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U.S. District Judge Lewis Kaplan delivered a harsh rebuke to prosecutors last week for pressuring Big Four accountant KPMG to cut off legal fees for employees unwilling to cooperate in the largest tax fraud investigation in U.S. history. Saying the government “let its zeal get in the way of its judgment” and “violated the Constitution it is sworn to defend,” Kaplan said prosecutors had violated the Fifth and Sixth amendments by “causing KPMG to cut off legal fees and other defense costs upon indictment.” U.S. v. Stein, No. S1 05 Crim. 0888 (S.D.N.Y.). The decision has been eagerly anticipated by defense groups and business organizations such as the U.S. Chamber of Commerce and the Association of Corporate Counsel, which have become increasingly concerned at prosecutorial tactics they believe are eroding defendants’ rights to counsel and a fair trial. Kaplan said KPMG should consider paying the fees of 16 former employees now under indictment. He invited the former partners and employees of the accounting company to sue for fees if need be. And he urged the government to use its influence with the company to persuade it to pay the fees. Indictments not dismissed For the moment, Kaplan declined defense requests to dismiss the indictments although he held open that possibility. KPMG had long made it a practice to pay the fees of its employees, the judge found, but it changed its policies in the hopes of obtaining the deferred prosecution agreement that it ultimately signed in August 2004. In an 83-page opinion that was unsparing in its criticism of the government, Kaplan said KPMG was so intent on staving off indictment and surviving as an entity that it told its employees it would no longer pay their fees if they refused to cooperate with the government, and that it would cut off fees for those who were indicted. “KPMG refused to pay because the government held the proverbial gun to its head,” the judge said. David Spears of Richards Spears Kibbe & Orbe in New York, one of the attorneys for lead defendant Jeffrey Stein, said that the “decision will change the way the government does business in the investigation and prosecution of entities.” The U.S. attorney for the Southern District of New York, Michael Garcia, issued a statement saying, “We are disappointed in Judge Kaplan’s opinion today . . . which we respectfully believe is unsupported by the factual record and the applicable law. The actions of the government were entirely consistent with appropriate Department of Justice policy, and we believe that the prosecutors acted ethically and properly throughout this case.”

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