In a closely watched case, a federal judge has finally called the Justice Department to account for its high-handed tactics against business firms and businesspeople that are under investigation. 

Prosecutors are increasingly using the threat of indictment to pressure firms into discharging certain employees and reneging on pre-existing company policies that would reimburse employees for attorneys’ fees associated with the business. When a CEO is convinced that some of his employees have engaged in criminal conduct, his decision is easy.  But if the CEO is unsure or is convinced of their innocence, shouldn’t he maintain a presumption of innocence and help the employees in question by honoring the company policy?  And what if prosecutors step up the pressure by leaking stories to press about the company’s “ongoing failure to cooperate with investigators”?

Here’s an excerpt from today’s NYT story:

In a strongly worded opinion, Judge Kaplan agreed with the defendants’ contention that KPMG, which was under criminal investigation, was improperly pressured to cut their legal fees.

KPMG refused to pay the defendants’ legal expenses, he wrote “because the government held the proverbial gun to its head.”

The government, he said, “has let its zeal get in the way of its judgment.”

…

In his ruling, the judge wrote that during negotiations with KPMG, the government violated the employees’ Fifth Amendment right to a fundamentally fair trial and their Sixth Amendment right to a lawyer.

An employer’s payment of legal fees is “very much part of American life,” he wrote, and applies to “bus drivers sued for accidents, cops sued for allegedly wrongful arrests, nurses named in malpractice cases, news reporters sued in libel cases and corporate chieftains embroiled in securities litigation.”

The right to legal fees is “as much a part of the bargain between employer and employee as salary or wages,” he wrote.

The judge also dressed down Manhattan prosecutors for being “economical with the truth” about pressuring KPMG to cut off the fees.

In his new book, Trapped, John Hasnas critiques the tactics of federal prosecutors because they so often put CEOs in catch-22 situations in which they must either act illegally or unethically.  To listen to a lecture by the author, go here.  For still more background, go here.