The KPMG Fiasco
The Wall Street Journal Editorial
Tuesday, July 10, 2007
The judge in the "largest criminal tax fraud case
in history" is now preparing a ruling that may result in the
dismissal of all charges against two-thirds of the 18 so-called
KPMG defendants. This would itself be a remarkable outcome, but
we think the judge has every right to go further and tell the
government it has forfeited the right to prosecute this case in
even diminished form.
The KPMG prosecution was supposed to illustrate the Bush Justice
Department's post-Enron efforts to be tough on white-collar
crime. Instead, it has become a symbol of how ambitious
prosecutors can exploit an anti-business political climate to
bring a dubious case, and then abuse due process to browbeat the
defendants into submission. The history is worth recounting as
a cautionary tale to prosecutors and business alike.
* * *
In late 2003 and early 2004, the Senate was holding hearings on
tax shelters for rich clients, and bringing a prosecution had a
dual appeal. The pursuit of rich people avoiding taxes had
populist flair, and, in the wake of Arthur Andersen's
post-indictment collapse, prosecutors knew they could swing a
heavy club to bring corporate suspects to heel.
The case made for such good headlines that it went largely
unnoticed, at first, that the tax shelters in question had never
been challenged in court by the IRS. This is an extraordinary
and troubling precedent. The U.S. tax code is full of loopholes
written by Congress, and while tax evasion is a crime, tax
avoidance can be entirely legal. Just as a person is innocent
until proven guilty, a tax-reduction strategy has long been
understood to be legal until proven otherwise. This is a
principle of law, but also of fairness. Taxpayers deserve
notice that they are exposing themselves to potential criminal
liability for engaging in certain forms of tax avoidance.
So the theory of the case was, at a minimum, legally
aggressive. But the aggression didn't end there. The U.S.
Attorney for the Southern District of New York wielded the
threat of a firmwide indictment against KPMG to compel a series
of extraordinary actions by the firm. KPMG was told, for
example, that if it continued to pay the legal costs of partners
under suspicion for marketing the tax shelters, that decision
would be "looked at under a microscope."
The U.S. Attorney vetted KPMG's internal communications with its
employees in a bid to encourage individuals to make
incriminating statements and to meet with investigators without
the benefit of counsel. Under pressure, KPMG offered the DOJ a
"statement of facts" about its tax shelter operations. Justice
felt it was too weak, and it told the firm's leadership that if
KPMG didn't admit its own guilt in no uncertain terms, an
indictment of the firm was virtually assured.
KPMG gave Justice the statement it demanded, reversing its
previous position in defense of the shelters. In exchange for
adopting the government's view of the case, it was spared
indictment. Or, to put it another way, KPMG sold out the
employees now on trial rather than run the risk of an indictment
that might have meant (a la Andersen) the end of the firm.
KPMG also abrogated the severance agreement of one fired
employee and sent the rest of the future defendants packing.
This was no mere housecleaning. The U.S. Attorney's office took
an active interest in what was happening to those under
investigation, at times asking about the employment status of
future defendants by name. KPMG also conditioned payment of its
former employees' legal fees on their cooperation with
prosecutors and said legal assistance would be cut off if
charges were filed against them.
When asked about this in the spring of 2006, one Assistant U.S.
Attorney stood before Judge Lewis A. Kaplan and declared that
KPMG had made its own decision about paying the legal bills. At
a hearing last week in Manhattan, Judge Kaplan noted that he'd
seen people convicted of making false statements for less. That
same Assistant U.S. Attorney, Justin Weddle, also said last year
that the government's interest was only to see that companies
under investigation did not shelter "wrongdoers." Judge Kaplan
reminded him that the accused had to be found guilty before they
were "wrongdoers" under the law.
* * *
The decision due soon from Judge Kaplan will focus on the narrow
matter of the legal fees. It is a serious issue, not because it
is important that lawyers get paid the hundreds of dollars an
hour that they charge, but because the government has been
caught trying to interfere with the right of the accused to
choose their own counsel and mount a defense.
Seen in its proper context, the legal fees issue is a proxy for
what has been wrong with this case from the beginning.
Prosecutors hoped to starve the defendants of support,
compelling some or all to cop a plea to avoid financial ruin.
The fees business was only one element of a plan to set the
defendants against each other, just as it had set KPMG against
its former employees. In this way, the prosecutors hoped to get
their scalps without the messy business of proving a dubious
legal theory to a jury.
This case has been shot through with prosecutorial overreach
from the first, and the U.S. Attorney's office pushed the
boundaries of the law to win it. Due process is the sine qua
non of a just system of criminal law. When those entrusted with
upholding it instead trample on it, they have surrendered any
claim to be acting in the public interest. Judge Kaplan has
suggested in court that if private citizens had done some of the
things that the KPMG prosecutors have done, they would be on
trial. If Attorney General Alberto Gonzales won't dismiss the
case, Judge Kaplan should do it for him.