KPMG Judge Rejects Gov't Request He Withdraw Statements

The Manhattan federal judge overseeing a KPMG LLP tax shelter case on Thursday rejected the U.S. government's request he withdraw statements from a recent decision that were critical of prosecutors' actions.

U.S. District Judge Lewis Kaplan had on June 26 ruled that prosecutors unconstitutionally pressured the accounting firm not to pay legal fees for 16 former partners accused of setting up fraudulent tax shelters for wealthy clients.

While not dismissing the indictment, Kaplan said the government violated the defendants' rights to a fair trial and assistance of counsel.

He said prosecutors "held the proverbial gun to (KPMG's) head" and were "economical with the truth" in denying it applied pressure.

In a two-page order issued on Thursday, Kaplan said he received a June 30 letter from U.S. Attorney Michael Garcia asking him to withdraw some criticisms of prosecutors and delete the names of individual prosecutors from his June 26 opinion.

Kaplan said the pressure arose from the use of an influential 2003 Justice Department memorandum that suggested companies facing possible indictment might curry favor with the government if they stopped paying legal bills of accused employees.

While saying he has long held the U.S. Attorney's office in New York in "high regard," Kaplan declined most of Garcia's request.

"(The Court) views the actions of the U.S. Attorney's office that evoked criticism more as a disappointment borne of the ordinarily exceptional performance of the office that this Court has come to expect than as anything else," Kaplan wrote.

"The Department of Justice policy that the office dutifully carried out, on the other hand, is more than a disappointment — it is unconstitutional," he added.

Bridget Kelly, a spokeswoman for the U.S. Attorney, declined to comment. The Wall Street Journal earlier on Thursday reported the letter's existence.

"When you're the U.S. Attorney, you want to protect your troops and not have an opinion out there that takes what could be perceived as unnecessary shots," said Henry Hockeimer, a partner at Ballard Spahr Andrews & Ingersoll LLP in Philadelphia.

But in this case, he said, the judge may have concluded that removing the statements would have no legal impact.

Kaplan did agree to modify his earlier opinion in part to reflect that one prosecutor, Justin Weddle, raised the issue of legal fees in his first meeting with Skadden, Arps, Slate, Meagher & Flom LLP, which represents KPMG.

Prosecutors are accusing 18 defendants, including the 16 former partners, of scheming to defraud the Internal Revenue Service by setting up bogus tax shelters.

They said the scheme cost the government $2.5 billion of taxes, and won KPMG $115 million of fees. A trial is expected to begin in September.