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Sixteen former employees of accounting firm KPMG have sued to compel the company to advance their legal fees and expenses in connection with a federal probe of an illegal tax shelter scheme. Jeffrey M. Stein v. KPMG, S106 Civ. 5007, was filed in federal court late Monday. It follows an invitation last month by Southern District Judge Lewis A. Kaplan, who ruled in United States v. Stein, S105 Crim. 0888, that prosecutors had violated the defendant employees’ Fifth and Sixth Amendment rights by coercing KPMG into capping legal fees for the former employees. Thomas Fitzgerald, a spokesperson for KPMG, said his company is “presently reviewing the complaint,” but would not say whether KPMG is considering reversing its position on advancing legal fees to the former employees. In his decision, Judge Kaplan urged KPMG to do just that. And he took jurisdiction over the civil case as well as the related criminal case. According to the complaint joined by all the former employees, the action was based on findings by Judge Kaplan that KPMG would have advanced legal fees and expenses to the employees “but for unconstitutional interference with KPMG’s practice and policy of advancing such expenses” by the U.S. Attorney for the Southern District through the application of the Thompson Memorandum and the conduct of assistant U.S. attorneys assigned to the case. Plaintiffs Jeffrey M. Stein, John Lanning, Richard Smith, Jeffrey Eischeid, Philip Weisner, John Larson, Robert Pfaff, Larry DeLap, Steven Gremminger, Gregg Ritchie, Randall Bickham, Mark Watson, Carol G. Warley, Carl Hasting, Richard Rosenthal and David Greenberg have been charged with committing tax fraud on behalf of KPMG. They contend in the civil suit that an implied contract obligates KPMG to pay their legal fees and expenses as they fight the criminal charges. They argue that KPMG had a “thirty-year unbroken practice of doing so in civil, regulatory and criminal cases and prosecutions.” The former employees point out that in the mid-1970s KPMG advanced legal fees and expenses for the defense of two employees through the investigation and trial stages, and in post-conviction proceedings. “More recently, KPMG advanced more than $20 million in legal fees and expenses for the defense of four partners in an enforcement action brought by the Securities and Exchange Commission, and in a related criminal investigation.” They claim that this previously uncontested practice created a “reasonable expectation” that legal fees and expenses would be advanced in relation to any criminal investigation or prosecution. In Mr. Stein’s case, the complaint asserts that in accordance with a January 2004 severance agreement, KPMG had an obligation to advance his legal fees and expenses. According to the complaint, �13 of Mr. Stein’s severance agreement stated that he would be represented “in all legal proceedings or actions . . . brought against [Mr. Stein] arising from and within the scope of his duties.” Under the agreement, KPMG also agreed to retain on Mr. Stein’s behalf, and with his consent, “appropriate and qualified separate counsel. The cost of such counsel, and related expenses, shall be the responsibility of the Firm and not that of the member.” In May 2005, however, Mr. Stein received a letter from Joseph Loonan, KPMG’s deputy general counsel, informing him that the company would no longer be advancing his legal fees and expenses. Mr. Stein has continued to “seek advancement of legal fees and expenses from KPMG, which it has refused,” the complaint says. California law Finally, the former KPMG employees contend that the California Labor Code and the California Corporations Code require the advancement of legal fees to Messrs. Larson, DeLap, Ritchie, Bickham, Hasting, Rosenthal and Greenberg, all of whom reside in California. Section 2802(a) of the California Labor Code requires an employer to indemnify an employee for all “necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.” Section 16401(c) of the California Corporations Code requires a partnership to reimburse a partner for payments made and to indemnify a partner for liabilities incurred by it in the “ordinary course of the business of the partnership or for the preservation of its business or property.” The remaining defendants maintain they are entitled to legal fees under their implied contract with KPMG. The filing of the complaint following Judge Kaplan’s June 27 scathing rebuke to prosecutors came as no surprise to some observers. “It seems like the next logical step in the process,” said Benjamin Brafman, a partner at Brafman & Associates who is not representing any of the former KPMG employees. “[Judge Kaplan] gave them this option.” Mr. Brafman said he was also not surprised to see that attorneys for the individuals filed one complaint. “To have had 16 separate complaints would be insanity, especially since time is of the essence,” Mr. Brafman said. Judge Kaplan wrote in his opinion that while the former KPMG employees all are represented by retained counsel, “the cost of mounting their defenses in this complex case is potentially very large.” He said that “in order to guarantee their right to choose their own counsel, to ensure that they can afford to pay those counsel to do what they think appropriate to defend the case, and to avoid the possibility of their becoming indigent and requiring the appointment of counsel, this Court has the power to exercise ancillary jurisdiction to resolve their right to advancement of expenses by KPMG.” Bridget Kelly, a spokeswoman for the U.S. Attorney’s Office in Manhattan, declined to comment on the filing of the civil suit. Mr. Stein is represented by David Spears, a partner at Richards Spears Kibbe & Orbe. Stanley S. Arkin, a partner at Arkin Kaplan Rice, is counsel to Mr. Eischeid. Michael Kim, a partner a Kobre & Kim, is representing Mr. Watson, and Robert S. Fink, a partner at Kostelanetz & Fink, is counsel to Mr. Smith. Leonard F. Lesser, a partner at Simon Lesser, represents Mr. Greenberg. Stephen Wiley, a partner at Savitt & Bruce, represents Mr. Larson. Mr. Pfaff is being represented by David C. Scheper, a partner at Overland Borenstein Scheper & Kim. Mr. Weisner is being represented by Ronald E. DePetris, a partner at DePetris and Bachrach. John F. Kaley, a partner at Doar Rieck Kaley & Mack, is representing Mr. Gremminger. Susan R. Necheles, a partner at Hafetz & Necheles, is representing Mr. Rosenthal. Ms. Warley is being represented by Jay Warren, a partner at Bryan Cave. Mr. Lanning is being represented by Michael Madigan, a partner at Akin Gump Strauss Hauer & Feld. Mr. Hasting is represented by Russell M. Gioiella, a partner at Litman, Asche & Gioiella. John R. Wing, a partner at Lankler Siffert & Wohl, is representing Mr. DeLap. David C. Smith, a partner at McNamara, Spira & Smith, represents Mr. Ritchie. Mr. Bickham is representing himself pro se. � Beth Bar can be reached at [email protected]

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