Monday, August 29, 2005

KPMG to Pay $456 Million In Settlement on Tax Shelters

By JONATHAN WEIL Staff Reporter of THE WALL STREET JOURNALAugust 27, 2005 4:09 p.m.; Page C1

In a crucial step toward ensuring KPMG LLP's survival, the U.S.'s fourth-largest accounting firm signed a settlement agreement with prosecutors Friday under which it will pay $456 million in penalties, admit to fraudulent conduct in connection with past tax-shelter sales and avoid a criminal indictment, according to people familiar with the matter.

An indictment would have meant almost certain death for KPMG, as it did in 2002 for Arthur Andersen LLP, whose obstruction-of-justice conviction was overturned this year. Still, KPMG faces numerous challenges ahead, including a heavy caseload of civil lawsuits by former tax-shelter clients who could benefit from the firm's admissions.

Under the agreement, KPMG admitted that the tax strategy called "Bond Linked Issue Premium Structure," or Blips, was a fraudulent tax shelter, according to a person familiar with the agreement. It also admitted that the firm engaged in fraudulent conduct in connection with its promotion of the shelters known as Flip and Opis, which stand for "Foreign Leveraged Investment Program" and "Offshore Portfolio Investment Strategy," respectively.

But it stopped short of admitting that Flip and Opis on their face were fraudulent shelters, this person said. KPMG sold the shelters to wealthy Americans who used them to generate billions of dollars in false tax losses, the government said previously. KPMG sold the tax shelters from 1996 through 2002.

The terms of KPMG's so-called deferred-prosecution agreement, which would remain in effect through Dec. 31, 2006, are expected to be announced Monday at a court hearing scheduled in federal court in Manhattan, a person familiar with the matter said. KPMG would pay the $456 million in penalties in installments over the next 16 months.

As part of the agreement, the government plans to file a criminal information against the firm listing a single count of conspiracy to defraud the U.S. government, this person said. Importantly, this person said, the government's accusations will not include a charge of obstruction of justice. This person explained that KPMG considered this to be a vital concession because it feared its audit clients might not be able to stand by KPMG if it admitted to obstructing government investigations.

Under the terms of the agreement reached Friday, the government will not prosecute KPMG on the fraud count so long as the firm complies with all the agreement's conditions.

Additionally, as previously reported, KPMG agreed to the appointment of an independent monitor selected by the Justice Department, former Securities and Exchange Commission Chairman Richard Breeden.

In a statement Saturday, KPMG's chief outside counsel, Robert Bennett said: "I am confident under the new leadership that KPMG will not only survive but will flourish." Mr. Bennett, a partner at the Washington law firm Skadden, Arps, Slate, Meagher & Flom LLP, and his firm were hired by KPMG in late 2003, midway through the government's tax-shelter investigation, amid government complaints that the accounting firm wasn't complying with the government's demands for information.

Other conditions in the agreement include a requirement that KPMG continue to cooperate with federal prosecutors' ongoing tax-shelter investigations, which are focusing on the actions of numerous bankers, tax attorneys and accountants. KPMG also agreed to a series of new restrictions on its tax practice, including a ban on marketing and selling prepackaged tax strategies.

The size of the penalties and the 16-month term of the deferred-prosecution agreement were reported today by the New York Times.

In a related agreement, the Internal Revenue Service will forgo seeking further penalties against KPMG over any tax shelters that previously had been the subject of IRS investigations, so long as the firm continues to cooperate with the government and meet certain other conditions, according to a person familiar with the matter. The IRS's original requests for information from KPMG in 2002 sought records pertaining to Blips, Flip and Opis, as well as numerous other types of KPMG tax shelters, most of which KPMG sold to large corporations, including audit clients.

Separately, the government is expected to unveil its first wave of indictments next week against a number of former KPMG partners on fraud and conspiracy charges in connection with the firm's past sales of tax shelters. There could be additional indictments against former KPMG personnel and others in the coming months, people familiar with the investigation said, because the government's probe is continuing.


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