Prosecutors Spare Law Firm
Deferral Reflects Concerns Over Indicting Corporations

By Carrie Johnson
Washington Post Staff Writer
Thursday, May 24, 2007

Chicago law firm Sidley Austin avoided criminal charges yesterday related to its sale of abusive tax shelters after prosecutors determined that an indictment could ravage the 1,700-lawyer firm and its clients.

The decision by Manhattan U.S. Attorney Michael J. Garcia comes during a backlash to corporate enforcement efforts, including a conspiracy indictment that helped push accounting firm Arthur Andersen out of business five years ago.

Sidley expressed "deep regret" and agreed to pay $39.4 million to the Internal Revenue Service to resolve an audit connected to its tax work for wealthy institutions and individuals. The prosecution of former Sidley lawyer Raymond J. Ruble on conspiracy charges "sufficiently vindicates the interests of law enforcement and the public," Garcia said in a written statement.

In a related development, a federal appeals court in New York yesterday ruled in favor of one of the country's major accounting firms, KPMG, in a dispute with more than a dozen former partners. The partners, who await trial in the same long-running tax shelter investigation, demanded that the firm reimburse them for millions of dollars in legal defense bills.

A federal judge last year ruled that the government violated the constitutional rights of the former partners by pressuring KPMG to cut them loose. But an appeals court panel said U.S. District Judge Lewis A. Kaplan lacked the authority to open a civil case over legal fees.

KPMG narrowly escaped criminal charges over its own role in the case, the largest single tax avoidance probe ever by federal officials. KPMG paid $456 million and submitted to independent monitoring to resolve its liability. The firm refused to cover the former executives' defense costs because it claimed that the partners were subject to arbitration agreements, had received nearly $400,000 each to defray legal expenses, and in some cases they had victimized KPMG.

The tax shelter investigation continues with respect to numerous investment banks and accounting firms, authorities said.

Sidley, which merged with law firm Brown & Wood in 2001, cooperated with investigators and argued that most of the alleged improprieties took place before the merger. The firm failed to scrutinize Ruble's work sufficiently after the merger, prosecutors contended.

"Sidley recognizes that, while law firms must operate on the principle of trust among partners, there is also a need for robust checks and balances on all of the work done in a firm's name," the firm's statement said.

Brown & Wood collected more than $23 million for approving three different tax shelters the IRS later deemed abusive, according to a 2004 letter from Sen. Carl M. Levin (D-Mich.), whose staff investigated tax avoidance schemes.

In March, Dallas-based Jenkens & Gilchrist paid a $76 million fine to conclude a government tax shelter investigation. The law firm closed this year after more than 400 partners defected to rival firms.