Saturday, August 27, 2005
The worst-kept secret these days is the deferred prosecution agreement that KPMG will enter into with the U.S. Department of Justice regarding its tax shelters. Media reports (see New York Times article here) peg the firm's penalty at $456 million (that's a nice round figure), and former SEC Chairman Richard Breeden will serve as KPMG's outside monitor. Breeden has been the outside monitor or conducted internal investigations for a number of companies, including MCI after it settled the case involving its predecessor, WorldCom, so KPMG is certainly going top-drawer. The agreement will likely be announced officially on Monday, Aug. 29, barring any last minute snags.
The next step will be the prosecution of former partners. A Bloomberg report (here) notes that a defense attorney for a former KPMG tax partner stated that eight individuals will be indicted for their role in the creation and selling of the tax shelters. The New York Times article on the firm's settlement notes that KPMG agreed to limit its funding of attorney's fees for its former partners in a step to show its cooperation and avoid a criminal charge that could have put it out of business. This is a relatively new approach by the Department of Justice, in which it considers the company's payment of attorney's fees as an indication of whether it is cooperating when it comes time to decide whether to charge the organization. The effect can be to keep individuals involved in cases from having their lawyers paid for by the organization and having to foot the bill themselves, which can be quite expensive. Contractual and statutory requirements may limit a company's authority to deny an employee (current or former) the payment of attorney's fees (see earlier post here). KPMG is a limited liability partnership, so it is not subject to state corporation laws that often provide a statutory mechanism for recovering attorney's fees. Although I would not be surprised if the partnership agreement provided for some right to have the firm pay legal costs, those provisions often contain "good faith" requirements that can result in any demand for fees by a partner being tied up in litigation, to the detriment of the individual who has to pay the attorneys today and not later.
Finally, it will be interesting to see if the delay in finalizing the deferred prosecution agreement and the announcement of the indictments of tax partners was due to working out plea agreements with any of them. While a united front might be in the best interests of the group, the pressure to cooperate may result in one or more agreeing to plead guilty and testifying against the others. (ph)