Ultra high-level settlement talks continue between KPMG and Milberg Weiss, with KPMG seeking to head off Milberg-led litigation aimed at compensating former clients who were victimized by the accounting firm's dubious tax shelters during the 1990s.

This friendly discussion, which began a little over a year ago (and is being mediated by retired judges) has seen the heat on KPMG's continue to rise with federal authorities legitiimately starting to fear the implosion of another big four firm. Just this month the accounting firm narrowly avoided charges being brought by the justice department.

Meanwhile 20 former employees are under investigation for their roles in the tax shelter embroglio.

Via The Financial Times:

KPMG in talks

By Andrew Parker in New York
The Financial Times
August 22/23 2005

KPMG is in talks with a leading law firm that could result in compensation for former US clients who were sold two of its flagship tax avoidance schemes. But the accounting firm has also signalled it will aggressively defend itself, and highlight the conduct of others, if clients insist on going to court to seek damages after the US tax authorities objected to the schemes.

Since July last year, KPMG has held talks with Milberg Weiss Bershad & Schulman, a law firm that specialises in class action lawsuits, about a “global settlement” of claims arising from sales of avoidance schemes known as Bond Linked Issue Premium Structure (Blips) and Offshore Portfolio Investment Strategy (Opis).

The tax avoidance industry was highly lucrative until the Bush administration launched a crackdown in 2001. A report by staff on the Senate permanent subcommittee on investigations, published in 2003, found that KPMG generated fees of $124m from four avoidance schemes sold to hundreds of people between 1996 and 2001, including Blips and Opis.

Blips and Opis were classified as “potentially abusive tax shelters” by the Internal Revenue Service in 2000 and 2001, after which KPMG stopped marketing them. The IRS probed people's use of the avoidance schemes, and some face demands for tax payments worth millions of dollars, as well as fines. Meanwhile, David Kelley, the US attorney for the southern district of New York, has been leading a criminal investigation into KPMG's tax work.

The talks between KPMG and Milberg Weiss also involve Sidley Austin Brown & Wood, a law firm. Brown & Wood, a predecessor law firm to Sidley, earned fees of $23m by providing letters to KPMG clients that said its avoidance schemes could withstand scrutiny by the IRS, according to an updated version of the Senate report published in February.

Milberg Weiss alleged in a lawsuit filed in June that KPMG and Sidley “fraudulently misrepresented” Blips and Opis as legitimate investment strategies because they knew the avoidance schemes were “abusive tax shelters that would not pass IRS scrutiny”. Melvyn Weiss, senior partner at Milberg Weiss, said most of the terms of a settlement with KPMG and Sidley were in place although no agreement had been signed. Milberg Weiss is seeking more than $200m from KPMG and Sidley. The intensive nature of the settlement talks has been underlined by the use of two retired judges to act as mediators.

Efforts by former clients of KPMG who bought its tax avoidance products to secure compensation may have been assisted by a statement made by the firm on June 16. KPMG's US business, after outlining the justice department's investigation of its tax services offered between 1996 and 2002, said: “KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred.”

However, KPMG, as well as holding talks with Milberg Weiss about a “global settlement”, has signalled it will strongly defend itself if clients insist on going to court. For example, KPMG last month raised the stakes in a lawsuit brought by former clients in Texas who used the Blips avoidance product.

The 2003 Senate report said Blips was designed to generate artificial losses to offset against other income on tax returns. KPMG alleged in court documents that the Texas clients, Cal and Cary McNair, claimed losses resulting from Blips in their 1999 tax returns, which were filed after the IRS had objected to the avoidance product. It also said that a KPMG partner, after the IRS ruling on Blips, had advised the clients to consult lawyers about whether to include losses resulting from the product on their 1999 returns.

To limit the potential impact of the lawsuit, KPMG said if it is found liable to pay damages to the Texas clients then law firms that allegedly advised them on Blips should also contribute. The firms, Andrews Kurth, and Holland, Johns, Schwartz & Penny, were not available for comment.

Paul Dobrowski, a partner at Dobrowski, the law firm representing the McNair brothers in their lawsuit against KPMG, said his clients had acted appropriately. “KPMG assured my clients that the positions they adopted in their 1999 tax returns were appropriate, both before and after they filed them,” he said.

KPMG's US business said: “We look forward to resclving the civil litigation expeditiously and with full and fair accountability.”

The original article appears here.

-- MDT

Labels: Department of Justice, KPMG