Federal prosecutors received yet another slap on the wrist from Manhattan Judge Lewis Kaplan, as the judge ruled they inappropriately used economic pressure to coerce testimony from two partners at KPMG.

Kaplan said statements from the two partners would be inadmissible in the government's trial against 18 people -- including 16 former KPMG employees -- on charges of selling illegal tax shelters. Just last month, Kaplan accused the government of pressuring the Big Four firm to stop paying the legal bills of any workers accused of wrongdoing before encouraging the defendants to file suit against the firm demanding their full legal expenses be covered.

The judge said he believed that financial pressure led both KPMG vice chairman Richard Smith and former partner Mark Watson to waive their Fifth Amendment rights and speak with prosecutors, even if that meant exposing themselves to legal risk. Kaplan said prosecutors intimated in policy documents that organizations that didn't cooperate with the feds could face an indictment of the entire firm -- the legal maneuver that effectively lead to the end of Big Five firm Arthur Andersen.

"The government brandished a big stick -- it threatened to indict KPMG," Kaplan wrote in his opinion. "And [the government] held out a very large carrot, [offering KPMG the hope of avoiding indictment if it could deliver] employees who would talk, notwithstanding their constitutional right to remain silent."The actual shelter case has been postponed until January, with the defendants having filed a lawsuit against KPMG requesting full payment of their legal fees.

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