KPMG charges may be cut

Federal prosecutors urged a judge to dismiss charges against 12 of 16 former KPMG partners accused of selling illegal tax shelters, dealing a blow to the largest tax fraud case in U.S. history.

Prosecutors told U.S. District Judge Lewis Kaplan in court papers filed in New York on Saturday that he should throw out the case against the 12 former executives after finding that the government had violated their right to counsel. Charges shouldn’t be dismissed against six other defendants, including four former KPMG partners, the prosecutors said.

“We have concluded that the defendants are correct in their assertion that the only remedy that directly addresses the constitutional violations found by the court is dismissal of the indictment,” Assistant U.S. Atty. John Hillebrecht wrote in the filing.

Defendants including former KPMG Deputy Chairman Jeffrey Stein still may be prosecuted if the government pursues and wins an appeal of Kaplan’s ruling last year that prosecutors violated the defendants’ rights by threatening to indict KPMG unless it cut off payment of legal fees for its former executives.

In 2005, U.S. prosecutors accused 17 ex-KPMG executives and two others of selling illegal tax shelters from 1996 to 2005 that cost the U.S. Treasury at least $2 billion. One executive pleaded guilty, along with other defendants who were later charged. Charges against KPMG were dismissed in January after the firm paid a $456-million fine.

Last year, Kaplan said prosecutors violated the executives’ 5th and 6th Amendment rights to a fair trial and effective assistance of counsel with the threat to KPMG over the fees.