homesheltersuncovering schemesprospects for reform
update - august 2005
  • In a major series of developments since this report was originally broadcast in February 2004, federal prosecutors filed the largest criminal tax case in U.S. history against the accounting firm KPMG LLP on Aug. 29, 2005. KPMG admitted to wrongdoing and agreed to pay $456 million to avoid a criminal indictment for its role in creating and promoting questionable tax shelters. The accounting giant also agreed to permanent restrictions on its tax practice.

    An indictment would have spelled an almost certain death for KPMG. As part of the settlement, KPMG admitted that it engaged in fraud that generated at least $11 billion in phony tax losses, costing the U.S. government at least $2.5 billion in evaded taxes. The firm accepted responsibility in a detailed mea culpa that prosecutors would be able to use in criminal cases against individuals. KPMG acknowledged that the promotion of fraudulent tax shelters was deliberately approved and "perpetrated at the highest levels of KPMG's tax management, and involved dozens of KPMG partners and other personnel," according to the statement of facts (PDF, 138k) issued as part of the settlement.

    On the same day, Jeff Stein, the former head of KPMG's tax practice, and several other former partners of KPMG were named in an indictment (PDF, 441k) charging them with conspiring to defraud the government by filing "false and fraudulent" tax returns. The indictment also named an outside lawyer, a former tax partner at the New York office of Sidley Austin Brown & Wood, a prominent national law firm.

    But in July 2007 U.S. District Judge Lewis A. Kaplan threw out the charges against Stein and 12 other former KPMG employees, ruling that prosecutors had denied the defendants their constitutional right to legal representation by pressuring KPMG to cut off funding for their legal bills. "Their deliberate interference with the defendants' rights was outrageous and shocking in the constitutional sense because it was fundamentally at odds with two of our most basic constitutional values -- the right to counsel and the right to fair criminal proceedings," the judge wrote in his opinion.

    The case against five other defendants is proceeding, and prosecutors have signaled their intent to appeal Judge Kaplan's decision.

  • In May 2005, KPMG settled a lawsuit filed by tax shelter investor Joseph Jacoboni, who said the firm had helped him eliminate the more than $7 million in capital gains tax he owed after selling his company. An attorney for Jacoboni told The Wall Street Journal that the case had been "settled amicably." Although the terms of the agreement were sealed, unnamed lawyers told the paper that KPMG likely agreed to pay $5-10 million to settle the case. In March 2004, a Florida federal district court judge had thrown out Jacoboni's suit, ruling that his allegations of racketeering were barred under federal law, but that he could proceed in state court. [Watch Chapter Three of the film that details Jacoboni's story.]


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posted february 19, 2004, updated august 7, 2007

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