Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:05-cv-00999-MMS

Document 12-2

Filed 02/08/2006

Page 1 of 41

Exhibit 1

Order of

the United States District Court for the Northern District of

Texas (Dallas Div), John Doe 1 & Johne Doe 2 v. KPMG, L.L.P.
398 F.3d 686 (5th Cir. 2005).

Page 1 of 12 Filed Filed 02/08/2006 Page 2 of 41 04/02/2004 Case ~3-CV-02036 Case 1:05-cv-00999-MMS Document 59 12-2 Document
us DlSTRICTCOURT

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IN THE UNITED STATES DISTRICT CO FOR THE NORTHERN DISTRICT OF TE DALLAS DIVISION

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FIED
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DISCfOF

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:, CL U.sDlCfCOURT
B1

JOHN DOE 1 and JOHN DOE 2, Plaintiffs,
v.

* * * * * * * *

Dep.t)'

Civil No.3: 03-CV-2036-H

KPMG, L.L.P., Defendant,

UNTED STATES OF AMERICA, Intervenor-Defendant.

* *

MEMORANDUM OPINION AND ORDER
Before the Court are Intervenor-Defendant United States of America's Motion for

Order to Show Cause Why Plaintiffs Should Not be Held in Contempt, filed March 30, 2004, and

Plaintiffs' Motion for Reconsideration, fied March 30, 2004. Although these two motions do not

directly address each other, the Cour concludes that the issues are substantially similar such that

no response to either motion is needed. The United States asks the Cour to hold Plaintiffs in
contempt for not signing a waiver of the statute of

limitations as the United States asserts is

required by the Court's Order of

March 25, 2004. Plaintiffs ask the Court to reconsider its Order

entered March 25, 2004, allowing the United States to intervene. Plaintiffs also ask the Court to
interpret the Order to not require Plaintiffs to sign a waiver of

the statute oflimitations. Upon

review of the pleadings, briefs, and relevant authorities, the Court is of the Opinion for the
reasons stated below that the United States of America's Motion for Order to Show Cause should

be DENID, and Plaintiffs' Motion for Reconsideration should be DENID in par and

GRATED in par.

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I. BACKGROUND
Plaintiffs John Doe 1 and John Doe 2 are taxpayers, as defined in I.R.C. §
770l(a)(14), for the years 2000 and 2001. (Joint Stipulation of Facts,

1 ir 7.) Both Plaintiffs

engaged Defendant KPMG to "render tax consulting services regarding investments though
paricular limited liability companies" and to "prepare each Plaintiffs federal income tax retus,"

both their individual retus and their S corporation returns (Id. at ir 8-9, 11.) Defendant KPMG is
a federal authorized tax practitioner as defined in I.R.C. § 7525(a)(3)(A). (Id. at ir 8.)

The engagement agreement between Plaintiffs and KPMG provided that "(a)

confidentiality privilege under Internal Revenue Code Section 7525 may pertain to certain

communications between KPMG personnel and Client regarding federal tax advice provided
pursuant to this engagement." (Id. at ir 11.) It explained that "(b)y retaining KPMG, Client agrees
that KPMG is instrcted to claim the privilege on Client's behalf, with respect to any

applicable

communications, up until such time as Client may waive such privilege in writing." (Id.) Additionally, the engagement letter also stated "Client understands that KPMG makes no

representation, waranty, or promise, and offers no opinion with respect to the applicabilty of such confidentiality privilege to any communication and agrees to hold KPMG harless should
the privilege be determined not to apply to paricular communcations." (Id.)
In April

2002, KPMG received administrative summons from the IRS, "seeking

information as to the names of its clients and documents with respect to certain tyes of

transactions, including, but not limited to, a sumons relating to transactions that are the same as,

iPlaintiffs and Defendant KPMG filed the Joint Stipulation of

Fact as par ofthe appendix
2

to their respective motions for sumar judgment. (See P1.s' App. at 3-8; Def.'s App. at 3-8.)

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or substantially similar to those described in Notice 2000-44, 2000-36 i.R.B. 255 ("Notice 200044 Summons" or "summons")." (Id. at ir 1.) In late August 2003, KPMG notified Plaintiffs that it
believed Plaintiffs' names were responsive to the sumons and that KPMG intended to disclose

Plaintiffs' names and relevant documents not subject to LR.C. § 7525(a), the attorney-client privilege, or the attorney work product privilege. (Id. at ir 2.) "Plaintiffs advised KPMG that

(they) wished to invoke the tax advisor privilege under (I.R.C.) § 7525(a), and instructed KPMG
not to disclose to the IRS Plaintiffs' names in response to the Notice 2000-44 Sumons or any

other sumons, or to take any other action that would waive Plaintiffs' privilege." (Id. at ir 3.)

KPMG informed Plaintiffs that it could not guarantee that it would not disclose the Plaintiffs'
identities and other information that it believed was responsive to the IRS sumons and not

subject to any privileges. (Id.)

Plaintiffs fied this case on September 9,2003, seeking injunctive and declaratory
relief.2 "On September 11,2003, the paries filed a Stipulation and Agreed Order whereby KPMG
agreed not to disclose to the Governent of

the United States (including the IRS), the identities

of

Plaintiffs or any documents or other information relating to Plaintiffs or relating to their
this action until the Cour enters final

transactions that are the subject of

judgment on the merits

of

the privilege issue raised." (Id. at ir 5.) Plaintiffs filed a motion for summar judgment on

March 5, 2004.
Before KPMG responded to Plaintiffs' motion for sumar judgment, the United

States of America moved to intervene as a defendant to protect its interests and the public fisc,

2The Cour received Plaintiffs Complaint on September 8,2003. Plaintiffs filed their Motion for Leave to File a John Doe Complaint on September 8, 2003, and the Cour granted the
motion September 9, 2003. The Complaint was subsequently fied September 9,2003.

3

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claiming that, on average, paricipants in the tax shelter identified in Notice 2000-44 Summons

reported between $2 milion and $6 milion less per year in federal income taxes than they should
have reported. (See Emergency Motion to Intervene, filed March 25,2004.) The United States

asserts that this resulted in tax benefits between $4 milion and $12 milion to the two Plaintiffs for
year 2000. (Id.) Paricularly, the United States was concerned that while this case is pending, the

statute of limitations in which the IRS can stil determine and assess additional income taxes from
Plaintiffs may expire. (Id.) The Court granted the United States' Motion to Intervene on March
25,2004. In the Order granting the Motion to Intervene, the Cour ordered the paries to "take all

necessar steps to prevent the statutes of limitations from expiring on the IRS's abilty to assess
additional income taxes against plaintiffs for tax years 2000 and 2001 while this case is pending."
(See Order, entered March 25, 2004.) The instant Memorandum Opinion and Order will address

whether the United States had a right to intervene pursuant to Federal Rule of Civil Procedure

24(a) and wil interpret the language ofthe Court's Order requiring the paries to "take all
necessar steps to prevent the statutes of limitations from expiring."

