Although KPMG LLP was able to avoid a criminal indictment regarding its sale of questionable tax shelters, eight former partners of the Big Four firm were not so fortunate.
On Monday, federal prosecutors indicted those individuals, as well as an outside lawyer who worked with KPMG, on charges of conspiring to defraud the Internal Revenue Service through the creation and sale of abusive tax shelters, according to press reports. Jeffrey Stein, a former deputy chairman of the firm; Richard Smith, a former partner; and Raymond Ruble, a former partner of the law firm Sidley Austin Brown & Wood LLP, were reportedly among those indicted.
All nine are scheduled to be arraigned on Wednesday before U.S. District Judge Lewis Kaplan, according to Bloomberg.
Prosecutors alleged that from 1996 through 2002, the nine men “participated in a scheme to defraud the IRS by devising, marketing, and implementing fraudulent tax shelters” and preparing tax returns that helped individuals evade taxes on billions of dollars in income, reported The New York Times. The executives also gave assurance to wealthy investors who bought the shelters that they would be protected from the IRS, added the paper.
In mid-June, KPMG stated that it accepted “full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred.” In a statement today, Smith’s lawyer, Robert S. Fink, maintained that the indictments are an attempt by the government “to criminalize the type of tax planning that tax professionals engage in on a daily basis.”
Earlier on Monday KPMG reached a deferred-prosecution agreement with the government that will likely allow it to avoid the fate of Arthur Andersen, which collapsed after federal prosecutors indicted the former auditor of Enron Corp. on an obstruction-of-justice charge. (That conviction was overturned this year.) Under the terms of today’s deal, approved by U.S. District Judge Loretta Preska, the Big Four firm will pay $456 million, admit wrongdoing, and accept former Securities and Exchange Commission chairman Richard Breeden as an outside monitor for three years.
The firm also agreed to end its tax practice targeting wealthy individuals by February 28, 2006, which resolves a separate IRS investigation, reported Bloomberg. KPMG may still have to contend with potentially costly class-action lawsuits regarding the tax shelters. According to the news service, however, provided the firm abides by the terms of the deal, the deferred criminal charges will be dismissed in December 2006.
In addition to KPMG’s assistance during the case against the nine individuals, prosecutors are also expected to have the help of Domenick DeGiorgio, a former official at German bank Bayerische Hypo und Vereinsbank, who has pleaded guilty to conspiracy, wire fraud and tax evasion. The German bank participated in transactions known as “bond-linked issue premium structure” (BLIPS) tax shelters, which KPMG made and marketed and that it acknowledges as being fraudulent.