Is KPMG’s tough stance helping its former partners in the tax shelter case?

kpmg logo50.jpgIn connection with negotiations over its non-prosecution agreement with the Justice Department in the KPMG tax shelter case, KPMG decided to give in to a DOJ “suggestion” and revoke in the tax shelter case its longstanding policy of paying defense costs of the firm’s partners who were accused of wrongdoing in the course of firm’s business. U.S. District Judge Lewis Kaplan issued a blistering decision condemning the DOJ’s tactic, but stopped short of dismissing the case. Rather, he directed the former KPMG partners to sue KPMG to reimburse them for the defense costs.
As noted in this earlier post, I’m skeptical that attempting to force KPMG to pay the defense costs through another legal action is a sufficient remedy for the prosecutorial misconduct and, according to this Lynne Browning/NY Times article, it’s looking as if my skepticism is warranted — KPMG is contesting any obligation to pay its former partners’ defense costs in the tax shelter case.
Frankly, despite Judge Kaplan’s belief that KPMG should pay the defense costs, KPMG’s position is a smart one. If the firm voluntarily paid the costs, then it faces the risk that the DOJ would view that action as a lack of cooperation, which could damage KPMG’s prospects of avoiding a criminal prosecution in a future case. On the other hand, if the firm continues to stiff its former partners, then it does not run the risk of being perceived as being uncooperative by the DOJ and besides — even if it loses the former partners’ civil action for reimbursement of the defense costs — the firm will only have to pay about the same amount that it would if it paid the defense costs voluntarily.
However, the more interesting question is whether KPMG’s continued refusal to pay the defense costs will ultimately persuade Judge Kaplan that dismissal of the criminal case is the only effective remedy to the Justice Department’s improper interference with the financing of the defendants’ legal defense. Judge Kaplan is already perturbed with the prosecution’s foot-dragging on other issues in the case, and the financial plight faced by the defendants as a result of KPMG’s refusal to pay their defense costs may be enough to push Judge Kaplan toward dismissal of the charges against the former KPMG partners. If so, then KPMG’s tough stance on refusing to pay its former partners’ defense costs could turn out to be better for its former partners than if the firm had simply paid the defense costs after issuance of Judge Kaplan’s earlier decision.

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