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Did Tommy Hilfiger Corporation get special treatment when it negotiated a nonprosecution agreement with the U.S. Department of Justice last summer? The question has come to light in recent weeks as the now-private company defends itself against a class action shareholders’ suit. Typically, when the government completes a deferred or nonprosecution agreement, it makes the deal public. The Manhattan U.S. attorney’s office departed from this practice with Hilfiger, however. On August 10, 2005, then�U.S. attorney David Kelley announced that his office had reached an agreement with the retailer’s American subsidiary. While Kelley’s press release outlined the general features of the pact, it wasn’t accompanied by an actual copy of the deal. Ten months later, neither Hilfiger nor the government has made the agreement public. (Hilfiger was represented in the nearly yearlong tax evasion investigation by one of Kelley’s former colleagues�Mary Jo White�a former Manhattan U.S. attorney who is now a partner at Debevoise & Plimpton.) The secret agreement is a problem for the shareholders who filed suit against Hilfiger after the government started investigating the company in 2004. In most deferred and nonprosecution agreements, the corporate defendant admits the government’s criminal allegations. Without access to the details of the Hilfiger deal, the company’s shareholders say that they don’t know how the retailer responded. Hilfiger has moved to dismiss the suit, in part, because prosecutors didn’t file charges against the clothing chain. The company, which was acquired this spring by Apax Partners Worldwide, a private equity fund, is being defended in the shareholders’ litigation by Wachtell, Lipton, Rosen & Katz. Hilfiger supports its position by citing Kelley’s August 2005 press release, which it says doesn’t confirm any wrongdoing at the retailer. According to a transcript of a May hearing, Wachtell’s John Savarese told Manhattan federal district court judge Richard Owen that the release is “far from confirming that there was some basis to the initially announced U.S. attorney investigation or that some great liability would emerge for the company from that, or some criminal case.” But Savarese cited only the government’s press release in his argument, and not the nonprosecution agreement itself. Savarese did not return calls for comment for this article. The shareholders’ lead attorney, Samuel Rudman, says that he finds it unusual that the agreement was not made public, given that the government “always make them public.” It’s especially unusual, Rudman adds, “when [Hilfiger's] lawyers are in court arguing what the agreement says.” Rudman is a partner with Lerach, Coughlin, Stoia, Geller, Rudman & Robbins. Rudman’s observation is supported by Corporate Counsel research. Corporate Counsel completed an extensive review of the Justice Department’s and many U.S. attorneys’ Web sites and found that 14 deferred and nonprosecution agreements were completed in the past 12 months. Of these 14 deals, only the Hilfiger agreement was not made public. A spokesperson for the Manhattan U.S. attorney’s office declined to comment when asked why Hilfiger was treated differently. Former U.S. attorney Kelley, now a partner at Cahill Gordon & Reindel in New York, also declined to comment. A Justice Department spokesperson in Washington, D.C., would only say that the publication of agreements “is within the discretion of individual U.S. attorney’s offices.” A Hilfiger spokesperson says that the company won’t make the agreement public “because it has no obligation to.” Debevoise’s White did not return calls for comment. What is known from Kelley’s press release is that the nonprosecution agreement ended an investigation into two related areas. One was whether Hilfiger paid inflated service commissions to its overseas subsidiaries in an effort to lighten its U.S. tax burden. The other was whether some, or all, of the services were actually performed in Hong Kong, but with the commission payments sent elsewhere in an effort to avoid paying Hong Kong taxes. Under the deal, according to the press release, Hilfiger agreed to implement new ethics and compliance programs, to cooperate with the U.S. attorney’s office for the next three years, and to amend four years’ worth of U.S. tax returns from 2001 to 2004 to reflect a lower rate of commissions. Hilfiger also agreed to pay the IRS about $18.1 million in additional taxes and interest, and to cooperate fully with the Hong Kong tax authorities. Subject to the company fulfilling its part of the deal, the government agreed to close the U.S. tax case but left open the Hong Kong part of the case. If Hilfiger cooperates with Hong Kong authorities, the government agreed not to prosecute for activities “which may constitute mail fraud or wire fraud on the Hong Kong taxing authorities,” according to the press release. Hilfiger, which was still a public company at the time of the deal, disclosed in various filings with the Securities and Exchange Commission that it had reached a nonprosecution agreement. But the company did not furnish a copy of the pact with its quarterly filing in December 2005. Hilfiger’s spokesperson says that the clothing chain believes it is not required to file a copy with the SEC. Asked whether businesses are required to file copies of nonprosecution agreements, an SEC spokesperson cited regulation S-K 229.601, which requires a public company to include with its quarterly and annual reports a complete copy of “any material contract” made outside “the ordinary course of business.” The spokesperson wouldn’t comment on any specific case, or on whether the SEC considers a nonprosecution agreement to be a “material contract.”

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