is far

21 from certain” that KPMG is legally obligated to advance

22 defendants’ legal fees, Stein v. KPMG, LLP, 486 F.3d 753,

28
1 762 n.3 (2d Cir. 2007), a firm may have potent incentives to

2 advance fees, such as the ability to recruit and retain

3 skilled professionals in a profession fraught with legal

4 risk. Also, there is evidence that, before the prosecutors’

5 intervention, KPMG executed an agreement under which it

6 would advance Stein’s legal fees without cap or condition

7 (and negotiated toward an identical agreement with Smith).

8 And while the government maintains that the civil, criminal

9 and regulatory investigations confronting KPMG constituted

10 an unprecedented state of affairs that might have caused

11 KPMG to adopt new and different policies, Judge Kaplan was

12 not required to agree. Indeed, KPMG itself represented to

13 the court that the Thompson Memorandum and the prosecutors’

14 conduct “substantially influenced [its] determination(s)

15 with respect to the advancement of legal fees.”

16 For the foregoing reasons, we cannot disturb Judge

17 Kaplan’s factual findings, including his finding that, but

18 for the Thompson Memorandum and the prosecutors’ conduct,

19 KPMG would have advanced legal fees without condition or

20 cap.

21

22

29
1 II

2 We now consider the government’s claim of cure. If the

3 government is correct, the “taint” of the purported Sixth

4 Amendment violation would be “neutralize[d],” dismissal of

5 the indictment would be inappropriate, and we could avoid

6 deciding the constitutional question. United States v.

7 Morrison, 449 U.S. 361, 365 (1981); see, e.g., id. at 366-67

8 (referring to “[t]he Sixth Amendment violation, if any” and

9 concluding that “the violation, which we assume has

10 occurred, has had no adverse impact upon the criminal

11 proceedings” (emphases added)).

12 “Cases involving Sixth Amendment deprivations are

13 subject to the general rule that remedies should be tailored

14 to the injury suffered from the constitutional violation and

15 should not unnecessarily infringe on competing interests.”

16 Id. at 364. Therefore, we must “identify and then

17 neutralize the taint by tailoring relief appropriate in the

18 circumstances to assure the defendant the effective

19 assistance of counsel and a fair trial.” Id. at 365.

20 Dismissal of an indictment is a remedy of last resort, id.,

21 and is appropriate only where necessary to “restore[] the

22 defendant to the circumstances that would have existed had

30
1 there been no constitutional error,” United States v.

2 Carmichael, 216 F.3d 224, 227 (2d Cir. 2000).

3 In Stein IV, Judge Kaplan concluded that dismissal of

4 the indictment as to the thirteen defendants was warranted

5 because no other remedy would restore them to the position

6 they would have enjoyed but for the government’s

7 unconstitutional conduct. Stein IV, 495 F. Supp. 2d at 419-

8 28. Specifically, Judge Kaplan found that the government

9 deprived four defendants–-Gremminger, Hasting, Ritchie and

10 Watson–-of counsel of their choice. Id. at 421 (“[T]hey

11 simply lack the resources to engage the lawyers of their

12 choice, lawyers who had represented them as long as KPMG was

13 paying the bills.” (footnote omitted)). Judge Kaplan also

14 found that all thirteen defendants–-even those who were

15 still represented by their counsel of choice–-were forced by

16 KPMG’s withholding of post-indictment legal fees “to limit

17 their defenses . . . for economic reasons and that they

18 would not have been so constrained if KPMG paid their

19 expenses.” Id. at 419. After reviewing defendants’

20 finances and determining the estimated cost of legal

21 representation, Judge Kaplan concluded: “[N]one of the

22 thirteen KPMG Defendants . . . has the resources to defend

31
1 this case as he or she would have defended it had KPMG been

2 paying the cost, even if he or she liquidated all property

3 owned by the defendant.” Id. at 425.

4 The government argues that it cured any Sixth Amendment

5 violation on March 30, 2006, when it told the district court

6 that KPMG was free to “exercise [its] business judgment.”

7 Therefore, the government contends, the appropriate remedy

8 for any constitutional violation would be to allow

9 defendants to retain their counsel of choice using whatever

10 funds KPMG is willing to provide now. At most, the

11 government claims, all that would be warranted is an

12 adjournment of trial to afford defendants additional time to

13 review documents and consult with counsel and expert

14 witnesses; and since 16 months passed between the

15 government’s March 30, 2006 in-court statement and the July

16 16, 2007 dismissal of the indictment, defendants have

17 already enjoyed this remedy.

18 Judge Kaplan was unpersuaded. In his view, KPMG is

19 unlikely to pay defendants’ legal fees as if the government

20 had never exerted any pressure: KPMG might prefer not to be

21 seen as reversing course and implicitly “admitting that it

22 caved in to government pressure”; the defendants have been

32
1 “indicted on charges the full scope of which may not

2 previously have been foreseeable to KPMG”–-so that defense

3 costs may be larger than expected; and KPMG has since paid a

4 $456 million fine under the DPA, reducing the firm’s

5 available resources. Stein I, 435 F. Supp. 2d at 374.

6 We agree with the district court. The prosecutor’s

7 isolated and ambiguous statement in a proceeding to which

8 KPMG was not a party (and the nearly 16-month period of

9 legal limbo that ensued) did not restore defendants to the

10 status quo ante.

11 Judge Kaplan asked whether the government would

12 represent that [i] it has no objection to “KPMG exercising

13 its free and independent business judgment as to whether to

14 advance defense costs” and [ii] “if it were to elect to do

15 so the government would not in any way consider that in

16 determining whether it had complied with the DPA.” The AUSA

17 affirmed only the first proposition. See supra p. [18].

18 And as to that, the AUSA stated that the government’s

19 position had not changed: so the import of that statement

20 depends on what position one thinks the government had

21 previously adopted.

22 Furthermore, it was unrealistic to expect KPMG to

33
1 exercise uncoerced judgment in March 2006 as if it had never

2 experienced the government’s pressure in the first place.

