The Second Circuit today dismissed a complaint against accounting firm KPMG to recover fees and expenses arising from criminal tax fraud charges involving former KPMG partners and employees. The court held that the district court, which presides over the criminal case, erred in extending "ancillary" jurisdiction to the civil dispute between the defendants and non-party KPMG. Treating KPMG’s appeal as a petition for writ of mandamus, the court issued the writ, vacated the district court’s orders, and dismissed the civil complaint. Stein v. KPMG, LLP, No. 06-4358 (2d Cir. May 23, 2007) (available at www.ca2.uscourts.gov).
The case stems from allegations that KPMG devised and marketed fraudulent tax shelters. The district court concluded that the government violated the individual defendants’ constitutional rights under the fifth and sixth amendments by pressuring KPMG — under threat of indictment — not to pay the ex-KPMGers’ criminal defense costs. The Second Circuit expressed no opinion on the constitutionality question.
Update: WSJ story here.