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A federal judge Monday denied accounting firm KPMG’s request for a jury trial over the issue of whether it should advance defense costs to its former employees who are now facing criminal tax fraud charges. Southern District Judge Lewis A. Kaplan, in United States v. Jeffrey Stein, S1 05 Crim. 0888, ruled that the employee claim was for specific performance of a contract. Thus, he said that it was equitable in nature and did not require a jury trial. The decision will be published Monday. As a result of the ruling, Judge Kaplan will decide whether the employees are entitled to legal fees. He had already refused to dismiss the employees’ claim and compel arbitration of the issue. KPMG filed a notice Monday asking the U.S. Court of Appeals for the Second Circuit to reverse the decision. Attorneys for KPMG had argued in their memorandum of law in opposition to the former employees’ motion to strike KPMG’s jury demand that the former employees’ breach of contract claim is an “action at law” and one for which KPMG is entitled to a trial by jury. Judge Kaplan, however, said that the monetary relief the former KPMG executives seek would be “exactly the type of monetary relief that courts, and the Restatement [of Contracts], envision as equitable relief; they are incidental to the grant of equitable relief, yet are necessary to afford complete relief.” In reaching this decision, Judge Kaplan quoted the Sixth Circuit in its decision in Golden v. Kelsey-Hayes Co., 73 F.3d 648. Judge Kaplan’s ruling on the jury issue was released on the same day that KPMG filed its answer to the civil complaint filed against it by its former employees. The company argued as an affirmative defense that the complaint is barred in whole or in part because the former employees, through their conduct, “have unclean hands and are at fault in bringing about any loss and harm they might suffer.” KPMG also argued that forcing it to pony up what could amount to millions of dollars in legal fees would amount to an unconstitutional taking in violation of its due process rights. Attorneys for KPMG singled out former executive David Greenberg, and former employee Robert Pfaff in their answer. KPMG accused Mr. Greenberg of embezzlement and fraud, saying Mr. Greenberg intentionally concealed his illegal conduct from KPMG and the government. It said Mr. Pfaff received compensation in the form of “side fees” from tax shelter promoters while he was a KPMG partner. “KPMG suffered actual injury and damages as a result of this conduct, by [Mr.] Pfaff,” KPMG said. The company accused Jeffrey Stein, a former vice chairman of the company, and former Chief Financial Officer Richard Rosenthal of breaching their fiduciary duty to the company. Richard Smith, KPMG’s former chairman of tax services, was also accused of breach of fiduciary duty. Charles A. Stillman, a partner at Stillman, Friedman & Shechtman, and Robert S. Bennett and Sheila L. Birnbaum, partners at Skadden, Arps, Slate, Meagher & Flom, represent KPMG. Mr. Bennett declined to comment, as did Mr. Stillman. David Spears, a partner at Spears & Imes who represents Mr. Stein, did not return calls to comment on the latest claims against his client. Susan R. Necheles, a partner at Hafetz & Necheles who represents Mr. Rosenthal, and David C. Scheper, a partner at Overland Borenstein Scheper & Kim who represents Mr. Pfaff, also did not return calls for comment. Robert S. Fink, a partner at Kostelanetz & Fink who represents Mr. Smith, declined to comment, as did Leonard F. Lesser, a partner at Simon Lesser who represents Mr. Greenberg. Beth Bar can be reached at [email protected]

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