White Collar Crime Prof Blog

KPMG (Stein) Case Argued in the Second Circuit

The Second Circuit Court of Appeals heard oral arguments on the KPMG related case (Stein).  Amir Efrati of the Wall Street Journal provides a detailed description of this hearing in an article titled KPMG Prosecutors Come Under Scrutiny.  For some of the background, briefs, and more see the entries in this index here and the government's brief can be found here.

(esp)(w/ a hat tip to Bill Olis)

New KPMG Related Indictment

The former KPMG partner is charged with "participating in a conspiracy to defraud the IRS by [allegedly] concealing fee income received by [the accused] and his co-conspirators from tax shelter transactions."  He is "also charged for [allegedly] conspiring to defraud a company located in Saipan .... of the right to the honest services of its employees, by sharing tax shelter fee income with officers of that company who failed to disclose those secret payments to the Saipan Company's Board of Directors."

This individual, according to the government, "is currently awaiting trial before Judge Lewis A. Kaplan on charges relating to other tax shelters not at issue in today's indictment."

Some questions that are likely to arise are: Why is the government filing a separate action when there already is a case pending against this defendant? Did the prosecutors know of this alleged activity at the time of the filing of the initial charges, and only chose to file this action now in order to secure a prosecutorial advantage? Is this a case of the government trying to separate the accused from others charged with him, so that the government receives the benefit of moving ahead on trial on this individual alone?  Is this a situation of the government hoping to convict the individual so that he can be offered immunity and forced to testify against other actors?  There are clearly a good number of unanswered questions here, and one has to think that motions made by defense counsel will bring to light some of the answers to these questions.  For more see Business Week here.

(esp)

Indictment of KPMG Related Individual

An indictment was issued today to a former "partner or 'member' of the accounting firm KPMG."  More details will follow, but for now, the Indictment and forfeiture claim are below.

Indictment - Download pfaff_indictment.pdf

Forfeiture - Download pfaff_civil_forfeiture_complaint.pdf

(esp)

Reply Brief in KPMG Related Case

We have seen the different briefs filed by the parties in the government's appeal of the dismissal of charges against the thirteen former KPMG partners and employees by U.S. District Judge Lewis Kaplan.  There was the government's initial brief here, followed by several briefs of the appellees (here, here, here, here, and here) and some amici briefs (here).  Now filed is the government's reply brief - a brief that totals 70 pages.  The following is an outline of the arguments:

POINT I—The Government Cured Any Sixth Amendment Violation

A. The Government Did Not Waive The Cure Argument

B. Dismissal Was Not The Most Narrowly- Tailored Remedy To Address Any Sixth Amendment Violation

POINT II—KPMG’s Decision Not To Pay The Defendants’ Attorneys Fees Was Not State Action

A. The Government Did Not Waive The State Action And Coercion Arguments

B. The State Action Doctrine Applies To The Defendants’ Claims

C. KPMG’s Decision Cannot Be Imputed To The Government

1. The Government Did Not Compel KPMG Not To Pay Fees

2. The Government Did Not Significantly Encourage KPMG’s Decision

3. The Government Did Not Participate In KPMG’s Decisionmaking Or Become Entwined In KPMG’s Management

POINT III—KPMG’s Decision To Terminate Fee Payments For Indicted Defendants Did Not Violate The Sixth Amendment

A. Standard Of Review

B. Discussion

1 . Caplin & Drysdale Controls This Issue

2. The Defendants’ Restatement Of Their Argument And Recitation Of Unrelated Sixth Amendment Authorities Do Not Change The Result

3. The Government Did Not Violate The Right To Counsel Of Choice

POINT IV—The Government Did Not Violate The Defendants’ Due Process Rights

A. The Defendants’ Claim Arises Under The Sixth Amendment And Is Barred By Graham

B. The Defendants’ Claim Does Not Implicate Fundamental Right

C. The Government’s Conduct Did Not “Shock The Conscience”

POINT V—The District Court’s Dismissal Of The Indictment Cannot Be Sustained Under The Federal

Courts’ Supervisory Powers

CONCLUSION

The Reply Brief -  Download 073042cr_u.S. v. Stein Reply Brief.pdf

(esp)

Onto the Amici Briefs in the KPMG case

After a long list of briefs by many of the individuals in the KPMG related matter, things are now turning to the briefs of the amici.  We have three to report on here:

1) Brief of Amici Former Attorney General and U.S. Attorneys in Support of Affirmance.

Clearly this is an extremely strong brief.   Having Walter Dellinger as counsel of record and names like --Dick Thornburgh, Edwin Meese III, William Weld, and Stuart Gerson -- as some of the amici, certainly doesn't hurt.  This brief is also powerful in its content.  A sampling of the brief can be seen in this passage below:

"First, based on their experience in the Department, amici believe the prosecutors’ conduct in this case, in addition to violating the Fifth and Sixth Amendments of the Constitution, was inconsistent with the high standards of conduct that should be expected of lawyers at the DOJ. Department lawyers of course should not use tactics that deprive defendants of their constitutional rights. Nor should they seek to gain litigation advantage by attempting to undermine a defendant’s legal representation."

