Judge Faults U.S. in Tax Case
Prosecutors erred in forcing KPMG to stop paying employees' legal bills, a ruling says.
http://www.latimes.com/business/la-fi-kpmg28jun28,1,7698738.story?coll=la-headlines-business&ctrack=1&cset=true
By Kathy M. Kristof and Walter Hamilton, Times Staff Writers
June 28, 2006
In a ruling that could force the government to change its tactics in some corporate fraud cases, a federal judge said Tuesday that the Justice Department violated the rights of 16 former KPMG executives by coercing the accounting firm to cut off funds for their defense.
In a harshly written opinion, U.S. District Judge Lewis Kaplan said the government "let its zeal get in the way of its judgment" and "violated the Constitution it is sworn to defend."
In a statement, U.S. Atty. Michael Garcia countered that "the actions of the government were entirely consistent with appropriate Department of Justice policy, and we believe that the prosecutors acted ethically and properly throughout this case."
At issue was a Justice Department practice in which prosecutors ask companies whether they are paying the legal bills for employees charged with corporate crimes. The tactic derived from a 2003 memo from former Deputy Atty. Gen. Larry Thompson, which said prosecutors may weigh a company's legal defense of its employees in deciding whether the company itself should be prosecuted.
In a hearing on the issue a month ago, Kaplan likened the Thompson memo to "the barrel of a rifle."
KPMG agreed last year to pay $456 million to settle charges that it promoted fraudulent tax shelters to wealthy investors, including Global Crossing Ltd. founder Gary Winnick, Guess Inc. co-Chairmen Paul and Maurice Marciano and former California Republican gubernatorial candidate Bill Simon Jr.
But the firm — unlike the 16 former employees — was not indicted.
In court papers, KPMG acknowledged that it had departed from a longtime policy to pay its employees' legal bills. Instead, the accounting firm decided in the tax fraud case that it would pay bills only for those who cooperated with the government and agreed to a $400,000 cap on fees, and that payments would cease for workers who were criminally charged.
"If those whom the government suspects are culpable in fact are guilty, they should pay the price," Kaplan ruled. "But determination of guilt or innocence must be made fairly — not in a proceeding in which the government has obtained an unfair advantage long before the trial even has begun."
Legal experts said Kaplan's ruling would probably force the government to reexamine its use of the Thompson memo.
"It's going to chill the government's willingness" to use this tactic, said Steven Peikin, a partner at Sullivan & Cromwell in New York and former chief of the securities fraud division at the U.S. attorney's office in Manhattan.
The ruling also could affect scores of other corporate fraud cases being prosecuted in cities all over the country, experts said.
"The implications for the criminal defense bar nationwide are huge," said Joseph Price, a partner at law firm Arent Fox in New York. "If this stands up on appeal, it could affect hundreds of cases."
Justice Department officials did not say whether they would appeal.
John Coffee, a Columbia University law professor, said a legal challenge would be risky because an opinion upholding Kaplan could further restrict the ability of prosecutors to apply pressure in white-collar cases.
"I think [the judge] is dead right, and he's going to stop this practice dead in its tracks," Coffee said.
Charles Rettig, a partner at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, speculated that Kaplan's ruling alone might be sufficient to make the government's tactic obsolete.
"It will likely cause the government to back away from any discussion regarding an entity paying defense costs of current or former employees," he said.
The defendants in the KPMG case include Jeffrey Stein, the firm's former deputy chairman, and Gregg Ritchie, a former tax partner in KPMG's Woodland Hills office.
Business groups including the Securities Industry Assn. and the U.S. Chamber of Commerce had filed friend-of-the-court briefs on behalf of the defense because they were concerned about the Justice Department in effect taking away the employer's discretion to defend workers for "acts committed in the course of employment," Rettig said.
Prosecutors erred in forcing KPMG to stop paying employees' legal bills, a ruling says.
http://www.latimes.com/business/la-fi-kpmg28jun28,1,7698738.story?coll=la-headlines-business&ctrack=1&cset=true
By Kathy M. Kristof and Walter Hamilton, Times Staff Writers
June 28, 2006
In a ruling that could force the government to change its tactics in some corporate fraud cases, a federal judge said Tuesday that the Justice Department violated the rights of 16 former KPMG executives by coercing the accounting firm to cut off funds for their defense.
In a harshly written opinion, U.S. District Judge Lewis Kaplan said the government "let its zeal get in the way of its judgment" and "violated the Constitution it is sworn to defend."
In a statement, U.S. Atty. Michael Garcia countered that "the actions of the government were entirely consistent with appropriate Department of Justice policy, and we believe that the prosecutors acted ethically and properly throughout this case."
At issue was a Justice Department practice in which prosecutors ask companies whether they are paying the legal bills for employees charged with corporate crimes. The tactic derived from a 2003 memo from former Deputy Atty. Gen. Larry Thompson, which said prosecutors may weigh a company's legal defense of its employees in deciding whether the company itself should be prosecuted.
In a hearing on the issue a month ago, Kaplan likened the Thompson memo to "the barrel of a rifle."
KPMG agreed last year to pay $456 million to settle charges that it promoted fraudulent tax shelters to wealthy investors, including Global Crossing Ltd. founder Gary Winnick, Guess Inc. co-Chairmen Paul and Maurice Marciano and former California Republican gubernatorial candidate Bill Simon Jr.
But the firm — unlike the 16 former employees — was not indicted.
In court papers, KPMG acknowledged that it had departed from a longtime policy to pay its employees' legal bills. Instead, the accounting firm decided in the tax fraud case that it would pay bills only for those who cooperated with the government and agreed to a $400,000 cap on fees, and that payments would cease for workers who were criminally charged.
"If those whom the government suspects are culpable in fact are guilty, they should pay the price," Kaplan ruled. "But determination of guilt or innocence must be made fairly — not in a proceeding in which the government has obtained an unfair advantage long before the trial even has begun."
Legal experts said Kaplan's ruling would probably force the government to reexamine its use of the Thompson memo.
"It's going to chill the government's willingness" to use this tactic, said Steven Peikin, a partner at Sullivan & Cromwell in New York and former chief of the securities fraud division at the U.S. attorney's office in Manhattan.
The ruling also could affect scores of other corporate fraud cases being prosecuted in cities all over the country, experts said.
"The implications for the criminal defense bar nationwide are huge," said Joseph Price, a partner at law firm Arent Fox in New York. "If this stands up on appeal, it could affect hundreds of cases."
Justice Department officials did not say whether they would appeal.
John Coffee, a Columbia University law professor, said a legal challenge would be risky because an opinion upholding Kaplan could further restrict the ability of prosecutors to apply pressure in white-collar cases.
"I think [the judge] is dead right, and he's going to stop this practice dead in its tracks," Coffee said.
Charles Rettig, a partner at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, speculated that Kaplan's ruling alone might be sufficient to make the government's tactic obsolete.
"It will likely cause the government to back away from any discussion regarding an entity paying defense costs of current or former employees," he said.
The defendants in the KPMG case include Jeffrey Stein, the firm's former deputy chairman, and Gregg Ritchie, a former tax partner in KPMG's Woodland Hills office.
Business groups including the Securities Industry Assn. and the U.S. Chamber of Commerce had filed friend-of-the-court briefs on behalf of the defense because they were concerned about the Justice Department in effect taking away the employer's discretion to defend workers for "acts committed in the course of employment," Rettig said.