NEW YORK, March 25 (Reuters) - The U.S. government sought on Tuesday to revive its criminal tax shelter case against 13 former partners of accounting firm KPMG [KPMG.UL], arguing the previous judge had thrown it out on erroneous grounds.
In a hearing before the U.S. Second Circuit Court of Appeals, the government argued it had not pressured KPMG to refrain from paying its former partners’ legal fees and that, if it had violated any legal rights of the defendants, it had done so only temporarily.
At issue were the circumstances under which KPMG avoided indictment in the case by settling the federal probe in 2005 for $456 million and agreeing to cooperate with the government’s investigation.
In the past, KPMG had paid legal fees for former employees accused of wrongdoing. But KPMG refused to pay in this case to avoid giving the impression it was protecting culpable parties and thereby invite the indictment of the entire firm, some of the appeals court judges said at the hearing.
A government document now known as the “Thompson memo” said factors that prosecutors should consider in deciding whether to charge a company include whether a firm pays legal fees for indicted employees.
But U.S. District Judge Lewis Kaplan, who heard the case in the lower court last year, said that memo was unconstitutional. He dismissed charges against the 13 ex-employees, saying the government interfered with their right to a lawyer of their choosing. Judge Kaplan ruled that, had the government not interfered, KPMG would likely have advanced the partners their legal fees, as has been its long-standing policy.
On Tuesday, Assistant U.S. Attorney Karl Metzner told the court it was up to KPMG to make a business decision on whether it would pay the partners legal fees and that, if the defendants’ right to counsel had been violated, it had only been temporarily for 5 months to 7 months.
But attorneys for the defense countered their clients had been greatly harmed, in some cases irreparably.
In its arguments on Tuesday, the government criticized the Kaplan ruling.
“It suggests that any defendant in a complicated fraud, who doesn’t have substantial resources could not get a fair trial,” Metzner said.
The appeals court judges questioned whether the government’s behavior might still prevent KPMG from deciding to pay legal fees.
“Time has moved forward and there are different considerations (for KPMG) and they may argue strongly against advancing fees,” Dennis Jacobs, the chief judge on the appeals court said.
One defense attorney said the only way to repair the harm, other than dismissing the case, would be for KPMG to pay all the former partners’ legal fees going forward and to grant the defense enough time to make their case.
The original 2005 indictment alleged that, between 1996 and 2005, the defendants put together tax shelters known as FLIP, OPIS, BLIPS and SOS designed to generate phony tax losses. It also said the defendants prepared false documents to deceive the government.
Three additional former KPMG employees — David Greenberg, Robert Pfaff and John Larson — and Raymond Ruble, a former partner at law firm Sidley Austin, are still set to go on trial late this year after Kaplan determined KPMG would not have paid their legal fees. (Editing by Andre Grenon)