U.S. District Judge Lewis Kaplan’s decision earlier this week was a major victory for the defendants in the KPMG tax shelter case because it at least gives the defendants the basis for obtaining the financial means for defending the case effectively. However, as this Lynnlee Browning/NY Times article points out, the deck is still stacked firmly in favor of the prosecution in such multiple-defendant, business fraud criminal cases. The conflicting interests of the multiple defendants are now rising to the surface of the case, as is the prosecution’s ability to cherry-pick certain defendants for attractive plea deals:

In pretrial hearings since their clients’ indictments last August and last October, defense lawyers have presented a unified front, filing joint motions and refraining from public squabbling. Lawyers for all of the defendants, countering prosecutors’ assertions of criminal intent, are expected to argue that their clients thought at the time that what they did was aggressive but legal.
But increasingly, defense lawyers speak of different camps forming over recent weeks, with lawyers for the junior defendants indicating that they will focus on proving that their clients took orders from the senior defendants, who were responsible for designing and approving the tax shelters.
“You’re beginning to already see the finger-pointing,” said a lawyer for one of the KPMG defendants, declining to be named or to name his client, saying he did not want to jeopardize the case. “It’s going to get antagonistic.”

Another lawyer, who also declined to be named, said, “If the shelters weren’t legitimate, then my client was fooled as much as anybody else.”
Lawyers for the junior defendants are expected to argue that senior-level defendants contributed to their clients personally being indicted, by withholding crucial materials from or lying to the Internal Revenue Service when KPMG first came under hard scrutiny, in early 2004.
By contrast, lawyers for the senior defendants, who also include a former chief financial officer and a former associate general counsel, have indicated that they will argue that because the lower-level defendants dealt directly with the investors who bought the shelters, the senior defendants are not responsible for any misrepresentations those clients may have made to the I.R.S.
In recent weeks, prosecutors offered a plea deal to Mark T. Watson, a former partner in KPMG’s Washington National Tax group, saying they would drop at least one of the 40 counts he faces and recommend probation if he pleads guilty and agrees to cooperate with the prosecution.
Mr. Watson, a midlevel partner, declined the offer, according to two defense lawyers close to the matter. Michael Kim, the lawyer representing Mr. Watson, said that he “was not authorized to comment” on the matter. But Mr. Kim said that in the past Mr. Watson “had a lot of friction with his co-defendants over some of the very issues on trial here, and those frictions have not disappeared.” He declined to elaborate.
The bad blood stems from Mr. Watson’s appearance under subpoena before a Senate subcommittee in 2003 looking into tax shelters. In the hearings, which later started a wave of criminal and civil cases against KPMG and other promoters of supposed tax shelters, Mr. Watson cast himself as a canary in the coal mine. He said he wrote e-mail messages to his superiors questioning the propriety of certain shelters at the heart of the indictment.

Peter Henning has typically insightful thoughts on the situation confronting the KPMG defendants. Judge Kaplan’s decision is a welcome criticism of the prosecutorial misconduct that has been apparent in numerous of the criminal prosecutions in this particular post-stock market bubble era. However, the more insidious corruption that besets the federal criminal justice system is the policy of prosecutors placing employees under pressure not not only to plead guilty, but also to testify against their bosses and fellow employees. When such a witness is placed under such extraordinary pressure, the witness will almost always feel compelled to deliver testimony that will ingratiate the witness to prosecutors. Grizzled criminal defense attorneys refer to this syndrome as a pressured witness learning how to “sing and compose.”