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United States v. KMPG LLP

February 15, 2007

UNITED STATES OF AMERICA
v.
KPMG LLP, DEFENDANT.



The opinion of the court was delivered by: Loretta A. Preska, U.S.D.J.

OPINION AND ORDER

On January 2, 2007, the Court entered an order of nolle prosequi without prejudice (the "Order") as to the information filed in this case. Several defendants in United States v. Stein, No. S1 05 Cr. 888 (LAK) (S.D.N.Y.) then filed motions for leave to intervene and appear as amicus curiae to, inter alia, vacate the Order. The Court accepted for filing the memoranda in support of the motions and invited further submissions. For the reasons set forth below, the Order stands.

BACKGROUND

On August 26, 2005, the Government and KPMG LLP ("KPMG") entered into a deferred prosecution agreement (the "DPA"). (Spears Decl., Ex. 1).*fn1 In connection with the DPA, KPMG waived its right to be indicted and consented to the filing of a one-count felony information (the "Information") charging KPMG with a conspiracy to defraud the United States, evade taxes, cause the filing of false and fraudulent tax returns, and aid and assist in the preparation of false and fraudulent tax returns, in violation of 18 U.S.C. § 371. (Id., Ex. 2). On August 29, 2005, the DPA, the Waiver of Indictment, and the Information were filed. (Id., Exs. 1-2; see also Dkt. Nos. 2-4). That day a hearing was held where KPMG entered a plea of not guilty and knowingly and voluntarily entered into the DPA, which the Court approved. (Spears Decl., Ex. 3 at 3/14-5/20 & 8/3-9/11).

As part of the DPA, KPMG accepted responsibility for the conduct of its partners and employees and described in detail how the firm had "[a]ssisted high net worth United States citizens to evade United States individual income taxes on billions of dollars in capital gain and ordinary income by developing, promoting and implementing unregistered and fraudulent tax shelters." (Id., Ex. 1, ¶ 2). Among other things, the DPA required KPMG to do the following: (i) pay $456 million to the Government (attributable to a criminal fine of $128 million, criminal restitution to the IRS of $228 million, and a civil penalty to the IRS of $100 million) (id. ¶ 3); (ii) adopt various permanent restrictions on and elevated standards for its tax practice (id. ¶ 6); (iii) implement new compliance procedures and practice standards (id. ¶¶ 16-17); (iv) accept an independent monitor to oversee KPMG's compliance with the DPA (id. ¶ 18); and (v) cooperate with the Government's investigation into the conduct detailed in the Information (id. ¶¶ 7-9).

The DPA further provided that, based on KPMG's agreement to the terms and conditions therein, the Government would recommend to the Court that prosecution of the Information be deferred until December 31, 2006. (Id. ¶ 10). If, at that time, KPMG was in full compliance with its obligations under the DPA, the Government would seek to dismiss the Information without prejudice. (Id. ¶ 11). If, at that time, KPMG was not in full compliance with its obligations under the DPA, the Government could, in its discretion, extend further the period of deferral for one year. (Id. ¶ 14). If KPMG engaged in additional violations of the DPA, the Government could defer prosecution in additional one-year increments, not exceeding a total of five years. (Id.). However, regardless of when the deferral of prosecution ended or the Information was dismissed, the DPA provided that the term of monitorship extends through 2008, and the requirement of cooperation continues without time limitation. (Id. ¶¶ 9 & 18(e)(I)).

On December 21, 2006, the Government submitted to the Court a proposed order, which stated, in part, that "assuming there are no violations of the terms of the [DPA] between [December 20, 2006] and December 31, 2006," the United States Attorney directs "that, with leave of the Court, an order of nolle prosequi without prejudice be filed as to Information 05 Cr. 903 (LAP) on or after December 31, 2006," pursuant to the terms of the DPA. (Gov't Stein Mem. at 2).*fn2 The Court issued the Order on January 2, 2007. (Dkt. No. 8).

On December 29, 2006, Jeffrey Stein served the Government with a motion to intervene and appear as amicus curiae to oppose any application for dismissal of the Information. (Gov't Stein Mem. at 2). On January 3, 2007, Mr. Stein's motion was filed with the Court. (Id. at n.1; see also Dkt. No. 5). On January 4, 2007, the Court issued an order accepting for filing Mr. Stein's memorandum in support of his motion and granting Mr. Stein leave to appear as amicus curiae. (Dkt. No. 9). The Court permitted the Government to submit a response to Mr. Stein, which it did on January 16, 2007. (Dkt. No. 17). The Court also permitted Mr. Stein to submit a reply to the Government's response, which it did on January 19, 2007. (Dkt. No. 16).

