judgelewiskaplankpmgchargesdropped.jpgThe federal judge in the tax shelter case against former KPMG executives dismissed the charges against 13 of the defendants. In a 64-page opinion, Judge Lewis Kaplan wrote that he had “reached this conclusion only after pursuing every alternative short of dismissal and only with the greatest reluctance.”
A little over a year ago, Kaplan issued a stunning indictment of the conduct of the federal prosecutors in the case. He found that the prosecutors had violated the due process rights of the accused by pressuring KPMG not to pay for the legal defense of its employees. “Those who commit crimes – regardless of whether they wear white or blue collars – must be brought to justice. The government, however, has let its zeal get in the way of its judgment. It has violated the Constitution it is sworn to defend,” Kaplan said in his written opinion last June.
Charges against three KPMG defendants—Robert Pfaff, John Larson and David Greenberg, all former senior tax advisers at KPMG—still stand, as do the charges against a lawyer and an investment adviser who were not employed by KPMG. The judge said Pfaff, Larson and Greenberg had not proven that KPMG would have paid their defense costs. The lawyer and the investment adviser were outside advisers not KPMG employees at the time, and so KPMG would not have paid for their defense in any case.
The case arose out of the accounting scandals of the late nineties. The defendants were accused of creating tax shelters that allowed clients to avoid billions of dollars in taxes. Because the case has been sullied by prosecutorial misconduct, no legal judgment has ever been rendered on the legality of the shelters.
In a strange twist, last month the prosecutors requested a dismissal of the case. It is widely believed that the prosecutors sought the dismissal so that they could appeal Kaplan’s earlier rulings against the high-pressure tactics they had employed against the defendants and KPMG. As the New York Times puts it: “Prosecutors, in court filings a couple of weeks ago, had essentially dared Judge Kaplan to do what he did today. At the time, the move was seen as an effort by prosecutors to get the case moving again.”
Charges Dropped in KPMG Tax Case [New York Times]
Judge Dismisses Charges Against 13 in KPMG Case [Wall Street Journal]

  • 10 Jul 2007 at 11:40 AM
  • KPMG

The KPMG Case: Does Dismissal Go Far Enough?

kpmgdismissabuseprosecutors.jpgThe Wall Street Journal’s editorial page comes out swinging against the prosecution in the now infamous KPMG tax shelter case. After a long list of the abuses, usurpations and creative legal theorizing by the prosecutors, the editorial page calls for the judge in the case to dismiss the charges against the defendants, who are former employees and advisers to KPMG.

This case has been shot through with prosecutorial overreach from the first, and the U.S. Attorney’s office pushed the boundaries of the law to win it. Due process is the sine qua non of a just system of criminal law. When those entrusted with upholding it instead trample on it, they have surrendered any claim to be acting in the public interest. Judge Kaplan has suggested in court that if private citizens had done some of the things that the KPMG prosecutors have done, they would be on trial. If Attorney General Alberto Gonzales won’t dismiss the case, Judge Kaplan should do it for him.

But we have to wonder, will dismissing the charges go far enough? The prosecutors have asked Judge Kaplan to dismiss charges as part of a risky gambit to set the stage for an appeal to a higher court, where they hope to overturn Kaplan’s earlier rulings that they violated the defendants’ constitutional rights to counsel. The appeals process could take several more months or even years, perhaps going as high as the Supreme Court. If the prosecutors win their appeal, the case will land back down at the trial level. This means that the KPMG defendants could spend several more months or years in legal limbo, a very costly legal limbo while their legal bills continue to stack up.
If the case against the KPMG defendants is as bad as the Journal editorial board says it is, shouldn’t the editorial have gone further? Where’s the call for President George Bush to pardon the defendants? Or is the power of the presidential pardon reserved exclusively for the politically well-connected these days?
The KPMG Fiasco [Wall Street Journal]

  • 03 Jul 2007 at 1:08 PM
  • KPMG

KPMG Hearing: To Dismiss or Not To Dismiss?

