Saturday, July 1, 2006
While the former KPMG partners and employees scored a victory when the U.S. District Court found that the government pressured the firm into cutting-off attorney's fees and giving them an opportunity to seek reimbursement, in some ways that issue is a minor -- if expensive -- sideshow to the broader question of how to defend against the government's case. One defendant has already entered a guilty plea, and a New York Times article (here) indicates that the remaining defendants, 16 of whom were affiliated with KPMG, may be dividing up essentially along class lines. According to the article, the lower- and mid-level KPMG employees and partners may point the finger at the higher-ups for not making the proper disclosures about the shelters to the IRS. The senior partners and managers (including a former associate general counsel) may essentially argue an ignorance defense because they did not deal with individual clients or get involved in structuring individual shelters that may have involved misrepresentations or bogus transactions. To make matters worse for all defendants, estimates of the number of documents range from 5 to 6 million (see U.S. District Judge Kaplan's recent opinion) all the way to 20 million, according to a defense lawyer cited in the article, so discovery is a quagmire.
Describing this case as complex doesn't really do justice to that word. The tax shelter transactions themselves are almost impenetrable, and the relevant IRS regulations and accounting rules are not models of clarity. Simplifying the case for the jury and sorting out the potential liability of so many defendants will be the government's greatest challenge. To the extent there is a "divide-and-conquer" approach by prosecutors, it will not necessarily make the case that much easier because the legitimacy of the shelters would still be an issue. If some of the defendants can be persuaded to plead guilty and testify against others, that may allow the government to move the case from one about accounting and financial issues to one about disclosure and honesty -- an approach that worked well in a recent case in Houston. Regardless, the prosecutors will be playing before a judge who will be watching them closely -- any time a judge accuses prosecutors of being "economical with the truth" that is not a good sign for the government's case. (ph)