Prosecutors Urge Dismissal Of KPMG Indictments
Government Cites Flaw In Tax-Shelter Action; Tactic to Save Case
By David Reilly and Paul Davies
The Wall Street Journal
Monday, June 25, 2007
Federal prosecutors are urging a judge to dismiss indictments
against a dozen former KPMG LLP executives on charges they sold
illegal tax shelters, the latest twist in what the government
has billed as the biggest criminal-tax case in U.S. history.
The government's case has fared poorly since indictments were
handed up in the fall of 2005, after a years-long investigation
into sales of tax shelters that cost the government billions of
dollars in lost tax revenue.
Last year, U.S. District Judge Lewis A. Kaplan ruled that the
government had overreached in its investigation, violating the
defendants' constitutional rights to counsel and due process. He
also slammed prosecutors for acting improperly.
Judge Kaplan has since tried, but failed, to find a way to fix
the constitutional violation without dismissing the indictments.
In response to a recent suggestion for the government and
defense attorneys to suggest further remedies, prosecutors
argued in a filing late Friday in federal court in Manhattan
that the judge's decision showed that there is a fundamental
flaw in the proceedings and that he must dismiss the
indictments. The upshot is that 12 of the 18 defendants may now
never stand trial, including the accounting giant's former vice
"They're just giving up on everything," said David Spears,
attorney for Jeffrey Stein, the former KPMG vice chairman who is
the highest-ranking firm executive charged in the case. "It's
just stunning and very ungovernment-like."
Some legal experts said the move actually was aimed at allowing
prosecutors to appeal last year's ruling by Judge Kaplan, a
tactic that may let the government resume its case against all
of the defendants. "It seems they are challenging the judge,"
said Steven Peikin, a former federal prosecutor who is now a
defense attorney at Sullivan & Cromwell LLP. "I don't see the
government going down easy."
Judge Kaplan's 2006 ruling turned on the matter of legal fees
for the defendants. He ruled that prosecutors can't pressure
companies to stop paying legal bills for indicted employees, and
that such pressure is a violation of due-process rights.
After the ruling, the Justice Department repudiated a policy
which had called for prosecutors to consider a company's
willingness to stop paying legal fees for executives under
investigation as a sign of cooperation that could help the
organization avoid charges. Because the original ruling didn't
prescribe a remedy, legal experts said, it wasn't appealable.
On Friday, consequently, prosecutors recommended that Judge
Kaplan dismiss indictments against 12 of 18 defendants currently
slated to stand trial in September on charges they sold and
marketed tax shelters that created sham investments designed to
generate paper losses so wealthy individuals could evade taxes.
Prosecutors said the remaining six defendants shouldn't be
affected by such a decision because they weren't involved in the
wrangle over the payment of legal fees. The defendants all have
pleaded not guilty.
A dismissal of the indictments based on the earlier ruling could
constitute an action that would give the government grounds to
appeal that groundbreaking decision. "I think it makes a lot of
tactical sense," said Stephen Gillers, a New York University law
school professor who has followed the case. "This gives the
government an opportunity for immediate review" by the appeals
An appellate decision overturning Judge Kaplan's finding of a
violation of the KPMG defendants' constitutional rights would
let prosecutors continue with the criminal case against all 18
defendants without having to worry that a conviction could be
overturned later on appeal because of the question of
In arguing for a dismissal of some of the indictments of former
KPMG executives, prosecutors are echoing advice recently given
to Judge Kaplan by an appeals court. That court suggested that
Judge Kaplan could dismiss the indictments as it quashed a plan
by the judge aimed at remedying the constitutional violations by
allowing the defendants to sue KPMG for their legal fees.
The next move is up to Judge Kaplan. He has scheduled a July 2
hearing to hear arguments on how to proceed in the criminal
case. A decision regarding the government's argument, as well as
motions to dismiss the indictments from the defendants, could be
issued sometime this summer.
Write to David Reilly at
email@example.com and Paul Davies at