Judge Frees 13 ex-KPMG Employees

Previously, Judge Kaplan had admonished prosecutors for pressuring the Big Four firm to cut off legal fees for 16 former employees charged in the tax-shelter scandal.

While doing so “only with the greatest reluctance,” a federal judge dismissed conspiracy and tax-evasion charges against 13 former KPMG employees after finding that their former employer shouldn’t have refused to pay their legal fees.

In his ruling Monday, U.S. District Judge Lewis Kaplan said he reached his conclusion only after pursuing every alternative short of dismissal. However, he added, “There are limits on the permissible actions of even the best prosecutors.”

The decision followed Kaplan’s ruling last year that prosecutors violated the constitutional right to legal representation for many of the former employees by pressuring the accounting firm not to pay their legal bills, according to Bloomberg.

The judge’s ruling effectively scuttled the prosecutors’ case, which has been called the largest criminal tax case in American history. Nineteen individuals–17 of them formerly partners or employees of KPMG—were charged with conspiracy and tax evasion. The government alleged they used fraudulent tax shelters that bilked the government out of more than $2 billion in taxes.

One executive of the audit firm pleaded guilty, along with other individuals not affiliated with KPMG who were later charged, according to Bloomberg. They are cooperating with the government, the wire service added.

KPMG agreed to a deferred prosecution agreement and paid $456 million in fines and penalties. By doing so, KPMG was able to avoid prosecution by agreeing to cooperate fully with the government.

In June 2006, Kaplan admonished prosecutors for pressuring KPMG to cut off legal fees for 16 former employees charged in the scandal. The Second U.S. Circuit Court of Appeals ruled in May that Kaplan could throw out the KPMG case if he believes prosecutors denied 16 of the audit firm’s former employees their constitutional rights by compelling the firm to stop paying their legal fees.

For his part, Michael J. Garcia, the U.S. Attorney for the Southern District of New York, said he would appeal. “The Government respectfully disagrees with Judge Kaplan as to whether there was any constitutional violation in this case, he said. “We will continue to pursue appellate review.”

Last year, Kaplan accused investigators in the KPMG case of using Department of Justice guidelines to justify pressuring the audit firm to cut off legal support for employees. At first, KPMG promised to pay the employees’ legal defense fees, according to their attorneys.

But the audit firm allegedly dropped the promise when it was indicted, and, much to the consternation of employee-rights activists, KPMG agreed to a deferred prosecution agreement and paid $456 million in fines and penalties. By doing so, KPMG has avoided prosecution by agreeing to cooperate fully with the government.

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