Twofer Tuesday: CIRCUIT DECIDES KAPLAN LACKS AUTHORITY TO HEAR DEMANDS KPMG PAY LEGAL FEES and SIDLEY ESCAPES PROSECUTION IN TAX CASE

NYLJ 5/24/07

3. CIRCUIT DECIDES KAPLAN LACKS AUTHORITY TO HEAR DEMANDS KPMG PAY LEGAL FEES

It takes a broad canvas to paint a picture of eras in turmoil and transition. It probably wasn’t invented by them, but it would be hard to beat Dickens with “A Tale of Two Cities” and Tolstoy with “War and Peace”. The events of the day are the macrocosm of large events that give it real form; the microcosm fills the space with details we can readily understand. So when two articles appear on the same day, even with a tangential reference, one must pause to appreciate the novelette presented.

3. When judges clash, mix-and-match animal behaviors come to mind first because that befits organizing myths. So…Caveat Lector—this is not going to be pretty. Miscegenation in metaphor means locking horns over the pecking order to see which Great Ape gets to mount the other. And to further confuse the faunal, the stream of consciousness, in Judge Mendel’s mind, is one in which his salmon of logic gets to vault torrents from one jurisdiction to another, hoping to spawn in new pools of thought. Yes, all well and good and beautiful, yet there’s another stream out there and, it’s not that he ain’t polite, but in a pissing contest employed to mark territory, when Justice Wasp can grant a writ of mandamus, you’re in the urine, Gefilte-Fish-boy.

To trace the scent to its source, it would have to be the Thompson Memorandum. This was the document setting out standards to be followed by federal prosecutors in deciding whether to bring charges against companies. Think about it: you can go after alleged perps or the business they represent—and then it all becomes a matter of who has the deepest pockets.

Because this is the issue at issue today and the way of the weight of the world. In Dickens it was despotic rule vs. bloody revolution. In Tolstoy, it was the aftermath of that revolution devolved to a despotic end. Taken together, you can see the wheel go round its cycle if life. Here, it is America, so it has to be all about money. One of the “Seven Sisters” in the realm of super-sized accounting firms, KPMG is accused of bilking the US Treasury of billions in taxes. You’d think the prosecutors’ first mission would be to go at them hammer-&-tongs until a settlement was offered & cash coughed. With a gang of ex-execs already indicted, there would be ample opportunity to leverage them into turning state’s evidence, right?

Then put yourself in KPMG’s shoes. It would even appear to be a wise investment of capital to have the firm continue to pay off their legal expenses, no? Not. Not when you cut off the defense dollars at the source. This is where the beavers of the DoJ figure to put their dam; to where KPMG, the Big “D”, stops the cash flow, and the government drops the charges, letting the little “d”—the ex-execs—fend for themselves. (If this sounds too much like a Jack McCoy move, well...it should.) That’s how the game of high conviction rate gets played. Watching it from the riverbanks, you get a sense that somebody must like the Big “D” very much. That’s when Old School ties and Masonic handshakes and class warfare start to stir the imagination.

Mendel, though, didn’t have to go all Talmudic logic or Rombom wisdom; he just thought he could see the writing on the wall. The “mene mene tekel upharisian,” freely translated here, came out in his previous decision in United States v. Stein, 435 F.Supp, 2d 330, concluding that the government had used the threat of prosecution to pressure the company to cut off the defendants, thereby violating their rights to a fair trial and effective assistance of counsel.

And that was why he claimed ancillary jurisdiction over the fees issue and found for the defendants in Stein v. KPMG, 06-4358-cv. In a perfect world, this would be the cherry on top of just(ice) desserts.

Unfortunately, a criminal prosecution being heard in SDNY is a dog that not only won’t hunt, but should have never been given the scent. In Wasp’s opinion, that case, and its claims, sound in contract—a far cry from the faintest Federal odor. He did throw Mendel a bone, though, leaving him free to offer other remedies for prosecutorial misconduct, event the most drastic one of dismissing the indictment for 5th and 6th Amendment violations, “if it turns out that the government’s conduct separates them from their counsel of choice.”

Which brings it all back to the Thompson memo. Mendel could yelp and yip all he wants that the prosecutors let their zeal get in the way of their judgment, violating the Constitution they swore to defend. Let ‘em howl for all I care, says Wasp, a trial of claims to expenses based on contract—especially implied contract—will go over very different factual ground. You’re on the wrong track, Bowser; time to get the snout out!


2. SIDLEY ESCAPES PROSECUTION IN TAX CASE

2. Now, so that ground can be seen from both ends of the binoculars, let’s go for the up-close and personal. It’s the story of the tax partner at Phallus Dallas, one Sidney Tsarina. He was part of the package when Greene & Foliage merged with Phallus and was, at that point in time, quite a quill in the cap for creating tax shelters, the very same ones he managed with the ex-execs of KPMG. And it was bogus opinion letters he, and they, issued by the hundreds which were used to provide legal cover, giving shade to the shelters from the bright light of reason.

It took Phallus nearly two years to come to the conclusion that Sidney’s terrific billing rate had a heftier price. They, too, had seen the writing, but their ‘mene’ was another “Sister” called Arthur Anderson. When too much of Sidney began to resemble Arthur, they politely steered him to the Golden Parachute & Greenmail exit. This was at the same time as Jenkins & Gilchrist were reaching a non-prosecution agreement… mostly because they were going belly-up when their clients began to read similar screeds—that wall now resembling interiors of grafitti-ized subway cars.

So, if everybody is caught dead-to-rights, then why was the Anderson case overturned by the US Supreme Court? Was that the same reason that the Thompson memo was crafted? Ah, question, question! We might let our conspiracy theorists suggest that orders had come from on high, revising the guidelines and setting higher hurdles in criminal investigation and prosecutions of business organizations. It wouldn’t require a license to paranoia to believe the justice department had decided to go out of the business of justice, or justice in business—or something…but it might help. All of this inevitably leads to watching the wheel go round again, and letting the old hound tell the pups the truth: it is not so much a Get-Out-Of-Jail-Free card as much as a Make-A-Contribution-to-The-Community-Chest. Either way, the money game could go on, at least until Monopoly merges with Clue.

And that’s how Sidney ended up all alone in criminal court (except for his own well-heeled attorneys), Phallus pays a $40-million-dollar fine and KPMG gets off the hook while its staff goes surfing in the sewers.

Thus barketh the Big Dog.