Questions Clarity of Prosecution's Tax-Shelter Case
By Lynnley Browning
Friday, March 31, 2006
A federal judge raised questions yesterday about the
prosecution of 16 former KPMG employees over aggressive tax
shelters, criticizing prosecutors for what he called murky
definitions of fraud and evasion.
The judge, Lewis A. Kaplan of Federal District Court in
Manhattan, said he was confused by what prosecutors said was
a conspiracy by the defendants to make and sell aggressive
shelters that allowed hundreds of wealthy investors to evade
$2.5 billion in taxes from 1996 to 2002.
"Was the fraud and evasion in the execution or the design"
of the shelters, Judge Kaplan asked during a hearing held to
consider defense motions to drop or alter some charges.
Judge Kaplan made no ruling yesterday; he is expected to
issue orders on the motions in coming weeks.
The case — with 16 former employees of the accounting firm
KPMG, an outside lawyer and an investment adviser as
defendants — is unusually large and dauntingly complex. The
defendants are scheduled to stand trial in September. Their
lawyers say their clients acted lawfully and appropriately.
Yesterday, Judge Kaplan asked prosecutors if they would
consider dropping some of the 39 counts of tax evasion and
limiting the evidence to be introduced during the trial, "in
the interest of getting this thing tried in a single human
Prosecutors say the defendants made, sold and in some cases
used for themselves certain tax shelters that they knew
would not pass muster with the Internal Revenue Service.
They are also charged with cheating on their own and others'
tax returns and with lying to government investigators. Not
all defendants face the same charges.
One of the original defendants, David Rivkin, a former
partner in KPMG's office in San Diego, pleaded guilty last
week and agreed to cooperate with prosecutors against the
Judge Kaplan also questioned aspects of an influential
Justice Department memorandum that lays out guidelines on
prosecutions of corporations. That document, known as the
Thompson memorandum, drafted in 2003 by a deputy attorney
general, Larry Thompson, advises prosecutors to grant more
lenient treatment to firms facing indictment if they forgo
paying the legal fees of potentially culpable employees.
"Frankly, I'm very bothered by it," the judge said, saying
the document "puts the government's thumb on the scales" and
raises questions about the Sixth Amendment constitutional
right to legal representation.
KPMG narrowly avoided indictment and instead reached a $456
million deferred-prosecution agreement in August, in the
process admitting criminal wrongdoing and agreeing to
cooperate with investigators. But around the same time,
KPMG, aware that some of its employees were about to be
indicted, ended its longstanding practice of advancing legal
fees of as much as $400,000 an employee.
"I find it shameful that the fees haven't been advanced,"
Judge Kaplan said. "The reality is that you are depriving
people of counsel, or at least interfering or impairing."
Some lawyers for the defendants argued yesterday that their
clients would go bankrupt financing their defense. One of
the defendants, David Greenberg, a former senior tax partner
at KPMG, has been unable to come up with the $25 million in
bail needed to get out of jail, and appeared at the hearing
in prison garb.
In court papers and oral arguments, prosecutors have
repeatedly described the complex shelters as consisting of
sham and fraudulent transactions, like phantom loans and
investments, that generated artificial losses. Investors
then cited these to claim tax losses against legitimate
income. Lawyers for the defendants argue that they had
thought the shelters were legitimate.
To Judge Kaplan's question of whether fraud and evasion
occurred in the design or in the carrying out of the
shelters, Justin Weddle, an assistant United States
attorney, answered, "Both."
No court has ruled the shelters illegal, but the I.R.S. has
never considered them valid for deductions.
Nonetheless, Steven Bauer, a lawyer who represents John
Larson, a former KPMG partner who is one of the 18
defendants, said prosecutors had withheld important
information detailing, among other things, debate inside the
I.R.S. over whether the shelters were legitimate.
Judge Kaplan ordered the prosecution to turn over any