Federal prosecutors said yesterday that they would not file criminal charges against Sidley Austin, one of the largest law firms in the nation, over its work with questionable tax shelters that helped wealthy investors evade billions of dollars in taxes.
The decision not to prosecute the firm suggests that the Justice Department is modifying its stance toward the firms it contends promoted bogus tax shelters, focusing its efforts instead on pursuing their employees. It may also show the effect of new restraints placed on prosecutors in corporate investigations. The Justice Department adopted revised guidelines for prosecutors in December amid criticism that tactics used against companies like Bristol-Myers Squibb and the accounting firm KPMG were coercive and unconstitutional.
The United States attorney’s office in Manhattan said in a statement that it had decided not to charge Sidley Austin because the firm’s tax-shelter work was primarily carried out by a single person, a former partner and tax lawyer, Raymond J. Ruble.
Mr. Ruble and 16 former employees of the accounting firm KPMG and one other person are set to stand trial in Manhattan federal court over their work with tax shelters. That trial may be significantly affected by another development yesterday. A federal appellate court reversed a ruling by the trial judge, Lewis A. Kaplan, who had ordered KPMG to stand trial over its refusal to pay the legal fees of its indicted former employees.
The ruling by a three-judge panel of the United States Court of Appeals for the Second Circuit could jeopardize the government’s case against the KPMG defendants, each of whom face legal defense costs in the millions to tens of millions of dollars. In several rulings last year, Judge Kaplan had indicated that he might consider dismissing the indictment against the defendants if they were unable to pay their legal fees.
KPMG has argued that it is not obligated to pay the fees because it was defrauded by at least some of the defendants. The KPMG defendants have said that prosecutors improperly forced KPMG to cut off the legal fees as a condition for not indicting the firm in 2005 over its tax shelter work. In 2005, KPMG narrowly avoided indictment — which could have destroyed the firm as it did its former rival, Arthur Andersen — over its work with tax shelters and instead reached a $456 million agreement with prosecutors, which has since expired. The appellate judges wrote that if the rights of the KPMG defendants were violated, dismissal of the indictment against them was the proper remedy.