The United States government appears to have conceded that a complete dismissal of indictments against 12 former KPMG partners is the only appropriate remedy in light of an earlier ruling that federal prosecutors violated the defendants’ constitutional rights. The action, U.S. v. Stein, No. 05 Crim. 0888 (S.D.N.Y.), stems from allegations that KPMG employees participated in a scheme to defraud the IRS by creating fraudulent tax shelters for wealthy clients. Last summer, Judge Lewis A. Kaplan ruled that the government’s successful efforts to force KPMG to cut off defense costs for the individual defendants by threatening to indict the entity itself amounted to a violation of the defendants’ Fifth and Sixth Amendment rights. The court, however, reserved its decision on whether a dismissal was necessary to remediate the harm suffered.

In a recently filed opposition to defendants’ subsequent motion to dismiss the indictments, federal prosecutors registered their disagreement, stating: "[w]e continue to believe that the legal and factual premises of the underlying conclusion are mistaken." However, assuming the correctness of the court’s constitutional ruling, the government conceded that "no remedy short of dismissal appears adequate." Observers note that the concession appears to be a tactical maneuver, since a complete dismissal will permit the government to challenge the court's ruling on the government's role in forcing KPMG's to withhold defense costs before the Second Circuit Court of Appeals. 

At a July 2, 2007 hearing on the motion to dismiss, Judge Kaplan ordered defendants to produce further evidence as to the extent of their inability to defend the charges against them, and further asked the government to provide an estimate of the reasonable costs of a defense for the KPMG partners. The motion has yet to be decided. 

The court's initial decision on the KPMG defendants' constitutional right to defense costs can be found here. 

The government's opposition to the KPMG defendants' motion to dismiss can be found here.