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Dismissal Sought For KPMG Case On Tax Shelters
By David Reilly and Paul Davies, Staff Reporters
Friday, January 13, 2006

In the first formal glimpse of what is expected to be a vigorous defense, attorneys for 19 defendants facing criminal charges related to sales of tax shelters by KPMG LLP yesterday asked a federal judge to dismiss the government's case, arguing the products sold to wealthy individuals weren't illegal.

One defense filing, submitted to the U.S. District Court in New York, accused prosecutors of "distorting" the facts and "obfuscating the truth-finding process" in order to win the case.  By threatening KPMG with criminal indictment, the motion said, the government forced the firm to accept a "draconian" deferred prosecution agreement in which it admitted the tax strategies were fraudulent and agreed to waive attorney-client privilege.

"The goal is obviously not justice, nor truth, but instead the unsavory desire to tack another skin to the wall," the filing said.

The legal filings marked the first formal rebuttal by defense attorneys of the government's case since the individuals were indicted last year on tax evasion and conspiracy charges.  All 19 of the defendants, 17 of whom are former KPMG tax professionals, have pleaded not guilty to the charges.

Representatives of the U.S. Attorney's Office didn't return calls for comment.

Underlining the case's complexity, all the defendants filed individual motions.  Many sought to have the actions against them severed from those of other defendants.  Others asked for a change of venue from the Southern District of New York.  Most of the defendants also took part in some of what were expected to be at least five joint motions attacking the substance of the government's charges related to four KPMG tax shelters at the heart of the case, lawyers involved in the case said.

Those shelters, sold to about 600 wealthy individuals between 1996 and 2002, generated about $2.5 billion in tax savings.  KPMG last year entered into a $456 million settlement with the government to avoid prosecution for selling the shelters.

"The tax shelters at issue had never been declared illegal or in any way improper by any court," lawyers for the 19 defendants said in a joint filing.  KPMG only admitted that the shelters were fraudulent to avoid a criminal indictment that probably would have put the firm out of business, they argued.

Prosecutors contend the shelters were fraudulent and that the defendants knew they wouldn't survive a challenge by the Internal Revenue Service.  The legality or illegality of the shelters likely will be a central theme of the case.

Defense motions also argued that even if the shelters ran afoul of the law, rules governing the products at the time didn't make it clear that they were illegal.  As a result, defense attorneys argued, the indicted individuals shouldn't be charged because they didn't know they were breaking the law.  The attorneys said that in tax law, unlike in many other areas of law, individuals can be convicted only if they knew they were breaking the law.

Write to David Reilly at and Paul Davies at