US judge deals blow in KPMG tax case

WASHINGTON -- A federal judge dismissed charges against 13 former executives of KPMG LLP accused in the largest criminal tax-shelter prosecution in US history, gutting the case and handing the Bush administration a defeat.

Yesterday's ruling by US District Judge Lewis Kaplan in New York follows his decision last year that prosecutors violated the constitutional right to counsel for many of the former executives by pressuring KPMG not to pay their legal bills.

The Justice Department "foreclosed these defendants from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice," Kaplan wrote in a 64-page opinion. "This is intolerable in a society that holds itself out to the world as a paragon of justice."

With most of the defendants out of the case, the Justice Department must pin its hopes of reinstating the charges on an appeal of Kaplan's earlier decision. Kaplan said "it's reasonably plain" prosecutors will do so.

In 2005, prosecutors accused 17 former KPMG executives and two others of selling illegal tax shelters from 1996 to 2005, depriving the US Treasury of at least $2 billion in revenue. One executive pleaded guilty, along with other individuals not affiliated with KPMG who were later charged. Those defendants are cooperating with the government.

Charges against KPMG, the fourth-largest US accounting firm, were dismissed in January after it paid a $456 million fine.

Kaplan said yesterday the conspiracy and fraud case will go forward against three former KPMG executives for whom the firm wasn't required to pay lawyers' fees and two other defendants who never worked for the company. KPMG said it wasn't obligated to pay any of the defendants' legal expenses. The trial is scheduled for September.

US Attorney Michael Garcia in New York said in a statement that prosecutors disagree with Kaplan as "to whether there was any constitutional violation in this case." He said prosecutors previously appealed an unrelated ruling by Kaplan in the case and "will continue to pursue appellate review."

Deputy Attorney General Paul McNulty intimated the government would contest the ruling. He said a decision hasn't been made yet.