I have a vague recollection of reading about the KPMG case in my 12-hour professional responsibility course, but apparently even that shred of information no longer will be good law. While the ruling doesn't have much effect on the Justice Department as a whole because the DOJ already had revised its policies on allowing corporations to fund employees' counsel, I wonder if having a court disapprove of the government's interference in how defendants obtain counsel -- to whom they have a constitutional right -- will affect the SEC's frowning on corporations' compensating employees for fines and penalties incurred in the court of employment.

I'm thinking of the case underlying some of the KPMG prosecutions, i.e. that of Xerox. That probe was resolved by a settlement that included six former officers' paying $22 million in penalties and "disgorgement," but Xerox annoyed the SEC by indemnifying the officers. Then-chairman William H. Donaldson complained that "the fight against corporate fraud requires resolve in the boardroom and at all levels of government. I'm concerned about companies that, under permissive state laws, indemnify their officers and directors against disgorgement and penalties ordered in law enforcement actions, including those brought by the Commission. In my mind, this isn't good public policy. This is an area we may need to consider ways to bring about reform." For a while, the SEC required that settlements include a promise that the penalties really will be punishments and not just indemnified by the company or reimbursed by the D&O insurers, but I get the sense they're turning away from that on efficiency grounds. Requiring that the penalties come from the officer's own pocket might bankrupt him and keep the SEC from getting all the money, as well as reducing the likelihood of settlement.

Because Judge Kaplan's reasoning regarding KPMG seems to turn on the constitutional aspect of access to (employer-funded) counsel, rather than on any freedom of agreement between employers and employees, the ruling probably will have no such effect on the SEC's attempt to make the bad guys pay. Nonetheless, I'd be interested to see a federal court address this issue directly, even if only to say in passing that yep, the state courts have it right and Xerox can indemnify its heart out.