KPMG LLP, the fourth-largest U.S. accounting firm, and law firm Sidley Austin Brown & Wood LLP, who advised it, agreed to pay $225 million to resolve claims by hundreds of investors that KPMG committed fraud by selling illegal tax shelters.
KPMG and Sidley Austin Brown & Wood LLP would pay $195 million to former clients who bought four tax shelters that the U.S. KPMG admitted fraudulently selling the shelters to 601 wealthy clients from 1996 and 2002 and hiding the arrangements from the IRS.
The class action centered on tax shelters such as BLIPS, OPIS and FLIP sold by KPMG from 1996 to 2002. These same shelters were involved in KPMG’s agreement in August to pay $456 million to settle a federal tax shelters investigation.
Eight former KPMG partners and a former Sidley Austin partner were indicted, and prosecutors say “at least a dozen” more people will be indicted.
“KPMG has been in a firestorm of controversy between civil private suits and the criminal investigation,” said John Carney, a former federal prosecutor now at Baker & Hostetler.
The plaintiffs’ lawyers, including Milberg Weiss Bershad and Hynes, would be paid $30 million for fees and expenses under the plan. Individual investors could decide to “opt out” of the agreement.
An amended class action lawsuit said KPMG and Sidley Austin knew that customers were buying “unlawful tax shelters” that should have been, but were not, registered with the IRS, and were not “more likely than not” to be approved by the IRS if discovered.’
On Aug. 29, KPMG admitted that the products generated at least $11.2 billion in phony losses and cost the U.S. Under the settlement agreement, mediated by two retired judges, a special master would decide how much to pay each customer. Customers would not be reimbursed for taxes or penalties they owe to the IRS under the proposed settlement.
The clients who sued the two firms were led by Marvin Simon and are represented by the Milberg Weiss, a New York Law firm. The clients paid for tax-shelter strategies known as Foreign Leveraged Investment Program or FLIP, Offshore Portfolio Investment Strategy or OPIS, Bond Linked Issue Premium Structure or BLIPS or Short Option Strategy or SOS from Jan. 14, 2005, court papers show.