KPMG tax trial delayed in dispute

A federal judge has postponed indefinitely the criminal trial of 16 former KPMG executives accused of selling illegal tax shelters, citing a dispute over whether the accounting firm must pay the defendants’ legal fees.

The 16 former KPMG executives and two other people had faced a January trial in New York federal court in what prosecutors said was the largest tax-shelter prosecution ever. Also pending is a civil suit over whether KPMG must pay its former executives’ legal fees. An appeals court will hear arguments next Tuesday on whether that suit should proceed in court or go to arbitration.

U.S. District Judge Lewis Kaplan said Monday that the criminal trial, which he is overseeing, couldn’t go forward until the fee issue was resolved.

“Given all of the current uncertainties, it is impossible now to predict with confidence when the charges in the indictment may be tried,” Kaplan said in a five-page order.

The ruling is a setback for U.S. Atty. Michael Garcia of Manhattan, whose office had sought a swift trial. The case, which was filed in 2005, had initially been scheduled for trial in September before being delayed until January. Yusill Scribner, a spokeswoman for Garcia, declined to comment.

The former KPMG executives facing trial include Jeffrey Stein, once the firm’s deputy chairman. A lawyer and a financial advisor also are charged.

Kaplan ruled June 27 that the Justice Department had violated the rights of the 16 former executives by pressuring KPMG to stop paying their legal fees. He invited the 16 to ask for fees. They sued. KPMG said it wasn’t obligated to pay and asked that the issue be resolved in arbitration. Kaplan ordered a trial on the fee issue, prompting KPMG to appeal.

In his ruling, Kaplan said he had ordered KPMG to pay the fees, rather than dismissing the case or imposing other sanctions on prosecutors, as a way “to greatly mitigate the impact of the government’s improper actions.” If KPMG isn’t forced to pay, or if a prompt determination isn’t made, Kaplan said, he may have to reconsider the issue of sanctions.

A lawyer for one former executive said that his client could no longer afford to pay him and that he might need to quit the criminal case if KPMG isn’t ordered to pay fees, Kaplan said. Another defendant may be “wiped out” by defense costs, the judge said.

A “basic defense” in the trial, expected to last as long as six months, may cost $1 million or more, Kaplan said.

“There is a real and growing possibility that some and perhaps all lack funds necessary to their defense,” Kaplan wrote.

Attorney David Pitofsky, who represents former KPMG partner David Greenberg, wouldn’t say whether the delay would help or hurt the defendants.

“Speaking generically, you want to be fully prepared,” Pitofsky said. “On the other hand, you don’t want things hanging over your client’s head.”