While excoriating prosecutors, Judge Lewis Kaplan has also exposed the tactics of KPMG counsel Robert BennetT

On July 20, after his latest round of hearings in the KPMG L.L.P. tax shelter case, flame-throwing federal district court judge Lewis Kaplan had a new demand: He ordered lawyers for the 16 former KPMG partners or employees who are defendants to submit affidavits disclosing who had referred their clients to them. The reason, as Judge Kaplan explained at the hearing, was his concern that KPMG and its lawyers at Skadden, Arps, Slate, Meagher & Flom had directed the individual defendants to lawyers "who would understand that the best thing to do here for these individuals would be what was in KPMG's best interest."

Judge Kaplan isn't likely to find any damning evidence in the affidavits; only two of the KPMG defendants, according to the affidavits, are still using lawyers referred by Skadden. But the judge's extended investigation of the KPMG prosecution has thrown a spotlight on KPMG's lead outside counsel, Skadden partner Robert Bennett-exposing defense tactics usually confined to the shadows of white-collar dealmaking. According to Stephanie Martz of the National Association of Criminal Defense Lawyers, Judge Kaplan's call for affidavits sent "a message that he perceives that what happened [in Skadden's representation of KPMG] was, if not over the line, then awfully close to it."

In 2004 KPMG was nearly indicted by prosecutors from the Southern District of New York for creating and promoting allegedly illegal tax shelters. But after 18 months of intense negotiations, in August 2005 Bennett secured a deferred prosecution agreement for KPMG, which agreed to pay $456 million. Shortly thereafter, in what's been called the biggest tax case in American history, the U.S. Department of Justice indicted 17 former KPMG employees and two outside professionals on charges of creating abusive tax shelters and selling them to investors. (One KPMG defendant has since pled guilty.) American Attorney Portal

But in recent months Judge Kaplan has turned the case into an investigation of the conduct of the government and KPMG. Spurred by counsel for individual defendants, including David Spears of Spears & Imes and Ronald DePetris of DePetris & Bachrach, the judge has called two hearings to examine claims that KPMG, at the prosecutors' behest, exerted pressure on individual defendants that amounted to a violation of their constitutional rights.

In a landmark ruling in June, Kaplan ruled that the Justice Department's Thompson Memorandum, which governs the treatment of corporate defendants, led KPMG to cut off legal fees for its indicted employees-thus depriving them of constitutional rights against self-incrimination as well as their right to counsel. And in late July, Kaplan found that two defendants had been coerced into meeting with prosecutors by the threat of losing their legal fees. He suppressed their statements. The criminal trial, originally scheduled for this month, has been postponed until January.

Meanwhile, Bennett's tactics in KPMG's defense emerged as evidence in the two hearings before Judge Kaplan-and have set defense lawyers in the case buzzing. One key document, cited in both of Kaplan's rulings, is a set of notes taken by Internal Revenue Service special agent Laura Mercandetti, the government's principal note-taker, at a February 25, 2004, meeting attended by, among others, prosecutors Justin Weddle, Shirah Neiman, and Stanley Okula, Jr., and Skadden partners Bennett and Kenneth Bialkin.

At the meeting, prosecutors made it clear they would be scrutinizing KPMG's payment of the legal fees of its employees-one of the elements of the Thompson memo. When Weddle asked if KPMG intended to pay the fees, Bennett and Bialkin explained that KPMG generally paid the legal fees of its partners. But in this case, the accounting firm offered to include a condition for payment that Bennett later called unprecedented: It would cut off legal fees to anyone who didn't cooperate.

Moreover, according to Mercandetti's notes, Bennett told prosecutors that he would refer individual defendants to lawyers "who understand cooperation is the best way to go in this type of a case." Mercandetti wrote, "He feels it is in the best interests of KPMG for [its] people to get attorneys that will cooperate."

In a formal memo on the meeting, the agent elaborated: "Mr. Bennett stated that this would also help him keep control [and] that he would want to know the fruits of the witness interviews. . . . Bennett stated that he had two firms in mind, both in the Washington, D.C., area."

