Former executives indicted in tax-sheltering scandal
Their accounting firm, KPMG, avoided indictment but will pay hefty penalties. It admitted to helping rich clients avoid taxes.
By Associated Press
Published August 30, 2005
NEW YORK - Eight former executives of KPMG were indicted Monday as the Big Four accounting firm admitted it had set up fraudulent shelters to help rich clients dodge billions of dollars in taxes.
The firm, mindful of how criminal charges wrecked competitor Arthur Andersen in an Enron-related accounting scandal, avoided an indictment but agreed to pay $456-million in penalties.
The Justice Department called it the largest criminal tax case ever filed and said the KPMG scam allowed the firm's clients to avoid paying $2.5-billion in taxes.
IRS commissioner Mark Everson said the firm's conduct had exceeded "clever lawyering and accounting" and amounted to plain theft from the people.
"Accountants and attorneys should be pillars of our systems of taxation, not the architects of its circumvention," he told reporters in Washington.
The eight former executives, most of them onetime KPMG tax partners, were indicted in New York along with an outside lawyer who had worked with the firm on a charge of conspiring to defraud the IRS.
KPMG admitted it helped "high net worth" clients evade billions of dollars in capital-gains and income taxes by developing and marketing the tax shelters and concealing them from the IRS.
The $456-million fine includes $128-million in forfeited fees that KPMG earned by selling the fraudulent tax shelters.
Under the scheme, KPMG marketed the tax shelters to clients who made more than $10-million in 1997 and more than $20-million per year from 1998 to 2000, according to the indictment of the nine men.
Rather than paying tax on income or capital gains, the client could choose an amount of purported tax losses to offset the gains, paying KPMG and law firms as much as 7 percent of that amount in fees.
The firm then designed tax shelters disguised as legitimate investments, providing the clients fraudulent "opinion letters" suggesting the tax shelter losses would withstand IRS scrutiny, the indictment said.
Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April 2002. His lawyer did not immediately return a call for comment.
Another was Jeffrey Eischeid, whose lawyer, Stanley Arkin, strongly criticized the government for bringing the case.
"The indictment of Jeffrey Eischeid and certain of his partners represents a serious abuse of federal prosecutorial discretion and as well a profound betrayal of its partners by KPMG," Arkin said.
There was no immediate word on when the men would appear in court.
Federal prosecutors and KPMG engaged in what is known as a deferred prosecution agreement, meaning the prosecutors will not seek a grand jury indictment of the firm as long as it commits no further wrongdoing.
In a statement, KPMG chairman and chief executive Timothy Flynn noted that the men indicted in the scheme are no longer with the company.
"We regret the past tax practices that were the subject of the investigation," he said. "KPMG is a better and stronger firm today, having learned much from this experience."
KPMG must submit to three years of outside monitoring by Richard Breeden, a former Securities and Exchange Commission chairman who also has served as a court-appointed monitor for MCI, the postbankruptcy incarnation of WorldCom Inc.
The firm also agreed to end its private client tax practice by Feb. 26. The company's board of directors unanimously approved the settlement in a teleconference Friday.
KPMG was eager to avoid a criminal indictment of the company. Arthur Andersen was decimated after prosecutors charged it with obstruction of justice, reducing accounting's Big Five firms to a Big Four.
Some 28,000 workers had to find other jobs after Arthur Andersen was convicted of destroying Enron-related documents, which forced it to surrender its accounting license and stop conducting public audits.
Avoiding the loss of jobs that followed Arthur Andersen's conviction was a factor in the government's decision not to prosecute KPMG, federal authorities said.
"The conviction of an organization can affect ordinary workers," Attorney General Alberto Gonzales said. "Justice must serve offenders and victims as well as the economy and the general public."
The Supreme Court reversed Arthur Andersen's conviction earlier this year.