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KPMG tax trial delayed in dispute

The New York federal court postponed indefinitely, on 13 November 2006, the criminal trial of 16 former KPMG executives accused of selling illegal tax shelters, on grounds that a dispute over whether the accounting firm must pay the defendants' legal fees should be settled first.

The 16 former KPMG executives, including erstwhile deputy chairman Jeffrey Stein, together with a lawyer and a financial advisor, had faced a January trial but the appeals court is this month to hear arguments on whether the fee issue should proceed in court or go to arbitration.

US District Judge Lewis Kaplan said: "Given all of the current uncertainties, it is impossible now to predict with confidence when the charges in the indictment may be tried."

The ruling is a setback for US Attorney Michael Garcia, whose office had sought a swift trial. The case, which was filed in 2005, had initially been scheduled for trial in September, before being stayed until January.

Kaplan ruled on 27 June that the Justice Department had violated the rights of the 16 former executives by pressuring KPMG to stop paying their legal fees. He invited the 16 to ask for fees, thereby provoking the civil action. KPMG said it was not obligated to pay and asked that the issue be resolved in arbitration. Kaplan ordered a trial on the fee issue, prompting KPMG to appeal.

In his ruling, Kaplan said he had ordered KPMG to pay the fees, rather than dismissing the case or imposing other sanctions on prosecutors, as a way "to mitigate the impact of the government's improper actions." If KPMG is not forced to pay, or if a prompt determination isn't made, Kaplan said, he would have to reconsider the issue of sanctions.

A "basic defense" in the trial, expected to last as long as six months may cost US$1 million or more, said Kaplan.

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