A lawyer representing KPMG has told a judge in Manhattan that the firm stopped paying legal and consulting fees to its former deputy chairman in an effort to convince prosecutors the firm was cooperating with their investigation into questionable tax shelters.

Jeffrey Stein, the deputy chairman in question, along with 15 other former KPMG partners, are facing trial over their alleged involvement in the tax shelter scheme which the government claims cost it $2.5bn (£1.34m) in lost tax revenue.

Joseph Loonan, general counsel for KPMG, testified this week that a letter he wrote to Jeffrey Stein in March 2005 was to tell him his legal and consulting fees would be stopped in order to ‘have the government believe we were co-operating with them’.

The judge is trying to determine whether federal prosecutors improperly pressured KPMG not to pay the legal fees of 16 of its former executives in an effort to avoid prosecution.

The defendants argue that without the financial backing of KPMG they are being deprived of their rights to a fair trial and legal representation.

Last August KPMG paid $456m (£244m) and admitted to criminal wrongdoing to resolve a federal probe into the shelters.