The amici show their disagreement with DOJ's tactic here:

"the tactics at issue in this case, in addition to being inappropriate, are wholly unnecessary to the prosecution of corporate crime."

See Brief here -

Download 20080123_former_ag_amici_brief_tj252.pdf

2) Brief of the Washington Legal Foundation.

If anyone had any question as to whether an alleged error here might have been harmless, they need only read this brief. The brief advocates for the dismissal granted in this case.

See Brief here -

Download 20080123_wlf_amicus_brief_tj252.pdf

3) Brief of the Securities Industry & Financial Markets Association -

This brief was submitted "to address the principles supporting the common practice of companies advancing attorneys' fees to their officers, directors, and employees."

See Brief here -

Download 073042cr_usa_v. Stein, et.pdf

(esp)

Yet another Brief in the KPMG Case

We have been collecting the briefs in the KPMG related case - Stein, et. al. see here, here, and here, and now have a new one to add to the collection.  The brief of Appellee Ritchee is one of the longer separate briefs, although like the others it joins the main brief on many of the arguments.  This brief focuses on the appellee's "Sixth Amendment right to be represented by counsel of his choice."  Appellee states that "[c]ontrary to the government’s argument, the validity of the district court’s ruling does not turn on whether the government 'coerced' KPMG’s decision. The district court found that the USAO deliberately caused the deprivation of Ritchie’s constitutional right."

This brief also refutes the government use of forfeiture literature to support its position.  The appellee response here is:

"Finally, the government’s reliance on Supreme Court forfeiture decisions for the proposition that the USAO may lawfully block funding that would otherwise be available to the defense is misplaced. The forfeiture cases are inapposite. Those decisions hold only that a criminal defendant has no Sixth Amendment right to use forfeitable assets — that is, property that belongs to the government — to fund his defense. The forfeiture cases do not hold that the government may obstruct a defendant’s access to lawfully available resources; and other cases make clear that such interference with the freedom to retain counsel of one’s choice violates the Sixth Amendment."

But perhaps the most ironic aspect of the brief is found near the beginning when the appellee argues waiver by the government.  One so often finds the government claiming that defense counsel has waived an issue on appeal by failing to properly preserve the issue or properly present it in the opening brief.  With the tables turned in this case - and the government being on the defensive - it will be fascinating to see how the government handles a claim of waiver when they are in the shoes of an appellant, a position the government seldom holds on appeal.  The waiver claim is:

"The government does not directly challenge the district court’s finding that the USAO violated Ritchie’s Sixth Amendment rights by depriving him of the ability to proceed with counsel of his choice. Indeed, the government’s brief scarcely mentions that ground for dismissal. Issues not sufficiently argued in an appellant’s opening brief are deemed waived."

Download ritchie_final_brief_11108.pdf

(esp)

Another Brief in the KPMG Appeal

We've been collecting the briefs in the government's appeal of the dismissal of charges against the thirteen former KPMG partners and employees by U.S. District Judge Lewis Kaplan.  Below is the appellee brief filed on behalf of Larry DeLap (tax partner), Steven Gremminger (associate general counsel), Carol Warley (tax partner), and Philip Wiesner (tax partner).  Similar to the briefs of the other appellees in the case, they argue that the government overstepped its bounds when it pressured KPMG into not paying the attorney's fees for former employees and partners:

The essential question here is whether the government could constitutionally use the threat of indictment to prevent one of the nation’s largest accounting firms from paying the legal fees of several of its professional employees, not because there would have been anything improper about the payment of the fees but simply because it served the government’s purposes to reduce or eliminate the ability of those employees to retain independent counsel and to defend themselves. The net effect of the prosecution’s conduct was to deprive the 13 defendant-appellees of their ability to defend against their indictment in what is claimed to be the largest tax fraud prosecution in the nation’s history.

The case for these four will be argued by John S. Martin, Jr., former U.S. Attorney for the Southern District of New York (he was Rudy Giuliani's predecessor) and former U.S. District Court Judge for thirteen years before leaving the bench in 2003 to set up shop with another former U.S. Attorney, Otto Obermaier.  The heavy hitters are appearing in this case, which pretty much guarantees the Second Circuit will have the best legal arguments available in deciding the case. (ph)

Download us_v_stein_appelle_brief_delap_et_al_jan_11_2007.pdf

Another Brief of An Appellee in the KPMG Related Case

In this post  one finds the main brief of appellees and the Hastings appellee brief in the Stein, et. al. case.  These briefs support the court's dismissal of the government's case against individual defendant's related to KPMG. Below is the brief of appellee Eischeid.  This appellee presents specific facts in support of a claim against the government's conduct in securing cooperation to the detriment of this appellee. Appellee states, "[t]he Government's conduct in this case is, and has been 'conscience-shocking,' downright dishonest and mean-spirited." 

