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The 16 former employees of KPMG L.L.P. indicted for tax shelter fraud probably couldn’t have asked for a more sympathetic judge to hear their case. First Judge Lewis Kaplan found that the government unconstitutionally pressured KPMG to stop paying their legal fees. Then he ruled that two defendants had been improperly coerced into talking with prosecutors. Now Kaplan is looking at whether KPMG’s lead outside lawyer tried to steer the former employees toward defense attorneys willing to cooperate with the government. On July 20 the New York � based judge ordered lawyers for the defendants to disclose whether their clients had been referred to them by KPMG’s outside attorneys at Skadden, Arps, Slate, Meagher & Flom. The reason, as Kaplan explained at the hearing, was his concern that KPMG and Skadden had directed the individual defendants to lawyers “who would understand that the best thing to do here for these individuals would be what was in KPMG’s best interest.” Kaplan isn’t likely to find any damning evidence in affidavits submitted by the defendants’ lawyers, which show that only two former employees are still using attorneys referred by Skadden. But the judge’s extended investigation of the KPMG prosecution has thrown a spotlight on Robert Bennett, the Skadden attorney heading the company’s defense. In 2004 KPMG was nearly indicted by Manhattan-based federal prosecutors for creating and promoting allegedly illegal tax shelters. But after 18 months of intense negotiations, the company struck a deferred prosecution agreement with the government in August 2005. Shortly thereafter, the U.S. Department of Justice indicted 17 former KPMG employees and two outside professionals on charges of creating abusive tax shelters and selling them to investors. (One KPMG defendant has since pled guilty.) In recent months Judge Kaplan has turned the case into an investigation of the conduct of the government and KPMG ["Putting On the Brakes," August, and "Bill Collectors," September]. The defendants’ choice of counsel is the judge’s latest focus. One key document, cited in Kaplan’s earlier rulings, is a set of notes taken by Internal Revenue Service special agent Laura Mercandetti, the government’s principal note-taker, at a February 25, 2004, meeting attended by, among others, prosecutors Justin Weddle, Shirah Neiman, and Stanley Okula, Jr., and Skadden partners Bennett and Kenneth Bialkin. At the meeting, prosecutors made it clear that they would be scrutinizing KPMG’s payment of the legal fees of its employees. When prosecutor Weddle asked if KPMG intended to pay the fees, Skadden’s Bennett and Bialkin explained that KPMG generally covered the legal bills of its partners. But in this case, the accounting firm offered to include a condition for payment that Bennett later called unprecedented: It would cut off legal fees to anyone who didn’t cooperate. Moreover, according to Mercandetti’s notes, Bennett told prosecutors that he would refer individual defendants to lawyers “who understand cooperation is the best way to go in this type of a case.” Mercandetti wrote, “[Bennett] feels it is in the best interests of KPMG for [its] people to get attorneys that will cooperate.” In a formal memo on the meeting, the IRS agent elaborated: “Mr. Bennett stated that this would also help him keep control [and] that he would want to know the fruits of the witness interviews.” The February 25 meeting is now a linchpin for the arguments of the individual defendants. Mercandetti’s notes were introduced and discussed in detail during three days of hearings before Judge Kaplan in May, and cited in his fee-payment and testimony-coercion opinions. In July Kaplan referred to the notes when he mentioned the possibility of additional hearings on the defense attorneys’ conflict of interest. “This is not some academic exercise,” he said. “We have documentary evidence … about Mr. Bennett assuring Mr. Weddle that he had in mind trying to get lawyers [who would cooperate].” Bennett denies the suggestion that his referrals compromised the individual defendants. “Any suggestion that we steered people to attorneys who would tell them to cooperate because it would be in KPMG’s interest is absolutely false and outrageous,” he says. “On its face, that’s preposterous.” Bennett adds, “I never saw the [agent's] notes. But that’s not how I would have put it. . . . I might have said, ‘We’re not about circling the wagons.’” Bennett also cites some of the lawyers he recommended to the KPMG defendants, including such preeminent white-collar defenders as C. Michael Buxton of Vinson & Elkins, E. Lawrence Barcella of Paul, Hastings, Janofsky & Walker, and Michael Madigan of Akin Gump Strauss Hauer & Feld. Bennett offers these names as proof that he referred attorneys who would act only in the best interests of their clients. “These are not stooges,” he says.

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