New York Federal Criminal Practice Blog
November 25, 2008

In KPMG Tax Fraud Case, SDNY Judge Kaplan Denies Remaining Defendants’ Motion to Dismiss Based on Alleged Misuse of a Parallel Civil Investigation

White collar defendants often face parallel civil investigations, a situation full of traps for the unwary, as noted here and here.  In United States v. Stein, 05 CR 888 (LAK), 2008 WL 4212516 (S.D.N.Y. September 10, 2008), the four remaining defendants in the tax fraud prosecution arising out of certain KPMG tax shelter products (previously discussed here and here), moved to dismiss the indictment against them on the grounds that the government’s alleged deceitful procurement of KPMG’s confidential tax returns through a parallel civil tax fraud investigation by the DOJ was a violation of due process.  The defendants relied on three cases where district courts dismissed indictments or suppressed evidence “where the Government has brought a civil action solely to obtain evidence for its criminal prosecution, or has failed to advise the defendant in its civil proceeding that it contemplates his criminal prosecution.”  (Two of these cases were later reversed on appeal.)

Judge Kaplan rejected the motion, finding that neither circumstance applied here: “Defendants do not deny that there was a bona fide civil investigation, they complain merely that there was a criminal investigation as well.  And defendants, who were not the targets of the civil investigation, do not claim to have been deceived by the government.”  Interestingly, in a footnote, the court notes that the defendants relied in part on the fact that four of the now dismissed defendants had given deposition testimony while unaware of the criminal investigation.  Judge Kaplan adds that they “do not suggest that the government deceived these individuals,” suggesting perhaps that if the government had engaged in some deceptive conduct, the defendants’ motion might have had more traction. 

Which leads me to the obvious point that in a civil enforcement action, where there is potential for criminal liability, it may be worth directly asking the government representative if he/she knows of any parallel criminal proceeding – the answer to which may lead to a prudent exercise of the right to remain silent, or might set up a due process claim based on affirmative misrepresentation.

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