3 The government’s intervention, coupled with the menace

4 inherent in the Thompson Memorandum, altered the decisional

5 dynamic in a way that the district court could find

6 irreparable. Having assumed a supine position in the DPA–-

7 under which KPMG must continue to cooperate fully with the

8 government7 –-it is not all that likely that the firm would

9 feel free to reverse course.

10 True, even if KPMG had decided initially to advance

11 legal fees, it might always have changed course later: it is

12 undisputed that KPMG’s longstanding fees policy was

13 voluntary and subject to revision. (In fact, in the civil

14 suit KPMG represented that it would not have obligated

15 itself to pay millions of dollars in fees on behalf of an

16 unknown number of employees without regard to the charges

17 ultimately lodged against them.) So, the government argues,

18 even absent government pressure KPMG would not have advanced

19 legal fees indefinitely and without condition.

7
“The cooperation provisions of the DPA . . . require
KPMG to comply with demands by the USAO . . . [or else face]
the risk that the government will declare that KPMG breached
the DPA and prosecute the criminal information to verdict.”
Stein I, 435 F. Supp. 2d at 350.

34
1 This is certainly plausible; but it directly

2 contradicts the district court’s central finding–-which is

3 not clearly erroneous–-that “[a]bsent the Thompson

4 Memorandum and the actions of the USAO, KPMG would have paid

5 the legal fees and expenses of all of its partners and

6 employees both prior to and after indictment, without regard

7 to cost.” Id. at 353. Because we cannot disturb this

8 finding, we cannot accept the government’s claim of cure on

9 this score.

10 * * *

11 The appropriate remedy for a constitutional violation

12 is “one that as much as possible restores the defendant to

13 the circumstances that would have existed had there been no

14 constitutional error.” Carmichael, 216 F.3d at 227. Since

15 it has been found that, absent governmental interference,

16 KPMG would have advanced unlimited legal fees

17 unconditionally, only the unconditional, unlimited

18 advancement of legal fees would restore defendants to the

19 status quo ante. The government’s in-court statement and

20 the ensuing 16-month delay were not enough. If there was a

21 Sixth Amendment violation, dismissal of the indictment is

22 required.

35
1

2 III

3 Judge Kaplan found that “KPMG’s decision to cut off all

4 payments of legal fees and expenses to anyone who was

5 indicted and to limit and to condition such payments prior

6 to indictment upon cooperation with the government was the

7 direct consequence of the pressure applied by the Thompson

8 Memorandum and the USAO.” Stein I, 435 F. Supp. 2d at 353

9 (emphasis added); see also Stein II, 440 F. Supp. 2d at 334

10 (relying on this finding to conclude that KPMG’s conduct was

11 fairly attributable to the State for Fifth Amendment

12 purposes). The government protests that KPMG’s adoption and

13 enforcement of its Fees Policy was private action, outside

14 the ambit of the Sixth Amendment.

15 When “[t]he district court’s dismissal of [an]

16 indictment raises questions of constitutional

17 interpretation, . . . we review the district court’s

18 decision de novo.” United States v. King, 276 F.3d 109, 111

19 (2d Cir. 2002).

20 Actions of a private entity are attributable to the

21 State if “there is a sufficiently close nexus between the

22 State and the challenged action of the . . . entity so that

36
1 the action of the latter may be fairly treated as that of

2 the State itself.” Jackson v. Metro. Edison Co., 419 U.S.

3 345, 351 (1974). The “close nexus” test is not satisfied

4 when the state “[m]ere[ly] approv[es] of or acquiesce[s] in

5 the initiatives” of the private entity, S.F. Arts &

6 Athletics, Inc. v. U.S. Olympic Comm., 483 U.S. 522, 547

7 (1987) (internal quotation marks omitted and first

8 alteration in original), or when an entity is merely subject

9 to governmental regulation, see Jackson, 419 U.S. at 350 &

10 n.7. “The purpose of the [close-nexus requirement] is to

11 assure that constitutional standards are invoked only when

12 it can be said that the State is responsible for the

13 specific conduct of which the plaintiff complains.” Blum v.

14 Yaretsky, 457 U.S. 991, 1004 (1982). Such responsibility is

15 normally found when the State “has exercised coercive power

16 or has provided such significant encouragement, either overt

17 or covert, that the choice must in law be deemed to be that

18 of the State.” Id.

19 Although Supreme Court cases on this issue “have not

20 been a model of consistency,” Edmonson v. Leesville Concrete

21 Co., 500 U.S. 614, 632 (1991) (O’Connor, J., dissenting),

22 some principles emerge. “A nexus of state action exists

37
1 between a private entity and the state when the state

2 exercises coercive power, is entwined in the management or

3 control of the private actor, or provides the private actor

4 with significant encouragement, either overt or covert, or

5 when the private actor operates as a willful participant in

6 joint activity with the State or its agents, is controlled

7 by an agency of the State, has been delegated a public

8 function by the state, or is entwined with governmental

9 policies.” Flagg v. Yonkers Sav. & Loan Ass’n, 396 F.3d

10 178, 187 (2d Cir. 2005) (emphasis added and internal

11 quotation marks omitted); see also Skinner v. Ry. Labor

12 Executives’ Ass’n, 489 U.S. 602, 615 (1989) (finding state

13 action where “the Government did more than adopt a passive

14 position toward the underlying private conduct” and where it

15 “made plain not only its strong preference for [the private

16 conduct], but also its desire to share the fruits of such

17 intrusions”). But see Maher v. Roe, 432 U.S. 464, 476

18 (1977) (“Constitutional concerns are greatest when the State

19 attempts to impose its will by force of law; the State’s

20 power to encourage actions deemed to be in the public

21 interest is necessarily far broader.” (emphasis added)).

22 The government argues: KPMG simply took actions in the

38
1 shadow of an internal DOJ advisory document (the Thompson

2 Memorandum) containing multiple factors and caveats; the

3 government’s approval of KPMG’s Fees Policy did not render

4 the government responsible for KPMG’s actions enforcing it;

5 even if the government had specifically required KPMG to

6 adopt a policy that penalized non-cooperation, state action

7 would still have been lacking because KPMG would have

8 retained the power to apply the policy; and although the

9 prosecutors repeatedly informed KPMG when employees were not

10 cooperating, they did so at KPMG’s behest, without knowing

11 how KPMG would react. We disagree.

