It had been billed as the “largest tax fraud ever” by the feds and the trial was set to teach those that set up illegal tax shelters a lesson. And then it all went very, very badly.
Defendants in the case asked the judge to throw out the charges against them when it was revealed that prosecutors had engaged in misconduct. The alleged constitutional violations by prosecutors resulted in the dismissal of charges against thirteen of the defendants; an appeal to the 2nd Circuit was unsuccessful. Two of the remaining defendants took a plea. And with just four of the original nineteen defendants remaining, the prosecution moved ahead with their case.
During the trial, a juror skipped out, annoying the judge, and defendants again moved for dismissal, claiming that they were blindsided by the prosecution’s change of strategy. The judge did not grant the motion and the trial proceeded. Prosecutors then suffered another serious blow when one of their star witnesses, Steven Acosta, was called out on the witness stand as a liar.
Nonetheless, three and a half years after I originally blogged this story, it has an end:
One defendant, David Greenberg, was acquitted on all charges. It was likely a relative consolation as Greenberg had served five months in jail before trial. Greenberg’s acquittal was thought to have been tied to the flawed Acosta testimony, testimony which embarrassed the prosecution on cross-examination and which the judge referred to as “an injustice.”
Greenberg’s three co-defendants were not so lucky (if you want to call what happened to him lucky). Raymond Ruble was convicted on 10 counts of tax evasion and investment consultants Robert Pfaff and John Larson were each convicted on 12 counts of tax evasion.
Sentencing for Ruble, Pfaff and Larson will be in March of this year. Each count could bring up to five years of jail time.
With that, the “largest tax fraud ever” is over. What was planned as a spectacular prosecution turned instead into a spectacular failure.
Check in later today for my thoughts on what it all means (did you expect any different?).
I can’t wait for Hollywood to see the potential in this KPMG tax shelters mess. I predict movie gold!
There’s nothing waiting in the wings yet (so far as I know) but the live coverage is just as good. After declaring the KPMG lead tax evasion scandal as the “largest tax fraud ever“, overzealous prosecutors outmaneuvered themselves into having many of the charges dropped.
Four defendants remain for the current set of charges. They are former KPMG partner David Greenberg, investment consultants Robert Pfaff and John Larson, and Raymond J. Ruble, a former partner at Brown & Wood, now Sidley Austin. The four are charged with marketing a scheme that allowed wealthy tax payers to declare manufactured paper losses to offset real capital gains. hey relied on “hundreds of opinion letters” from Ruble, who also helped Larson and KPMG design the shelters. Ruble was paid $50,000 per opinion letter so each client would have the assurance they were protected if the IRS ever questioned the legality of the shelters.
Prosecutor John Hillebrecht claims that while the Tax Code is complicated, the rules are simple:
Ladies and gentlemen, you can’t lie to get out of paying taxes.
The feds charge that Larson and Pfaff created a company to market their scheme. Clients relied on “opinion letters” written by Ruble, which were supposed to protect clients from the IRS. Ruble was reportedly paid $50,000 per opinion letter, plus hundreds of thousands of dollars from Larson and Pfaff’s company.
The trial began on yesterday, just as a sitting juror advised the judge that she could no longer continue. She claimed that she would “vote guilty from day one” after reading articles about the trial, despite earlier assurances to the contrary.
Federal Judge Lewis Kaplan, who is presiding over the trial, questioned the juror. She was dismissed from the trial and advised that the U.S. Attorney’s Office would investigate her for perjury or obstruction of justice.
Kaplan told the remaining jurors, “you don’t have to be a genius to duck jury duty if you really want to do it.” It’s vaguely reminiscent of that great line from one of my favorite TV shows, Designing Women: “Juries scare me. I don’t want to put my faith in 12 people who weren’t smart enough to get out of jury duty.” (Of course, this in no way implies that you should skip out on jury duty…)
The remaining jurors agreed that they were willing to serve and that they could be impartial. The dismissed juror was replaced by an alternate. The trial resumes today.
…Unlike Jenkens Gilchrist, which folded after being hit with penalties related to tax advice involving tax shelters that the Internal Revenue Service found to be abusive.
The IRS announced today that it has reached a settlement with the law firm of Sidley Austin LLP, the successor firm of the 2001 merger between Sidley & Austin and Brown & Wood LLP (though the name change was in 2006). Sidley agreed to a civil tax shelter promoter penalty of $39.4 million for its promotion of abusive tax shelters and a failure to comply with tax shelter registration requirements. According to the IRS, at least one attorney at Sidley issued opinions in connection with potentially abusive tax shelters. Some of the packages were BOSS (Bond & Option Sale Strategy) and variants of the so-called “Son of BOSS” shelter that went by names of COBRA (Currency Options Bring Reward Alternatives), BLIPS (Bond Linked Issue Premium Structure) and COINS (Currency Option Investment Strategy).
Also on today, Michael Garcia, the US Attorney for the District of New York, announced that he would not file criminal charges against Sidley. The decision was based largely on Sidley’s ongoing cooperation with the IRS in their investigation, the fact that Sidley did not mass market the shelters and that the purveyor of the schemes, Raymond Ruble, who was ultimately fired by Sidley, acted in a deceptive manner and without Sidley’s blessing. Ruble is currently awaiting trial with eight other defendants (each of whom is a former KPMG employee, other than Ruble) for conspiracy to defraud the IRS and various tax evasion offenses; the case is U.S. v. Stein.
Eight former KPMG execs have been charged with conspiracy to sell fraudulent tax shelters. They are former KPMG Deputy Chairman Jeffrey Stein, former officials John Lanning, Richard Smith, Jeffrey Eischeid, Philip Weisner, John Larson, Robert Pfaff and Mark Watson; a ninth person was also charged in the scheme, outside tax attorney Raymond Ruble. It is being described as "the largest tax evasion scheme in U.S. history."
The company will pay at least $456 million in fines to the feds as a penalty (KPMG made at least $115 million on the schemes, according to prosecutors). You can click on the title link above to read the press release from the Department of Justice.