II. ANALYSIS

A. Rule 24(a) Intervention as of Right
An applicant may intervene as of

right pursuant to Rule 24(a)(2) ifit satisfies the

following requirements: "(1) the applicant must fie a timely application; (2) the applicant must
claim an interest in the subject matter of

the action; (3) the applicant must show that disposition of

the action may impair or impede the applicant's ability to protect that interest; and (4) the

applicant's interest must not be adequately represented by existing paries to the litigation."
Heaton v. Monogram Credit Card Bank of

Georgia, 297 F.3d 416,422 (5th Cir. 2002) (quoting
4

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United States v. Franklin Parish Sch. Bd., 47 F.3d 755, 756 (5th Cir. 1995)) (internal quotations

omitted). The applicant has the burden of showing that it is entitled to intervention, and the
"(fJailure to satisfy anyone requirement precludes intervention of

right." Edwards v. City of

Houston, 78 F.3d 983,999 (5th Cir. 1996). See United States v. Texas Eastern Transmission

Corp., 923 F.2d 410,414 (5th Cir. 1991). Nonetheless, "(fJederal cours should allow
intervention where no one would be hurt and the greater justice could be attained." Sierra Club
v. Espy, 18 F.3d 1202, 1205 (5th Cir. 1995) (quoting

McDonald v. E.1. Lavino Co., 430 F.2d

1065, 1074 (5th Cir. 1970)) (internal quotations omitted). Whereas a distrct cour's finding as to

timeliness is reviewed for abuse of discretion, the distrct cour's findings as to the remaining
requirements are reviewed de novo. See Sierra Club v. Glickman, 82 F.3d 106, 108 (5th Cir.

1996).

1. Interest
In the instant case, Plaintiffs argue that the United States does not meet any of

the

four requirements necessary to intervene as of right. First, Plaintiffs argue that the only issue
before this Court is whether KPMG has a fiduciar duty to not disclose Plaintiffs' identities absent

a "final cour order. . . pursuant to a sumons enforcement action." (pl.'s Br. at 7.) The Court
concludes, however, that to determine the issue of

whether KPMG has a fiduciar duty not to

disclose Plaintiffs' identities, the Cour must first decide whether Plaintiffs' identities are
confidential communications protected against disclosure pursuant to Internal Revenue Code § 7525. See LR.C. § 7525. The Court concludes the United States has an interest in the
interpretation of Intemal Revenue Code § 7525 suffcient to meet the requirement of

Rule

24(a)(2).
5

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2. Timeliness
Next, Plaintiffs argue that the United States' Motion to Intervene was not timely.

"When determining whether a motion to intervene is timely, a cour must consider the following
four factors: 1) how long the potential intervener knew or reasonably should have known of

her

stake in the case into which she seeks to intervene; 2) the prejudice, if any the existing paries may
suffer because the potential intervener failed to intervene when she knew or reasonably should
have known of

her stake in that case; 3) the prejudice, if any, the potential intervener may suffer if

the cour does not let her intervene; and 4) any unusual circumstances that weigh in favor of or
against a finding of

timeliness." John Doe 1 v. Glickman, 256 F.3d 371,376 (5th Cir. 2001)

(citations omitted). "A motion to intervene may stil be timely even if all the factors do not weigh
in favor of a finding of

timeliness." ¡d. Also, "(a) cour should ignore how far the litigation has

progressed when intervention is sought, the amount of time that may have elapsed since the
institution of the action, and the likelihood that intervention may interfere with orderly judicial
processes." ¡d. at 375.
Although Plaintiffs are correct that the United States has known of

this action

since it was fied, "(t)he timeliness clock does not ru from the date the potential intervener knew
. . . of the existence of

the case," but rather "from the time he became aware that his (stake)

would no longer be protected by the existing paries to the lawsuit." ¡d. at 376-77 (citations

omitted). The United States contends that it only realized KPMG would not be asserting the same

defenses the United States wishes to assert after Plaintiffs filed their Motion for Summar
Judgment. (See United States's Motion to Intervene at 5.) Thus, the Cour concludes that the

timeliness clock did not star rug in September when the case was filed, as Plaintiffs assert,
6

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but rather in March 2004 when the United States realized that KPMG would not be asserting
certain defenses.

Additionally, Plaitiffs argue that the timing ofthe United States's Motion to
Intervene prejudices Plaintiffs, the Cour, and KPMG. Plaintiffs claim that the late intervention
"has burdened the Does with multiple fiings in a compressed period of

time" while

"simultaneously alleging for the first time in ths proceeding that expedited consideration is
required." (P1.'s Br. at 12.) The Cour concludes that this prejudice is not sufficient to outweigh
the prejudice the United States would face if

not allowed to intervene, ie., the inabilty to assert

potential defenses and the inability to assert an interpretation ofLR.C. § 7525 favorable to the

United States. After evaluating the four factors described above, the Cour concludes the Motion
to Intervene was timely.

3. Abilty to Protect Interest
Third, Plaintiffs argue that disposition ofthis case canot impair the United

States's ability to protect its interest. Plaintiffs assert that the United States could fie an
enforcement action to the summons it has already issued to protect its interest in this case. (pl.'s

Br. at 13-14.) The Cour concludes that although the United States may have other options to
preserve its interests, disposition of

this case may stil impair or impede its interests suffcient to

satisfy the requirements of intervention as of right pursuant to Rule 24( a)(2).

4. Adequate Representation by Another Party
Finally, Plaintiffs argue that any interest the United States does have in this case is
adequately represented by KPMG. (Pl.'s Br. at 15.) The United States asserted that KPMG has
not brought certain defenses the United States thinks are necessar. (See Motion to Intervene at

7

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5.) The Court concludes that the United States has met the fourh requirement of

intervention as

of

right. See Trbovich v. United Mine Workers of America, 404 U.S. 528, 538 n.lO (1972) ("The
the Rule is satisfied if the applicant shows that representation of

requirement of

his interest 'may

be' inadequate."). The Cour DENIS Plaintiffs' Motion for Reconsideration to allow the United

States to intervene.
B. Statute of Limitations

The second issue the Court must address in ths Memorandum Opinon and Order
is the interpretation ofthe Order granting the emergency Motion to Intervene, entered March 25,

2004. It reads, in pertinent par, "That the paries take all necessar steps to prevent the statutes
of limitations from expiring on the IRS's abilty to assess additional income taxes against the
plaintiffs for the tax years 2000 and 2001 while this case is pending." (See Order, entered March

25,2004.) The United States asserts, in its Motion for Order to Show Cause, that this language
must be interpreted to require Plaintiffs to sign a consent to extend the statutes of limitations on
assessment found in I.R.C. § 6501. (See U.S.'s Br. at 5.) The United States requests the Cour

find Plaintiffs in contempt for not signing such extensions. The Cour concludes that the language
of the Order is ambiguous and does not require Plaintiffs to sign consents extending the statute of
limitations found in 1.R.c. § 6501. Additionally, the Court agrees with Plaintiffs that waivers

pursuant to § 6501(a)(4) must be voluntar. The Cour DENIS the United States Motion for
Order to Show Cause.

