Charges Dropped Against 13 Ex-KPMG Officials
Tuesday, July 17, 2007
A federal judge tossed out indictments against 13 former KPMG executives yesterday in the government's largest criminal tax-fraud case ever, citing "intolerable" prosecutorial abuses that deprived the officials of their constitutional right to a defense.
The decision, by U.S. District Judge Lewis A. Kaplan, is a strong rebuke of federal prosecutors who exerted intense pressure on the giant accounting firm to stop paying legal bills for employees who refused to cooperate with the investigation.
The sanction, which Kaplan called "drastic," averts a trial focused on whether the former KPMG executives knowingly helped wealthy clients avoid $2.5 billion in tax liabilities by selling them unlawful tax shelters.
"There are limits on the permissible actions of even the best prosecutors," Kaplan wrote. "The responsibility for the dismissal of this indictment . . . lies with the government."
Michael J. Garcia, the U.S. attorney in Manhattan, whose office led the investigation, said he "respectfully disagrees" with the judge's findings. Prosecutors are reviewing their appellate options.
The sprawling tax-shelter investigation has ensnared law firms, accounting firms and investment banks. Over time, it also has come to symbolize a backlash against hard-nosed tactics the Justice Department adopted to police corporate crime after scandals at Enron and WorldCom five years ago. Today, federal officials plan to gather to mark the fifth anniversary of the presidentially created Corporate Fraud Task Force.
Yet the case involving KPMG was unusual from the start, in terms of the number of defendants targeted and the strategies prosecutors embraced to do so, legal analysts said.
Kaplan's ruling centered on KPMG's decision to stop what he said was its longtime practice of paying legal fees for employees caught up in federal investigations.
That decision resulted from a February 2004 meeting between prosecutors and representatives from KPMG, the judge said. KPMG was desperate to avoid criminal charges that could put it out of business.
At the meeting, KPMG agreed to do whatever it took to cooperate with the probe, according to notes taken by a lawyer who attended the session.
Under pressure, the firm urged its executives to meet with prosecutors and share information or risk being dismissed or forced to pay their own mounting legal bills -- as happened to some of them.
Ultimately, KPMG went so far as to walk away from a severance agreement it had signed a month before the government meeting with former deputy chairman Jeffrey Stein. The firm cut off payments to Stein because a KPMG lawyer "thought it would help [KPMG] with the government," the lawyer later told the judge.