Limits Judge in KPMG Case
By Chad Bray
The Wall Street Journal
Wednesday, May 23, 2007
NEW YORK -- A federal appeals court said Wednesday that a
district judge overseeing the criminal trial of a group of
former KPMG LLP executives doesn't have the jurisdiction to
oversee a separate legal-fee dispute with the firm.
In an opinion Wednesday, a three-judge panel of the 2nd Circuit
Court of Appeals said U.S. District Judge Lewis A. Kaplan can't
hold an ancillary proceeding to determine whether KPMG should be
required to pay legal fees for the former executives who have
been charged criminally with promoting illegal tax shelters.
"We vacate the order asserting ancillary jurisdiction as beyond
the district court's power," the circuit found.
Last June, Judge Kaplan found that prosecutors violated the
former executives' constitutional rights by putting undue
pressure on the firm not to advance them defense costs. The
former executives then filed a civil complaint against KPMG
seeking legal costs.
The appeals court dismissed that complaint as part of their
order on Wednesday, saying an ancillary proceeding may not be
the proper way to remedy the constitutional violations. KPMG
had argued that the legal-fee issue should be decided by an
arbitration panel, as set out in the firm's partnership
agreement, rather than by Judge Kaplan.
Prosecutors have charged 16 former KPMG executives and two
others with allegedly participating in a scheme that allowed
wealthy individuals to avoid paying billions of dollars in taxes
to the Internal Revenue Services. Five people, including former
KPMG tax partner David Rivkin, have pleaded guilty to criminal
charges in the matter.
The criminal case has been on hold pending the outcome of the
A conspiracy charge was dropped against KPMG itself last
December after the firm fulfilled the terms of its 2005 deferred
prosecution agreement with the government, in which KPMG agreed
to pay $456 million and admitted to fraudulent conduct in the
design and marketing of certain tax shelters. The deferred
prosecution agreement allowed KPMG to avoid the fate of auditing
firm Arthur Andersen LLP, which collapsed following a criminal
indictment against it as part of the government's probe into
Enron Corp. A 2002 felony conviction against Andersen in the
matter was overturned in 2005.
Separately, federal prosecutors said Wednesday that they won't
prosecute Sidley Austin LLP criminally in connection with the
probe of fraudulent tax shelters allegedly promoted by one of
the law firm's former tax partners.
The U.S. attorney's office in Manhattan said it believes the
criminal prosecution of former Sidley Austin tax partner Raymond
J. Ruble individually "sufficiently vindicates the interests of
law enforcement and the public." Mr. Ruble is among the 18
individuals facing charges in the KPMG case.
"Prosecution of Sidley might have significant collateral
consequences on partners, employees and clients of the firm,"
the office said in a press release.
In deciding not to prosecute Sidley Austin criminally,
prosecutors noted that Mr. Ruble carried out a major part of the
alleged fraud while a partner at Brown & Wood, a firm that
merged with Sidley in May 2001.
The government said Sidley didn't write opinion letter for
mass-marketed tax shelters prior to the merger and stipulated as
part of the merger agreement that Mr. Ruble no longer engage in
the practice of writing such letters and that he did so after
the merger "largely by deception."
Prosecutors noted Sidley cooperated in the investigation, made a
public statement of responsibility and entered an agreement with
the Internal Revenue Service in which it has paid a $39.4
million civil penalty to resolve the agency's tax-shelter
promoter penalty audit against the firm.
Write to Chad Bray at