On January 19, 2007, Philip Wiesner, Larry DeLap, David Greenberg, John Lanning, Richard Smith, and Carol Warley (collectively, the "Wiesner Intervenors") also filed a joint motion to intervene and appear as amicus curiae to address the public policy reasons why the Order should be vacated and enforcement of the DPA should be denied. (Dkt. No. 12). On January 25, 2007, the Court issued an order accepting for filing the Wiesner Intervenors' memorandum in support of their motion and granting them leave to appear as amicus curiae. (Dkt. No. 19). The Court permitted the Government to submit a response to the Wiesner Intervenors, which it did on January 31, 2007. (Dkt. No. 22). The Court also permitted the Wiesner Intervenors to submit a reply to the Government's response, which they did on February 2, 2007. (Dkt. No. 23).

Mr. Stein and the Wiesner Intervenors are defendants in United States v. Stein, No. S1 05 Cr. 888 (LAK) (S.D.N.Y.) ("Stein"), a criminal case in this District pending before the Honorable Lewis A. Kaplan. The indictment in Stein charges Mr. Stein, the Wiesner Intervenors, and other defendants, most of whom are former KPMG partners or employees, with the following illegal acts: (i) a conspiracy to defraud the United States, evade taxes, and cause the filing of false and fraudulent taX returns; (ii) substantive tax evasion; and, as to certain defendants, (iii) obstruction of the due administration of the tax laws. See United States v. Stein, 452 F. Supp. 2d 230, 237 (S.D.N.Y. 2006) ("Stein III"). The charges in Stein are based on essentially the same conduct that is acknowledged by KPMG in the DPA. Compare Spears Decl., Ex. 2 (Information against KPMG in this case), with Stein, Dkt. No. 57 (first superseding indictment against former KPMG partners and employees). KPMG is an unindicted co-conspirator in the Stein indictment. See Stein, Dkt. No. 57, ¶ 1.

There are many issues in the Stein litigation, some of which are currently on appeal. See Stein v. KPMG LLP, No. 06-4358-cv (2d Cir. Sept. 18, 2006) (notice of appeal filed by KPMG challenging Stein III) ("Stein Appeal").*fn3 Of principal concern to Mr. Stein and the Wiesner Intervenors is Judge Kaplan's conclusion that the Government violated the Fifth and Sixth Amendment rights of former KPMG partners and employees by causing KPMG to cut off payment of legal fees and other defense costs upon their indictment. See United States v. Stein, 435 F. Supp. 2d 330, 356-73 (S.D.N.Y. 2006) ("Stein I"). Judge Kaplan found that, in an effort to avoid indictment, KPMG changed its long-standing policy of paying the legal fees of its personnel "because the [G]overnment held the proverbial gun to its head" and that "[h]ad that pressure not been brought to bear, KPMG would have paid [their] legal expenses." Id. at 336.

Judge Kaplan "deferred the request of the [former KPMG partners and employees] to dismiss the indictment based upon the [G]overnment's misconduct, reasoning that dismissal might prove inappropriate if KPMG were obligated to advance the defense costs, in which case all or much of the harm caused and still threatened by the [G]overnment's actions might be remedied or avoided." Stein III, 452 F. Supp. 2d at 238. Judge Kaplan then "held that [he] has ancillary jurisdiction over the claims against KPMG for advancement of defense costs and permitted the assertion of those claims." Id. Judge Kaplan also rejected KPMG's argument that former partners and employees cannot litigate their claims for defense costs in civil, summary fee advancement proceedings because they are bound to arbitrate those claims. Id. at 238-39.*fn4 To compel arbitration under the circumstances in Stein would, according to Judge Kaplan, be against public policy. Id.

Mr. Stein and the Wiesner Intervenors contend that the Order should be vacated. (See Stein Reply Mem. at 1; Wiesner Mem. at 1 & 18-19).*fn5 According to Mr. Stein, "[f]or so long as KPMG continues to obstruct the proceedings in [Stein], the Information against it should not be dismissed because it would be against the public interest to dismiss when KPMG is actively and in bad faith interfering with the due administration of justice in [Stein]." (Stein Mem. at 6-7).*fn6 According to the Wiesner Intervenors, the Court should vacate the Order on the ground that, inter alia, "the DPA's criminal fine and criminal restitution provisions violated fundamental constitutional principles of separation of powers." (Wiesner Mem. at 18-19).

Mr. Stein and the Wiesner Intervenors differ in their position as to whether the DPA should be enforced. Mr. Stein requests that the parties return to the status quo ante, with the Information pending pursuant to the DPA for up to five years. (Stein Reply Mem. at 12-13). According to Mr. Stein, "[i]mplicit in that form of relief is the recognition that having the Information pending is undesirable to KPMG and represents a form of leverage over it which can and ...


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