US Dismisses Criminal Case Against KPMG

by Glen Shapiro, Lawandtax-News.com, New York

05 January 2007

New York District Judge Loretta Preska agreed this week to dismiss a deferred criminal charge against KPMG resulting from the settlement reached by KPMG and the Justice Department over the sale of improper tax shelters in 2005.

Former executives of KPMG who are facing separate criminal charges attempted to prevent the dismissal, claiming that KPMG's refusal to pay their legal fees amounted to a breach of KPMG's agreement with the government; but the judge did not agree.

In August 2005, KPMG agreed to pay $456 million in penalties to cover former clients who participated in the tax shelters known as Blips, Flip, Opis and Short Option Strategy. Under the agreement, prosecution was deferred, with the government agreeing to drop charges after 31st December 2006 if KPMG submitted to outside monitoring and discontinued some types of tax-related activity.

The trial of the former employees is currently delayed after the trial judge cited concerns over the dispute concerning who should pay the defendants' lawyers. In an order made public in November, US District Judge Lewis A. Kaplan stated that questions over whether KPMG should pay legal fees for the former executives probably wouldn't be resolved before the criminal trial's scheduled start date in January.

"Given all of the current uncertainties, it is impossible now to predict with confidence when the charges in the indictment may be tried," he said. Consequently, the judge delayed the trial date. Later it was set for September, 2007.

The 16 former KPMG employees and two others are accused of selling tax shelters which were deemed "abusive" by the Internal Revenue Service. The agency has estimated that the tax shelters helped investors avoid some $2.5 billion in taxes.

However, the trial bogged down when in June, Judge Kaplan found that prosecutors violated the constitutional rights of the former KPMG partners by pressurising them to cut off payment of legal costs to the defense. The former executives then filed a civil complaint against KPMG seeking advancement of defense costs.

A trial on the fee issue was scheduled for October, but KPMG appealed Kaplan's ruling, saying the matter should be dealt with by arbitrators rather than the Courts.

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