Charges are dismissed for 13 ex-KPMG workers

A federal judge dismissed charges yesterday against 13 former employees of the accounting firm KPMG, delivering a blow to prosecutors who once heralded the case as a showpiece in the government's crusade against questionable tax shelters.

Judge Lewis A. Kaplan of U.S. District Court in Manhattan ruled that he had no choice but to dismiss the charges because the government had strong-armed KMPG into not paying the legal fees of defendants and violating their rights.


The ruling severely hobbles a case - once billed by the government as the largest criminal tax case ever - that was filed in 2005 amid a government crackdown on questionable tax shelters.

Prosecutors indicted 19 defendants on charges of conspiracy, fraud and tax evasion in creating and selling four types of aggressive tax shelters beginning in the late 1990s that cost the government $2.5 billion in unpaid taxes. One former KPMG employee has pleaded guilty.


KPMG averted an indictment when it reached a landmark $456 million deferred-prosecution agreement in August 2005.

While a setback for prosecutors - the judge wrote that government pressure to cut off the legal fees rose to a level of misconduct that "shocks the conscience" - it does not spell the end of the case.

Criminal charges remain against five others, including three former KPMG employees.

"This case has real implications for the government, it could be a watershed," said Ronald J. Nessim, a lawyer who is co-chairman of the American Bar Association's White Collar Crime Committee. "Most federal judges don't have the desire or the ability or the will to take on the government, and Kaplan was willing to do that."

A spokesman for the U.S. attorney's office for Manhattan said yesterday that the office had not decided whether it would appeal the ruling.

While prosecutors have had their share of successes in the battle against corporate fraud, yesterday's ruling was the latest in which they have seen a prominent case unravel because it hinged, in part, on aggressive legal tactics.

In 2005, the U.S. Supreme Court overturned the conviction of the accounting firm Arthur Andersen in connection with the collapse of Enron Corp. And the case against Richard M. Scrushy, former chief executive of HealthSouth, was undermined by the complexity of the conspiracy case.

Kaplan also implied that the prosecution in the KPMG employees' case had made a grave strategic mistake by indicting 19 individuals. "It mistakenly expected a substantial number of guilty pleas," he wrote.


On one level, the dismissal is a narrowing of a complex proceeding, one that could actually provide much-needed traction for prosecutors, who, since two crucial legal rulings in 2006, have been searching for a way to turn the focus of the case away from their prosecutorial tactics and back on the complex issue of what constitutes an abusive tax shelter.

A successful appeal would allow prosecutors, who deny using coercive pressure, to do just that.

In the first crucial ruling against prosecutors in April 2006, Kaplan gave defense lawyers access to documents from prosecutors and KPMG regarding legal fees, providing a highly unusual look into the inner workings of the accounting firm's negotiations with the government.

Those documents suggested that prosecutors exerted pressure on KPMG and that the accounting firm felt it had no choice but to accede to the government's demands and avert indictment.

In the second ruling, in June 2006, Kaplan said that prosecutors had violated the constitutional rights of certain defendants by pressuring KPMG to reverse its long-standing practice and not pay their legal fees. He then suggested that he might throw out the indictments.

It was that pressure on KPMG, Kaplan wrote in his 68-page ruling yesterday, that prevented the defendants "from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice. This is intolerable in a society that holds itself out to the world as a paragon of justice."