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KPMG Case Delayed As Defense Lawyer Is Disqualified
By Chad Bray and Amir Efrati
The Wall Street Journal
Friday, October 19, 2007

NEW YORK -- A federal judge in Manhattan delayed the trial of three former KPMG LLP executives and a onetime Sidley Austin LLP lawyer yesterday after disqualifying a lead defense attorney in the tax-shelter case.

U.S. District Judge Lewis A. Kaplan disqualified Steven Bauer, counsel for ex-KPMG senior tax manager John Larson, after several closed hearings on potential conflicts of interest.  Opening statements were scheduled to begin next week.

The judge didn't rule on whether Mr. Bauer's law firm, Latham & Watkins LLP, also should be disqualified "unless and until Mr. Larson seeks to be represented at trial by someone else at that firm."

Mr. Bauer didn't return a phone call seeking comment.

Last month, prosecutors asked the judge to explore potential conflicts of interest by Mr. Bauer and David C. Scheper, a lawyer for former KPMG tax partner Robert Pfaff, as a result of a joint defense agreement they may have reached with David Amir Makov, who is a cooperating witness in the government's case and is expected to testify in the trial.

Prosecutors then asked the judge to preclude Mr. Bauer from cross-examining Mr. Makov based on evidence that he had acted as counsel to Mr. Makov early in the government's investigation.  "A lawyer cannot attack his former client through cross-examination or argument to the jury" because of his "duty of continuing loyalty" to that former client, prosecutors said.

The government also raised the possibility that Mr. Bauer "may be viewed as having participated in the preparation of, or at a minimum having been aware of," false statements and testimony Mr. Makov made to prosecutors in 2004 and 2005.  In court filings, Messrs. Larson, Pfaff and Bauer denied the government's assertions.

Mr. Larson, Mr. Pfaff, former KPMG tax partner David Greenberg and ex-Sidley Austin lawyer Raymond J. Ruble are accused of participating in a scheme that allowed people to avoid paying billions of dollars in taxes to the Internal Revenue Service through the use of tax shelters.  The men, who have been charged with conspiracy and multiple counts of tax evasion, have denied wrongdoing.

Write to Chad Bray at chad.bray@dowjones.com and Amir Efrati at amir.efrati@dowjones.com

http://online.wsj.com/article/SB119272954747063584.html?mod=us_business_whats_news