KPMG Tax Shelter Fraud
Tax Shelter Fraud Scandal
CLASSIFICATION: Financial Crime
LOCATION
New York, New York
TIME PERIOD
2003-2008
VICTIMS
600 confirmed
The KPMG tax shelter fraud scandal involved the illegal marketing of abusive tax shelters by KPMG LLP, which began to be exposed in 2003, with significant allegations surfacing in early 2005. The U.S. Department of Justice accused KPMG of facilitating tax evasion for wealthy clients, resulting in an estimated $2.5 billion in unpaid taxes. On August 29, 2005, nine individuals, including six former KPMG partners and the former deputy chairman, were indicted for their roles in the conspiracy. A deferred prosecution agreement was reached in 2006, where KPMG admitted to criminal wrongdoing, paid $456 million in penalties, and avoided criminal prosecution contingent on compliance until September 2008. The status of the case remains under monitoring, with the potential for reinstatement of charges if compliance is not maintained.
Investigators and the public speculate that KPMG's leadership fostered a culture that prioritized profit over ethical standards, leading to the creation of fraudulent tax shelters. There are beliefs that the firm's extensive network and influence may have allowed them to evade accountability for a longer period than other firms involved in similar practices. Additionally, some theorize that the penalties imposed were insufficient to deter future misconduct within the financial services industry.
The KPMG Tax Shelter Fraud: A Scandal Unveiled
In the early 2000s, a scandal of monumental proportions began to unfold, shaking the foundations of the financial world. This was the KPMG tax shelter fraud, a case involving one of the most prominent accounting firms in the world, KPMG LLP. Known for its vast network and reputable standing, KPMG found itself entangled in a web of deceitful tax shelters designed to help wealthy clients evade a staggering $2.5 billion in taxes. This story of corporate malpractice came to light in 2003, culminating in a series of legal battles and settlements that would leave an indelible mark on the firm and its associates.
The Deferred Prosecution Agreement
The United States Department of Justice (DOJ) accused KPMG LLP of criminal wrongdoing in early 2005. The firm had been marketing illegal tax shelters, a practice that would eventually lead to a deferred prosecution agreement. Under this agreement, KPMG admitted to its fraudulent activities and agreed to pay $456 million in penalties. This deal allowed the firm to avoid criminal prosecution, provided they adhered to the terms set by the government. By January 3, 2007, the criminal conspiracy charges against KPMG were dropped, although Federal Attorney Michael J. Garcia warned that these charges could be reinstated if KPMG failed to comply with ongoing monitorship through September 2008.
The Indictments
The scandal's legal proceedings began on August 29, 2005, when nine individuals, including six former KPMG partners and the firm’s ex-deputy chairman, were criminally indicted. These individuals were:
- Jeffrey Stein: Former Deputy Chairman of KPMG, Vice Chairman of Tax Services, and a tax partner with a Master's in tax law.
- John Lanning: Former Vice Chairman of Tax Services and KPMG tax partner, a Certified Public Accountant (CPA).
- Richard Smith: Former Vice Chairman of KPMG in charge of Tax, a leader in KPMG's Washington National Tax department, and a lawyer.
- Philip Wiesner: Former Partner-In-Charge of KPMG's Washington National Tax and a tax partner with a Master's in tax law and a CPA.
- John Larson: A lawyer, CPA, and former KPMG Senior Tax Manager who left to form entities with Robert Pfaff for tax shelter transactions.
- Robert Pfaff: A lawyer, CPA, and former KPMG tax partner who collaborated with Larson.
- Raymond J. Ruble (R.J. Ruble): A lawyer and former tax partner at Sidley Austin in New York.
- Mark Watson: Former Partner-in-Charge of the Personal Financial Planning division at KPMG’s Washington National Tax and a CPA.
On October 17, 2005, another ten individuals faced similar charges of criminal conspiracy and tax evasion.
The Tax Shelters
The fraudulent tax shelters at the heart of this case were complex schemes with innocuous-sounding names: BLIPS (Bond Linked Issue Premium Structure), FLIPS (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy, a FLIPS variant), and SOS (Short Option Strategies). These shelters were designed to generate artificial losses, enabling affluent clients to offset legitimate income and thus evade taxes.