However, the Court also concludes that the Internal Revenue Code provides for
the suspension of the rung of the statute of limitations in circumstances analogous to the

instant case. See LR.C. § 6503. Plaintiffs' contention that § 6501 establishes "an absolute right for
8

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a taxpayer to be free from additional assessments oftax from 3 years after the retur was fied" is

incorrect. (See Pl.'s Br. at 16.) The I.RC. provides that the statute oflimitations is not applicable
in the case of a false or fraudulent return fied with the intent to evade tax or when the taxpayer
has omitted a substantial amount properly includible in gross income. See § 6501(c)(1), (e)(I).
Additionally, the LR.C. provides for the suspension of the runnng of

the statute oflimitations
the taxpayer

found in § 6501 at the issuance of statutory notice of deficiency, when the assets of

are in the control or custody of the court, when the taxpayer is outside the United States for a
period of at least six months, during the automatic stay in a banptcy proceeding of

the

taxpayer, or during any judicial proceeding to enforce certain sumons issued by the IRS. See §
6503(a), (b), (c), (h), (j).

In the instant case, Plaintiffs choose not to intervene in the judicial enforcement

proceeding instituted by the IRS against KPMG in the Distrct Cour of the Distrct of Columbia.
(See Pl.'s Br. at 3-5.) Such intervention would have suspended the ruing of

the statute of

limitations. Instead, Plaintiffs chose to institute this action and subsequently asked the Cour to
enter an Agreed Order preventing KPMG from disclosing "to the Governent of

the United

States (including the Internal Revenue Service), the identities of

the John Doe Plaintiffs, or any

documents or other information relating to the John Doe Plaintiffs or relating to their transactions
that are the subject of this action, until this Cour enters final judgment on the merits of

the

privilege issues raised by the John Doe Plaintiffs." (Agreed Order, entered September 11,2003
(emphasis added).) In light of

this language, Plaitiffs' assertion that the United States could have
limitations from running by filing for judicial enforcement of

prevented the statute of

the sumons

is, at best, implausible. The United States could have reasonably assumed from reading the
9

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Agreed Order that fiing for judicial enforcement ofthe sumons, or takng any ofthe actions

Plaintiffs suggest in their brief, would have been useless until a final order is entered by this court.

It appears to the Court that the United States's assertion that Plaintiffs are trng to "run out the
clock" is correct. 3

The Cour concludes that it is appropriate to apply equitable principles to suspend

the runnng ofthe statute oflimitations in the instant case. "As a general rule, equitable tollng
operates only in rare and exceptional circumstances where it is necessar to preserve a plaintiffs
claims when strct application of the statute of

limitations would be inequitable." Fierro v.

Cockrell, 294 F.3d 674,682 (5th Cir. 2002) (citations omitted). "Equitable tollng thus applies
principally where the plaintiff is actively misled by the defendant about the cause of action or is
prevented in some extraordinar way from asserting his rights." ¡d. The Cour concludes that the
application of the three year statute oflimitations pursuant to § 6501 of

the I.R.C. would be

inequitable to the United States as a plaintiff

in a tax assessment action against these Plaintiffs.

The United States was prevented from asserting its rights to assess the John Doe Plaintiffs

additional taxes for the year 2000 by Plaintiffs fiing this suit and by the entr ofthe Agreed Order
3Plaintiffs instituted this suit on September 8, 2003, and filed the Agreed Order on

September 11, 2003. In their Joint Status Report, the paries estimated that five months would be needed for discovery. (See Joint Status Report, fied October 3,2003.) Based on this information,
the Court entered a Scheduling Order setting the discovery deadline as Februar 17, 2004, and the

deadline for fiing dispositive motions as Februar 24,2004. (See Scheduling Order, entered
October 9,2003.) As of

December 1, 2003, the paries had not stared any discovery. (See Joint

Report, filed December 1,2003.) On Februar 17,2004, the paries fied an agreed request to extend the time to conduct discovery and to fie dispositive motions. (See Motion to Extend Time,
fied Februar 17, 2004.) However, it appears that little discovery actually took place; the paries have stipulated to all the facts on which they are relying in their motions for sumar judgment,

and the facts appear to be inormation that must have been known at the time the lawsuit was fied time to in September. It is puzzling, therefore, why the paries would have needed an extension of
complete discovery, unless it was for the purose of "ruing out the clock."

10

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on September 11,2003. Cf United States v. Henderson, 133 F.RD. 28, 32 (M.D.N.C. 1990).4
The Cour concludes that suspending the rung of the statute of

limitations

allows Plaintiffs to assert their confidentiality privilege without prejudicing the rights of the United
States. The Court fuher concludes that the time period provided in I.R.C. § 6503(a)(1) is an

appropriate time period to use in the instant case. See LR.C. § 6503(a)(1) (establishig the time
period for suspension of the statute of

limitations when a taxpayer files an action in Tax Court).

Therefore, the Court SUSPENDS the ruing of

the statute oflimitations in § 6501(a) as to the
judgment on the merits and for

John Doe Plaintiffs' year 2000 retus until this Cour issues a final

a period of 60 days thereafter.

III. CONCLUSION
For the reasons discussed above, the United States's Motion for Order to Show

Cause is DENIED.
Plaintiffs' Motion for Reconsideration is DENIED as to the intervention by the
United States of America. The Court's Order granting intervention by the United States of

America stands.
Plaintiffs' Motion for Reconsideration is GRATED as to the Court clarfying the
language reading: "That the paries take all necessar steps to prevent the statutes of limitations

4In United States v. Henderson, Magistrate Judge Eliason reasoned that it would be

inequitable to allow the statute of limitations to ru as to taxpayers who had purposely not
intervened in the action against their attorney to enforce a thrd-par sumons. If the taxpayers

had intervened, the statute of limitations would have been tolled, thus protecting the IRS while allowing the taxpayers to assert their rights. Magistrate Judge Eliason would not allow the taxpayers to "have their cake and eat it too." Although Magistrate Judge Eliason's solution was to deny the attorney standing to assert the taxpayers' rights, the Cour fids the underlying concerns of the Henderson case and the instant case analogous.

11

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from expiring on the IRS's ability to assess additional income taxes against the plaintiffs for the

tax years 2000 and 2001 while this case is pending." (See Order, entered March 25,2004.) The
paries are not required to sign consents extending the statute oflimitations pursuant to I.R.C. §

650l(c)(4). The actions of

the paries in cooperating with the expedited resolution of

the motions

for sumar judgment satisfies the Court's Order.
The Cour SUSPENDS the ruing of the three year statute of

limitations in

I.R.C. § 6501(a) as to the John Doe Plaintiffs' year 2000 retus until this Cour issues a final

judgment on the merits and for a period of 60 days thereafter.
SO ORDERED.

DATED: April L..2004.

BARFO T SANERS, ENIOR JUGE
UNED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS

12

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Exhibit 2

Memorandum Opinion of

the United States District Court for the New York, United States v. Jeffey Stein, et aI., Southern District of S05 Crim. 888 (LAK) (SDNY).

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,

- ---- ------ --- --- --- --- -------------- --- --x
S 1 05 Crim. 0888 (LAK)

-against-

JEFFREY STEIN, et aI.,
Defendants.
__ __ ___ ___ --- ---- -- ------ - --- -- --- ---- ----x

MEMORANDUM OPINION

Appearances:
Stanley J. Okula, Jr.
Justin S. Weddle

Assistant United States Attorney
MICHAEL J. GARCIA UNITED STATES ATTORNEY

Robert S. Fink Caroline Rule
KOSTELANETZ & FINK, LLP

Attorneys for Defendant Richard Smith

LEWIS A. KAPLAN, District Judge.