12 KPMG’s adoption and enforcement of the Fees Policy

13 amounted to “state action” because KPMG “operate[d] as a

14 willful participant in joint activity” with the government,

15 and because the USAO “significant[ly] encourage[d]” KPMG to

16 withhold legal fees from defendants upon indictment.8

17 Flagg, 396 F.3d at 187. The government brought home to KPMG

18 that its survival depended on its role in a joint project

19 with the government to advance government prosecutions. The

8
As explained in section IV.A, infra, the government’s
pre-indictment conduct was designed to have an effect once
defendants were indicted, and it is therefore proper to
consider such conduct for purposes of evaluating state
action.

39
1 government is therefore legally “responsible for the

2 specific conduct of which the [criminal defendants]

3 complain[].” Blum, 457 U.S. at 1004 (emphasis omitted).

4 The government argues that “KPMG’s decision to

5 condition legal fee payments on cooperation, while

6 undoubtedly influenced by the Thompson Memorandum, was not

7 coerced or directed by the Government.” But that argument

8 runs up against the district court’s factual finding (which

9 we do not disturb) that the fees decision “was the direct

10 consequence” of the Memorandum and the prosecutors’ conduct.

11 Stein I, 435 F. Supp. 2d at 353. Nevertheless, it remains a

12 question of law whether the facts as found by the district

13 court establish state action. See Blum, 457 U.S. at 1004

14 (asking whether the private conduct “must in law be deemed

15 to be that of the State” (emphasis added)).

16 State action is established here as a matter of law

17 because the government forced KPMG to adopt its constricted

18 Fees Policy. The Thompson Memorandum itself–-which

19 prosecutors stated would be considered in deciding whether

20 to indict KPMG–-emphasizes that cooperation will be assessed

21 in part based upon whether, in advancing counsel fees, “the

22 corporation appears to be protecting its culpable employees

40
1 and agents.” Since defense counsel’s objective in a

2 criminal investigation will virtually always be to protect

3 the client, KPMG’s risk was that fees for defense counsel

4 would be advanced to someone the government considered

5 culpable. So the only safe course was to allow the

6 government to become (in effect) paymaster.

7 The prosecutors reinforced this message by inquiring

8 into KPMG’s fees obligations, referring to the Thompson

9 Memorandum as “a point that had to be considered,” and

10 warning that “misconduct” should not or cannot “be rewarded”

11 under “federal guidelines.” Stein I, 435 F. Supp. 2d at

12 341-42. The government had KPMG’s full attention. It is

13 hardly surprising, then, that KPMG decided to condition

14 payment of fees on employees’ cooperation with the

15 government and to terminate fees upon indictment: only that

16 policy would allow KPMG to continue advancing fees while

17 minimizing the risk that prosecutors would view such

18 advancement as obstructive.

19 To ensure that KPMG’s new Fees Policy was enforced,

20 prosecutors became “entwined in the . . . control” of KPMG.

21 Flagg, 396 F.3d at 187. They intervened in KPMG’s

22 decisionmaking, expressing their “disappoint[ment] with

41
1 [the] tone” of KPMG’s first advisory memorandum, Stein I,

2 435 F. Supp. 2d at 346, and declaring that “[t]hese problems

3 must be remedied” by a proposed supplemental memorandum

4 specifying that employees could meet with the government

5 without being burdened by counsel. Prosecutors also “made

6 plain” their “strong preference” as to what the firm should

7 do, and their “desire to share the fruits of such

8 intrusions.” Skinner, 489 U.S. at 615. They did so by

9 regularly “reporting to KPMG the identities of employees who

10 refused to make statements in circumstances in which the

11 USAO knew full well that KPMG would pressure them to talk to

12 prosecutors.” Stein II, 440 F. Supp. 2d at 337. (The

13 government’s argument that it could not have known how KPMG

14 would react when informed that certain employees were not

15 cooperating is at best plausible only vis-à-vis the first

16 few employees.) The prosecutors thus steered KPMG toward

17 their preferred fee advancement policy and then supervised

18 its application in individual cases. Such “overt” and

19 “significant encouragement” supports the conclusion that

20 KPMG’s conduct is properly attributed to the State.9

9
Because the Sixth Amendment attaches only upon
indictment, the KPMG conduct attributable to the government
is relevant only insofar as it contributed to KPMG’s

42
1 The authorities cited by the government are not to the

2 contrary. The government relies on Blum v. Yaretsky, 457

3 U.S. 991 (1982), and Albert v. Carovano, 851 F.2d 561 (2d

4 Cir. 1988) (en banc), two cases in which state action was

5 held to be lacking. In Blum, a class of Medicaid patients

6 unsuccessfully challenged the transfer and discharge

7 decisions of private nursing homes. The patients claimed

8 that the private conduct was attributable to New York State

9 because state regulations required that the nursing homes

10 transfer patients to a facility providing the level of care

11 “‘indicated by the patient’s medical condition or needs.’”

12 Blum, 457 U.S. at 1007-08 (quoting N.Y. Comp. Codes R. &

13 Regs. tit. 10, §§ 416.9(d)(1), 421.13(d)(1) (1980)). Even

14 though the regulations “encouraged for efficiency reasons”

15 the “downward” transfer of patients to “lower levels of

16 care,” id. at 1008 n.19 (emphasis added), and even though

17 “federal law require[d] . . . state officials [to] review”

18 nursing home assessments and “[a]djust[] . . . benefit

decision to withhold legal fees upon defendants’ indictment.
See Part IV, infra. Many of KPMG’s actions occurred prior
to the August and October 2005 indictments. Nevertheless,
when the defendants were indicted, KPMG had been so schooled
by the government in the necessity of enforcing a particular
fee advancement policy that KPMG understood what was
expected of it once the indictments came down.

