John Hasnas (Georgetown University, McDonough School of Business) has published an interesting op-ed in the Weekend Wall Street Journal, Department of Coercion:

Say you run a financial services firm that markets tax shelters to wealthy clients. Although the shelters are aggressive, you firmly believe they’re legal. Indeed, you have sent one of your tax partners to testify before Congress to that effect. The IRS hasn’t challenged the shelters in court, and no court has declared them to be illegal. Nevertheless, the Department of Justice has opened an investigation of your firm for tax fraud and indicted the partner who testified before Congress.

As a responsible executive, what should you do? Instruct corporate counsel to conduct an internal investigation to ensure that no law has been broken? Have the legal department begin to work on the corporation’s defense? Enter into a joint defense agreement with the partner under indictment? Advance the partner’s legal fees in accordance with the company’s policy of supporting employees sued for employment related actions?

Or should you have the corporation accept responsibility for tax fraud, officially declare that several of your tax partners engaged in unlawful conduct, refuse to enter into a joint defense agreement or advance the legal fees of any of these partners, fire those who refuse to cooperate with the government, waive the firm’s attorney-client and work product privileges, disclose all information that may incriminate your employees to the government, and agree to pay a several hundred million dollar fine? This, surprisingly, is the answer. Under current federal law and Department of Justice policy, it would be irresponsible management to attempt to defend the corporation or its employees….

Incidentally, my initial hypothetical is not a fanciful one. KPMG recently agreed to pay $456 million to avoid indictment for marketing tax shelters that have never been shown to be illegal. It also waived its attorney-client and work product privileges and is helping the government prosecute 17 of its former employees, including a tax partner it sent to testify before Congress. This help includes providing the government with all incriminating evidence in its possession and firing and refusing to advance the attorney’s fees of employees who defend themselves rather than cooperate with prosecutors. It also includes agreeing not to retain employees who say anything inconsistent with the indicted employees’ guilt, something that neatly precludes the accused from obtaining defense witnesses. Legally, KPMG is on good grounds in taking these actions. Ethically, the case is considerably less clear.