Posturing Shown in KPMG Notes

Recently released notes of conversations between federal prosecutors and lawyers for accounting firm KPMG reveal posturing and bluster as both sides pressed for a favorable resolution of tax shelter allegations.

KPMG avoided criminal charges by fulfilling a two-year delayed prosecution agreement, but the criminal prosecution of 16 former tax employees continues. The case has drawn attention following a judge’s ruling that prosecutors coerced the company to cut off legal fees to the employees, who are accused of creating illegal tax shelters.

One prosecutor, Justin Weddle, asserted that “Enron was only $1 billion; this fraud is much bigger,” according to notes quoted in the New York Times. And the lead prosecutor, David Kelley, reportedly warned the accounting firm that it was in “a grave situation.”

Defense lawyer Robert Bennett of Skadden Arps countered that an indictment would create a “death spiral” for the accounting firm. “If we go under, that will disrupt not only KPMG clients but also the national economy,” he reportedly said in an unusual meeting with Deputy Attorney General James Comey.

Peter Henning, a former lawyer in the Justice Department’s criminal fraud division, reviewed the notes before commenting to the Times. “There’s a lot of posturing going on on both sides,” he said. “The government was threatening to put KPMG out of business, but I don’t think they were serious.”

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