Opinion: Corporations pick up attorneys' fees in federal prosecutions

Business scandals cause investigations of many employees for criminal behavior. Most are not guilty of wrongdoing. The nature of their work, however, targets them for investigation.

Other than a life-threatening illness to a loved one, nothing is more consuming than a criminal prosecution or threat of a criminal prosecution.

Besides the emotional costs, the financial costs are staggering. At a minimum, a good white-collar criminal defense lawyer will probably charge $300 an hour, with many charging much more. Filing and responding to motions, discovery efforts and multiple court hearings can cost defendants millions in legal fees.

Given the almost unlimited finances of federal prosecutors, most defendants are quickly financially overwhelmed. Some defendants may plead guilty, regardless of their innocence, just for their families’ financial well-being.

Legal expense compensation

To prevent personal financial ruin from defending against criminal charges, most corporations compensate corporate officers, managers and other employees for legal expenses incurred in such cases. Employment contracts often provide legal expense indemnification.

Some corporations, however, practice indemnification without regard to contractual ties, which helps attract and keep talented employees and build company loyalty.

The Department of Justice, however, is pressuring corporations to stop compensating employees for attorneys’ fees. In a 2003 memo, Deputy Attorney General Larry Thompson told prosecutors to consider the corporation’s payment of employees’ legal fees in deciding whether to indict the corporation for wrongdoing. Although state incorporation statutes legalize indemnifications, prosecutors view them as attempts to impede investigations.

The Department of Justice’s threat has chilled the practice of indemnification. KPMG abandoned its policy of paying its partners’ legal fees without regard to costs. KPMG now caps indemnification for legal fees at $400,000. In one case, KPMG threatened to stop paying the legal fees of employees under investigation if they refused to speak to government investigators. This pressured employees to surrender their Fifth Amendment right against self-incrimination. KPMG took its extraordinary position under threat of indictment for not fully cooperating with federal investigators.

The government’s position on indemnification may not concern many people because of the compensation paid to some high-level executives. Why not let wealthy people pay for their own defense? Not every defendant is wealthy enough to afford astronomical legal fees. Federal investigations also target middle-level managers and their subordinates.

Even more importantly, the practice of assuming a corporation guilty of criminal wrongdoing because it indemnifies employees’ legal fees is simply wrong. A corporation’s honoring of legal and moral commitments to employees is not a lack of cooperation in an investigation.

Policy change?

Because of congressional outrage, the Department of Justice may be changing its position. Deputy Attorney General Paul McNulty issued a new prosecution guidelines memo in 2006. Although the memo does not go into great detail on the issue of indemnification, in a memo footnote McNulty references the government’s pressuring of KPMG to stop compensating its employees for legal fees. McNulty remarks that “in extremely rare cases, the advancement of attorneys’ fees may be taken into account when the totality of circumstances show that it was intended to impede a government investigation.”

The footnote might signal a policy change, but the memo is not much help to corporations in deciding whether to continue indemnification practices. Federal legislation is necessary to stop the Department of Justice from putting unfair pressure on corporations to cooperate in federal investigation by giving up their rights and those of employees.

John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at The Soderquist Center for Leadership and Ethics and professor of business at John Brown University in Arkansas.