A Chronology of Events
The scandal's timeline is marked by a series of significant legal and financial maneuvers. In August 2005, Domenick DeGiorgio, a former official of Bayerische Hypo-Und Vereinsbank AG (HVB), who had worked with KPMG to sell these shelters, pleaded guilty to charges of tax evasion and fraud. On February 15, 2006, HVB admitted to its role in the fraud, agreeing to pay $29.6 million in fines and penalties under a deferred prosecution agreement.
March 10, 2006, saw U.S. District Judge Lewis A. Kaplan release former KPMG executive David Greenberg on $25 million bail, despite claiming him to be a flight risk due to financial disarray. Kaplan ordered Greenberg to remain under electronic monitoring in Manhattan until his trial for tax fraud.
Later that month, David Rivkin pleaded guilty to conspiracy and tax evasion. He admitted to conspiring with others to prepare false documents for filing deceptive tax returns and agreed to cooperate with prosecutors, potentially earning a more lenient sentence.
By June 27, 2006, Judge Kaplan ruled that the DOJ had violated constitutional rights by coercing KPMG not to pay the defense costs for indicted partners. This decision led to the dismissal of charges against 13 former employees, as Kaplan declared that the government's actions deprived defendants of their right to a fair defense.
In a related civil case in late 2004, Texas lawyers Harold W. Nix and C. Cary Patterson sued the IRS for refunds after the denial of nearly $67 million in deductions from using BLIPS. Judge T. John Ward initially ruled in their favor, but later reversed his decision, declaring the tax shelters illegitimate.
The Settlement and Legal Repercussions
On February 8, 2007, Deutsche Bank settled with investors over its role in selling aggressive tax shelters, a year after DOJ prosecutors began investigating the bank's involvement. The KPMG legal saga continued, with the Second Circuit dismissing a complaint against KPMG on May 23, 2007, regarding fees from the fraud charges. Judge Kaplan further dismissed charges against 13 former KPMG employees on July 17, 2007, due to the improper pressure exerted by the government.
David Amir Makov, a key conspirator, entered a guilty plea on September 10, 2007. He agreed to a $10 million penalty and provided insights into the fraudulent operation of BLIPS, which generated $5.1 billion in fake tax losses. His testimony revealed the absence of real economic substance in these shelters, exposing the scheme's deceptive nature.
The Trial Postponement and Conclusion
Jury selection for the trial began on October 9, 2007, but Judge Kaplan postponed the proceedings indefinitely on October 18, 2007, due to conflicts of interest involving defense attorneys. The U.S. Court of Appeals later upheld the dismissal of charges against former KPMG executives on August 28, 2008, citing government interference with defendants' counsel.
Opening arguments in the trial of remaining defendants began on October 15, 2008. Prosecutors accused the defendants of orchestrating a scheme to eliminate tax liabilities for over 600 clients. Defense attorneys argued their clients believed their actions were lawful, setting the stage for a contentious trial.
The KPMG tax shelter fraud case remains a cautionary tale of corporate malfeasance and legal intrigue, highlighting the complexities and consequences of financial deception at the highest levels.
Sources
For more detailed information, please visit the Wikipedia page: KPMG tax shelter fraud
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Fraud Exposed
The KPMG tax shelter fraud scandal begins to be exposed.
Indictments Issued
Nine individuals, including former KPMG partners, are indicted for tax fraud.
Additional Indictments
Ten more individuals are indicted on conspiracy and tax evasion charges.
Bail Granted
Former KPMG executive David Greenberg is released on $25 million bail.
Charges Dismissed
Judge Kaplan dismisses charges against 13 former KPMG employees due to prosecutorial misconduct.
Charges Dropped
Criminal conspiracy charges against KPMG are dropped under a deferred prosecution agreement.
Trial Begins
Opening arguments begin in the trial of four former KPMG partners.
Verdict Delivered
Raymond Ruble and others are convicted of tax evasion; David Greenberg is acquitted.
Case Closure
Federal prosecutors decide not to seek Supreme Court review of dismissed charges.
