Judge rejects charges for 13 on tax shelter
A federal judge dismissed charges yesterday against 13 former employees of the accounting firm KPMG, delivering a blow to prosecutors who once heralded the case as a showpiece in the government’s crusade against questionable tax shelters.
Judge Lewis A. Kaplan of Federal District Court in Manhattan ruled that he had no choice but to dismiss the charges because the government had strong-armed KPMG into not paying the legal fees of defendants and had violated their rights.
The ruling severely hobbles a case once billed by the government as the largest criminal tax proceeding ever; the charges were filed in 2005 in a broad government crackdown on questionable tax shelters.
Prosecutors indicted 19 defendants on charges of conspiracy, fraud and tax evasion in creating and selling four types of aggressive tax shelters beginning in the late 1990s that cost the government $2.5 billion in unpaid taxes. One former KPMG employee has pleaded guilty.
KPMG averted an indictment when it reached a landmark $456 million deferred-prosecution agreement in August 2005.
While a setback for prosecutors — the judge wrote that government pressure to cut off the legal fees rose to a level of misconduct that “shocks the conscience” — it does not spell the end of the case. Criminal charges remain against five others, including three former KPMG employees.
“This case has real implications for the government, it could be a watershed,” said Ronald J. Nessim, a lawyer who is co-chairman of the White Collar Crime Committee of the American Bar Association. “Most federal judges don’t have the desire or the ability or the will to take on the government, and Kaplan was willing to do that.”
A spokesman for the United States attorney’s office for Manhattan said yesterday that the office had not decided whether it would appeal the ruling.
While prosecutors have had their share of successes in their battle against corporate fraud, yesterday’s ruling was the latest in which they have seen a prominent case unravel because it hinged, in part, on aggressive legal tactics. In 2005, the Supreme Court overturned the conviction of the accounting firm Arthur Andersen, a death knell for the firm, in connection with the collapse of Enron. And the case against Richard M. Scrushy, the former chief executive of HealthSouth, was undermined by the complexity of the conspiracy case.
Judge Kaplan also implied that the prosecution in the KPMG employees’ case “mistakenly expected a substantial number of guilty pleas.”
On one level, the dismissal is a narrowing of a complex proceeding, one that could actually provide much-needed traction for prosecutors, who, since two crucial legal rulings in 2006, have been searching for a way to turn the focus of the case away from their prosecutorial tactics and back on the complex issue of what constitutes an abusive tax shelter.
A successful appeal would allow prosecutors, who deny using coercive pressure, to do just that.
In the first crucial ruling against prosecutors in April 2006, Judge Kaplan gave defense lawyers access to documents from prosecutors and KPMG regarding legal fees, providing a highly unusual look into the inner workings of the accounting firm’s negotiations with the government. Those documents suggested that prosecutors exerted pressure on KPMG and that the accounting firm felt it had no choice but to cave in to the government’s demands to avert indictment.
In the second ruling, in June 2006, Judge Kaplan said that prosecutors had violated the constitutional rights of certain defendants by pressuring KPMG to reverse its longstanding practice and not pay their legal fees. He then suggested that he might throw out the indictments.
The second ruling galvanized support among criminal defense lawyers and trade groups to pressure the Justice Department to revise its prosecutorial tactics. Those procedures, enshrined in a document known as the Thompson Memorandum, after the deputy attorney general then, Larry Thompson, were softened in December. The revisions expressly forbid prosecutors from considering whether a firm was paying a current or former employee’s legal fees when weighing whether to indict the firm.
It was that pressure on KPMG, Judge Kaplan wrote in his 68-page ruling yesterday, that prevented the defendants “from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice.”
“This is intolerable in a society that holds itself out to the world as a paragon of justice.”
Yesterday’s ruling dismisses charges against Randy Bickham, Larry DeLap, Jeffrey Eischeid, Steven Gremminger, Carl Hasting, John Lanning, Gregg Ritchie, Richard Rosenthal, Richard Smith Jr., Carol Warley, Mark Watson, Philip Wiesner and Jeffrey Stein, the former vice chairman of KPMG and the lead defendant.
A lawyer for Mr. Stein, David Spears, called the dismissal “a tremendous victory.”
In filings last week, lawyers for the defendants — the wealthiest of whom have net assets in the range of several million dollars, according to the judge’s ruling — estimated that their clients faced legal bills averaging $13 million if a trial, expected to last six to eight months, ever began.
The judge declined to dismiss charges against a former KPMG partner, David Greenberg, and two former KPMG employees, Robert Pfaff and John Larson. Charges against an outside lawyer, Raymond J. Ruble, and an outside investment adviser, David Amir Makov, also still stand.
KPMG’s payment of at least $3.4 million in defense costs for at least 11 defendants in civil lawsuits — involving the same tax shelters and KPMG as a co-defendant — further showed that KPMG had been unduly coerced to cut off legal fees in the criminal case, Judge Kaplan wrote yesterday.
“The government’s actions with respect to legal fees were at least deliberately indifferent to the rights of the defendants and others,” he wrote.
“In all the circumstances, this behavior shocks the conscience in the constitutional sense whether prosecutors were merely deliberately indifferent to the KPMG defendants’ rights or acted more culpably.”
Yesterday, lawyers were split on whether the prosecution was likely to win an appeal of Judge Kaplan’s dismissal.
“Yes, they can appeal, but it is unlikely to be successful, because the court of appeal has already said to the district court that you don’t have this ancillary jurisdiction, but we’re not disturbing your finding on misconduct,” Mr. Nessim said.
He was referring to a ruling in May by a three-judge panel of the United States Court of Appeals for the Second Circuit that reversed a ruling in which Judge Kaplan had ordered KPMG to stand trial over its refusal to pay the legal fees of its indicted former employees.
But Kathleen F. Brickey, a professor of criminal justice at Washington University in St. Louis who has studied the case, said that the government stood a good chance of winning any appeal.
“You’re not guaranteed a constitutional right to the best lawyer, the most expensive lawyer, or even the lawyer of your choice,” she said.
(Published by The New York Times, July 17, 2007)