43
1 levels in response to a decision to discharge or transfer a

2 patient,” id. at 1010, the Supreme Court ruled that state

3 action was lacking. As the Court explained, the

4 “regulations do not require the nursing homes to rely on the

5 [patient care assessment forms designed by New York] in

6 making discharge or transfer decisions,” and “do not dictate

7 the decision to discharge or transfer in a particular case.”

8 Id. at 1008, 1010 (emphasis added). Instead, those

9 decisions “ultimately turn[ed] on medical judgments made by

10 private parties according to professional standards that are

11 not established by the State.” Id. at 1008.

12 Likewise, Albert declined to deem the disciplinary

13 decisions of a private college to be state action, despite a

14 New York law requiring colleges to adopt disciplinary rules

15 and file them with the state. Albert, 851 F.2d at 568-69.

16 We rejected plaintiffs’ claim that the college was compelled

17 by New York State to promulgate a disciplinary policy that

18 it would not have adopted otherwise. The policy was not “a

19 rule of conduct imposed by the state,” we explained, because

20 “[c]olleges are free to define breaches of public order

21 however they wish, and they need not resort to a particular

22 penalty in any particular case.” Id. at 564, 568.

44
1 Moreover, even if the state had mandated a particular rule,

2 “the ultimate power to select a particular sanction in

3 individual cases would, as in [Blum], rest with the private

4 party.” Id. at 571. That is, there was “nothing in either

5 the legislation or those rules” that “required that these

6 appellants be suspended.” Id. at 568 (emphasis added).

7 In Blum and Albert, it was decisive that [1] actions of

8 the private entity were based on independent criteria (the

9 medical standards; the college rules of conduct), and that

10 [2] the government was not dictating the outcomes of

11 particular cases.

12 Here, however, [1] KPMG was never “free to define”

13 cooperation independently: AUSA Weddle told Bennett that he

14 had “had a bad experience in the past with a company

15 conditioning payments on a person’s cooperation, where the

16 company did not define cooperation as ‘tell the truth’ the[]

17 way we [the prosecutors] define it.” KPMG’s fees

18 advancement decisions in individual cases thus depended

19 largely on state-influenced standards. In addition, [2] the

20 prosecution designated particular employees for deprivation

21 of fees (and, in some cases, termination of employment) by

22 demanding that KPMG threaten and penalize those employees

45
1 for non-cooperation. As Bennett later reported to the

2 Deputy Attorney General, “[w]henever your Office has

3 notified us that individuals have not . . . cooperat[ed],

4 KPMG has promptly and without question encouraged them to

5 cooperate and threatened to cease payment of their attorneys

6 fees and . . . to take personnel action, including

7 termination.” Furthermore, by indicting the thirteen

8 defendants after inspiring and shaping KPMG’s Fees Policy

9 and after exacting KPMG’s compliance with it, prosecutors

10 effectively selected which employees would be deprived of

11 attorneys’ fees. Having forced the constriction of KPMG’s

12 longstanding policy of advancing fees, the government then

13 compelled KPMG to apply the Fees Policy to particular

14 employees both pre- and post-indictment. This conduct finds

15 no protection in Blum and Albert.

16 The government also directs us to another line of state

17 action cases: D.L. Cromwell Investments, Inc. v. NASD

18 Regulation, Inc., 279 F.3d 155 (2d Cir. 2002), and United

19 States v. Solomon, 509 F.2d 863 (2d Cir. 1975). These cases

20 involved parallel, cooperative investigations by private

21 regulatory entities and government investigators. In D.L.

22 Cromwell, the USAO and the National Association of

46
1 Securities Dealers (“NASD”) simultaneously investigated

2 plaintiff stockbrokers. The plaintiffs sought to enjoin

3 NASD from compelling on-the-record interviews (on pain of

4 expulsion from their profession), arguing under the Fifth

5 Amendment that the NASD inquiry was a tool of the

6 prosecutors. D.L. Cromwell, 279 F.3d at 156-57. Plaintiffs

7 pointed to the informal and formal sharing of documents and

8 information between the government and the NASD, id. at 157-

9 58, 162, and the fact that the NASD interview demands

10 followed shortly after plaintiffs contested grand jury

11 subpoenas, id. at 162. Similarly, in Solomon, the New York

12 Stock Exchange (“NYSE”) had taken testimony from a trader

13 under threat of suspension or expulsion, and then forwarded

14 his deposition to the SEC pursuant to an SEC subpoena. 509

15 F.2d at 864-65.

16 In both cases, we held that there was no state action

17 because the private actors had independent regulatory

18 interests and motives for making their inquiries and for

19 cooperating with parallel investigations being conducted by

20 the government. In D.L. Cromwell, the NASD had a

21 preexisting “regulatory duty to investigate questionable

22 securities transactions,” 279 F.3d at 163–-that is, it would

47
1 have requested interviews regardless of governmental

2 pressure. And in Solomon, the NYSE’s efforts were “in

3 pursuance of its own interests and obligations, not as an

4 agent of the [government],” 509 F.2d at 869–-absent SEC

5 involvement, the NYSE would have investigated anyway.

6 Because the NASD and the NYSE had preexisting and

7 independent investigatory missions, their cooperation with

8 the government was not state action. See Lisa Kern Griffin,

9 Compelled Cooperation and the New Corporate Criminal

10 Procedure, 82 N.Y.U. L. Rev. 311, 369 (2007) (observing that

11 D.L. Cromwell and Solomon “turned in large part on the fact

12 that requests for interviews” were not “generated by

13 governmental persuasion or collusion”). By contrast (as the

14 district court found), absent the prosecutors’ involvement

15 and the Thompson Memorandum, KPMG would not have changed its

16 longstanding fee advancement policy or withheld legal fees

17 from defendants upon indictment. See Stein I, 435 F. Supp.

18 2d at 353.

19 The government responds: Solomon declined to find state

20 action even though it involved a private entity compelling

21 interviews with one of its members, backed by the explicit

22 threat of expulsion, in the context of continuous

48
1 coordination between the NYSE and the SEC on the same side.

2 So how can KPMG, an adversary of the government, also be its

3 partner? See Brentwood Acad. v. Tenn. Secondary Sch.

