KPMG Tax Fraud Prosecution in SDNY Spawns Several Notable Pre-Trial Rulings

The KPMG tax fraud prosecution, the largest in U.S. history and currently pending in the SDNY, has kept Judge Kaplan’s law clerks burning the midnight oil, with twenty-one decisions on Westlaw to date.  The latest, added to the database last week, United States v. Stein, 2007 WL 3025658 (S.D.N.Y. October 12, 2007), addresses the government’s motion to introduce evidence of the defendants’ “other acts” at trial under Fed.R.Evid. 404(b).  A trial can be lost before it ever begins if there’s an adverse ruling on 404(b) evidence, so it’s always good to hear of a decision one can cite where the government’s 404(b) motion was denied, to counter the hundreds of others the government can marshal in its favor. 

Stein involves tax shelter schemes that allegedly employed sham transactions to generate phony tax losses.  The government sought to introduce at trial evidence relating to uncharged tax shelters, side payments from some defendants to another and personal tax evasion by three of the four defendants.  The court denied all motions with leave to renew two if the trial placed them in a different light. 

Interestingly, while questioning whether any of the proffered evidence met the requirements of Rule 404(b) for admission (i.e. was probative of motive, intent, knowledge, identity, plan, absence of mistake, etc.), the court excluded all the evidence under Fed.R.Evid. 403, on the grounds that any probative value was outweighed by its likely prejudicial effect. 

In particular, with regard to uncharged acts of tax evasion, the court rejected the government’s citation of numerous cases where similar evidence was admitted.  “These cases . . . establish only that uncharged acts of evasion may be admitted to show intent. They do not require admission or dictate an outcome in the Rule 403 analysis” (my emphasis).

Also noteworthy is the court’s rejection of the government’s argument that evidence of uncharged transactions is admissible to show “relationships among alleged co-conspirators,” an argument the government often raises to rescue a 404(b) proffer that smacks of establishing the defendant’s propensity for crime.  Accepting that relationship evidence is “an appropriate not-for-character purpose under Rule 404(b),” the court nonetheless rejected the adequacy of the proffer, pointing out:  “The government has not explained its assertions that these relationships are relevant and that the evidence is probative of them, much less why it is necessary or helpful to get into the details of these other transactions beyond simply adducing evidence that the alleged coconspirators in fact had prior relationships involving uncharged transactions.”  In other words, Stein is a useful precedent for the proposition that the government can introduce the fact of prior relationships, but not the details of prior (criminal) activities together. 

Stein is a treasure trove of other interesting, useful and cautionary decisions.  Since most predate the establishment of this blog, I will note them briefly here:

• Indictment Dismissed as to Thirteen Defendants Due to Government’s “Conscience Shocking” Misconduct: In the mother of all decisions, 495 F.Supp.2d 390 (S.D.N.Y. 2007), the court dismissed the indictment as to thirteen defendants due to the government’s inducement of KPMG’s cut-off of defense costs for its former employees, thus denying the defendants’ right to (expensive) counsel of choice.  This unusual set of facts is unlikely to be repeated but the case is currently the subject of an interlocutory appeal and likely to yield an interesting decision from the Second Circuit on the parameters of conduct meriting the extraordinary remedy of a dismissal of an indictment. 
• Defense Lawyer Denied Permission to Withdraw: Cautionary tale involving defense lawyer who had only received $200,000 upfront for representation likely to exceed $1.5 million.  Court denied him permission to withdraw after client became insolvent, where lawyer had relied on unsecured promises of funds to come, rather than “the more careful or prudent approach” of obtaining a security interest in the defendant’s home.  The court offered to alleviate the burden somewhat by appointing the lawyer under the Criminal Justice Act and authorizing a waiver on maximum limits as well as interim payments.  488 F.Supp.2d 370 (S.D.N.Y. 2007).
• Fact that Defense Lawyer’s Firm Previously Represented Trial Witness Was Waivable Conflict:  The court denied the government’s motion to disqualify defense counsel on the grounds that attorneys at the same firm had represented two trial witnesses, where defendant made knowing and intelligent waiver of conflict, and his lawyers would not be permitted in any way to participate in cross-examination of those witnesses.  410 F.Supp.2d 316 (S.D.N.Y. 2006).  The decision is a useful in-depth primer on the issue of the right to conflict-free representation.
• Defendant-Employee’s Conversations with Employer’s In-House and Outside Counsel Not Privileged:  Indicted former partner at KPMG sought suppression of certain statements she had made to KPMG’s in-house and outside counsel on the grounds that they were protected by attorney client privilege.  Reviewing several circuits’ consideration of this thorny problem, the court found persuasive the view that individual privilege may be asserted successfully only when communications regarding individual acts and liabilities are segregable from discussions about the corporation.  Here, however, where the defendant’s personal interests and the corporate interests were not divisible, the claim of privilege failed. 463 F.Supp.2d 459. 
• Government Must Produce Rough Notes Taken by Government Agents During Interviews with Defendants: In this useful decision worth citing in all discovery motions, the court analyzed the current version of Fed.R.Crim.P. Rule 16, adopted in 1991, and held that the government must produce rough notes of interviews with defendants even where government produced more formal summaries created from those notes.  424 F.Supp.2d 720 (S.D.N.Y. 2006)
• Government’s Motion to Sever Denied: Court denied government’s motion to sever one defendant, where the government was in the controlling position to determine how the case initially was charged, and there was no showing of government prejudice by denying the motion, nor any showing of increased efficiency by granting it.  497 F.Supp.2d 565 (S.D.N.Y. 2007).