KPMG Deal Gets Preliminary OK

Average payout for tax-shelter clients would amount to $750,000.
Stephen TaubNovember 1, 2005

A federal judge gave preliminary approval to a $225 million settlement by KPMG LLP stemming from its tax-shelter abuses, according to published reports.

The proposed agreement covers that tax shelters known as BLIPS (bond linked issue premium structure, FLIP (foreign leveraged investment program), OPIS (offshore portfolio investment strategy), and SOS (short option strategy). The settlement would be reportedly be paid by KPMG and by Sidley Austin Brown & Wood, the law firm that advised KPMG on the shelters.

About 275 of the firm’s former clients would recover $195 million and their lawyers will seek up to $30 million, reported Bloomberg. The Associated Press noted that clients would recover a portion of the transaction fees that they paid to arrange the shelters but that the settlement cannot cover back taxes and Internal Revenue Service penalties.

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The average payout would work out to about $750,000, reported the AP, which cited Melvyn Weiss, a partner at Milberg Weiss Bershad & Schulman, which brokered the deal. Weiss added that taxpayers without statute-of-limitation issues would recover about 65 percent of their transaction fees; others would receive 25 percent.

The two-day hearing pitted a number of class-action lawyers against one another, according to The New York Times; many asserted that Milberg Weiss has a conflict of interest since it represented individual former clients of KPMG while secretly negotiating a settlement. Judge Dennis M. Cavanaugh of U.S. District Court in Newark rejected those arguments, but he reportedly said that the issue of “who was the client, and when” was “giving me some concern.”

A hearing that will probably result in final approval has been scheduled for February 24.

In August, KPMG reached a deferred-prosecution agreement with federal prosecutors regarding the BLIPS, FLIP, and OPIS shelters. The Big Four firm agreed to pay $456 million, admit wrongdoing, and accept former Securities and Exchange Commission chairman Richard Breeden as an outside monitor. A total of 19 individuals, including 17 former KPMG executives, face criminal charges in connection with the shelters.