updated 7/16/2007 1:05:39 PM ET 2007-07-16T17:05:39

A federal judge dismissed charges Monday against 13 former KPMG employees in what the government had described as the largest criminal tax case in U.S. history, saying the prosecutors prevented them from presenting their defenses.

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U.S. District Judge Lewis A. Kaplan said the dismissal was necessary because the government coerced KPMG to limit and then cut off its payment of the onetime employees’ legal fees.

The case resulted after the government investigated what it described as a tax shelter fraud that helped the wealthy escape $2.5 billion in U.S. taxes.

Yusill Scribner, a spokeswoman for federal prosecutors, said the government had no comment.

Kaplan said the case will proceed to trial against three former employees who had not established that KPMG would have paid their defense costs even if the government had left the company alone in regards to defense costs. He also let the case proceed against two defendants who were not employed by KPMG and whose rights were not affected.

Kaplan said the Department of Justice “deliberately or callously” prevented many of the defendants from getting funds for their defense, blocking them from hiring the lawyers of their choice.

“This is intolerable in a society that holds itself out to the world as a paragon of justice,” Kaplan said, adding that he reached his conclusion “only after pursuing every alternative short of dismissal and only with the greatest reluctance.”

Kaplan said he understands prosecutors must be aggressive in pursuing serious crimes. He called the federal prosecutor’s office in Manhattan a “model for the nation,” but said there are limits on the permissible actions of even the best prosecutors.

A federal appeals court in May had all but dared Kaplan to dismiss some cases, saying he had the authority to toss out conspiracy and tax evasion charges if he concludes prosecutors deprived the workers of constitutional rights by pressuring KPMG to stop paying legal fees.

KPMG LLP has signed a deal admitting its role in the tax shelter scheme. It avoided criminal prosecution as it agreed to continue cooperating and to pay a $456 million fine, including $128 million in forfeited fees from sales of the shelters.

Kaplan found in June 2006 that the government violated the constitutional rights of the former KPMG employees charged in the case by threatening the company with indictment and destruction as it demanded the firm depart from its prior practice of paying legal fees for its workers. He did not decide the remedy at the time.

The judge had concluded KPMG would have paid the legal expenses if the government had not acted improperly.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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