fraud case wilts
A federal judge throws out charges against 13 former partners,
ruling their constitutional rights were violated.
By Kathy M. Kristof, Staff Writer
Los Angeles Times
Tuesday, July 17, 2007
A federal judge dismissed criminal charges Monday
against 13 former partners of accounting giant KPMG, including
two in Southern California, gutting what had been billed as the
largest tax fraud case in U.S. history.
The ex-partners and other defendants were accused of helping
wealthy KPMG clients, including Global Crossing Ltd. founder
Gary Winnick and former Treasury Secretary William Simon, evade
more than $2 billion in income taxes through complicated
shelters that allegedly concocted enormous investment losses
from 1996 to 2002.
The defendants whose charges were dismissed included Gregg
Ritchie and Carl Hastings, who both worked in KPMG's Woodland
Hills office. Ritchie left KPMG in 1998 to become chief
financial officer of Pacific Capital Group Inc., an investment
firm controlled by Winnick.
The case dates to 2005, when the government charged 17 former
KPMG partners, two other people and KPMG itself. The firm was
spared criminal charges by agreeing to pay a $456-million fine
and cooperate with prosecutors.
The firm's clients were not criminally prosecuted. Instead, tax
authorities offered blanket settlement agreements that allowed
many to fess up, pay back taxes and penalties, and keep the
nature of their deals and settlements secret.
It was the nature of KPMG's cooperation that led to Monday's
ruling. The firm's plea agreement barred it from picking up the
legal bills of its indicted partners even though it had
traditionally paid such costs for employees accused of
wrongdoing within the scope of their employment.
The former partners maintained that by pressuring KPMG to cut
off funding, the government had denied them their constitutional
rights to legal representation.
U.S. District Judge Lewis Kaplan in New York agreed, saying in a
64-page opinion that he came to the decision "with the greatest
"This indictment charges serious crimes. They should have been
decided on the merits as to every defendant," Kaplan wrote.
"But there are limits on the permissible actions of even the
Barring KPMG from paying its former employees' legal bills
"foreclosed these defendants from presenting the defenses they
wished to present, and, in some cases, even deprived them of the
counsel of their choice. This is intolerable in a society that
holds itself out to the world as a paragon of justice," Kaplan
wrote in his ruling.
The judge's decision left five defendants in the case, two of
whom didn't work for KPMG.
The prosecution was to proceed against three former KPMG
partners, including David Greenberg, who worked in the firm's
Orange County office and released KPMG from any obligation to
him when he left the firm. The other two former partners still
facing charges left KPMG eight years before the criminal action
was filed and did not initially seek to have the accounting firm
pay their legal bills.
One of the original 17 partners charged in the case reached a
plea deal and was cooperating with prosecutors.
Government lawyers said they would appeal the ruling.
"The government respectfully disagrees with Judge Kaplan as to
whether there was any constitutional violation in this case,"
said U.S. Atty. Michael J. Garcia.
Attorneys for the defendants hailed the ruling.
"As difficult as it may have been, I strongly believe it was the
right thing to do," said George D. Niespolo, partner at the
Duane Morris firm of San Francisco, who represented former KPMG
manager Randy Bickham.
Noting that more than 22 million documents had been filed in the
criminal proceedings, Niespolo said, "Most of these defendants
couldn't possibly afford to defend themselves given the
magnitude of this case."
Frederick J. Krebs, president of the Assn. of Corporate Counsel,
which represents in-house corporate lawyers, said the ruling
could encourage prosecutors to refrain from what he described as
"This decision sends a clear message to the Department of
Justice that its prosecutorial policies and procedures must
change," he said.