4 Athletic Ass’n, 531 U.S. 288, 304 (2001) (“The state-action

5 doctrine does not convert opponents into virtual agents.”).

6 An adversarial relationship does not normally bespeak

7 partnership. But KPMG faced ruin by indictment and

8 reasonably believed it must do everything in its power to

9 avoid it. The government’s threat of indictment was easily

10 sufficient to convert its adversary into its agent. KPMG

11 was not in a position to consider coolly the risk of

12 indictment, weigh the potential significance of the other

13 enumerated factors in the Thompson Memorandum, and decide

14 for itself how to proceed. See Griffin, 82 N.Y.U. L. Rev.

15 at 367 (“The threat of [ruinous indictment] brings

16 significant pressure to bear on corporations, and that

17 threat ‘provides a sufficient nexus’ between a private

18 entity’s employment decision at the government’s behest and

19 the government itself.”).

20 We therefore conclude that KPMG’s adoption and

21 enforcement of the Fees Policy (both before and upon

22 defendants’ indictment) amounted to state action. The

49
1 government may properly be held “responsible for the

2 specific conduct of which the [criminal defendants]

3 complain[],” Blum, 457 U.S. at 1004 (emphasis omitted),

4 i.e., the deprivation of their Sixth Amendment right to

5 counsel, if the violation is established.

6

7 IV

8 The district court’s ruling on the Sixth Amendment was

9 based on the following analysis (set out here in précis).

10 The Sixth Amendment protects “an individual’s right to

11 choose the lawyer or lawyers he or she desires,” Stein I,

12 435 F. Supp. 2d at 366 (citing Wheat v. United States, 486

13 U.S. 153, 164 (1988)), and “to use one’s own funds to mount

14 the defense that one wishes to present,” id. (citing Caplin

15 & Drysdale, Chartered v. United States, 491 U.S. 617, 624

16 (1989)). The goal is to secure “a defendant’s right to

17 spend his own money on a defense.” Id. at 367. Because

18 defendants reasonably expected to receive legal fees from

19 KPMG, the fees “were, in every material sense, their

20 property.” Id. The government’s interest in retaining

21 discretion to treat as obstruction a company’s advancement

22 of legal fees “is insufficient to justify the government’s

50
1 interference with the right of individual criminal

2 defendants to obtain resources lawfully available to them in

3 order to defend themselves.” Id. at 369. Defendants need

4 not make a “particularized showing” of how their defense was

5 impaired, id. at 372, because “[v]irtually everything the

6 defendants do in this case may be influenced by the extent

7 of the resources available to them,” such as selection of

8 counsel and “what the KPMG Defendants can pay their lawyers

9 to do,” id. at 371-72. Therefore, the Sixth Amendment

10 violation “is complete irrespective of the quality of the

11 representation they receive.” Id. at 369.10

10
In Stein IV, Judge Kaplan nevertheless expanded his
findings as to Sixth Amendment harms suffered by particular
defendants: defendants Gremminger, Hasting and Watson were
deprived of their chosen counsel, “lawyers who had
represented them as long as KPMG was paying the bills”; and
defendant Ritchie was deprived of the services of Cadwalader
Wickersham & Taft, “which was to have played an integral
role in his defense.” 495 F. Supp. 2d at 421. In addition:

All of the [present] KPMG Defendants . . . say
that KPMG’s refusal to pay their post-indictment legal
fees has caused them to restrict the activities of
their counsel, limited or precluded their attorneys’
review of the documents produced by the government in
discovery, prevented them from interviewing witnesses,
caused them to refrain from retaining expert witnesses,
and/or left them without information technology
assistance necessary for dealing with the mountains of
electronic discovery. The government has not contested
these assertions. The Court therefore has no reason to
doubt, and hence finds, that all of them have been

51
1

2 A

3 Most of the state action relevant here–-the

4 promulgation of the Thompson Memorandum, the prosecutors’

5 communications with KPMG regarding the advancement of fees,

6 KPMG’s adoption of a Fees Policy with caps and conditions,

7 and KPMG’s repeated threats to employees identified by

8 prosecutors as being uncooperative–-pre-dated the

9 indictments of August and October 2005.11 (Of course, after

10 the indictments were filed KPMG ceased advancing fees to all

11 thirteen of the present defendants who were still receiving

12 fees up to that point. As explained in Part III, this was

13 also state action.) So we must determine how this pre-

forced to limit their defenses in the respects claimed
for economic reasons and that they would not have been
so constrained if KPMG paid their expenses subject only
to the usual sort of administrative requirements
typically imposed by corporate law departments on
outside counsel fees.

Id. at 418-19 (footnote omitted). Judge Kaplan explained
that even though many defendants had net assets ranging from
$1 million to $5 million, their resources were inadequate
“to defend this case as they would have defended it absent
the government’s actions.” Id. at 423.
11
Again, “state action” includes both conduct by the
government and conduct by KPMG that is fairly attributable
to the government. See Part III, supra.

52
1 indictment conduct may bear on defendants’ Sixth Amendment

2 claim.

3 “The Sixth Amendment right of the ‘accused’ to

4 assistance of counsel in ‘all criminal prosecutions’ is

5 limited by its terms: it does not attach until a prosecution

6 is commenced.” Rothgery v. Gillespie County, 554 U.S. ---,

7 128 S. Ct. 2578, 2583 (2008) (quoting U.S. Const. amend. VI)

8 (some internal quotation marks and footnote omitted).

9 “Attachment” refers to “when the [Sixth Amendment] right may

10 be asserted”; it does not concern the separate question of

11 “what the right guarantees,” i.e., what the “substantive

12 guarantee of the Sixth Amendment” is at that stage of the

13 prosecution. Id. at 2592, 2594 (Alito, J., concurring).

