Against KPMG Dropped
Firm Cooperated Over Tax Shelters, Prosecutors Say
By Carrie Johnson, Staff Writer
Thursday, January 4, 2007
A federal judge dismissed a criminal conspiracy charge
yesterday against the accounting firm KPMG after prosecutors
said it had complied with an August 2005 deal that helped it
avoid a possible death sentence.
U.S. District Judge Loretta A. Preska's action puts KPMG a
step further from a scandal over the sale and marketing of
abusive tax shelters that once threatened to put the firm
out of business. A 2002 obstruction-of-justice indictment
of accounting rival Arthur Andersen hastened that firm's
demise and reduced competition in the audit industry,
raising the stakes in the KPMG case.
In August 2005, after frenzied negotiations, KPMG eventually
reached a deal with the U.S. attorney's office in the
Southern District of New York, opening its operations to
scrutiny by former Securities and Exchange Commission leader
Richard C. Breeden and agreeing to pay the government $456
million to settle.
KPMG, the nation's fourth-largest accounting firm, still
must submit to special oversight until September 2008, a
term that could be extended if KPMG violates the terms of
the deal, Manhattan U.S. Attorney Michael J. Garcia said in
"We regret the past activities that led to these charges,"
KPMG Chairman Timothy P. Flynn said in a statement. "The
20,000 people of KPMG today are focused on maintaining
ethics and compliance programs that will serve as a role
model for the profession."
Under Flynn and Executive Vice Chairman Sven Erik Holmes,
the firm has cleaned house, imposing what it calls permanent
changes in its tax operations and putting fresh leaders in
charge of its key service units. KPMG also developed a new
compliance and ethics program with the help of
District-based law firm Williams & Connolly, where Holmes, a
former federal judge, once worked as a partner.
Preska agreed to drop the conspiracy count despite protest
from Jeffrey Stein, KPMG's former deputy chairman who was
indicted in 2005 alongside more than a dozen other partners
for their role in peddling tax shelters to help wealthy
clients avoid or reduce tax payments. Stein's lawyer argued
that KPMG had reneged on an agreement to pay his legal
fees. The scheme cost the United States more than $2.5
billion in evaded taxes, according to Justice Department
officials, who called it the largest tax prosecution ever.
Defense lawyers for the former partners say they followed
laws then on the books and asserted that they were the
victims of intense government pressure, an argument that has
received support from U.S. District Judge Lewis A. Kaplan.
He is overseeing the case against the former partners.
Last year, Kaplan ruled that the government had violated the
former KPMG officials' constitutional rights by forcing the
firm to stop paying attorneys' fees. An appeals court has
yet to rule on that issue. The trial of the individual KPMG
partners has been postponed, pending resolution of the fee
The case has touched off a debate in the business and legal
communities over government tactics to combat fraud. In
part because of the fallout from the KPMG prosecution,
Deputy Attorney General Paul J. McNulty last month rolled
out changes to guidelines that prosecutors use when deciding
whether to indict corporations.