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Charge Against KPMG Dropped
Firm Cooperated Over Tax Shelters, Prosecutors Say

By Carrie Johnson
Washington Post Staff Writer
Thursday, January 4, 2007

A federal judge dismissed a criminal conspiracy charge yesterday against the accounting firm KPMG after prosecutors said it had complied with an August 2005 deal that helped it avoid a possible death sentence.

U.S. District Judge Loretta A. Preska's action puts KPMG a step further from a scandal over the sale and marketing of abusive tax shelters that once threatened to put the firm out of business. A 2002 obstruction-of-justice indictment of accounting rival Arthur Andersen hastened that firm's demise and reduced competition in the audit industry, raising the stakes in the KPMG case.

In August 2005, after frenzied negotiations, KPMG eventually reached a deal with the U.S. attorney's office in the Southern District of New York, opening its operations to scrutiny by former Securities and Exchange Commission leader Richard C. Breeden and agreeing to pay the government $456 million to settle.

KPMG, the nation's fourth-largest accounting firm, still must submit to special oversight until September 2008, a term that could be extended if KPMG violates the terms of the deal, Manhattan U.S. Attorney Michael J. Garcia said in a statement.

"We regret the past activities that led to these charges," KPMG Chairman Timothy P. Flynn said in a statement. "The 20,000 people of KPMG today are focused on maintaining ethics and compliance programs that will serve as a role model for the profession."

Under Flynn and Executive Vice Chairman Sven Erik Holmes, the firm has cleaned house, imposing what it calls permanent changes in its tax operations and putting fresh leaders in charge of its key service units. KPMG also developed a new compliance and ethics program with the help of District-based law firm Williams & Connolly, where Holmes, a former federal judge, once worked as a partner.

Preska agreed to drop the conspiracy count despite protest from Jeffrey Stein, KPMG's former deputy chairman who was indicted in 2005 alongside more than a dozen other partners for their role in peddling tax shelters to help wealthy clients avoid or reduce tax payments. Stein's lawyer argued that KPMG had reneged on an agreement to pay his legal fees. The scheme cost the United States more than $2.5 billion in evaded taxes, according to Justice Department officials, who called it the largest tax prosecution ever.

Defense lawyers for the former partners say they followed laws then on the books and asserted that they were the victims of intense government pressure, an argument that has received support from U.S. District Judge Lewis A. Kaplan. He is overseeing the case against the former partners.

Last year, Kaplan ruled that the government had violated the former KPMG officials' constitutional rights by forcing the firm to stop paying attorneys' fees. An appeals court has yet to rule on that issue. The trial of the individual KPMG partners has been postponed, pending resolution of the fee appeal.

The case has touched off a debate in the business and legal communities over government tactics to combat fraud. In part because of the fallout from the KPMG prosecution, Deputy Attorney General Paul J. McNulty last month rolled out changes to guidelines that prosecutors use when deciding whether to indict corporations.

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