The KPMG tax shelter fraud scandal involved the illegal marketing of abusive tax shelters by KPMG LLP, which began to be exposed in 2003, with significant allegations surfacing in early 2005. The U.S. Department of Justice accused KPMG of facilitating tax evasion for wealthy clients, resulting in an estimated $2.5 billion in unpaid taxes. On August 29, 2005, nine individuals, including six former KPMG partners and the former deputy chairman, were indicted for their roles in the conspiracy. A deferred prosecution agreement was reached in 2006, where KPMG admitted to criminal wrongdoing, paid $456 million in penalties, and avoided criminal prosecution contingent on compliance until September 2008. The status of the case remains under monitoring, with the potential for reinstatement of charges if compliance is not maintained.
Investigators and the public speculate that KPMG's leadership fostered a culture that prioritized profit over ethical standards, leading to the creation of fraudulent tax shelters. There are beliefs that the firm's extensive network and influence may have allowed them to evade accountability for a longer period than other firms involved in similar practices. Additionally, some theorize that the penalties imposed were insufficient to deter future misconduct within the financial services industry.
The KPMG Tax Shelter Fraud: A Scandal Unveiled
In the early 2000s, a scandal of monumental proportions began to unfold, shaking the foundations of the financial world. This was the KPMG tax shelter fraud, a case involving one of the most prominent accounting firms in the world, KPMG LLP. Known for its vast network and reputable standing, KPMG found itself entangled in a web of deceitful tax shelters designed to help wealthy clients evade a staggering $2.5 billion in taxes. This story of corporate malpractice came to light in 2003, culminating in a series of legal battles and settlements that would leave an indelible mark on the firm and its associates.
The Deferred Prosecution Agreement
The United States Department of Justice (DOJ) accused KPMG LLP of criminal wrongdoing in early 2005. The firm had been marketing illegal tax shelters, a practice that would eventually lead to a deferred prosecution agreement. Under this agreement, KPMG admitted to its fraudulent activities and agreed to pay $456 million in penalties. This deal allowed the firm to avoid criminal prosecution, provided they adhered to the terms set by the government. By January 3, 2007, the criminal conspiracy charges against KPMG were dropped, although Federal Attorney Michael J. Garcia warned that these charges could be reinstated if KPMG failed to comply with ongoing monitorship through September 2008.
The Indictments
The scandal's legal proceedings began on August 29, 2005, when nine individuals, including six former KPMG partners and the firm’s ex-deputy chairman, were criminally indicted. These individuals were:
- Jeffrey Stein: Former Deputy Chairman of KPMG, Vice Chairman of Tax Services, and a tax partner with a Master's in tax law.
- John Lanning: Former Vice Chairman of Tax Services and KPMG tax partner, a Certified Public Accountant (CPA).
- Richard Smith: Former Vice Chairman of KPMG in charge of Tax, a leader in KPMG's Washington National Tax department, and a lawyer.
- Philip Wiesner: Former Partner-In-Charge of KPMG's Washington National Tax and a tax partner with a Master's in tax law and a CPA.
- John Larson: A lawyer, CPA, and former KPMG Senior Tax Manager who left to form entities with Robert Pfaff for tax shelter transactions.
- Robert Pfaff: A lawyer, CPA, and former KPMG tax partner who collaborated with Larson.
- Raymond J. Ruble (R.J. Ruble): A lawyer and former tax partner at Sidley Austin in New York.
- Mark Watson: Former Partner-in-Charge of the Personal Financial Planning division at KPMG’s Washington National Tax and a CPA.
On October 17, 2005, another ten individuals faced similar charges of criminal conspiracy and tax evasion.
The Tax Shelters
The fraudulent tax shelters at the heart of this case were complex schemes with innocuous-sounding names: BLIPS (Bond Linked Issue Premium Structure), FLIPS (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy, a FLIPS variant), and SOS (Short Option Strategies). These shelters were designed to generate artificial losses, enabling affluent clients to offset legitimate income and thus evade taxes.