Brief of Eischeid - 

Download 20904_arkin.pdf

(esp) 

KPMG - Appellee Brief Filed

The Appellee Brief in Jeffrey Stein et. al. - the KPMG related case - was filed late this past week. And as anticipated by the fact that the appellees requested that the court permit them to file an oversized brief of 25,690 words -- it's long.  The filed brief comes in at 25,604 words, which is slightly less than the 25,690 words filed by the government (see here). 

The opening words of this brief capture the essence of the argument - "may prosecutors, without justification, deprive a criminal defendant of funds that otherwise would lawfully be available for his defense?"  At the heart of this case are alleged violations of the Fifth and Sixth Amendments. The brief notes that KPMG for 30 years had "an unbroken practice of advancing, and indemnifying employees against, legal fees incurred in defending actions arising out of their employment."  That practice was not followed in this case with questions raised about the prosecutor's use of the Thompson Memo.

The Brief of Appellees questions the deprivation of attorney fee funds for these defendants, with the issues presented as to whether there was a Sixth Amendment deprivation of the right to the assistance of counsel and a Fifth Amendment right to due process.  Claimed here is that the government "interfer[ed] with the criminal defendants’ access to resources that would otherwise be lawfully available to finance their defense." 

When the government starts interfering with the accused's right to secure legal counsel, it is a serious deprivation. An individual brief is filed by one appellee to emphasize the unique circumstances in his case - the deprivation of counsel of choice. The predicament this individual was placed in by being told that his failure to cooperate with the government would cause legal fees to cease stresses the importance of what is before the appellate tribunal.   

Many of the issues raised in this case were resolved by the trial court, as they are factual issues.  This is important as the trial court's factual findings have a strong chance of being adhered to by the appellate tribunal. One issue that presents discussion is whether the appropriate remedy for a violation is dismissal.

And yes,  it was good to see a reference to my co-blogger, Peter Henning's 2005 law review article, Targeting Legal Advice, 54 Am. U. L. Rev. 669 in the main brief.

Brief of Appellees - Download us_v_stein_defense_reply_bried_jan_11_2008.pdf

Brief of Hastings - Download hasting_brief_11108.pdf

(esp)

Tax Shelter Ruling May Help In KPMG Prosecution -- Grab the No-Doz!

If a good fifty-page opinion analyzing the validity of a tax shelter doesn't get your juices flowing, you must be living a really boring life . . . no wait, maybe it's the other way around.  Anyway, what would otherwise be an obscure opinion from the Court of Federal Claims takes on added meaning when it is considered in connection with the KPMG tax prosecution, described at one point by prosecutors as the largest tax fraud case ever filed.  The decision in Jade Trading LLC v. United States (available below) found that a complex set of transactions designed to shelter income from taxes called Son of Boss -- these tax vehicles had other cute names like Flip/Opis and Blips -- violated the economic substance rule and hence the tax deductions generated by it would be disallowed.  The court summarized its conclusion in this way: "In sum, this transaction's fictional loss, inability to realize a profit, lack of investment character, meaningless inclusion in a partnership, and disproportionate tax advantage as compared to the amount invested and potential return, compel a conclusion that the spread transaction objectively lacked economic substance."  For those of us non-tax types, I think that means it was essentially a sham transaction.  Now, here's the scary part for the two taxpayers in the case, who were trying to limit (or avoid) taxes on a $40 million capital gain: "The determination that the transaction lacked economic substance and the conclusion that each LLC’s basis in its partnership interests must be substantially reduced requires this Court to conclude that the IRS’s 40-percent penalty is applicable at this juncture." [Italics added]  That's a very hefty price to pay on top of the taxes that will be due, so don't be surprised to see this case appealed to the Federal Circuit.

Where does the KPMG prosecution come in?  The Son of Boss tax shelter, which was peddled by BDO Seidman's "Tax $ells" Group [again with the cute name!] in this instance, is similar to what was sold by KPMG to its clients that is the basis of the prosecution, with the help of financing from Deutsche Bank and some alleged cookie-cutter legal opinions.  While there are only three defendants remaining at this point, the district court's order dismissing charges against thirteen other defendants is on appeal to the Second Circuit, so there is at least a chance that they too could face charges.  While the government would be ill-advised to get into a fight over the validity of the tax shelters in the criminal trial, at the risk of boring the jury to death, one avenue of defense was thought to be that the shelters peddled to KPMG's clients were legitimate, or at least the government never showed they were improper.  The decision in Jade Trading could make it much more difficult to offer that claim.  Defense briefs on the dismissal decision are due at the Second Circuit by January 11, so the case should be ready for oral argument by March, with a decision perhaps coming down by the summer.  (ph)

Download jade_trading_v_us_tax_shelter_opinion_dec_21_2007.pdf