Tuesday, February 10, 2009

Thoughts on KPMG Criminal Tax Trial

"The Biggest Tax Fraud Case in History." That's how the Government touted its case involving tax shelters promoted by KPMG. The defendants in the case included KPMG partners and outside professionals. The trial judge substantially took the wind out of the Government's sails when he dismissed 13 KPMG defendants because the Government had violated their constitutional rights by forcing KPMG to withdraw payment of their attorneys fees. The Second Circuit affirmed in an opinion following Judge Kaplan's lead excoriating the Government. For this reason alone, the case will be long remembered as a major embarrassment to the Government.

A footnote somewhere will be what happened to the 4 defendants left standing (2 had earlier pled guilty). They went to trial this past fall. The Government skinnied down its case, but left the guts of the original case (albeit with fewer charges) -- (1) a conspiracy with two objects (i) to violate the law (an offense conspiracy) and/or (ii) a defraud conspiracy to impair or impede the lawful functions of the IRS (a Klein conspiracy), and (2) substantive counts of tax evasion with respect to certain tax returns where the benefit of the shelters were claimed. In what was to me a stunning outcome, the jury acquitted one defendant on all charges, acquitted the other defendants on the conspiracy count, and convicted the other defendants on most of the substantive counts. The outcome is very bad for the convicted defendants, but I want to comment here briefly -- even cryptically -- on the disconnect I perceive in the jury verdict of acquittal on the conspiracy count with the guilty verdict on the substantive counts.

First, the quantum of proof for conviction of the offense conspiracy and the substantive counts is the same -- intentional violation of a known legal duty. By finding that these actors had that level of intent for the substantive counts, it strikes me as odd that the jurors rejected an offense conspiracy where the only additional element is that the defendants joined together to commit the substantive offenses. They clearly were joint actors with respect to the tax shelters involved. Hence, it strikes me that the jury must have been tremendously confused about what they were doing. Perhaps the jury should have convicted the defendants on both the offense conspiracy and the underlying offenses; but, on the other hand, perhaps the jury should have acquitted the defendants of both.

Second, focusing on the Klein conspiracy of which the defendants were acquitted, the Klein conspiracy as imagined by the Government requires nothing more than some type of joint activity -- even wholly legal activity -- intended to impair or impede the IRS in its duties. Judge Kozinski of the Ninth Circuit rejected that notion in the Caldwell case, but the Government continues to assert it elsewhere hoping that it will gain traction. Despite ample evidence in the case that the defendants took action to lower the audit profiles of the tax shelter investors, the jury verdict acquitting the defendants of the Klein conspiracy must mean that they are firmly in Judge Kozinski's camp on this issue (probably more viscerally than cerebrally).

Finally, it is interesting to note that the case that started out with such great fanfare ended up with a whimper -- so much so that when DOJ Tax was touting its accomplishments during the George W. Bush years, it did not even mention the case at all or its extorted deferred prosecution agreement with KPMG.

Disclosure: I represented one of the dismissed defendants in the case. Since my client managed to get out of the Government's line of fire, still I formulated my impressions of the Government's extravagant claims while in a combative mode. My ruminations above may not be wholly objective.

1 comment:

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