A Chronology of Events
The scandal's timeline is marked by a series of significant legal and financial maneuvers. In August 2005, Domenick DeGiorgio, a former official of Bayerische Hypo-Und Vereinsbank AG (HVB), who had worked with KPMG to sell these shelters, pleaded guilty to charges of tax evasion and fraud. On February 15, 2006, HVB admitted to its role in the fraud, agreeing to pay $29.6 million in fines and penalties under a deferred prosecution agreement.
March 10, 2006, saw U.S. District Judge Lewis A. Kaplan release former KPMG executive David Greenberg on $25 million bail, despite claiming him to be a flight risk due to financial disarray. Kaplan ordered Greenberg to remain under electronic monitoring in Manhattan until his trial for tax fraud.
Later that month, David Rivkin pleaded guilty to conspiracy and tax evasion. He admitted to conspiring with others to prepare false documents for filing deceptive tax returns and agreed to cooperate with prosecutors, potentially earning a more lenient sentence.
By June 27, 2006, Judge Kaplan ruled that the DOJ had violated constitutional rights by coercing KPMG not to pay the defense costs for indicted partners. This decision led to the dismissal of charges against 13 former employees, as Kaplan declared that the government's actions deprived defendants of their right to a fair defense.
In a related civil case in late 2004, Texas lawyers Harold W. Nix and C. Cary Patterson sued the IRS for refunds after the denial of nearly $67 million in deductions from using BLIPS. Judge T. John Ward initially ruled in their favor, but later reversed his decision, declaring the tax shelters illegitimate.
The Settlement and Legal Repercussions
On February 8, 2007, Deutsche Bank settled with investors over its role in selling aggressive tax shelters, a year after DOJ prosecutors began investigating the bank's involvement. The KPMG legal saga continued, with the Second Circuit dismissing a complaint against KPMG on May 23, 2007, regarding fees from the fraud charges. Judge Kaplan further dismissed charges against 13 former KPMG employees on July 17, 2007, due to the improper pressure exerted by the government.
David Amir Makov, a key conspirator, entered a guilty plea on September 10, 2007. He agreed to a $10 million penalty and provided insights into the fraudulent operation of BLIPS, which generated $5.1 billion in fake tax losses. His testimony revealed the absence of real economic substance in these shelters, exposing the scheme's deceptive nature.
The Trial Postponement and Conclusion
Jury selection for the trial began on October 9, 2007, but Judge Kaplan postponed the proceedings indefinitely on October 18, 2007, due to conflicts of interest involving defense attorneys. The U.S. Court of Appeals later upheld the dismissal of charges against former KPMG executives on August 28, 2008, citing government interference with defendants' counsel.
Opening arguments in the trial of remaining defendants began on October 15, 2008. Prosecutors accused the defendants of orchestrating a scheme to eliminate tax liabilities for over 600 clients. Defense attorneys argued their clients believed their actions were lawful, setting the stage for a contentious trial.
The KPMG tax shelter fraud case remains a cautionary tale of corporate malfeasance and legal intrigue, highlighting the complexities and consequences of financial deception at the highest levels.
Sources
For more detailed information, please visit the Wikipedia page: KPMG tax shelter fraud
No Recent News
No recent news articles found for this case. Check back later for updates.
No Evidence Submitted
No evidence found for this case. Be the first to submit evidence in the comments below.
Join the discussion
Loading comments...
Fraud Exposed
The KPMG tax shelter fraud scandal begins to be exposed.
Indictments Issued
Nine individuals, including former KPMG partners, are indicted for tax fraud.
Additional Indictments
Ten more individuals are indicted on conspiracy and tax evasion charges.
Bail Granted
Former KPMG executive David Greenberg is released on $25 million bail.
Charges Dismissed
Judge Kaplan dismisses charges against 13 former KPMG employees due to prosecutorial misconduct.
Charges Dropped
Criminal conspiracy charges against KPMG are dropped under a deferred prosecution agreement.
Trial Begins
Opening arguments begin in the trial of four former KPMG partners.
Verdict Delivered
Raymond Ruble and others are convicted of tax evasion; David Greenberg is acquitted.
Case Closure
Federal prosecutors decide not to seek Supreme Court review of dismissed charges.