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KPMG fraud case wilts

A federal judge throws out charges against 13 former partners, ruling their constitutional rights were violated.

July 17, 2007|Kathy M. Kristof | Times Staff Writer

A federal judge dismissed criminal charges Monday against 13 former partners of accounting giant KPMG, including two in Southern California, gutting what had been billed as the largest tax fraud case in U.S. history.

The ex-partners and other defendants were accused of helping wealthy KPMG clients, including Global Crossing Ltd. founder Gary Winnick and former Treasury Secretary William Simon, evade more than $2 billion in income taxes through complicated shelters that allegedly concocted enormous investment losses from 1996 to 2002.

The defendants whose charges were dismissed included Gregg Ritchie and Carl Hastings, who both worked in KPMG's Woodland Hills office. Ritchie left KPMG in 1998 to become chief financial officer of Pacific Capital Group Inc., an investment firm controlled by Winnick.

The case dates to 2005, when the government charged 17 former KPMG partners, two other people and KPMG itself. The firm was spared criminal charges by agreeing to pay a $456-million fine and cooperate with prosecutors.

The firm's clients were not criminally prosecuted. Instead, tax authorities offered blanket settlement agreements that allowed many to fess up, pay back taxes and penalties, and keep the nature of their deals and settlements secret.

It was the nature of KPMG's cooperation that led to Monday's ruling. The firm's plea agreement barred it from picking up the legal bills of its indicted partners even though it had traditionally paid such costs for employees accused of wrongdoing within the scope of their employment.

The former partners maintained that by pressuring KPMG to cut off funding, the government had denied them their constitutional rights to legal representation.

U.S. District Judge Lewis Kaplan in New York agreed, saying in a 64-page opinion that he came to the decision "with the greatest reluctance."

"This indictment charges serious crimes. They should have been decided on the merits as to every defendant," Kaplan wrote. "But there are limits on the permissible actions of even the best prosecutors."

Barring KPMG from paying its former employees' legal bills "foreclosed these defendants from presenting the defenses they wished to present, and, in some cases, even deprived them of the counsel of their choice. This is intolerable in a society that holds itself out to the world as a paragon of justice," Kaplan wrote in his ruling.

The judge's decision left five defendants in the case, two of whom didn't work for KPMG.

The prosecution was to proceed against three former KPMG partners, including David Greenberg, who worked in the firm's Orange County office and released KPMG from any obligation to him when he left the firm. The other two former partners still facing charges left KPMG eight years before the criminal action was filed and did not initially seek to have the accounting firm pay their legal bills.

One of the original 17 partners charged in the case reached a plea deal and was cooperating with prosecutors.

Government lawyers said they would appeal the ruling.

"The government respectfully disagrees with Judge Kaplan as to whether there was any constitutional violation in this case," said U.S. Atty. Michael J. Garcia.

Attorneys for the defendants hailed the ruling.

"As difficult as it may have been, I strongly believe it was the right thing to do," said George D. Niespolo, partner at the Duane Morris firm of San Francisco, who represented former KPMG manager Randy Bickham.

Noting that more than 22 million documents had been filed in the criminal proceedings, Niespolo said, "Most of these defendants couldn't possibly afford to defend themselves given the magnitude of this case."

Frederick J. Krebs, president of the Assn. of Corporate Counsel, which represents in-house corporate lawyers, said the ruling could encourage prosecutors to refrain from what he described as strong-arm tactics.

"This decision sends a clear message to the Department of Justice that its prosecutorial policies and procedures must change," he said.

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