Prosecutors on defensive in BDO Seidman fraud case

* BDO Seidman case has similarities to KPMG

* Same prosecutors in both cases

* Defendants' right to counsel at issue

By Andrew Longstreth

NEW YORK, Feb 4 (Reuters Legal) - Federal prosecutors who ignited a legal firestorm five years ago for pressuring the accounting firm KPMG to stop paying its former employees' legal fees are facing the same accusations in another high-profile tax-fraud case.

The defendant in this case, Denis Field, ex-CEO of BDO Seidman, the world's fifth largest accounting firm, claims Manhattan prosecutors intimidated his former firm into curtailing and eventually cutting off payments to his lawyers. In recently filed court papers, he claims that the government deprived him of his constitutional right to counsel and seeks dismissal of the case. Field alleges that among other tactics, prosecutors threatened to indict the firm if it kept funding his defense. During a hearing on Thursday, U.S. Judge William Pauley III of the Southern District of New York, who is presiding over the case, closely questioned prosecutors about the accusations. A ruling is expected soon.

The controversy touches on the common arrangement among U.S. companies of paying the legal fees of executives. It raises the question of whether a government attempt to meddle with this practice amounts to depriving a defendant of his or her lawyer -- which could constitute a violation of the right to counsel under the 6th Amendment.

The Field prosecution, in which he is charged with creating phony tax shelters, is strikingly similar to the KPMG matter. That case was thrown out in 2007 after U.S. Judge Lewis Kaplan found that prosecutors had improperly "coerced" KPMG into cutting off the legal fees of 13 former KPMG partners and employees. "KPMG refused to pay because the government held the proverbial gun to its head," Kaplan wrote.

Two of the prosecutors called out by Judge Kaplan -- Stanley Okula and Shirah Neiman -- have also been involved in the Field case, a fact that is prominently noted by Field's lawyers in their motion to dismiss. "The reason for the government's conduct is obvious -- as with KPMG, the prosecutors believed BDO 'should not pay the fees' of allegedly culpable individuals," Field's lawyers argue. They cited the KPMG case no fewer than 50 times in their brief. Okula and Neiman declined comment, as did a spokesperson for the Manhattan U.S. Attorney's office.

POWER SHIFT

Judge Kaplan's ruling, which was affirmed by the U.S Court of Appeals for the 2nd Circuit, had the effect of shifting the balance of power in corporate prosecutions toward the defense. After Kaplan found that prosecutors had violated the KPMG defendants' constitutional rights, the U.S. Justice Department issued a new policy stating that in deciding whether to indict a company, "prosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment." The new guidelines also limited when prosecutors can ask companies to waive the attorney-client privilege.

Lawyers for Field are now arguing that federal prosecutors strayed from the guidelines and improperly leaned on BDO to stop paying Field's legal fees. From 2007 to 2010, they allege, the government pressed BDO about whether it would pay for Field's defense, tacitly threatening to indict the company if it persisted. In 2008, BDO capped the amount of legal fees for Field at $1 million a year. Field claims this forced him to dismiss his high-powered law firm, McGuireWoods, which had been representing him for more than five years. The company stopped paying for Field's lawyers altogether in January 2010, roughly six months after he was indicted. That move, Field argues, was an attempt to curry favor with the government.

In response, the government says that BDO's decision to stop paying for Field's lawyers had nothing to do with any government pressure. In a brief filed last week, the government argues that BDO stopped paying Field's legal bills after the firm discovered that Field hid from the board a report, prepared by law firm Skadden, Arps, Slate, Meagher & Flom, warning that certain tax shelters that Field was promoting were questionable. The government also cites a statement by BDO's general counsel that the "decision to stop advancing legal fees or 'defense costs' had nothing to do with any attempt to 'curry favor' with the government."

Field was indicted in June 2009, along with three attorneys from the now-defunct law firm Jenkens & Gilchrist, two former employees of Deutsche Bank, and a former BDO tax partner. Prosecutors allege that the defendants designed and marketed sham tax shelters that eliminated or reduced the amount of taxes wealthy individuals would owe to the Internal Revenue Service.

At the hearing on Thursday, Judge Pauley asked prosecutors why the government had repeatedly broached the subject of legal fees during conversations with BDO. The judge seemed particularly troubled that during one meeting, prosecutor Okula -- one of the two assistant U.S. attorneys who appeared in both the KPMG and Field cases -- mentioned an obscure court case dealing with legal fees. "Why would the government even get involved in the discussion of shutting off legal fees?" Judge Pauley asked.

Assistant U.S. Attorney Katherine Polk Failla responded that "there was no message being sent" during the conversation. She said the case mentioned by Okula actually confirms a company's obligation to pay legal fees to its executives.

Judge Pauley could decide to hold an evidentiary hearing -- which would include testimony from witnesses -- on whether the government improperly influenced BDO's decision to stop paying Field's lawyers. The case is scheduled for trial early March.

The case is U.S. v. Daugerdas et al, U.S. District Court, Southern District of New York, No. 09-cr-581.

(Reporting by Andrew Longstreth; Editing by Eric Effron and Amy Stevens)

(A version of this article first appeared on Westlaw News & Insight www.westlawnews.com)