kpmgdismissabuseprosecutors.jpgThere were so many defense attorneys in the KPMG hearing yesterday (at least thirty by my count) that a separate observation room had to be set up so they could all sit down in courtroom 12D. It was a germane, if not ironic setting for what became a discussion of defense costs in a federal litigation.
In the way of background, sixteen KPMG employees, an outside lawyer and an investment adviser face charges of creating questionable tax shelters for major clients amounting to billions in breaks. Things got complicated when the government, betting on guilty pleas, pressured KPMG to stop paying the defendants’ legal fees, a pretty blatant Fifth Amendment violation. The trial pushed on however, and last year Judge Lewis Kaplan said he would probably dismiss the charges because of the government’s violations. In a surprising move last week, federal prosecutors agreed that the case should be dismissed, hoping to start new with an appeal.
Yesterday, Kaplan backed off last year’s decision, posing what he called the “Bill Gates Question:” If, by way of constitutional violation, a defendant’s legal fees are cut off, but that defendant(say, Bill Gates) can afford the same council out-of-pocket, is the appropriate remedy dismissal? On this question, the judge was undecided.
To understand this case, one must first enter the bizarro-world where the prosecution is arguing for dismissal with the motivation of appealing Kaplan’s earlier decision that the constitution was indeed violated. It is desperate move, but maybe the only thing the government can do. Kaplan’s hesitance to dismiss is a countermove to preserve the earlier ruling.
For much of the hearing, the defense attorneys argued that they themselves were replacements for more expensive attorneys that their clients could no longer afford. Many sentences began with phrases like, “Now I’m not saying I’m less capable then my client’s previous attorneys, but…”
In the end, Kaplan did not dismiss the case despite arguments from both sides, but ordered financial statements from the defendants, leaving the dismissal door open.

  • 26 Jun 2007 at 11:41 AM
  • KPMG

The KPMG 16: The Case That Won’t Die

kpmgdismissabuseprosecutors.jpgIt’s a tale that’s now becoming all two familiar. Aggressive prosecutors zealously pursue a case that probably should never have been brought, using every dirty trick in the government’s book (and a few that turn out to not be in the book at all), and refuse to let go even after the case has become a public embarrassment.
We’re not talking about the Duke phony-rape case here. In North Carolina at least they have the decency to disbar and fire their prosecutor-gone-wild.
But things are different if you work for the Justice Department. Being a federale means never having to say you are sorry. And far from apologizing to the 16 former KPMG partners who face trumped-up charges for tax evasion, the prosecutors in the case are mounting a daring legal gambit in an attempt to save their case from the dustbin of history.
This requires a bit of explanation. At first glance, it looks as if the prosecutors are admitting defeat. Yesterday the Wall Street Journal reported that the prosecutors asked the judge to dismiss the case against the defendants on the grounds that the government had violated their rights to defense of counsel. But, in fact, this is part of a strategy to revive the case against the former KPMG partners.
When the case was brought against the partners, the government intimidated KPMG into refusing to pay for their legal fees. The deal was that if KPMG refused to pay the fees for their employees, the firm would be treated as a cooperating witness in the case. If they paid the legal fees, the firm faced might more serious charges itself. It was an offer they couldn’t refuse.
Prosecutors hoped that the defendants would plead guilty rather than face near certain bankruptcy from the costs of defending themselves. Surprisingly, most of the defendants refused. It’s a rare defendant who is willing to take on the unlimited resources of the federal government and risk financial ruin as the cost of acquittal. But the KPMG partners were made of sterner stuff, and apparently were convinced of their own innocence.
Judge Lewis Kaplan ruled last year that the governments tactics had violated the defendants’ constitutional rights. The government has since dropped the tactic from its approved methods for bringing cases against white collar criminal defendants. But prosecutors refused to drop the case, and all attempts to cure the constitutional violations through procedural fixes have failed.
Now the prosecutors have asked the judge to dismiss the case. But they’ve already announced that they plan is to appeal the judge’s dismissal, as well as his earlier finding of constitutional violations, once it is dismissed. Why move to dismiss and then appeal? Apparently, the case cannot be appealed by the prosecutors until it is dismissed by the judge.
So the extraordinary and twisted case that began with accounting scandals in the late nineties—and somehow morphed from deceiving private shareholders to avoiding government taxes—marches on. Like some kind of horror movie killer that just…won’t…die.
Update: The New York Times headline in this story is truly noxious. “Prosecutors Invite a Dismissal in KPMG Tax-Shelter Case, Burdened by Technicalities” some editor of the Times wrote. When was the last time the New York Times editors dismissed constitutional violations as technicalities? This was the language used by law-and-order types a couple of three decades ago when the courts starting throwing out criminal convictions for minor mistakes in Miranda warnings (“You have the right to remain silent…” etc.) Here the government set out to effectively deprive the accused the financial means to defend themselves, and they call it a technicality.
Further Update: As is often the case, the business blog of the Times does a better job than the old gray lady herself on the case. They convey quickly and immediately the strategy of the prosecutors. “Federal prosecutors trying to bolster their faltering tax-shelter investigation have essentially dared a federal judge to dismiss charges against former employees of the accounting firm KPMG so that they can appeal the ruling and get the case moving again,” DealBook writes. “But there is a catch: Prosecutors also said in the filing that they did not believe any of the defendants’ rights had been violated — and that they would appeal any such dismissal. A hearing has been scheduled for Monday.”
Prosecutors Urge Dismissal Of KPMG Indictments [Wall Street Journal]
Prosecutors Invite a Dismissal in KPMG Tax-Shelter Case, Burdened by Technicalities [The New York Times]