Word was as many as twenty had been under investigation...but federal prosecutors have whittled that list down to eight who they will pursue in their investigation of KPMG's questionable tax shelters. KPMG itself has struck a delayed prosecution deal with regulators entailing a half-billion dollar settlement.

Via the New York Times:

Former KPMG officials indicted: Eight accused in questionable sales of tax shelters

By Jonanthan D. Glater
New York Times

Eight former partners of KPMG, the giant accounting firm under investigation for its role in creating and selling questionable tax shelters, were named by federal prosecutors in an indictment unsealed Monday in federal court in Manhattan. The indictment is the long-anticipated next step in prosecutors' broadening investigation into shelters that from 1996 through 2002 helped wealthy investors evade billions of dollars in taxes. It is also strong evidence that the government is prepared to pursue the accountants, financial advisers, lawyers and bankers who had a hand in the transactions.

KPMG was mindful of how criminal charges wrecked competitor Arthur Andersen in an Enron-related accounting scandal. Some 28,000 workers had to find other jobs after 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 Andersen's conviction was a factor in the government's decision not to prosecute KPMG, 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. Monday's indictment refers to unnamed foreign banks and other entities, which suggests that the government may file other criminal charges at some later date. While the banks are not identified, a 2003 report by a Senate subcommittee said that Deutsche Bank, UBS of Switzerland and HVB of Germany among others had roles in the questionable KPMG shelters. And earlier this month, a former executive in the New York office of HVB pleaded guilty to conspiracy to commit tax fraud and is presumably assisting prosecutors in their investigation.

The indictment, which names an outside lawyer along with the former partners, accuses the nine of conspiring to defraud the government by concocting "tax-shelter transactions and false and fraudulent factual scenarios to support them"; by preparing "false and fraudulent documents to deceive" the Internal Revenue Service; by preparing "false and fraudulent" tax returns that included the false tax losses; and taking steps to conceal the shelters from the IRS.

The former KPMG partners named in the indictment are: Jeffrey Stein, John Lanning, Richard Smith, Jeffrey Eischeid, Philip Wiesner, John Larson, Robert Pfaff and Mark Watson. The lawyer is Raymond Ruble. The arraignment of the nine men is scheduled for Sept. 6. Nearly all the lawyers representing the defendants and who could be reached for comment Monday said their clients intended to fight the charges vigorously.

The indictment was unsealed as a federal judge approved a $456 million settlement between KPMG and the Justice Department that allows the firm to avoid a criminal indictment, which would have been a near-certain death knell for the firm. As part of a deferred prosecution agreement that remains in effect until Dec. 31, 2006, the firm admitted wrongdoing, accepted an outside monitor, and pledged to limit its tax practice.

"The message we want to send is that if you engage in fraud, if you participate in providing false statements, you're going to be prosecuted," Gonzales said. "We want to be very, very clear: There is no company that is too big or too important an industry that will escape prosecution if they in fact engage in wrongdoing."

The agreement allows KPMG to begin to put the criminal investigation, which has been under way for more than a year and a half, behind the firm, said Timothy Flynn, KPMG's chairman and chief executive. "We regret the past tax practices that were the subject of the investigation," Flynn said in a prepared statement. But for individual former partners, the ordeal begins now in earnest — and under the terms of the agreement with prosecutors, the firm is allied against them. What strategy the partners may pursue — and to what extent they will coordinate their joint defense — is not clear.

According to the indictment, one of the defendants, Eischeid, gave "false, misleading and evasive" testimony to the IRS in 2002 about certain tax shelters. The indictment cited an e-mail message from one KPMG partner who wrote that the firm's general counsel and outside lawyer "determined that the best strategy was 'the less said the better.' " As a result, the e-mail continued, "the record will reflect repeated 'I don't knows,' 'I don't recalls,' and 'I was out of the loops' — the rope-a-dope/Enron defense."

As part of its agreement with the government, KPMG issued a strongly worded acknowledgment of wrongdoing, which can be used by prosecutors in their criminal case against the individual partners, as well as against the firm in the event it violates the terms of the deferred prosecution agreement. Lawyers for the former partners criticized the firm's statement as meaningless. "The government held a gun to KPMG's head and said, 'Say what we want or we will put you out of business,' " said Robert Hotz Jr., who represents Lanning.

The original article appears here.

-- MDT

Labels: Department of Justice, Enron, KPMG, New York AG