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US Judge Dismisses Charges Against KPMG Defendants

by Leroy Baker,, New York

18 July 2007

US District Judge Lewis Kaplan has dismissed charges against more than a dozen former executives of accounting firm KPMG, in a legal ruling that has dealt a blow to the US government's crackdown against illegal tax shelters.

In a 64-page opinion, Judge Kaplan ruled that he had little choice but to dismiss the charges against 13 former senior KPMG officials because the government had denied them their constitutional right to counsel by pressuring their former employer to cut off payment of legal fees.

While Judge Kaplan stated that his ruling had been made "with the greatest reluctance", he decided that the Justice Department had "foreclosed these defendants from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice".

"This is intolerable in a society that holds itself out to the world as a paragon of justice," Kaplan wrote.

The case will proceed against against three other former KPMG staff who weren't entitled to have their legal fees covered by the firm, and also against two lawyers who did not work for KPMG.

In August 2005, KPMG agreed to pay $456 million in penalties to cover former clients who participated in 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 withholding of legal fees to the defendants was a condition of this settlement.

The former KPMG employees and two others were accused of helping to structure and sell the 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.

The government has said that the case is the largest criminal trial in US history, and the ruling will be seen as a setback in its fight to stamp out abusive tax sheltering. Prosecutors have admitted that Judge Kaplan had little choice but to throw out the charges, but this could clear the way for the government to reinstate the charges on appeal.

In a statement, Michael J. Garcia, the United States Attorney for the Southern District of New York, revealed that he "respectfully disagrees" with Judge Kaplan as to whether there was any constitutional violation in this case. "We will continue to pursue appellate review," Garcia concluded.

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