Former KPMG parter Richard Smith and eighteen others, all but two formerly
employed by or affliated with KPMG, stand indicted for allegedly designing, marketing, and
implementing fraudulent tax shelters for wealthy individual clients and deliberately concealing
those tax shelters from the IRS. The government moves the Court for an order disqualifying
attorney Robert Fink, Esq., and the firm of

Kostelanetz & Fink, LLP ("K&F"), from continuing to

serve as Smith's counseL. It contends that K&F has conflicts of interest created by the prior

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2

representation by K&F of (1) Domenick DeGiorgio, a co-conspirator in the alleged tax fraud scheme

who has agreed to cooperate with the government and who likely wil be called to testify at trial, and

(2) an unidentified co-conspirator in the alleged scheme (referred to in the Superseding Indictment

and herein as "CC-l 0"). This is the Court's decision and findings of fact following an evidentiary
hearing.

Facts
Giorgio

A. The Prior Representation of De

According to the government, Smith and DeGiorgio - a former offcer ofthe German

bank Hypo und Vereinsbank ("HVB") - played substantial roles in securing the participation of
KMPG and HVB in a series of allegedly fraudulent tax shelter transactions known as Bond Linked
Issue Premium Strctures ("BLIPS"). i Although DeGiorgio initially defended the propriety of

the

BLIPS shelters, he later agreed to cooperate with the government and, on August 11, 2005, pleaded

guilty to, among other things, tax fraud conspiracy charges relating to his role in the BLIPS
transactions.2 The governent now expects to call him as a witness against Smith.3

DeGiorgio's relationship with K&F began in November 2003 - several months

before the firm was retained by Smith - when HVB engaged K&F partner Bryan Skarlatos to

represent DeGiorgio, who was scheduled to testify in the following week before a Senate

Gov. Ltr. Br. at 1-2.
2

Id. at 2.

!d.

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3

subcommittee investigating allegedly fraudulent tax shelters.4 In preparation for the Senate hearing,

Skarlatos and Andrew Kirk Susong, then an associate at K&F, met with DeGiorgio on at least three

occasions.5 Although the parties dispute whether Skarlatos ever met with DeGiorgio privately and

whether DeGiorgio shared any confidential information with Skarlatos that was not disclosed

publicly during DeGiorgio's Senate testimony,6 the Court finds that DeGiorgio did impart
confidences to Skarlatos that remain undisclosed. On November 20,2003, Skarlatos accompanied

DeGiorgio to his appearance before the subcommittee, during which DeGiorgio testified that the
BLIPS transactions, in his view, were lega1.?
Shortly thereafter, Skarlatos learned that several targets of the government's

investigation, including Smith, had expressed interest in hiring K&F.8 Skarlatos brought this fact

to DeGiorgio's attention, and DeGiorgio agreed to the firm's representation of Smith and to the
termination of

his own attorney-client relationship with the firm.9 Skarlatos then helped DeGiorgio
10

to find another attorney.

4

Skarlatos Decl. il3.
5

!d.
6

Tr., Jan. 19,2006, at 64, 68, 88-89; Skarlatos Decl il4.
?

Gov. Ltr. Br. at 2; Skarlatos Decl. ilil4-5; ¡d. Ex. A.

Skarlatos Decl. il5.
9

!d.
10

Tr., Jan. 19,2006, at 56-57.

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4

Smith formally retained K&F in March 2004, having been advised of the former

representation of DeGiorgio. II Skarlatos worked on Smith's case until shortly after DeGiorgio
pleaded guilty in August 2005, when Smith's defense team learned that DeGiorgio was cooperating
with the government and thus likely to take a position contrary to his own Senate testimony and thus

adverse to Smith (i.e., that the BLIPS transactions were not, in fact, legal).12 Realizing that its
former representation of De

Giorgio had become a conflict, K&F attempted to screen Skarlatos from

the matter, erecting a "wall" that, they claim, prohibited Skarlatos from working on the case and
barred other members ofthe team from discussing Smith's defense with Skarlatos.13 As with most

walls, this one was not built overnight.
On August 12,2005, the day after DeGiorgio's guilty plea, Skarlatos participated in

a conference with the governent on Smith's behalf-despite the then apparent conflct - allegedly
because Skarlatos was to playa key role in discussing some of

the more technical tax issues and it

was not possible to postpone the meeting or prepare another attorney to fill his shoes. 14 During this
meeting, Fink responded to the government's reference to DeGiorgio' s likely testimony by attacking

DeGiorgio's credibility based on DeGiorgio's contrary testimony before the Senate.IS Although
Skarlatos was present during this exchange, there is no indication that he said anything to defend
or to impugn his former client.
II

¡d.; Skarlatos Decl. ii 6; Fink Decl. ii 2.
12

Skarlatos Decl. iiii 7-8; Fink Decl. iiii 7-8.
13

Fink Decl. ii 7; Skarlatos ii 8.
14

Skarlatos Dee!. ii 8; Rule Decl. ii 7.
IS

Gov. Ltr. Br. at 2; Rule Ltr. Br. at 2.

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5

Following DeGiorgio's guilty plea, Skarlatos asked DeGiorgio's new attorney if

DeGiorgio would be wiling to sign a written waiver of any potential conflict of interest. 16
DeGiorgio refused to sign the waiver, and his position with respect to the disqualification ofK&F
remains somewhat murky. Although he repeatedly has refused to join in the government's motion

to disqualify, he stil refuses to waive the conflict and the attorney-client privilege with respect to
confidential statements he allegedly made to Skarlatos.17 He has expressed concerns about K&F's

continued involvement in the case insofar as it concerns the protection of the confidences he
imparted to Skarlatos. He has requested that, if K&F is permitted to represent Smith at trial, the
Court issue an order (1) requiring K&F to continue to screen Skarlatos from Smith's case and (2)
prohibiting K&F from taking any role in cross-examining him at trial, including sharing information

about him with counsel for Smith's co-defendants or any independent attorney hired to crossexamine him on Smith's behalf.ls

B. The Prior Representation of CC-l 0

The second alleged conflict involves K&F' s former representation of CC-i 0, an
unindicted co-conspirator affliated with The Diversified Group ("Diversified"), a New York-based
tax shelter boutique. Although CC-L 0 and Smith apparently have never met or spoken to each other,

both are alleged to have participated in another fraudulent tax shelter vehicle known as Short Option

16

Skarlatos Dec1 ~~ 9-10.
17

Tr., Jan. 19,2006, at 102.
IS

¡d. at 102-03.