14 The Supreme Court has “pegged commencement [of a

15 prosecution] to ‘the initiation of adversary judicial

16 criminal proceedings—-whether by way of formal charge,

17 preliminary hearing, indictment, information, or

18 arraignment.’” Id. at 2583 (majority opinion) (quoting

19 United States v. Gouveia, 467 U.S. 180, 188 (1984)). “The

20 rule is not ‘mere formalism,’ but a recognition of the point

21 at which ‘the government has committed itself to prosecute,’

22 ‘the adverse positions of government and defendant have

53
1 solidified,’ and the accused ‘finds himself faced with the

2 prosecutorial forces of organized society, and immersed in

3 the intricacies of substantive and procedural criminal

4 law.’” Id. (quoting Kirby v. Illinois, 406 U.S. 682, 689

5 (1972) (plurality opinion)).

6 Judge Kaplan focused on KPMG’s decision to withhold

7 fees upon indictment: “[T]he constitutional violation

8 pertinent to possible dismissal of the indictment was the

9 government’s role in KPMG’s action in cutting off payment of

10 legal fees for those who were indicted as distinct from the

11 limitations on payment of legal fees during the

12 investigative stage.” Stein IV, 495 F. Supp. 2d at 404 n.54

13 (emphasis added) (citing Stein I, 435 F. Supp. 2d at 373).

14 Therefore, Judge Kaplan explained, “[a]ctions by the

15 government that affected only the payment of legal fees and

16 defense costs for services rendered prior to the indictment

17 . . . do not implicate the Sixth Amendment.” Stein I, 435

18 F. Supp. 2d at 373 (emphasis added).

19 By the same token, state action that also (or only)

20 affected the advancement of legal fees for services rendered

21 post-indictment does implicate defendants’ Sixth Amendment

22 rights, regardless of when the conduct took place:

54
 1 It is true, of course, that the Sixth Amendment
2 right to counsel typically attaches at the initiation
3 of adversarial proceedings–-at an arraignment,
4 indictment, preliminary hearing, and so on. But the
5 analysis can not end there. The Thompson Memorandum on
6 its face and the USAO’s actions were parts of an effort
7 to limit defendants’ access to funds for their defense.
8 Even if this was not among the conscious motives, the
9 Memorandum was adopted and the USAO acted in
10 circumstances in which that result was known to be
11 exceptionally likely. The fact that events were set in
12 motion prior to indictment with the object of having,
13 or with knowledge that they were likely to have, an
14 unconstitutional effect upon indictment cannot save the
15 government. This conduct, unless justified, violated
16 the Sixth Amendment.
17
18 Id. at 366 (emphasis added). In other words, the

19 government’s pre-indictment conduct was of a kind that would

20 have post-indictment effects of Sixth Amendment

21 significance, and did.

22 We endorse this analysis. Although defendants’ Sixth

23 Amendment rights attached only upon indictment, the district

24 court properly considered pre-indictment state action that

25 affected defendants post-indictment. When the government

26 acts prior to indictment so as to impair the suspect’s

27 relationship with counsel post-indictment, the pre-

28 indictment actions ripen into cognizable Sixth Amendment

29 deprivations upon indictment.12 As Judge Ellis explained in

12
As Judge Kaplan recognized, the pre-indictment
conduct is separately constrained by the Fifth Amendment.

55
1 United States v. Rosen, 487 F. Supp. 2d 721 (E.D. Va. 2007),

2 “it is entirely plausible that pernicious effects of the

3 pre-indictment interference continued into the

4 post-indictment period, effectively hobbling defendants’

5 Sixth Amendment rights to retain counsel of choice with

6 funds to which they had a right. . . . [I]f, as alleged, the

7 government coerced [the employer] into halting fee advances

8 on defendants’ behalf and the government did so for the

9 purpose of undermining defendants’ relationship with counsel

10 once the indictment issued, the government violated

11 defendants’ right to expend their own resources towards

12 counsel once the right attached.” Id. at 734.

13 Since the government forced KPMG to adopt the

14 constricted Fees Policy–-including the provision for

15 terminating fee advancement upon indictment–-and then

16 compelled KPMG to enforce it, it was virtually certain that

17 KPMG would terminate defendants’ fees upon indictment. We

18 therefore reject the government’s argument that its actions

19 (virtually all pre-indictment) are immune from scrutiny

20 under the Sixth Amendment.13

13
We need not decide whether KPMG’s pre-indictment
conditioning and capping of fees–-conduct we have determined
was state action–-establishes a Sixth Amendment violation by

56
1 B

2 We now consider “what the [Sixth Amendment] right

3 guarantees.” Rothgery, 128 S. Ct. at 2592 (Alito, J.,

4 concurring).

5 The Sixth Amendment ensures that “[i]n all criminal

6 prosecutions, the accused shall enjoy the right . . . to

7 have the Assistance of Counsel for his defence.” U.S.

8 Const. amend. VI. Thus “the Sixth Amendment guarantees the

9 defendant the right to be represented by an otherwise

10 qualified attorney whom that defendant can afford to hire,

11 or who is willing to represent the defendant even though he

12 is without funds.” Caplin & Drysdale, Chartered v. United

13 States, 491 U.S. 617, 624-25 (1989). “[A]n element of this

14 right is the right of a defendant who does not require

15 appointed counsel to choose who will represent him.” United

16 States v. Gonzalez-Lopez, 548 U.S. 140, 144 (2006).14

itself. As discussed below, KPMG’s termination of fees upon
indictment deprived defendants of their Sixth Amendment
right to counsel.
14
Although the Sixth Amendment right to counsel of
choice “has been regarded as the root meaning of the
constitutional guarantee,” id. at 147-48, the right is
qualified: the attorney must be admitted to the bar, willing
to represent the defendant, free from certain conflicts of
interest, compliant with the rules of the court, and so on,
see Wheat v. United States, 486 U.S. 153, 159-60 (1988).

57
1 The government must “honor” a defendant’s Sixth

2 Amendment right to counsel:

3 This means more than simply that the State cannot
4 prevent the accused from obtaining the assistance of
5 counsel. The Sixth Amendment also imposes on the State
6 an affirmative obligation to respect and preserve the
7 accused’s choice to seek this assistance. . . . [A]t
8 the very least, the prosecutor and police have an
9 affirmative obligation not to act in a manner that
10 circumvents and thereby dilutes the protection afforded
11 by the right to counsel.
12
13 Maine v. Moulton, 474 U.S. 159, 170-71 (1985). This is

14 intuitive: the right to counsel in an adversarial legal

15 system would mean little if defense counsel could be

16 controlled by the government or vetoed without good reason.

