Court upholds dismissal of charges in KPMG case

NEW YORK Thu Aug 28, 2008 3:56pm EDT

Jeffrey Eischeid, former head of the Innovative Strategies group from accounting firm KPMG exits federal court in New York, September 6, 2005. REUTERS/ Chip East

Jeffrey Eischeid, former head of the Innovative Strategies group from accounting firm KPMG exits federal court in New York, September 6, 2005.

Credit: Reuters/ Chip East

NEW YORK (Reuters) - A U.S. appeals court has upheld the dismissal of criminal charges against 13 former executives at KPMG, saying prosecutors violated the defendants' rights by pressuring the accounting firm not to pay their legal bills.

The ruling on Thursday came the same day the U.S. Justice Department announced new guidelines to rein in prosecutors' tactics in corporate crime cases that had been criticized by some politicians and business groups.

Critics have accused the government of going too far to press companies to cooperate in criminal probes or else risk indictment, such as demanding that businesses waive attorney-client privilege or stop paying attorney fees for employees under investigation.

The decision, by the U.S. Court of Appeals for the Second Circuit, also deals a blow to what had been touted at one time as the largest-ever criminal tax prosecution. Several other defendants in the tax fraud case who were not part of the appeal are still set to go on trial, but the case is now much smaller than it was when first announced in 2005.

In the ruling, a three-judge panel of the appeals court found that federal prosecutors inappropriately pressured KPMG to refrain from paying the legal fees of 13 former partners.

The decision upholds the principle that prosecutors "can't play dirty," said Stanley Arkin, a defense lawyer for one of the defendants, Jeffrey Eischeid.

The court "did the exact right thing," Arkin said. "It's a lesson to prosecutors all through this country that they have to be fair before they become ferocious."

The case landed in federal appeals court after U.S. District Judge Lewis Kaplan in Manhattan, who is overseeing the criminal case, ruled in July 2007 that prosecutors violated the constitutional rights of 13 defendants.

The government tried to revive the case against them, arguing that it had not pressured KPMG to refrain from paying the legal fees and that -- if it had violated any legal rights of the defendants -- it had done so only temporarily.

The appeals court, however, said that the government "unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense." The only remedy, the court said in its ruling, was to dismiss the charges.

A representative for Michael Garcia, the U.S. Attorney in Manhattan whose office brought the criminal case, said "we are reviewing the court's opinion and considering our options."

The former KPMG partners and others were accused of helping to cheat the government of $2.5 billion by creating improper tax shelters for wealthy clients and concealing them from the Internal Revenue Service. KPMG itself was not a defendant, agreeing in 2005 to pay $456 million to settle a federal probe.

Several remaining defendants are still set to go on trial later this year after numerous previous trial delays.

Separately on Thursday, Deputy U.S. Attorney General Mark Filip announced new prosecution rules aimed at not penalizing companies as noncooperative for protecting attorney-client material or paying for their employees' attorneys in probes.

"No corporation is obligated to cooperate or to seek cooperation credit by disclosing information to the government," Filip said at a press conference at the New York Stock Exchange. "Refusal by a corporation to cooperate, just like refusal by an individual to cooperate, is not evidence of guilt."

Filip declined comment on the KPMG case, saying he had not yet read the decision.

(Reporting by Martha Graybow, Chelsea Emery, Grant McCool and Randall Mikkelsen; Editing by Andre Grenon, Phil Berlowitz)

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