The first time the issue came up, the Judge ruled:

“KPMG’s decision to cut off all payments of legal fees and expenses to anyone who was indicted and to limit and to condition such payments prior to indictment upon cooperation with the government was the direct consequence of the pressure applied by the Thompson Memorandum and the USAO. Absent the Thompson Memorandum and the actions of the USAO, KPMG would have paid the legal fees and expenses of all of its partners and employees both prior to and after indictment, without regard to cost.”

The Government argued the Judge was misinterpreting the Thompson memo. Not so, says the Judge.

The Memorandum did not, the government contends, discourage payment of legal fees for company employees by increasing the risk of indictment of a company under investigation that chooses to make such payments. The Court disagrees. Not only is the Court’s reading of the document correct, and in any case certainly well within the bounds of its role as fact finder, but it is a reading shared by the Bar in general and KPMG’s counsel in particular.

A copy of the Thompson Memorandum is here (pdf). Its intent was to provide guidance in charging corporations with a crime. It stated that cooperation with the Government's investigation was a factor to be considered. It also said,

"[i]n gauging the extent of the corporation’s cooperation, the prosecutor may consider the corporation’s willingness to identify the culprits within the corporation, including senior executives; to make witnesses available; to disclose the complete results of its internal investigation; and to waive attorney-client and work product protection. ”

As if that wasn't bad enough, the memo continued:

“Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation's promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation."

In other words, as the Judge ruled today, the Thompson Memorandum said that if a corporation voluntarily paid legal fees for employees involved in the investigation, the Government could use that to decide the company was not cooperating after all. There was an exception for legal fees the corporation was contractually obligated to pay. It said,

“Some states require corporations to pay the legal fees of officers under investigation prior to a formal determination of their guilt. Obviously, a corporation’s compliance with governing law should not be considered a failure to cooperate.”

After the Judge first ruled this policy violated the defendant's rights, the Justice Department, in December 2006, revised the Thompson Memo. The revised version is called the McNulty Memo, and is available here (pdf).

Still, the Government claimed the Thompson Memo only referred to "circling the wagons," meaning instances in which the company was making an effort to appear cooperative while protecting culpable employees.”

Hogwash, said the Judge today.

Any competent lawyer reading the document would regard a corporate client that was under investigation as being at greater risk of indictment if it advanced legal fees to employees who might be viewed by prosecutors as culpable than if it did not advance legal fees. That is the plain meaning of the language.

I'm only up to page 11 of the 68 page opinion. If the case interests you, and it should, because the 5th and 6th Amendments are bedrocks of our criminal justice system and the case reeks of Government misconduct in trying to block the defendants from both guarantees, go on over and finish reading the opinion.

Ok, here's a little more. The Court said it wasn't necessary to decide whether the Thompson Memo amounted to outrageous conduct in order to find a due process violation. It then turned to the U.S. Attorneys' conduct and found their conduct was outrageous enough to shock the conscience of the court.

In this case, the USAO pressured KPMG to withhold payment of legal fees. As Stein I found, the prosecutors understood “that the threat inherent in the Thompson Memorandum, coupled with their own reinforcement of that threat, was likely to produce exactly the result that occurred – KPMG’s determination to cut off the payment of legal fees for any employees or former employees who were indicted and to limit and condition their payment during the investigative stage.”

And that's not the end of the prosecutorial misconduct.

The actions of the prosecutors with respect to legal fees may be considered also in light of their actions with respect to obtaining proffers from KPMG employees under suspicion, all of whom had a Fifth Amendment right to decline to speak to the government.

The prosecutors knew that the Thompson Memorandum effectively compelled KPMG to make its personnel available for interviews by the government. They knew, as the government said at the fee hearing, that “there are two ways the company could get their people in. One is they could hold over their head their job. The other is they could cut off their legal fees.”

They therefore understood that KPMG would threaten to fire or cut off payment of legal fees for employees and former employees whom prosecutors reported were not cooperating – i.e., who were refusing to submit to interviews with the government.

Yet the prosecutors identified such persons to KPMG anyway. These actions are significant not only in themselves, but also for the insight they provide into the prosecutors’ actions with respect to payment of legal fees. For they demonstrate a willingness by the prosecutors to use their life and death power over KPMG to induce KPMG to coerce its personnel to bend to the government’s wishes notwithstanding the fact that the Constitution barred the government from doing directly what it forced KPMG to do for it.

The Judge is really rocking now, and we're only up to page 38. He continues with his finding,

Their actions were not justified by any legitimate governmental interest. Their deliberate interference with the defendants’ rights was outrageous and shocking in the constitutional sense because it was fundamentally at odds with two of our most basic constitutional values – the right to counsel and the right to fair criminal proceedings.

....The government’s actions with respect to legal fees were at least deliberately indifferent to the rights of the defendants and others. In all the circumstances, this behavior shocks the conscience in the constitutional sense whether prosecutors were merely deliberately indifferent to the KPMG Defendants’ rights or acted more culpably.

The court then moves on to the argument that the Government deprived the defendants of their right to counsel of choice. He rules as to some of them it did.

The Supreme Court and the Second Circuit have recognized, a criminal defendant has a constitutional right “to control the presentation of his defense.”... “Inherent in a defendant’s right to control the presentation of his defense is the right to choose the counsel who presents it. ”... This includes the right to a second lawyer or law firm if the defendant can afford it, either from his own resources or from resources lawfully available to him from others.

The court cites last year's Supreme Court decision in Gonzales-Lopez:

“Where the right to be assisted by counsel of one’s choice is wrongly denied, . . . it is unnecessary to conduct an ineffectiveness or prejudice inquiry to establish a Sixth Amendment violation. Deprivation of the right is ‘complete’ when the defendant is erroneously prevented from being represented by the lawyer he wants, regardless of the quality of the representation he received.

To argue otherwise is to confuse the right to counsel of choice – which is the right to a particular lawyer regardless of comparative effectiveness – with the right to effective counsel – which imposes a baseline requirement of competence on whatever lawyer is chosen or appointed.”

He's much stronger on ruling that the Government impaired the defendants' ability to defend themselves.

This post has gone on long enough, so let me just say that any defense lawyer in a federal multi-defendant, document intensive case is going to want to read this part.

He concludes:

All of the KPMG Defendants as to whom the government concedes dismissal to be the proper remedy 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 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.

Interestingly, when the court turns its attention to remedies (p. 52) it considers whether appointing CJA counsel would solve the problem. He says it won't. Those interested in that issue will want to read this section.

The judge finds that the Government's interference with the defendants' right to counsel of choice alone warrant dismissal of the Indictment -- irrespective of the other violations.

Lastly, in dismissing the charges against 13 of the 16 remaining defendants , the court quotes these memorable words of the Supreme Court in 1935 in Berger v. United States.

a prosecutor “is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done.

As such, he is in a peculiar and very definite sense the servant of the law, the twofold aim of which is that guilt shall not escape or innocence suffer. He may prosecute with earnestness and vigor – indeed, he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones.

While the Government wanted this dismissal so it could take the issue to the Second Circuit, it may have gotten more than it bargained for.

Update: White Collar Crime Blog has some more commentary and analysis here and here.