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Strategies ("SOS").19 According to the government, Smith helped to implement a number ofSOS

deals, many of which were arranged through Diversified.20 The government asserts further that CC10 provided millions of dollars in illegal and unreported side fees to Smith's co-defendant, Raymond

Ruble, in exchange for opinion letters from Ruble falsely opining that the SOS shelters were likely
to survive IRS review.21

On May4, 2005, CC-LO appeared before the grand

jury in this case as the custodian

of records for Diversified, which had been asked to produce an employee to authenticate certain
corporate documents.22 Robert Fink, a K&F partner now leading Smith's defense, represented CC-

10 in connection with this appearance, although CC-IO was represented also by another attorney,
Wiliam Wachtel, Esq., who was present during all but one of

the meetings between Fink and CC-

10.23 According to Wachtel, CC-I0 knew that K&F already was representing Smith before CC-LO

retained it and was not concerned about a potential conflict.24 Prior to CC-I0's grand jury
appearance, Judge Griesa - the Part I Judge at the time - conducted a Curcio hearing regarding any

19

Gov. Ltr. Br. at 3.
20

¡d.
21

/d.
22

ld. at 2 n.l; Wachtel Ltr. ~ 1.
23

Ir., Jan. 19,2006, at 107; Wachtel Ltr. ~ 1.
24

Wachtel Ltr. ~ 2.

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potential conflict posed by K&F's joint representation ofCC-l 0 and Smith at which CC-L 0 waived
any potential conflict on the record.25

Although Fink's role with respect to CC-lO was limited both temporally and
substantively to CC-I0's May 2005 grand

jury appearance, K&F had not formally terminated the

attorney-client relationship with CC-I0 by the time the governent filed the instant motion to
disqualify in November 2005.26 In early December 2005, Fink, apparently motivated by the
government's motion, asked CC-LO to sign a written waiver of conflict after consulting with an
independent attorney regarding the joint representation.27 CC-IO promptly complied. In January
2006, moreover, Wachtel notified Fink that the attorney-client relationship between Fink and CC-L 0
had been terminated.28

C. The Government '8 Motion

The government does not dispute that the potential conflict involving CC-IO became
apparent at least as early as May 2005, when Fink accompanied CC-IO to his appearance before the

grand jury in this case, having represented Smith in previous meetings with the government.
Similarly, the DeGiorgio conflict was apparent to the governent no later than August 2005, when

DeGiorgio pleaded guilty to tax fraud conspiracy charges, and probably well before that time, when

25

Opp'n Br. at I 1-12 (quoting the transcript of the May 4, 2005 Curcio hearing, which has been sealed by Judge Griesa).
26

Tr., Jan. 19,2006, at 108.
27

Fink Decl. ii 14; id Ex. C.
28

Wachtel Ltr. ii 6;Tr., Jan. 19,2006, at 108.

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DeGiorgio first agreed to cooperate with the governent.29 The government raised the CC-LO
conflict with Smith's defense team several times during the spring and summer of2005 and raised
the DeGiorgio conflict at least once following DeGiorgio' s guilty plea.30 When K&F did not agree
to terminate its representation of Smith voluntarily, however, the governent delayed for nearly

three months before moving for disqualification on November 15,2005.
Notwithstanding this prejudicial and unjustified delay, the government now contends

that these conflicts of interest are so serious that they cannot be waived by Smith and require the
immediate disqualification ofK&F. 31 According to the government, Skarlatos' prior representation
of De

Giorgio would cripple the Smith defense team's ability to cross-examine DeGiorgio, who the

government claims is likely to testify against Smith at trial.32 The governent contends also that
the Smith defense team would face similar problems in attacking the credibility of CC-L 0 if CC-L 0

testifies at trial or ifthe government offers co-conspirator statements by CC-L 0 to support its case.33
Finally, the governent asserts that Smith's defense team would not be able to counsel Smith to

29

Tr., Jan. 19,2006, at 123; Gov. Rep. Br. at 5-6.
30

Gov. Rep. Br. at 5-6.
31

¡d. at 10-11; Gov. Ur. Br. at 7-8.
32

The government claims that, because of the prior representation, Fink could not use any information that he or other lawyers at his firm (i.e., Skarlatos) received from DeGiorgio to cross-examine him, and would be impaired by conflicting duties of loyalties to Smith and
DeGiorgio even in deciding whether and how vigorously to impeach DeGiorgio's credibility
on cross. See Gov. Ltr. Br. at 6.
33

¡d. at7.

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cooperate or to exculpate Smith by pointing the finger at other alleged members of the conspiracy
if either strategy would prejudice DeGiorgio or CC-l 0.34

D. Smith's Waiver of

the Conficts

1. The Written Waivers

In December 2005, after the government had filed this motion, Fink asked Smith to

consult with independent counsel regarding the purported conflicts.35 Smith complied, meeting
twice with Virginia attorney Thomas Lawson for a total of about two and a half

hours, during which

time he discussed the possible conflicts that might arise from K&F's prior representation of
DeGiorgio and CC-I0.36 Following these meetings, Smith executed two separate written waivers
relating to these potential conflicts of interest.37

2. The Curcio Hearing

On January 19,2006, this Cour held an evidentiary hearing on the government's
38
motion. It conducted also an inquiry of Smith pursuant to United States v. Curcio.

34

¡d.
35

Fink Decl. Ex. A & C.
36

Tr., Jan. 19,2006, at 11-12.
37

Fink Decl. Ex. A & c.
38

680 F.2d 881 (2d Cir. 1982).

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After determining that Smith, an attorney as well as a tax professional, was competent

to understand and consider the conflicts at issue,39 the Court advised Smith at length about his right

to conflict-free representation under the Sixth Amendment and about the dangers stemming from

the two conflicts of interest, including the fact that attorneys from K&F would be unable to use information gleaned from DeGiorgio or CC-I0 in Smith's defense and limited in their ability to
cross-examine DeGiorgio and CC-L 0 if either testifies at triaL. 40 The Court furher advised Smith

on the dangers posed by allowing K&F to remain in the case, but prohibiting any K&F attorney from

cross-examining either DeGiorgio or CC-LO and from discussing those witnesses with any
independent attorney hired to cross-examine them on Smith's behalf.41 The Court then confirmed

that Smith previously had discussed these issues with Lawson, an independent attorney, and offered

Smith the opportnity to consult Lawson or other counsel again.42
After listening to these warnings and declining the opportity to consult furher with

Lawson or another attorney, Smith testified that he understood the risks and that he wanted to
continue with K&F as his counsel, even if the firm were barred from cross-examining DeGiorgio
or CC-l 0 on his behalf and from sharing any information about DeGiorgio or CC-l 0 with any other

attorney Smith hired for the cross-examination ofthose potential witnesses.43 Smith stated also that

he understood that by electing to continue with K&F as his counsel, he would be waiving the right
39

Tr., Jan. 19,2006, at 34-35.
40

Jd. at 37-40.
41

¡d. at 41-42.
42

¡d. at 42-43.
43

¡d. at 44-45.

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to attack a conviction in this case - either on appeal or collaterally - on the ground that he had
received ineffective assistance of counsel based on the conflcts of interest stemming from K&F' s
prior representation of DeGiorgio and CC-l 0.44

At the close ofthe hearing several hours later, after a lunch break and testimony from

a number of other witnesses relating to the purported conflicts, the Court again asked Smith if he

wanted K&F to represent him despite these conflicts of interest,45 Smith declined the Cour's
renewed offer to consult with an independent attorney and confirmed that he stil wanted K&F to
represent him.46

Discussion

A. Legal Standards

The Sixth Amendment provides that "the accused shall enjoy the right. . . to have
the Assistance of

Counsel for his defense" in all criminal prosecutions.47 Although it does not grant

criminal defendants an absolute right to be represented by counsel of their choice,48 the Second

44

¡d. at 45-46.
45

¡d. at 130-31.
46

¡d. at 130.
47

U.S. Const. amend. VI.
48

United States v. Jones, 381 F.3d 114,119 (2d Cir. 2004), cert. denied, 543 U.S. 1072 (2005)

("The Sixth Amendment guarantees a criminal defendant an effective advocate, not
necessarily the advocate of

his or her choosing.") (citing Wheat v. United States, 486 U.S.

i 53, 159 (1988).

