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Last updated on April 24, 2014 at 10:25 EDT

KPMG settles tax shelter case with $456 mln fine

August 29, 2005

By Arindam Nag and Christine Kearney

NEW YORK (Reuters) – Accounting firm KPMG on Monday agreed
to pay $456 million to settle accusations it sold fraudulent
tax shelters, as it sealed a deal with the government to avoid
a criminal indictment that might have crippled the firm.

While KPMG, the smallest of the major U.S. accounting
houses, itself escaped an indictment of the kind that destroyed
Arthur Andersen when it was convicted of destroying documents,
eight former partners, including its former deputy chairman,
and a KPMG lawyer, were indicted for selling the tax shelters
to wealthy clients.

An outside monitor, Richard Breeden, a former Securities
and Exchange Commission (SEC) chairman, was appointed to
oversee the firm’s compliance with the settlement, which
includes an agreement to shut down its tax practice for high
net worth individuals within six months.

“That is a big blow, it was one of their flagship
businesses that was quite profitable,” said Robert Willens,
accounting and taxation analyst with Lehman Brothers.

Those charged include the firm’s former deputy chairman,
Jeffrey Stein and others who were involved in its tax practice.

Andersen’s indictment, stemming from the Enron Corp.
scandal, caused clients to flee and the firm to collapse,
throwing thousands of people out of work.

Federal agents for more than three years have been
investigating tax shelters that were sold by KPMG mostly to
wealthy individuals between 1996 and 2002.

“KPMG is pleased to have reached a resolution with the
Department of Justice. We regret the past tax practices that
were the subject of the investigation. KPMG is a better and
stronger firm today, having learned much from this experience,”
said the firm’s Chairman and CEO Timothy P. Flynn.

KPMG said publicly in mid-June that it accepted “full
responsibility for the unlawful conduct by former KPMG partners
during that period, and we deeply regret that it occurred.”

The shelters at issue are no longer sold by KPMG. The
accounting industry generally has scaled back its shelter
business amid a surge of official probes and bad publicity.

Separately, the SEC said that it was pleased with the
agreement between the audit firm and the DOJ. It said it was
not considering any action against KPMG as the tax shelters did
not violate any securities laws.

“Commission staff will of course monitor the situation in
view of the Commission’s responsibilities to investors and
markets,” said SEC Chief Accountant Donald Nicolaisen.

According to federal government documents on the probe,
KPMG sold three “abusive” tax products from 1997 to 2001 which
were used to claim losses on tax returns totaling several
billions of dollars. They were Bond-Linked Issue Premium
Structure, or BLIPS, Foreign Leveraged Investment Program
(FLIP) and Offshore Portfolio Investment Strategy (OPIS).

A lawyer for Richard Smith, one of the indicted former
partners, criticized the Monday’s settlement saying it was an
attempt to “criminalize” the type of tax planning that tax
professionals engage in on a daily basis.

“There is nothing hidden, fraudulent or criminal about the
BLIPS transaction. It was fully and openly reviewed and
approved by many KPMG professionals and independent law firms
who believed that BLIPS complied with the tax law. No court has
ever held that the BLIPS transaction does not work,” said
Robert Fink of law firm Kostelantez & Fink, LLP.

“If the government wants to put an end to these types of
transactions, the proper response is for Congress to change the
law, not to scare professionals away with indictments. It is a
misuse of prosecutorial discretion to use criminal prosecutions
to change accepted and legitimate standards of conduct,” Fink
added.