17 Consistent with this principle of non-interference,

18 courts have identified violations of the Sixth Amendment

19 right to counsel where the government obtains incriminating

20 statements from a defendant outside the presence of counsel

21 and then introduces those statements at trial. See, e.g.,

22 id. at 176; Massiah v. United States, 377 U.S. 201, 206

23 (1964). Likewise, the government violates the Sixth

24 Amendment when it intrudes on the attorney-client

25 relationship, preventing defense counsel from

26 “participat[ing] fully and fairly in the adversary

27 factfinding process.” Herring v. New York, 422 U.S. 853,

58
1 858 (1975); see, e.g., id. at 858-59 (holding that a New

2 York statute allowing judges in a criminal bench trial to

3 deny counsel the opportunity to make a closing argument

4 deprived defendant of his Sixth Amendment right to the

5 assistance of counsel); Geders v. United States, 425 U.S.

6 80, 91 (1976) (holding that a trial court’s order that

7 defendant not consult with his attorney during an overnight

8 recess during trial violated the Sixth Amendment).

9 Defendants-Appellees do not say that they were deprived

10 of constitutionally effective counsel. See Strickland v.

11 Washington, 466 U.S. 668, 686 (1984). Their claim is that

12 the government unjustifiably interfered with their

13 relationship with counsel and their ability to mount the

14 best defense they could muster.

15 The government, relying on Caplin & Drysdale, Chartered

16 v. United States, 491 U.S. 617 (1989), contends that a

17 defendant has no Sixth Amendment right to a defense funded

18 by someone else’s money. In that case, the Supreme Court

19 ruled that a defendant’s Sixth Amendment right to retain

20 counsel of choice was not violated when the funds he

21 earmarked for defense were seized under a federal forfeiture

22 statute, because title to the forfeitable assets had vested

59
1 in the United States. Id. at 628; see also United States v.

2 Monsanto, 491 U.S. 600, 616 (1989) (holding that pretrial

3 restraining order based on showing of probable cause that

4 property is forfeitable “does not ‘arbitrarily’ interfere

5 with a defendant’s ‘fair opportunity’ to retain counsel”).

6 The government focuses on the following passage from

7 Caplin & Drysdale:

8 Whatever the full extent of the Sixth Amendment’s
9 protection of one’s right to retain counsel of his
10 choosing, that protection does not go beyond ‘the
11 individual’s right to spend his own money to obtain the
12 advice and assistance of . . . counsel.’ Walters v.
13 National Assn. of Radiation Survivors, 473 U.S. 305,
14 370 (1985) (Stevens, J., dissenting). A defendant has
15 no Sixth Amendment right to spend another person’s
16 money for services rendered by an attorney, even if
17 those funds are the only way that that defendant will
18 be able to retain the attorney of his choice. A
19 robbery suspect, for example, has no Sixth Amendment
20 right to use funds he has stolen from a bank to retain
21 an attorney to defend him if he is apprehended. The
22 money, though in his possession, is not rightfully his
23 . . . .
24
25 Caplin & Drysdale, 491 U.S. at 626 (emphasis added and first

26 omission in original). The holding of Caplin & Drysdale is

27 narrow: the Sixth Amendment does not prevent the government

28 from reclaiming its property from a defendant even though

29 the defendant had planned to fund his legal defense with it.

30 It is easy to distinguish the case of an employee who

31 reasonably expects to receive attorneys’ fees as a benefit

60
1 or perquisite of employment, whether or not the expectation

2 arises from a legal entitlement. As has been found here as

3 a matter of fact, these defendants would have received fees

4 from KPMG but for the government’s interference. Although

5 “there is no Sixth Amendment right for a defendant to obtain

6 counsel using tainted funds, [a defendant] still possesses a

7 qualified Sixth Amendment right to use wholly legitimate

8 funds to hire the attorney of his choice.” United States v.

9 Farmer, 274 F.3d 800, 804 (4th Cir. 2001) (emphasis added).

10 It is axiomatic that if defendants had already received

11 fee advances from KPMG, the government could not (absent

12 justification) deliberately interfere with the use of that

13 money to fuel their defenses. And the government concedes

14 that it could not prevent a lawyer from furnishing a defense

15 gratis. See Caplin & Drysdale, 491 U.S. at 624-25 (“[T]he

16 Sixth Amendment guarantees a defendant the right to be

17 represented by an otherwise qualified attorney . . . who is

18 willing to represent the defendant even though he is without

19 funds.”). Presumably, such a lawyer could pay another

20 lawyer to represent the defendant (subject, of course, to

21 ethical rules governing third-party payments to counsel, see

22 United States v. Locascio, 6 F.3d 924, 932-33 (2d Cir.

61
1 1993)). And if the Sixth Amendment prohibits the government

2 from interfering with such arrangements, then surely it also

3 prohibits the government from interfering with financial

4 donations by others, such as family members and neighbors--

5 and employers. See United States v. Inman, 483 F.2d 738,

6 739-40 (4th Cir. 1973) (per curiam) (“The Sixth Amendment

7 right to counsel includes not only an indigent’s right to

8 have the government appoint an attorney to represent him,

9 but also the right of any accused, if he can provide counsel

10 for himself by his own resources or through the aid of his

11 family or friends, to be represented by an attorney of his

12 own choosing.” (emphasis added)). In a nutshell, the Sixth

13 Amendment protects against unjustified governmental

14 interference with the right to defend oneself using whatever

15 assets one has or might reasonably and lawfully obtain.

16 The government points out that KPMG’s past fee practice

17 was voluntary and subject to change, and that defendants

18 therefore could have had no reasonable expectation of the

19 ongoing advancement of fees. But this argument simply

20 quarrels with Judge Kaplan’s finding that absent any state

21 action, KPMG would have paid defendants’ legal fees and

22 expenses without regard to cost. See Stein I, 435 F. Supp.