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Circuit has "consistently recognized that the right of an accused who retains an attorney to be
represented by that attorney is 'a right of constitutional dimension. ",49 Accordingly, a defendant's
"( c )hoice of counsel should not be unnecessarily obstructed by the court. ,,50

The Sixth Amendment right to the effective assistance of counsel includes also the
5 right to be represented by an attorney free from conflicts of interest.

1 This right may be violated

if the attorney has '" (1) a potential conflict of interest that result( s J in prejudice to the defendant, or
(2) an actual conflict of

interest that adversely affect(s) the attorney's performance.,,52 An attorney

has a potential conflict of interest if "the interests of the defendant could place the attorney under
inconsistent duties in the future.,,53 An attorney has an actual conflict of

interest, however, when,

"the attorney's and defendant's interests diverge with respect to a material factual or legal issue or

49

United States v. Perez, 325 F.3d 115, 124 (2d Cir. 2003) (quoting United States v.
Wisniewski, 478 F.2d 274, 285 (2d Cir.1973)).
50

United States v. Cunningham, 672 F.2d 1064, 1070 (2d Cir. 1982) (quoting United States v. Bernstein, 533 F.2d 775, 788 (2d Cir. 1976)); see also Perez, 325 F.3d at 125; United States v. Bubar, 567 F.2d 192,203 (2d Cir.), cert. denied, 434 U.S. 872 (1977) (recognizing
a defendant's "constitutional right to be represented by counsel of

his own choice"); United

States v. Armedo-Sarmiento, 524 F.2d 591, 592 (2d Cir. 1975) (holding that the Sixth Amendment protects a criminal defendant's selection of retained counsel).
5i

United States v. Schwarz, 283 F.3d 76, 90 (2d Cir. 2002) (citing United States v. Blau, 159 F.3d 68, 74 (2d Cir. 1998)); see also Wood v. Georgia, 450 U.S. 261, 271 (1981) ("Where a constitutional right to counsel exists, our Sixth Amendment cases hold that there is a interest. "); Armienti v. United correlative right to representation that is free from conflicts of States, 234 F .3d 820, 823 (2d Cir. 2000); United States v. Rogers, 209 F .3d 139, 143 (2d Cir. 2000); United States v. Levy, 25 F.3d 146, 152 (2d Cir. 1994).
52

Perez, 325 F.3d at 125 (quoting Levy, 25 F.3d at 152).
53

Jones, 381 F .3d at 119 (citing United States v. Kliti, 156 F .3d 150, 153 n. 3 (2d Cir. 1998));
see also Perez, 325 F.3d at 125.

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to a course of action,,54 or "when the attorney's representation of the defendant is impaired by
loyalty owed to a prior client.,,55

In some cases, the right to a defendant's counsel of choice conflicts with the right to

an attorney of undivided loyalty. In such instances, "the choice as to which right is to take
precedence must generally be left to the defendant and not be dictated by the government.,,56 The

district court, however, must ensure that the defendant makes this choice knowingly and
intelligently. Accordingly, after learning ofthe possibility of a conflict of interest, the district court
first must determine "whether the attorney has an actual conflict, a potential conflict, or no conflict
at all. ,,57 As the Second Circuit has explained,

"(i)fthe court discovers no genuine conflict, it has no fuher obligation. At the other end of the spectrm, if the court determines that counsel has an actual conflict that is so severe as to indicate per se that the rendering of effective assistance wil be

impeded, or is analogous to such a conflict in breadth and depth, the court
must . . . disqualify counseL. And if, between these two extremes, the court

determines that the attorney suffers from a lesser (actual) or only a potential conflict,

then it may accept a defendant's knowing and intellgent waiver of his right to
conflict- free counsel and permit the defendant to be represented by the attorney of
his choice."58

54

Perez, 325 F.3d at 125; see also United States v. Feyrer, 333 F.3d 110, 116 (2d Cir. 2003);
Schwarz, 283 F.3d at 91; Winkler v. Keane, 7 F.3d 304,307 (2d Cir. 1993), cert. denied, 511
U.S. 1022 (1994).
55

Jones, 381 F.3d at 119.
56

Perez, 325 F.3d at 125 (citing Cunningham, 672 F.2d at 1073).
57

Id. (citing Levy, 25 F.3d at 153).
58

¡d. (internal citations and quotation marks omitted).

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Before accepting a defendant's waiver in the case of a lesser actual or potential conflict, the court
must advise the defendant ofthe dangers arising from the conflict, encourage the defendant to seek
advice from independent counsel, and then determine whether the defendant understands the dangers

of proceeding with conflicted counsel and knowingly and intelligently chooses to continue with the

representation in spite of the conflict. 59 District courts "do, of course, retain discretion to reject a

defendant's knowing and intelligent waiver when his attorney's conflict jeopardizes the integrity
of

judicial proceedings.,,60 Absent such institutional concerns, however, "courts wil not 'assume

too paternalistic an attitude in protecting the defendant from himself,' and although the defendant's

choice of counsel 'may sometimes seem woefully foolish' to the court, the choice remains his.61

A. The De

Giorgio Conflict
K&F appears to argue that its prior representation of

DeGiorgio creates no genuine

conflict of interest. Skarlatos maintains that he never met privately with DeGiorgio and that
DeGiorgio did not share any confidential information with him during the course of the
representation that was not disclosed publicly as part of the Senate Subcommittee hearings.62

Further, Smith's attorneys contend that even if

DeGiorgio did share confidences with Skarlatos,
the DeGiorgio matter with any other

Skarlatos did not discuss these confidences or the substance of

59

Curcio, 680 F.2d at 888-89.
60

Perez, 325 FJd at 125.
61

¡d. at 126 (quoting United States v. Curcio, 694 F.2d 14,25 (2d Cir. 1982)).
62

Skarlatos Decl. ii 4; Tr., Jan. 19,2006, at 64.

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attorney at K&F aside from Susong, who no longer is employed there.63 Accordingly, K&F asserts

that any conflict arising from Skarlatos' prior representation of DeGiorgio should not be imputed
to Fink and the other members ofthe team.64
There are two significant problems with this argument. First, Skarlatos' assertion that

he received no confidential information from DeGiorgio is untenable. As Judge Weinfeld explained
in T. C. Theatre Corp. v. Warner Bros. Pictures, 65 in any attorney client relationship, the court should

presume that "confidences were disclosed to the attorney bearing on the subject matter of the
representation" and should not "inquire into their nature and extent. ,,66 Even if this presumption

were rebuttable - as Smith's attorneys now assert - it has not been rebutted it here. DeGiorgio
testified that he met with Skarlatos privately and imparted confidences during those meetings that
were not disclosed publicly as a result of

his Senate testimony.67 Skarlatos' biling records and a

memo written by Susong - each of which describe one or more meetings with DeGiorgio without
listing any other attendees - also suggest that Skarlatos and Susong met with DeGiorgio in private. 68

The Court finds that DeGiorgio did share confidences with Skarlatos and that the continued
representation of Smith would present a genuine conflict of interest.

