Judge Deals Blow to Prosecution in Tax Case

Federal prosecutors used excessive economic pressure to coerce two partners at the KPMG accounting firm into cooperating in an investigation of illegal tax shelters, a judge ruled Wednesday.

U.S. District Judge Lewis A. Kaplan in New York said he wouldn’t allow statements made by the two men to be used at their upcoming trial.

The decision was the judge’s second targeting what he said were improper efforts by the government to get KPMG to force employees to cooperate in the tax shelter probe, which led to charges against 18 people.

In June, Kaplan ruled that the government improperly pressured KMPG to stop paying the legal bills of any workers accused of wrongdoing. He said the withdrawal of that financial support unfairly crippled the employees’ ability to defend themselves.

In Wednesday’s ruling, the judge said that financial pressure also led KPMG Vice Chairman Richard Smith and a former partner, Mark Watson, to waive their 5th Amendment rights and agree to speak with prosecutors, even if it meant exposing themselves to legal risk.

A spokeswoman for U.S. Atty. Michael J. Garcia declined to immediately comment on the ruling.

The trial in the case has been postponed until at least January.