Will your boss betray you?
A judge slams an unfair policy toward white-collar defendants.
By Geoffrey Colvin, Fortune Magazine senior editor-at-large

(Fortune Magazine) -- Thank you, Judge Lewis A. Kaplan. You've just done a big favor to anyone who could conceivably be charged, even unjustly, with a federal crime in connection with his or her job - which means anyone who works.

The favor is Judge Kaplan's ruling in the federal trial of some former KPMG employees on charges of peddling squirrelly tax shelters. The judge didn't rule -and I have no view - on the charges. But he ruled that a key prosecution tactic violated the defendants' constitutional rights.

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Though that has been reported as a somewhat abstruse legal issue, it's actually part of a truly frightening situation that has existed for the past three years with little notice. Now the judge's ruling puts it on the front burner.

From the moment a company becomes aware of even the possibility that it has committed a federal crime, its fate is influenced heavily by the Organizational Sentencing Guidelines.

Culpability score

They lay out a schedule of fines, which can be significantly multiplied or reduced by something called the organization's culpability score. That score is enormously important. Depending on its value, a fine can vary by a factor of 80, which could determine whether a fine ends up being financially meaningless or ruinous. So for a board of directors, legally required to protect shareholders' interests, achieving the lowest possible culpability score is imperative.

Several factors go into the score, but none is more important than a company's cooperation with the feds - its "clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct," as the guidelines put it.

So, in order to be deemed cooperative, a company must repent of its alleged sins before there has even been a trial. In his recent book, Trapped: When Acting Ethically Is Against the Law, attorney and Georgetown University Business School teacher John Hasnas states, "Acceptance of responsibility essentially requires an organization to plead guilty to the offense charged without putting on a defense."

Such behavior may seem crazy, but under the guidelines, the financial incentives for being deemed cooperative - regardless of the underlying facts - can simply be overwhelming.

On your own

What made the situation dangerous for employees, and not just companies, was the addition of new criteria for cooperation in 2003. That's when deputy attorney general Larry D. Thompson gave prosecutors new guidance.

In his now famous Thompson memorandum, he said that one factor prosecutors may consider in determining a company's cooperation is "whether the corporation appears to be protecting its culpable employees" by such means as covering their legal fees or continuing to employ them.

Again, the inside-out logic is striking: The minute an employee is charged with a federal crime connected with his work - long before his "culpability" has been determined in court, and even if the company believes him to be innocent - the company must fire him and cut off all support for his defense, if it is to be deemed cooperative.

Accordingly, KPMG has refused to pay its former employees' legal bills, and Judge Kaplan has stirred up the whole world of white-collar prosecution by stating the obvious: "KPMG refused to pay because the government held the proverbial gun to its head."

Though employees have no constitutional right to getting their legal bills paid by employers, the judge held that having those fees covered is "as much a part of the bargain between employer and employee as salary or wages." The feds have no business disrupting that compact.

Judge Kaplan's ruling applies only to the KPMG case, but it will probably affect Justice Department practice and the reasoning of other courts. That's good news.

The Thompson memorandum was conceived in the heated aftermath of the corporate scandals, and it went too far. Now the process of fixing it has perhaps begun, though that's far from complete. The ruling doesn't require the Justice Department to change its tactics in future cases.

In addition, the Thompson Memorandum also incentivizes companies to waive attorney-client protection, so that anything an employee says to his employer's counsel could be turned over to prosecutors - again, at the beginning of the process, before any guilt has been determined.

But for now, if the Justice Department's policy on legal fees hasn't subjected you to a Kafkaesque nightmare, just remember that it could, and be grateful. And thank the judge for putting this policy under the harsh light it deserves.

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