Crunch time in the KPMG case

Last June Judge Lewis Kaplan found in the KPMG tax shelter case that

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 [US Attorney's Office]. 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.* * *KPMG refused to pay because the government held the proverbial gun to its head.

Judge Kaplan rebuked the government for letting "its zeal get in the way of its judgment. It has violated the Constitution it is sworn to defend" and held that this conduct violated the defendants' Fifth Amendment right to a fair trial and Sixth Amendment right to counsel."

As I said last June in a TCS Daily commentary:

The court believed it had only one viable remedy -- use its ancillary jurisdiction to order KPMG to advance defendants' fees. The court invited the defendants to sue KPMG to bring it before the court for this purpose.

One might argue that the court could have dispensed with the whole constitutional part of the opinion and just let the defendants sue KPMG for breach of contract. But the government had already made clear that the defendants' mere contract right to fees would not prevent it from threatening indictment pursuant to the Thompson memo. It is far from clear what either KPMG or the court adjudicating the defendants' rights against KPMG would do in the face of this treat. The defendants needed a constitutional right because their contract rights alone could not stand up to the government's intimidation.

But yesterday the Second Circuit, in an opinion by Judge Ralph Winter, held that

the proceeding challenged on this appeal — a state law contract action against a non-party within a federal criminal proceeding — is well outside the subject matter jurisdiction conferred by Congress on the federal courts.

So what now? Judge Kaplan was obviously reluctant to throw out a huge prosecution for procedural reasons.  But it he's serious about the constitutional violations in this case, and I think he is and should be, it would seem he has to do the only other thing and dismiss the case. Here’s the White Collar Crime Blog:

Judge Kaplan's analysis of the constitutional violations in this case was an extension of existing caselaw, at best. Whether his findings survive depends on the next step: Will the judge grant the remedy pointed to by the Second Circuit as the most direct means of addressing the prosecutorial violations found by the court and thereby open his constitutional analysis to appellate review? If he does dismiss the indictment, an already slowed case will grind to a halt while appeals are pursued, and each side will have a strong incentive to seek Supreme Court review. Not dismissing the indictment puts the court in the uncomfortable position of finding sustantial constitutional violations but granting no relief to the aggrieved parties.

Here’s a WSJ story on the dilemma facing Judge Kaplan. And a WSJ editorial:

The Second Circuit's ruling would seem to leave Judge Kaplan with little alternative to dismissal, unless, like Gilda Radner of Saturday Night Live fame, he wants to offer a meek "never mind" and allow this tainted prosecution to proceed.

P.S. Tom Kirkendall reports on related issues in the Dynegy case concerning the government's pressure to throw its employee, Jamie Olis, to the wolves. Frightening stuff. The post demonstrates what's at stake in Judge Kaplan's impending decision.