Prosecutors increasingly are pushing companies to aid them with fraud investigations. Should that cooperation extend to companies cutting off legal support for employees suspected of wrongdoing?

A federal judge in Manhattan is considering that question as part of a high-profile case against 16 former KPMG LLP executives accused of marketing fraudulent tax shelters to wealthy individuals. Another defendant has pleaded guilty.

Defense attorneys for the former executives have complained to the judge that prosecutors leaned on KPMG to cap or cut off the legal-fee reimbursements to their clients, making it difficult for them to defend themselves.

Prosecutors deny that accusation, but the defense attorneys appear to have found a sympathetic ear in Judge Lewis A. Kaplan, who pronounced himself "troubled" by the government's actions at a hearing last month. His response could come any day.

The judge could undertake a variety of actions, lawyers and other legal experts say, including simply criticizing prosecutors in an opinion paper or ruling that KPMG should reconsider how much of the executives' legal costs it is willing to cover. The specific legal questions at issue are whether prosecutors violated the former KPMG executives' sixth-amendment right to counsel or fifth-amendment right to due process.

Judge Kaplan's decision is likely to set precedent, given his well-regarded track record in handling white-collar litigation, says Charles Ross, a white-collar defense lawyer with Herrick Feinstein LLP. "A Kaplan ruling will get a lot of attention."

Since Enron Corp.'s implosion started making headlines, prosecutors have increasingly pressured companies to cooperate with fraud investigations, according to defense attorneys. Authorities were bolstered by a controversial 2003 memo by then-Deputy Attorney General Larry Thompson that told federal prosecutors to factor in the level of cooperation by executives and directors when deciding whether to bring a criminal indictment against a company. That memo also said a firm's willingness to advance legal fees to "culpable employees" may signal a lack of cooperation.

Judge Kaplan's ruling could cause prosecutors to rethink their tactics.

"I think the government is going to have to evaluate the use of the Thompson memo," says Marc Mukasey, a defense attorney at Bracewell & Giuliani LLP and a former federal prosecutor in Manhattan. Adds Steven R. Peikin, a partner at Sullivan & Cromwell LLP who also was a former federal prosecutor in Manhattan, "The government is going to be excruciatingly clear in how it goes about discussing legal fees."

In the KPMG case, attorneys for the former executives allege that prosecutors pressured the firm to cut off payment of their legal fees as KPMG was negotiating to avoid criminal indictment.

Despite its long-standard practice of paying legal fees for employees who face charges for work done on behalf of the firm, KPMG capped payment for the indicted individuals at $400,000 before they were indicted and threatened to fire anyone who didn't cooperate with investigators. White-collar defendants' legal fees routinely run into six digits, and at least one KPMG defendant says he has long since exhausted the fees provided by his former employer. (KPMG later reached a deferred prosecution agreement with the government on the tax-shelter charges and agreed to pay $456 million.)

Prosecutors insist they didn't tell KPMG to cut off fees, but Judge Kaplan last month held a three-day hearing on the matter. Before that hearing, the judge said the government's actions on legal fees for the KPMG defendants were "shameful and may be worse than that."

Attorneys for the defendants pointed to a meeting prosecutors had with KPMG in February 2004 after the firm learned a number of employees were subjects of a grand-jury investigation. Notes from that meeting show that Assistant U.S. Attorney Justin Weddle told KPMG if the firm had any discretion over the fees, the government would "look at that under a microscope."

On March 2, 2004, a KPMG attorney called Mr. Weddle and said the firm was considering placing a cap on the legal fees, and any payment would be contingent on the employees "cooperating fully with the company and the government," according to an email Mr. Weddle sent colleagues. Mr. Weddle told the KPMG attorney that he had a bad experience with a company conditioning payments on an employee's cooperation because in that case the company didn't define "tell the truth" for the employee the way prosecutors would.

Later that same month, KPMG attorneys began sending letters to employees who were the subject of the grand-jury investigation that said the firm "had no obligation" to pay their legal fees but would do so provided they cooperated with the government, adding that the fees would be capped at $400,000. The KPMG attorneys also sent those employees a memo advising them of the investigation and telling them that they had the right to an attorney.