     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:


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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

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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.

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