A flurry of motions filed by 19 indicted tax and estate professionals — most formerly with auditing giant KPMG — accuses the government of stacking the deck against them in the deferred prosecution agreement it made with the company.
Last August, KPMG, an audit, tax and advisory firm, became the latest company to defer a prosecution, a relatively new avenue of avoiding corporate prosecution. The option avoided a likely indictment for crimes such as promoting fraudulent tax shelters.
Attorneys defending the indicted former employees or partners of these companies complain that the ever more onerous terms contained in deferred prosecutions prevent them from effectively representing their clients.
“A problem is that there are no standards governing what terms are appropriate in these agreements,” said Stephanie Martz, director of the White Collar Crime Project of the National Association of Criminal Defense Lawyers.
“It’s whatever prosecutors can get away with, and that’s a lot, because companies trying to save themselves are willing to do anything, and that starts with cutting government-targeted employees loose and not paying their lawyers,” Martz said.
The U.S. Department of Justice declined to comment except to say that it will be filing responses to the defense motions.
In a provision apparently unique to the KPMG agreement, the Justice Department requires that KPMG employees’ statements conform to the statement of facts that the company agreed to when it cut the deal. In the agreement, the company admits that “through the conduct of certain tax leaders, partners and employees,” KPMG “promoted and implemented … fraudulent tax shelters” and prepared fraudulent tax returns.
That provision also says that an employee who contradicts the statement of facts puts the company in breach of the agreement and at risk of being prosecuted. The definition of “contradictory statement” is determined solely by the prosecution, and the company’s admissions are admissible at trial if it is indicted. To avoid prosecution in such a situation, the company is required by other provisions to repudiate immediately an employee’s contradictory statement and take additional “personnel action for wrongdoing.”
That means firing anyone who makes a truthful but contradictory statement, alleged Patrick Hall of San Diego’s Seltzer Caplan McMahon Vitek, the attorney for defendant David Rivkin.
“I would be shocked that anyone would talk to us that’s employed by KPMG out of fear that they would lose their job,” said Hall, who challenged these provisions in a recently filed motion. “The agreement should require employees to tell the truth, nothing more, without any threats of any kind.” U.S. v. Jeffrey Stein, No. 05 CR 0888 (S.D.N.Y.).
The Justice Department declined to respond to e-mailed questions regarding Hall’s comments. KPMG also declined comment.
Hall alleges that his client’s state of mind — whether he intended to commit fraud or should have known that his conduct could be deemed illegal — is a critical aspect of the case, and that his co-workers are most likely the best source of evidence because they had worked on the deals. Most, if not all, of the defendants have already joined, or are expected to join, each other’s motions, such as those to dismiss on numerous grounds and that challenge venues.
Martz, of the NACDL, noted that the threat to witnesses of being fired if they don’t adhere to a government-approved truth could backfire on prosecutors. “Not a single employee is going to be a credible witness,” she said.
No court has ever determined the legality of the tax shelters that are included in the deferred prosecution agreement with KPMG and the indictments. That is a major reason defendants have asked the court to dismiss their cases. Until KPMG entered into the deferred prosecution agreement, they had insisted that their strategies were lawful.
Under the agreement’s terms, KPMG must also pay the government $456 million, restrict its tax work to certain areas, implement an “effective” compliance and ethics program, and accept oversight by a monitor appointed by the U.S. Attorney’s Office in New York.