In KPMG Case, the Thorny Issue of Legal Fees — Dynegy’s Mr. Olis, Now in Prison, Shows Stakes in Trial Of Accounting Firm’s Executives

By PAUL DAVIES and DAVID REILLY
Wall Street Journal
June 12, 2007

The federal judge overseeing criminal proceedings against 16 former KPMG LLP executives has been wrestling with a thorny issue: how to ensure they get a fair trial given his finding that the government improperly forced the accounting giant to cut off payment of their legal fees.

For a vivid illustration of what’s at stake, consider the case of Jamie Olis, a former executive at Dynegy Inc., who is serving a six-year term at the Bastrop Federal Correctional Institute in Texas.

Pressed by the government, Dynegy cut off Mr. Olis’s legal fees after he was indicted in 2003 on charges that he helped engineer a sham financial transaction at the Houston energy company. Mr. Olis, who sold his house as a result of his legal troubles, says he was outgunned by the federal government’s legal team, which he believes led to his conviction.

Late last month, a jury in a civil court in Texas ruled that Dynegy improperly cut off his defense costs in a bid to avoid a criminal indictment of the energy company. The jury ordered Dynegy to pay Mr. Olis’s attorney, who brought the case, $2.5 million in damages. The company plans to appeal.

For Mr. Olis, 41 years old, the decision was a hollow victory. A former midlevel accountant at Dynegy, Mr. Olis was convicted in November 2003 on fraud and conspiracy charges for helping arrange a $300 million loan disguised to look like normal corporate cash flows. Mr. Olis’s original sentence of 24 years was overturned on appeal, with help from a high-powered legal team. His lawyers won’t say who paid for the appeal, but one expert witness said he testified at no charge. Mr. Olis remains in prison.

Dynegy, like many other companies, had traditionally paid legal fees for employees caught up in company-related investigations. But as part of a broad crackdown on white-collar crime brought on by the collapse of Enron, the government increased pressure on companies to cut off legal support for employees.

The Justice Department has since repudiated that approach, codified in a document that became known as the Thompson memorandum.

Mr. Olis’s criminal defense attorney said the lack of financial resources limited his ability to mount a strong defense. “It would’ve made a difference,” said attorney Terry Yates.

The government, for example, used computer programs to sort through 12 million pages of documents produced as evidence. Mr. Olis couldn’t afford the $100,000 to print the documents. The government had prosecutors, Federal Bureau of Investigation agents, postal inspectors and accounting experts work the case. Mr. Olis found his attorney — part of a three-lawyer practice — after his wife saw a picture of him in the Houston Chronicle getting kissed by a client he had successfully defended.

Don DeGabrielle, the U.S. attorney in Houston, says Mr. Olis had “excellent” legal representation throughout his criminal trial and appeal. “A jury convicted him and an appeals court upheld the conviction,” he says.

A Dynegy spokesman says the company “fully cooperated” with the government and “we believe we satisfied all our obligations to our employees.”

In January 2003, Houston’s then-U.S. Attorney Michael Shelby sent Dynegy’s Chief Executive Bruce Williamson a letter expressing concern the firm’s cooperation in the government probe was “more apparent than real.” Mr. Williamson testified at the civil trial last month that he met with Mr. Shelby the next day and “walked out of there a few pounds lighter,” in a reference to the pressure he felt the government brought to bear on him.

Mr. Shelby then sent a copy of the Thompson memorandum, which at the time detailed factors prosecutors could consider when deciding whether to indict a company rather than individual employees, Mr. Williamson said. Among them: whether a company is paying an employee’s legal fees.

Mr. DeGabrielle, who succeeded Mr. Shelby, said his office “followed appropriate Justice Department policies and procedures at the time.”

Initially, Dynegy said it would pay Mr. Olis’s fees — as called for in its bylaws — even after he was fired in February 2003. But after Mr. Olis was indicted that June, along with two others, the following month Dynegy’s board passed a resolution placing his defense funds into an escrow account.

Before and after his indictment, and even after his conviction, Mr. Olis said federal prosecutors pressured him to accept a plea deal in return for testifying against others at the company. He refused.

“What they wanted was for me to tell the story that I and everyone else engaged in a conspiracy,” Mr. Olis said in testimony from prison during his attorney’s civil trial against the firm seeking his fees. “I couldn’t ruin those people’s lives. I’m Catholic. And I can’t do that.”

Mr. DeGabrielle said Mr. Olis was offered a plea deal before trial and chose to exercise his constitutional right to go to trial.

Two of Mr. Olis’s co-workers accepted the plea deals. His boss received a 15-month sentence; a colleague was sentenced to 30 days. Mr. Olis was convicted in November 2003. His lengthy sentence became a flashpoint for harsh federal sentencing guidelines. “I got a 24-year prison sentence based on a transaction that my bosses told me to work on that I didn’t make a dime off of,” Mr. Olis said at the civil trial brought by his lawyer.

No senior Dynegy executives were ever charged in connection with the financing, which prosecutors said was designed to help bolster the company’s financial results and in turn its share price.

At KPMG, the government held “the proverbial gun” to the firm’s head in forcing it to cut off legal payments for executives caught up in the investigation into the sale of allegedly improper tax shelters, Judge Lewis A. Kaplan ruled last year.

Attorneys for the former KPMG executives have argued that the fees are needed to ensure an adequate defense. Failing that, they argued in filings Friday that the judge should dismiss the charges because it would be impossible to undo the harm wrought by the government’s actions. The U.S. attorney’s office in Manhattan, which is overseeing the KPMG case, declined to comment.

Judge Kaplan allowed the defendants to sue KPMG for the fees, but a federal appeals court overturned his decision. Now, the judge is left weighing extreme choices — he could dismiss the charges, force the KPMG defendants to foot their own legal bills or hope the government comes up with a compromise. Judge Kaplan has scheduled oral arguments on the issue for July 2.

LEGAL LIMBO

• The Issue: After finding that prosecutors pressured KPMG to cut off legal fees for ex-partners indicted for tax fraud, a judge will determine how to proceed.

• Similar Stakes: A Texas jury just awarded $2.5 million to the attorney who defended former Dynegy Inc. executive Jamie Olis after finding prosecutors pressured the energy company to cut off his defense fees.

• The Impact: White-collar employees and defense laywers are watching the legal-fee issue for the impact on companies that come under investigation.

Write to Paul Davies at paul.davies@wsj.com1 and David Reilly at david.reilly@wsj.com2

URL for this article: http://online.wsj.com/article/SB118161499305632156.html

Hyperlinks in this Article:

(1) mailto:paul.davies@wsj.com
(2) mailto:david.reilly@wsj.com

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

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