Bennett and the Skadden team proceeded to push individual defendants to talk. Soon after the February 25, 2004, meeting, KPMG informed prosecutors and targeted employees that it would pay legal fees up to $400,000-but only if employees cooperated with the government and did not assert their Fifth Amendment rights. When a KPMG defendant did not meet the government's standard of cooperation, prosecutors informed Skadden, which in turn fired off letters to the defendants' lawyers, warning that their fees would be cut off unless their clients acquiesced to prosecutors' demands within ten days.

In a last-ditch effort to block KPMG's indictment, the Skadden team touted its tactics in a June 13, 2005, meeting with then-deputy attorney general James Comey. According to a Skadden-prepared memo on the meeting that was cited by Judge Kaplan, Bennett said KPMG's conditioning of attorneys' fees on cooperation with the government was "never heard of before." The Skadden memo quoted Bennett: " 'We said we'd pressure-although we didn't use that word-our employees to cooperate.' . . . This process exhibited 'a level of cooperation that is rarely done.' " The strategy worked: In August 2005 KPMG averted indictment and entered into the deferred prosecution agreement.

The February 25, 2004, meeting between prosecutors and Skadden lawyers is now a linchpin for the arguments of the individual defendants. Mercandetti's notes were introduced and discussed in detail during three days of hearings before Judge Kaplan in May, and cited in both of Kaplan's KPMG opinions. At the July hearings, Kaplan referred to the notes when he mentioned the possibility of additional hearings on defense attorneys' conflict of interest. "This is not some academic exercise," he said. "We have documentary evidence . . . about Mr. Bennett assuring Mr. Weddle that he had in mind trying to get lawyers [who would cooperate]."

While some see Bennett's comments as a deft display of his negotiating skills, other lawyers in the case see Bennett's offer to line up cooperative lawyers as unseemly. "I found it shocking," says Robert Fink of Kostelanetz & Fink, who represents Richard Smith, a former vice-chairman of KPMG. Stanley Arkin of Arkin Kaplan Rice, who represents defendant Jeffrey Eischeid, says of Bennett, "What he did here is beyond ruthless."

Bennett denies the suggestion that his referrals compromised individual defendants. "Any suggestion that we steered people to attorneys who would tell them to cooperate because it would be in KPMG's interest is absolutely false and outrageous," he says. "I never saw the [agent's] notes. But that's not how I would have put it. . . . I might have said, we're not about circling the wagons."

Bennett cites some of the lawyers he recommended to KPMG defendants-such preeminent white-collar defenders as C. Michael Buxton of Vinson & Elkins, E. Lawrence Barcella of Paul, Hastings, Janofsky & Walker, and Michael Madigan of Akin Gump Strauss Hauer & Feld-as proof that he referred lawyers who would act only in the best interests of their clients. "These are not stooges," Bennett says. "On its face, that's preposterous."

"I've known and worked with Bob Bennett for 35 years," says Henry Schuelke III of Janis, Schuelke & Wechsler. "I've never known him to ask or expect that a lawyer to whom he refers a client will . . . do anything not in the client's interest." (Bennett referred former KPMG vice-chairman Smith to Schuelke, but Smith retained Fink instead.)

Nor was there anything wrong, Bennett says, with the conditions KPMG placed on attorneys' fees for partners and employees. The firm is a partnership with no obligation to pay legal fees, he says, and KPMG had every interest in proving its commitment to cooperation. "The posture of the partnership was that they wanted these people to fully cooperate," Bennett says.

So far, Kaplan has held the government-not KPMG or Skadden-responsible for using attorneys' fees as a bludgeon. "KPMG took the only course open to it," the judge wrote in his July 25 ruling. But Judge Kaplan is also overseeing the defendants' civil suit against KPMG for legal fees. One lawyer in that case, who asked not to be named because the litigation is ongoing, predicts that if the defendants pursue a breach of fiduciary duty claim against KPMG, they will cite Bennett's comments, as recorded in the Mercandetti memo.

Another defense lawyer once involved in the KPMG case says the exposure of Bennett's predicament may make white-collar defense in the Thompson memo era a little easier, by cautioning prosecutors not to push for unconstitutional concessions.

"Bennett was in a position that was almost untenable," says this lawyer. "The client was in a panic, not without justification, and the government made a condition of cooperation a Sixth Amendment violation." He adds, "There may well be a savior for the rest of us in Judge Kaplan's opinion."