KPMG may face criminal charges

Report: Justice Department officials determining whether to seek indictment over tax shelters.

June 16, 2005: 5:53 AM EDT

NEW YORK (Reuters) - U.S. prosecutors have built a criminal case against KPMG LLP for obstruction of justice and the sale of abusive tax shelters, igniting a debate among top Justice Department officials over whether to seek an indictment, the Wall Street Journal reported Thursday.

Federal prosecutors and KPMG's lawyers are now locked in high-wire negotiations that could decide the fate of one of the leading accounting firms, according to lawyers briefed on the case, the newspaper said.

Under unwritten Justice Department policy, companies facing possible criminal charges often are permitted to plead their case to higher-ups in the department, the Journal said.

A KPMG lawyer declined to comment, the newspaper reported. The chief spokesman for the firm, George Ledwith, said Wednesday that "we have continued to cooperate fully" with investigators.

He declined to comment further to Reuters on Thursday.

KPMG disclosed two years ago that it was under investigation by the U.S. attorney's office for the Southern District of New York. A number of former KPMG partners also face possible criminal prosecution, the newspaper said.

KPMG was told in recent weeks that it could now face criminal charges for its aggressive marketing to wealthy clients in the 1990s of tax shelters subsequently deemed to be "abusive" by the Internal Revenue Service, according to lawyers briefed on the case, the Journal reported.

The firm also faces possible criminal charges for allegedly misleading IRS investigators and concealing evidence, the same people said, according to the Journal.

The threat of an indictment could persuade KPMG to settle the case with substantial financial penalties under a deferred-prosecution agreement or other settlement, according to the Journal.

For Justice Department officials, avoiding an indictment could avert serious damage to KPMG -- an "Andersen scenario" that could cost thousands of employees their jobs and deprive KPMG's hundreds of clients of a choice for accounting services, the Journal reported.

Just two weeks ago the Supreme Court reversed the conviction of the big accounting firm Arthur Andersen, which collapsed after being indicted by the Justice Department, the newspaper said.

Under a deferred-prosecution agreement, a company would avoid a criminal trial in exchange for agreeing to extraordinary oversight, sweeping changes in business practices and often a big fine, the newspaper said.