KPMG Judge Balks at Dismissal

Ex-Executives Must Show How Government Harmed Them

The federal court judge overseeing a criminal tax fraud case against 16 former executives at KPMG said he will not dismiss charges until he learns how the defendants were allegedly harmed by illegal government conduct.

U.S. District Judge Lewis A. Kaplan in New York heard arguments yesterday on whether he should dismiss the case against most or all of the defendants, accused of selling illegal tax shelters that cost the Treasury at least $2 billion. Kaplan said last year that the government violated the defendants' rights by pressuring KPMG to stop paying their legal fees.

Prosecutors and defense lawyers said Kaplan should dismiss the case against most defendants after finding that the government violated their constitutional right to counsel, though prosecutors denied the illegal conduct and are likely to appeal. Kaplan said yesterday that he would not decide whether to dismiss charges until the executives submit evidence showing how they were harmed by the government's conduct.

"There are quite a number of people in this courtroom who have not said anything about how they've been affected," Kaplan told a lawyer during a hearing. "It's your burden."

In 2005, prosecutors accused 17 former executives at KPMG of New York and two others of selling illegal tax shelters from 1996 to 2005. The defendants in the case, the largest-ever criminal tax prosecution, include former KPMG deputy chairman Jeffrey Stein.

One executive pleaded guilty, along with other defendants who were later charged. Charges against KPMG were dismissed in January after the firm paid a $456 million fine.

Last year, Kaplan said prosecutors violated the executives' Fifth and Sixth Amendment rights to a fair trial and effective assistance of counsel by threatening to indict KPMG unless it stopped paying their legal fees.

The judge ordered KPMG to stand trial on whether it owed fees. That led to KPMG's appeal. In May, a New York federal appeals court said Kaplan lacked the authority to force such a trial.

The executives subsequently asked Kaplan to dismiss the case, prompting the judge to ask prosecutors whether there were penalties he might impose. Prosecutors last week concluded dismissal was the only option. Defense lawyers claimed the government wants an appellate court to reverse Kaplan's earlier ruling.

Assistant U.S. Attorney John M. Hillebrecht took the unusual step of urging Kaplan to dismiss the charges against 12 of the 16 former KPMG executives. "I'm in the bizarrely uncomfortable position of arguing the position I'm arguing," Hillebrecht said yesterday.

Kaplan said he needed to consider whether a dismissal is warranted for a wealthy defendant who can afford the millions of dollars in legal costs, regardless of whether prosecutors pressured KPMG.

The judge asked the executives to submit evidence detailing how they were hurt by prosecutors' tactics. Nine of the 16 former executives have done so, but several say they can no longer afford their attorneys.