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Justice Department indicts eight ex-KPMG execs

Firm agrees to pay $456 million fine

By Terry Frieden
CNN America Bureau



Accounting and Audits
Justice Department
Internal Revenue Service (IRS)

WASHINGTON (CNN) -- In a case described as the largest tax evasion scheme in U.S. history, eight former executives of the major accounting firm KPMG were charged Monday with conspiracy in a scheme to sell fraudulent tax shelters that shorted the IRS at least $2.5 billion dollars, the Justice Department announced Monday.

A ninth alleged conspirator charged in the case is identified as an outside attorney paid to write letters for KPMG assuring clients the tax shelters "more likely than not" would withstand an IRS challenge.

According to court documents, unsealed in New York City, KPMG will pay a $456 million fine to settle a long-running federal investigation of the alleged illegal marketing of the shelters. The firm earned at least $115 million in fees for selling the instruments, prosecutors said.

IRS Commissioner Mark Everson issued a stinging condemnation of KPMG's actions.

"The wealthy have always paid more than average citizens. But not according to KPMG," Everson declared. "KPMG's actions were a direct assault on our progressive system of income taxation," he said. "Accountants and attorneys should be the pillars of our system of taxation, not the architects of its circumvention."

Although KPMG as an entity was charged with conspiracy in a criminal complaint, the firm was granted a "deferred prosecution" and can avoid a grand jury criminal indictment by paying the penalty, submitting to an independent monitor and continuing to cooperate with federal investigators.

KPMG sold the allegedly illegal tax shelters for a seven-year period ending in 2003, the indictment says.

"Defendant KPMG and others known and unknown participated in a scheme to defraud the the IRS by devising, marketing, and implementing fraudulent tax shelters ... and by fraudulently concealing from the IRS those shelters," the criminal information states.

At a Justice Department news conference in Washington, Attorney General Alberto Gonzales defended the government decision to defer prosecution.

"I want to be clear. No company is too big to be prosecuted," Gonzales said. "We have zero tolerance for corporate fraud, but we also recognize the importance of avoiding collateral consequences whenever possible."

Although Gonzales said he is prohibited from discussing the government's previous case against the Arthur Andersen accounting firm, he pointed to the range of potential victims from the possible demise of KPMG.

"Today's announcement reflects the reality that the conviction of an organization can affect innocent workers and others associated with the organization, and can even have an impact on the national economy," he said.

Court documents allege that under the scheme, the shelters were designed "as a means for wealthy individuals with taxable income or gains generally in excess of $10 million in 1996 and of $20 million in 1998-2000 fraudulently to eliminate or reduce the tax paid to the IRS on that income or gain."

Former KPMG Deputy Chairman Jeffrey Stein, former officials John Lanning, Richard Smith, Jeffrey Eischeid, Philip Weisner, John Larson, Robert Pfaff and Mark Watson, and outside tax attorney Raymond Ruble were indicted.

Officials identified Ruble as the individual referred to in court documents as an attorney who received $50,000 for each letter he wrote to clients stating that the purported tax losses generated by the shelters were "more likely than not" to withstand IRS scrutiny.

As part of the conspiracy, prosecutors said, Smith, Eischeid and Weisner provided false or misleading testimony before a U.S. Senate subcommittee investigating KPMG in November 2003.

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