KPMG tax shelter defendants seek dismissal or mistrial

NEW YORK (Reuters) - Two former executives of KPMG accounting firm have asked a judge presiding over their closely watched tax shelter trial to dismiss the charges or declare a mistrial, according to court documents made public on Monday.

The government had changed its theory mid-trial for indicting former KPMG tax partner Robert Pfaff and former senior tax manager John Larson, according to the motion filed by their lawyers.

Prosecutors said that argument was baseless and asked the court to deny the defendants' motion, court documents showed.

Larson and Pfaff are among four defendants in a case that has been closely watched by legal experts as its outcome could have an impact on the U.S. government's continuing investigations into questionable tax shelters.

Judge Lewis Kaplan of the U.S. District Court in Manhattan is set to hear arguments on the motion on Tuesday without the jury present. Opening arguments began on October 15.

The other defendants are former KPMG tax partner David Greenberg and Raymond Ruble, a former partner at law firm Sidley Austin.

The motion said that during the trial prosecutors elicited testimony from a witness accusing the men of concealing information from KPMG and its tax department to obtain KPMG approval for BLIPS, a type of tax shelter.

Prosecutors said that between 1996 and 2005 the defendants put together tax shelters known as FLIP, OPIS, BLIPS and SOS that were designed to generate phony tax losses.

"The new government allegations transform a tax fraud conspiracy with KPMG against the IRS into an honest services fraud conspiracy against KPMG," the defense motion said.

The motion said the defense had received no notice of such a change in the prosecution's theory and could not prepare a defense and so sought to have the judge to dismiss the indictment or grant a mistrial.

The response filed by the U.S. Attorney's office for the Southern District of New York opposing the motion said, "the government has always alleged, and still contends, that KPMG as an entity was a conspirator, not a victim of any kind of fraud.

"That for a period of time there was an effort to keep certain facts from certain individual KPMG employees is of no moment whatever," the government said.

In opening arguments in the trial, prosecutors said the former KPMG accounting firm employees cheated the U.S. government out of hundreds of millions of dollars by selling improper tax shelters for wealthy clients.

The four are charged with conspiring to evade taxes for more than 600 clients in a case that was touted as the largest criminal tax prosecution when it started in 2005 with 19 defendants, but is much smaller now.

(Editing by Leslie Gevirtz)