Show Me the Money: The Thompson Memo,Stein, and an Employee's Right to theAdvancement of Legal Fees Underthe McNulty Memo

I. IntroductionImagine, for a moment, that you are an employee at a company under investigation for corporate malfeasance. Perhaps the wrongdoing involves establishing illegal tax shelters, the reason me U.S. Attorney's Office (USAO) investigated KPMG beginning in 2002.1 Maybe you had a role in creating these tax shelters and could be held criminally or civilly liable. Or maybe you are innocent of any wrongdoing but were involved to such an extent that you can easily foresee interviews with the USAO, grand jury testimony, indictment, discovery, and a full trial before your name is cleared. Either way, you can tell that the process will likely drag on for months or years and cost tens or hundreds of thousands of dollars in legal fees.The only bright spot might be that your company has a policy of advancing to its employees the necessary legal fees to fight such charges. Until recently, this bright spot would quickly black out if you learned that me USAO planned on following guidelines in the Justice Department's "Principles of Federal Prosecution of Business Organizations."2 Known as the Thompson Memo, these guidelines stated, among other things, that when deciding whether or not to indict a business, prosecutors should view its advancement of legal fees to employees under investigation as a factor that weighs in favor of indicting that business.3Wishing to avoid indictment, your company informs you that, contrary to your expectations, they will only pay your legal fees if you agree to meet with the USAO and cooperate fully. You must waive your right to remain silent and put the prosecution to its proof, and instead you must be entirely forthcoming in all answers. You remain, of course, free to stand on your rights, but you will have to pay your own way.This is me situation a number of KPMG employees found themselves in beginning in 2004 when, in the interest of saving itself from the impending ruin of criminal indictment,4 KPMG informed its employees that the company would pay up to $400,000 of their legal fees, but only if the employees cooperated fully with the government and were not themselves charged with criminal indictment.5 Faced with legal fees beyond their means, a number of KPMG employees relented and gave statements to the USAO.6 While this strategy enabled KPMG to avoid indictment and saved the firm as a whole,7 it left indicted employees without the resources necessary to fight their prosecution.In a series of opinions, known as the Stein opinions, issued during the summer and fall of 2006, the District Court for the Southern District of New York rejected as illegitimate the pressure the government, through KPMG, placed on these employees.8 These opinions raised numerous questions about the validity of the Thompson Memo and sparked significant backlash.9 In December 2006, the Justice Department replaced the Thompson Memo with the McNulty Memo.10 While me McNulty Memo states that advancement of legal fees should generally not be taken into account when considering whether to indict a business, critics argue that the changes in the McNulty Memo are mostly cosmetic.11 Thus, despite the fact that the Department of Justice issued new guidelines for business prosecution, many of the questions raised by the Stein opinions remain, particularly those concerning me advancement of legal fees to employees under investigation.This Note examines an employee's right to advancement and argues that, after Stein, companies need to explicitly include or exclude advancement agreements in their employment contracts, and companies should be concerned about creating implied contracts by advancing legal fees to some employees on an ad hoc basis. Part H provides an overview of employee indemnification and advancement. This Part also includes some current arguments in favor of reining in indemnification agreements based on the belief that holding executives unaccountable creates a moral hazard and has various hidden transaction costs thereby undermining one of the essential underpinnings of corporate criminal liability in the first place: Its ability to encourage internal oversight. …