Tax Shelter Case: 13 Defendants to Walk Free

In a ruling that has come as a huge blow to prosecutors, federal judge Lewis Kaplan threw out charges against 13 employees of KPMG on Monday in a tax shelter case. Prosecutors were left embarrassed by the judgment, especially after their initial projections of the case as a ‘showpiece of the government’s campaign against dubious tax shelters.’

When it was first filed in 2005, this case was said to be the mother of all criminal tax cases. Two years later, 13 of the defendants are out free. Manhattan District Court Judge Kaplan said he was left with no recourse other than to dismiss the charges against the 13 because of the government tactic of muscling KPMG into not paying its employees’ legal costs. This amounted to a breach of the defendants’ rights.

Judge Kaplan termed the government’s tactic as amounting to misconduct that ‘shocks the conscience’. His stand at the end of the hearing also places him squarely on the confrontational path with the government. His colleagues say this attitude could make the case a landmark one. According to him, another mistake the prosecutors made was the indictment of so many people.

19 people had been indicted under charges of conspiracy, fraud, and tax evasion by the prosecution at the start of the trial. They were charged on these counts for creating and then selling four tax shelters to clients, which resulted in $2.5 in billion unpaid taxes. Only one of the 19 indicted has plead guilty to the charges. Charges against five more defendants, of whom three are ex-KPMG employees, remain. KPMG itself managed to escape indictment by agreeing to a $456 million deferred prosecution option.

The dismissal is yet another instance of prosecutors losing the plot after the initial success in a corporate fraud case. Another major loss had come about in 2005 when the Supreme Court quashed a conviction verdict handed out by a lower court against Arthur Andersen for its role in the Enron scandal. Another instance was the case against HealthSouth CEO Richard Scrushy.

Landmark case or not, the ruling in this particular case has left the prosecution stumped for the moment, with the US Attorney's Office in Manhattan still uncertain about whether to appeal the ruling or not.