- The Washington Times - Monday, August 29, 2005

NEW YORK (AP) — Eight former executives of the accounting firm KPMG were indicted yesterday, and the firm agreed to pay $456 million after admitting that it sold fraudulent tax shelters to help wealthy clients avoid paying billions.

The firm, part of the accounting industry’s so-called Big Four, avoided a potentially devastating criminal indictment, agreeing to submit to an independent monitor and to not commit further wrongdoing.

The Justice Department called it the largest criminal tax case ever filed and said the KPMG scam allowed the firm’s clients to avoid paying $2.5 billion in taxes.

“Today’s agreement requires KPMG to accept responsibility and make amends for its criminal conduct while protecting innocent workers and others from the consequences of a conviction,” Attorney General Alberto R. Gonzales said.

KPMG admitted that it helped “high net worth” clients evade billions of dollars in capital-gains and income taxes by developing and marketing the tax shelters and concealing them from the Internal Revenue Service (IRS).

The $456 million fine includes $128 million in forfeited fees that KPMG earned by selling the fraudulent tax shelters.

Federal prosecutors also released an indictment of nine men — eight former KPMG executives and an outside tax lawyer who worked with the firm — charging them with conspiring to defraud the IRS.

Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April 2002. His attorney did not return a call for comment. There was no word on when the nine men would appear in court.

U.S. District Judge Loretta Preska of Manhattan federal court said KPMG’s board had unanimously agreed to the deal.

Federal prosecutors had filed what is known as a criminal information charging the firm with conspiracy and other crimes, but agreed not to seek a grand jury indictment.

Under the deal, known as a deferred prosecution agreement, prosecutors can seek an indictment of the firm through Dec. 31, 2006, if it violates the terms of the agreement.

Timothy Flynn, KPMG chairman and chief executive officer, noted that the men indicted in the scheme are no longer with the company.

“We regret the past tax practices that were the subject of the investigation,” he said. “KPMG is a better and stronger firm today, having learned much from this experience.”

The company’s monitor will be Richard Breeden, a former Securities and Exchange Commission chairman who has also served as a court-appointed monitor for MCI, the post-bankruptcy incarnation of WorldCom Inc.

The investigation centered on a type of tax shelter marketed by KPMG in the late 1990s that allowed its clients to report tax losses to offset big profits elsewhere, thereby avoiding paying taxes.

KPMG stopped providing the shelters in 2002. In June, it said some of its former partners had engaged in “unlawful conduct” and pledged to cooperate with the Justice Department.

KPMG was eager to avoid a criminal indictment of the company. Another major accounting firm, Arthur Andersen, was destroyed after prosecutors charged it with obstruction of justice in the Enron scandal.

The Supreme Court reversed Andersen’s conviction earlier this year.

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