62
1 2d at 353. Defendants were not necessarily entitled to fee

2 advancement as a matter of law, see Stein v. KPMG, LLP, 486

3 F.3d 753, 762 n.3 (2d Cir. 2007) (commenting that

4 defendants’ likelihood of success in obtaining a judgment

5 against KPMG for legal fees is “far from certain”); but the

6 Sixth Amendment prohibits the government from impeding the

7 supply of defense resources (even if voluntary or gratis),

8 absent justification. Therefore, unless the government’s

9 interference was justified, it violated the Sixth Amendment.

10 The government is sometimes allowed to interfere with

11 defendants’ choice or relationship with counsel, such as to

12 prevent certain conflicts of interest. See, e.g., United

13 States v. Curcio, 680 F.2d 881 (2d Cir. 1982). However, the

14 government has failed to establish a legitimate

15 justification for interfering with KPMG’s advancement of

16 legal fees.

17 The government argues that it may inquire into third-

18 party payment of legal fees in certain circumstances. For

19 example, in United States v. Locascio, we affirmed the

20 disqualification of defendant’s counsel based in part on

21 defendant’s “benefactor payments” to the attorney to serve

22 as “house counsel” to members of the Gambino organized crime

63
1 family. Locascio, 6 F.3d at 932. We explained that “the

2 acceptance of such ‘benefactor payments’ . . . raises an

3 ethical question as to whether the attorney’s loyalties are

4 with the client or the payor,” id. (some internal quotation

5 marks omitted), and that “proof of house counsel can be used

6 by the government to help establish the existence of the

7 criminal enterprise under RICO, by showing the connections

8 among the participants,” id. at 932-33.

9 The government’s reliance on Locascio is misplaced.

10 There, the attorney’s status as “house counsel” “was

11 potentially part of the proof of the Gambino criminal

12 enterprise,” id. at 933, i.e., it was evidence going to an

13 element of the crime itself, and it was relevant to

14 ascertaining and preventing potential conflicts of interest,

15 id. at 932. But here, the government claims no such

16 compelling justifications.

17 It is also urged that a company may pretend cooperation

18 while “circling the wagons,” that payment of legal fees can

19 advance such a strategy, and that the government has a

20 legitimate interest in being able to assess cooperation

21 using the payment of fees as one factor. Even if that can

22 be a legitimate justification, it would not be in play here:

64
1 prosecutors testified before the district court that they

2 were never concerned that KPMG was “circling the wagons.”

3 Moreover, it is unclear how the circling of wagons is much

4 different from the legitimate melding of a joint defense.

5 The government conceded at oral argument that it is in

6 the government’s interest that every defendant receive the

7 best possible representation he or she can obtain. A

8 company that advances legal fees to employees may stymie

9 prosecutors by affording culpable employees with high-

10 quality representation. But if it is in the government’s

11 interest that every defendant receive the best possible

12 representation, it cannot also be in the government’s

13 interest to leave defendants naked to their enemies.

14 Judge Kaplan found that defendants Gremminger, Hasting,

15 Ritchie and Watson were unable to retain the counsel of

16 their choosing as a result of the termination of fee

17 advancements upon indictment. Stein IV, 495 F. Supp. 2d at

18 421-22. The government does not contest this factual

19 finding, and we will not disturb it. A defendant who is

20 deprived of counsel of choice (without justification) need

21 not show how his or her defense was impacted; such errors

22 are structural and are not subject to harmless-error review.

65
1 See Gonzalez-Lopez, 548 U.S. at 144, 148-52. “[T]he right

2 at stake here is the right to counsel of choice, . . . and

3 that right was violated because the deprivation of counsel

4 was erroneous. No additional showing of prejudice is

5 required to make the violation ‘complete.’” Id. at 146. Of

6 course, a completed constitutional violation may still be

7 remediable. However, as explained in Part II, the

8 government has failed to cure this Sixth Amendment

9 violation. Therefore, the government deprived defendants

10 Gremminger, Hasting, Ritchie and Watson of their Sixth

11 Amendment right to counsel of choice.

12 The remaining defendants–-Bickham, DeLap, Eischeid,

13 Lanning, Rosenthal, Smith, Stein, Warley, and Wiesner–-do

14 not claim they were deprived of their chosen counsel.

15 Rather, they assert that the government unjustifiably

16 interfered with their relationship with counsel and their

17 ability to defend themselves. In the district court, the

18 government conceded that these defendants are also entitled

19 to dismissal of the indictment, assuming the correctness of

20 Stein I. See Stein IV, 495 F. Supp. 2d at 393. We agree:

21 these defendants can easily demonstrate interference in

22 their relationships with counsel and impairment of their

66
1 ability to mount a defense based on Judge Kaplan’s non-

2 erroneous findings that the post-indictment termination of

3 fees “caused them to restrict the activities of their

4 counsel,” and thus to limit the scope of their pre-trial

5 investigation and preparation. Id. at 418. Defendants were

6 indicted based on a fairly novel theory of criminal

7 liability; they faced substantial penalties; the relevant

8 facts are scattered throughout over 22 million documents

9 regarding the doings of scores of people, id. at 417; the

10 subject matter is “extremely complex,” id. at 418; technical

11 expertise is needed to figure out and explain what happened;

12 and trial was expected to last between six and eight months,

13 id. As Judge Kaplan found, these defendants “have been

14 forced to limit their defenses . . . for economic reasons

15 and . . . they would not have been so constrained if KPMG

16 paid their expenses.” Id. at 419. We therefore hold that

17 these defendants were also deprived of their right to

18 counsel under the Sixth Amendment.15

15
This case does not raise, and therefore we have no
occasion to consider, the application of our holding to the
following scenario: A defendant moves unsuccessfully in the
district court to dismiss the indictment on the same Sixth
Amendment theory. The defendant proceeds to trial with his
or her chosen attorney, and the attorney is forced to limit
the scope of his or her efforts due to the defendant’s

67
1 CONCLUSION

2 For the foregoing reasons, we AFFIRM the judgment of

3 the district court dismissing defendants’ indictment.

financial constraints. The defendant is convicted based on
overwhelming evidence of his or her guilt.

68