63

Opp'n Br. at 24.
64

¡d.
65

113 F.Supp. 265 (S.D.N.Y. 1953).
66

¡d. at 268.
67

Tr., Jan. 19,2006, at 87-90.
68

/d. at 68-73.

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The claim that this conflict attaches only to Skarlatos and should not be imputed to

the rest of K&F also is unpersuasive. The Second Circuit has made clear that "(a)n attorney's
conflicts are ordinarily imputed to his firm based on the presumption that 'associated' attorneys
share client confidences.,,69 This presumption may be rebutted in some cases where the firm has
instituted "practices and structures. . . suffcient to avoid disqualifying taint,"70 including "the

intentional construction ofa 'Chinese Wall,' or (other) defacto separation that effectively protects
against any sharing of confidential information."7! In this case, however, the presumption has not
been rebutted.

K&F admits that courts have been more wiling to find the presumption to be rebutted

where the firm in question has been very large, a description that does not apply to a thirteen
attorney boutique like K&F. 72 Nevertheless, it contends that there is no per se rule that a small firm

cannot implement an effective wall or other adequate safeguards.73 Whether a firm has rebutted the
presumption, however, depends on the specific facts of

the case, and a firm's size, although not

controlling, may be relevant. Here, K&F is a small tax firm and the representations at issue all relate

to a highly publicized controversy regarding allegedly fraudulent tax shelters that has culminated
in what may be the largest criminal tax case in history. The Court cannot ignore the very real risk

69

Hempstead Video, Inc. v. Incorporated Vilage a/Valley Stream, 409 F.3d 127, 133 (2d Cir. 2005).
70

¡d. at 137.

7!
¡d. at 138.
72

Tr., Jan. 5,2006, at 9.
73

Opp'n Br. at 27.

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that discussion of these representations, possibly including confidential information, has occurred
in this relatively intimate environment, although it certainly does not mean to suggest any deliberate

or reckless betrayal of client confidences.

Moreover, the safeguards K&F has instituted are not particularly reassuring.
Although K&F purportedly screened Skarlatos from the Smith matter in August 2005, he already

had worked on the case for nearly eighteen months. He then represented Smith at a meeting with
prosecutors after learning of De

Giorgio's guilty plea.74 Furher, although K&F initially maintained

that there was "not one document" on the firm's computer system relating to DeGiorgio,75 Skarlatos

later testified that he found three such documents on the firm's computer system, including a memo
prepared by Susong about DeGiorgio and notes from a conversation between Skarlatos and attorneys

from HVB about DeGiorgio.76 These files were organized using a document management program

known as W orldDocs, which enables users to search for documents by title or keyword.77 There

is no indication that these documents were password protected or that other attorneys at the firms
could not have viewed them simply by doing a keyword search for DeGiorgio's name.

In seeking to avoid imputation of Skarlatos' knowledge, K&F bears the burden of
demonstrating the adequacy of

the safeguards it implemented. Although the Court accepts the good

faith of all concerned, it is not persuaded that DeGiorgio' s confidences have not been shared within
the firm. Accordingly, Skarlatos' conflict of

interest is imputed to the rest ofK&F.

74

Skarlatos Decl. ii 8.
75

Opp'n Br. at 26.
76

Tr., Jan.19, 2006, at 60-63.
77
!d. at 60.

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B. The CC-lO Conflict

Although Fink contends that he received no privileged information from CC-i 0, he

does not dispute that CC-LO shared confidences with him. Because Fink is Smith's primary
attorney, there is no question that Fink's prior representation ofCC-1 0 creates a conflict with respect
to his continued representation of Smith.78

C. The Purported Waivers

The Court next must consider whether these two conflicts of interest are waivable
and, ifso, whether Smith's waivers were made knowingly and intelligently.

As discussed above, a defendant generally is entitled to waive the right to conflict-

free representation unless the conflict is so significant that it would render counsel's assistance
ineffective per se or would jeopardize the integrity of the judicial proceedings. In determining

whether a case rises to this level, courts must balance "the defendant's constitutional right against
the need to preserve the highest ethical standards of

professional responsibility.,,79 The Second

Circuit has found that the balance tips away from the defendant's right to counsel of choice only in
a "very narrow category of cases.,,80 In United States v. Jones, a prosecution for an alleged conspiracy to distribute heroin
and cocaine, the government suspected defendant's counsel of

relaying drug-related information to

78

ld. at 114, 116-17.
79

Cunningham, 672 F.2d at 1070.
80

Perez, 325 F.3d at 126.

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8 another of his clients, an alleged drg dealer.

1 The Second Circuit held that this created an

unwaivable conflict because the representation would be tainted by the attorney's own "self-interest

in avoiding criminal charges" and by the possibility that the government would subpoena the
attorney to testify at trial regarding the ilicit relationship between his two clients.82

Similarly, in United States v. Schwarz, the Second Circuit found an unwaivable
conflict based on defense counsel's simultaneously representation of Charles Schwarz, one of

the

police offcers accused of the 1997 assault on Abner Louima, and the Policeman's Benevolent
Association (the "PBA,,), which was a defendant in a civil suit based on the assault.83 The PBA's
retainer agreement provided that counsel would receive $10 milion dollars over a two year period,

but permitted the PBA to hold back portions of this fee "to ensure the PBA's satisfaction with
(counsel's) performance.,,84 Because Schwarz's interests in the criminal prosecution diverged on
at least one substantial point from the interests of

the PBA in the civil litigation, the court found that

counsel's "representation of

Schwarz was in conflict not only with his ethical obligation to the PBA

as his client, but also with his own substantial self-interest" in the $10 milion retainer fee.85 This

81

381 F.3d at 120.
82

¡d. at 120-21; see also United States v. Fulton. 5 F.3d 605, 608-13 (2d Cir. 1993) (conflict could not be waived where defense counsel had been implicated in a related crime, and was therefore concerned not only with representing the defendant but also with his own 'personal reputation, and more than that, the potential that he himself might be accused of a crime;"
the court found that this conflict would "affect virtually every aspect of (counsel's)

representation of the defendant").
83

283 F.3d at 91.
84

¡d.
85

¡d. at 96.

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conflict created "the distinct possibility. . . that, at each point the conflict was felt, (counsel) would
sacrifice Schwarz's interests for those of

the PBA.,,86

By contrast, the Second Circuit has made clear that "lesser conflicts, such as an
attorney's representation of two or more defendants or his prior representation of a trial witness, are

generally waivable."87 In United States v. Perez, for example, the court held that a defendant was
entitled to waive a conflict created by his counsel's prior representation of a defendant in a similar
- and possibly related - currency smuggling scheme.88 Despite assertions that counsel "was blinded

by his own substantial self interest," the court found that counsel had nothing "approaching the sort
of

fiscal self-interest that was present in (Schwarz)," considering that there was "no indication that

(counsel) had a continuing relationship with, or an exceptionally lucrative retainer from, (the other

defendant)."89 Nor did the possibility that the defendant might be offered a plea agreement that
implicated his counsel's former client pose an insurmountable impediment to the representation;

the court found that this possibility did create a conflict, "but one whose likelihood a defendant

could assess and knowingly decide to waive.,,90 The court rejected also the argument that the

conflict was unwaivable because defense counsel was a potential witness for the government,

86

Id.
87

Perez, 325 F.3d 127.
88

Id. at 128-29.
89

¡d. at 127.
90

¡d. at 128.

