A judge has ruled that it was unconstitutional pressure from the government that led KPMG to place a cap on how much of the legal tab it would pick up for 16 former employees facing federal charges over the sale of questionable tax shelters.

U.S. District Judge Lewis A. Kaplan declined to dismiss the indictment against the former KPMG employees, but did open a civil court docket for the group -- suggesting that the former workers file civil charges against the Big Four firm to get their legal fees paid in full.

The issue arose out of a Justice Department policy that companies that continue to pay the legal bills of accused executives can be considered "uncooperative." In August, the firm agreed to pay $456 million to avoid prosecution over its sale of abusive tax shelters and threatened to fire workers who didn't cooperate with federal investigators. KPMG has a longstanding policy of covering workers' legal costs, and Kaplan wrote in his ruling that he didn't believe the government was telling the whole story in its denials that it had encouraged KPMG to set a $400,000 cap on the defendants' legal costs.

"Bus drivers sued for accidents, cops sued for allegedly wrongful arrests, nurses named in malpractice cases, news reporters sued in libel cases and corporate chieftains embroiled in securities litigation generally have similar rights to have their employers pay their legal expenses if they are sued as a result of their doing their jobs," Kaplan wrote, in his ruling. "This right is as much a part of the bargain between employer and employee as salary or wages."

Kaplan said that ultimately he agreed that the former KPMG executives' right to a fair trial was being threatened. "KPMG refused to pay because the government held the proverbial gun to its head," Kaplan wrote. "Had that pressure not been brought to bear, KPMG would have paid these defendants' legal expenses."

Previously on WebCPA:

KPMG Gets Okay for $153M Settlement (June 6, 2006)

Defendants Ask for Dismissal of KPMG Shelter Charges (Jan. 17, 2006)More KPMG Execs Indicted over Shelters (Oct. 19, 2005)

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