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holding that defendant's agreement to stipulate to certain facts eliminated the need for testimony
from his attorney.91

The court reached a similar conclusion in United States v. Cunningham.92 There, the

district cour had granted the governent's motion to disqualify counsel to defendant Patrick

Cunningham on the ground that the attorney previously had represented John Spain, an unindicted
co-conspirator whom the government planned to call as a witness at tria1.93 The Second Circuit

reversed. It found that because Cunningham had been represented by the same attorney for more
than six years in a substantial number of related investigations and prosecutions - during which time

counsel had become "familiar with all nuances" of the case - forced disqualification would not
merely defeat Cunningham's abstract right to be represented by counsel of

his choice," but "could

subject him to real prejudice" in the prosecution.94 On the other hand, the court found that the
government's interest in disqualification was relatively weak, especially considering that Spain
himself had not moved to disqualify Cunningham's attorney or even

joined in the governent's
Spain would be

motion, and that Cunningham had agreed that his counsel's cross-examination of

limited to facts disclosed in a prior related proceeding.95

As these cases make clear, the Second Circuit has considered a number of different
factors in determining whether a conflict can be waived including, among other things, (1) whether
91

¡d. at 128-29.
92

672 F.2d at 1073.
93

¡d. at 1066.
94

¡d. at 1070-71.
95

¡d. at 1071-73.

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disqualifying the defendant's chosen counsel would create "real prejudice" to the defendant based
on the length of

the representation and/or counsel's familiarity with the case,96 (2) whether there is

a possibility that the attorney could be called as a witness at the defendant's trial or implicated in
the defendant's alleged crimes,97 (3) whether the continued representation would conflict with the

attorney's own personal financial or libert interests, as opposed to the interests of a current or
former client,98 (4) whether, if the conflict concerns the interests of

another client, the attorney's

relationship with the other client is continuing or has been terminated,99 (5) whether any other
current or former client affected by the conflict has initiated or joined in the motion to disqualify
defendant's chosen counsel, tOO and (6) the availability of measures that might limit the dangers posed
by the conflict, such as restricting an attorney's cross-examination of a former client.10t

96

¡d. at 1071.
97

Cunningham, 672 F.2d at 1075 (holding that disqualification of counsel for defendant
Sweeney would be necessary only if defendant's counsel were called to testify at trial, and remanding for a determination or whether such testimony would be admissible); see also
Jones, 381 F.3d at 120; Perez, 325 F.3d at 128; Fulton. 5 F.3d at 608.
98

Jones. 38 1 F.3d at 1 20-2 i; Schwarz. 283 F.3d at 96; Perez, 325 F.3d at i 27; Fulton, 5 F .3d
at 608.
99

Schwarz. 283 F.3d at 96 (disqualification necessary where counsel simultaneously represented client with potentially adverse interest); Perez, 325 F .3d at i 27 (disqualification not necessary where counsel no longer represented client with potentially adverse interests).
tOO

Cunningham. 672 F .2d at 1072 (reversing district court decision disqualifying counsel solely the the government, not the counsel's former client, who was the source of alleged conflict); United States v. Kaufman, 429 F.2d 240, 247 (2d Cir.), cert. denied, 400 U.S. 925 (1970) (upholding disqualification of defendant's attorney on the motion of a codefendant who was a former client of the attorney).
at the behest of

tOt

Cunningham, 672 F.2d at 1073.

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23

Here, these factors weigh in favor allowing Smith to waive the conflicts posed by
K&F's prior representation of De

Giorgio and CC-L 0, as long as K&F has no role in cross-examining

either of them at triaL. On one hand, disqualification would result in real prejudice to Smith, not
merely in the deprivation of an abstract right. Given the small number of firms specializing in

complex criminal tax cases and the large number of defendants, witnesses, and other unindicted con-

conspirators, many of whom are represented by counsel, it would be diffcult to find a qualified
attorney with no prior relationship to the case in time to prepare adequately for triaL. And even if
Smith could find unconflicted counsel, requiring him to find new counsel now would deprive him

of the benefit of two years of preparation by Fink and his colleagues, who have developed a
significant body of

knowledge about the case, formulated theories for Smith's defense, consulted

with experts, begun reviewing the millions of pages of documents produced by the government, and

formed what Smith characterized as "a very close working relationship.,,102 Although nearly eight

months remain before trial is scheduled to begin, it would be extremely difficult for a new attorney
to learn the complexities of the case. Further, disqualification would cost Smith the nearly $1

million in attorneys fees he has already paid to K&F.103 The government's delay in filing this
motion has exacerbated Smith's plight significantly, reducing the amount of

time Smith would have

to find new counsel and prepare for trial and allowing Smith to spend additional financial resources

on representation by K&F.
On the other hand, the conflicts of interest at issue here - taken separately or together

- are not nearly as significant or pervasive as those in Jones or Schwarz. The government has not

102

Opp'n Br. at 30-31; Tr., Jan. 19,2006, at 8.
103

Tr., Jan. 19,2006, at 7.

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24

indicated a desire to call any of

Smith'

s attorneys as a witness in Smith's trial and has not suggested

that any member of K&F was involved in the tax fraud alleged in this case. Nor is there any
indication that K&F has reason to expect any future fees from DeGiorgio or CC-I0; the firm's
relationship with both clients has been terminated and, in any event, Smith appears to have paid the
firm far more than both former clients combined. 104 Continued representation in this case, therefore,
would not conflict with the personal financial or libert interests of Smith'

s attorneys. The fact that

neither DeGiorgio nor CC-I0 has joined in the government's motion also weighs against

disqualification here. Finally, Smith has consented to measures that might limit the dangers posed

by'the conflicts. Specifically, he is wiling to proceed with his current counsel even if they are

barred from cross-examining DeGiorgio and CC-I0 and from discussing those witnesses with
counsel for any of

his co-defendants or with any independent attorneys hired to cross-examine them

on Smith's behalf. Accordingly, the Court finds that these conflicts are waivable.

There is no doubt that Smith's waiver was knowing and intelligent. As discussed
above, Smith executed two separate written waivers in December 2005.105 Then, on January 19,
2006, this Cour held a Curcio hearing, at which it advised Smith of the dangers posed by the

conflicts of interest and encouraged him to consult with independent counsel. 106 After stating that

he understood the risks associated with the conflicts, Smith testified that he wish to continue with
104

Skarlatos and Susong biled a total of 63 hours on the DeGiorgio matter. See Opp'n Br. at hours biled on the CC7. K&P has not submitted evidence regarding the exact number of
10 matter, but Pink has averred that he believes that the representation was limited to meetings. Tr., Jan. 19,2006, brief jury and a handful of accompanying CC-10 to the grand

at 113; Pink Decl. ~~ 10-12. In contrast, the firm has biled nearly 2,000 hours on Smith's
case, for a total of