Beacon Hill Institute Exposed

Ernst & Young partners charged in tax fraud case

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By Emily Chasan

NEW YORK (Reuters) – Federal prosecutors on Wednesday accused four current or former partners of accounting firm Ernst & Young ERNY.UL in a tax fraud conspiracy case arising out of the sale of tax shelters.

In an indictment filed in U.S. district court in Manhattan, prosecutors allege the defendants at the “Big Four” accounting firm created and marketed tax shelters from 1998 through 2004 based on false and fraudulent scenarios to allow wealthy individuals to reduce the federal taxes they would have to pay.

The Ernst & Young current or former partners named in the case are Robert Coplan, Martin Nissenbaum, Richard Shapiro and Brian Vaughn.

A lawyer for Shapiro, John Tigue, said he has cooperated with the government for the last five years.

“He intends to vigorously defend himself,” Tigue said in a statement.

Brian Linder, a lawyer for Nissenbaum, said in a statement that his client has entered a plea of “not guilty.”

“We have provided them (The U.S. attorney’s office) over the past year with evidence that Mr. Nissenbaum did not engage in any unlawful activity,” Linder said.

Lawyers for Coplan and Vaughn could not be immediately reached for comment.

Prosecutors allege that the four defendants schemed to defraud the IRS by deceiving the IRS about tax shelters that were marketed and sold to clients with taxable income, generally higher than $10 or $20 million.

The indictment also charges that Coplan, Nissenbaum and Shapiro implemented tax shelters in 2000 to evade their own taxes, and arranged for eight other Ernst & Young partners to participate in that transaction, evading $3.7 million in taxes.

Ernst & Young has made changes to its tax practice since the transactions in question, the accounting firm said.

“The individuals who were indicted are two former partners and two partners who have been on administrative leave,” Ernst & Young spokesman Charles Perkins said in a statement. “They were part of a small group within the firm, disbanded years ago,…. Ernst & Young has cooperated with the government from the beginning of its investigation, and we will continue to do so.”

Rival “Big Four” accounting firm KPMG KPMG.UL has also been under scrutiny for tax shelters. In 2005, KPMG agreed to pay $456 million, accept an outside monitor and admit to wrongdoing to resolve a federal investigation into questionable tax shelters it sold to wealthy individuals.

Sixteen of the KPMG’s former employees are due to face trial over the shelters in September.

(Additional reporting by Martha Graybow)
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Four Current or Former Ernst & Young Partners Found Guilty On Criminal Tax Shelter…

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Four Current or Former Ernst & Young Partners Found Guilty On Criminal Tax Shelter Charges

Lev L. Dassin, the Acting United States Attorney for the Southern District of New York, Linda Stiff, the Deputy Commissioner for Services and Enforcement of the Internal Revenue Service, and John A. DiCicco, the Acting Assistant Attorney General for the Tax Division of the Department of Justice, announced today that Robert Coplan, Martin Nissenbaum, Richard Shapiro, and Brian Vaughn, each a current or former partner of the accounting firm Ernst & Young, were found guilty following a ten-week jury trial in Manhattan federal court on all counts, including conspiracy, tax evasion and other charges relating to the design, marketing and implementation of tax shelters sold by Ernst & Young (E&Y).

According to the evidence at trial:

Coplan, Nissenbaum, Shapiro and Vaughn, as members of E&Y’s national individual tax shelter group, led an effort to design and market tax shelter transactions used by wealthy individuals to eliminate, reduce or defer tax liabilities on annual income that generally exceeded $10 or $20 million.
Between 1999 and 2002, tax shelter transactions implemented by the defendants and their co-conspirators generated billions of dollars in non-economic or paper tax losses that were used to offset actual income or gain recognized by
the firm’s clients.
The defendants and their co-conspirators — which included tax, accounting and financial industry professionals, and law firms — worked to design, implement and defend the tax shelter transactions in ways intended to conceal the true
facts and circumstances of the transactions from the IRS.
All four defendants were found guilty of one count of conspiracy relating to four tax shelters, and two counts of tax evasion relating to clients who used a tax shelter transaction known as “CDS Add-On.” In addition, Coplan was found guilty of one count of obstructing the IRS and one count of making false statements to the IRS; Nissenbaum was found guilty of one count of obstructing the IRS; and Vaughn was found guilty of one count of making false statements
to the IRS. Each of the conspiracy, tax evasion, and false statements counts carries a maximum sentence of five years in prison and three years of supervised release. Each obstruction count carries a maximum sentence of three years in prison and one year of supervised release. In addition, the defendants face on each count a maximum fine of the greatest of $250,000 or twice the gross gain or loss derived from the offense.

Robert Coplan, 57, of Plano, Texas, is a former E&Y tax partner who was the leader of the individual tax shelter group, and the former National Director of E&Y’s Center for Wealth Planning. Coplan, a lawyer, was at one time a Branch Chief in the IRS’s Legislation and Regulations Division.

Martin Nissenbaum, 54, of Brooklyn, N.Y., also a lawyer, is an E&Y partner who was a member of the tax shelter group and the National Director of E&Y’s Personal Income Tax and Retirement Planning practice.

Richard Shapiro, 59, of Rye Brook, N.Y., also a lawyer, is an E&Y tax partner and was a member of the tax shelter group.

Brian Vaughn, 41, of Calhoun, La., a Certified Public Accountant, is a former member of the tax shelter group and a former E&Y tax partner.

In related matters, Charles Bolton, who was initially charged as a co-defendant with Coplan, Nissenbaum, Shapiro, and Vaughn, pleaded guilty on Jan. 22, 2009, to conspiracy to impede and impair the IRS. David L. Smith, the remaining defendant charged in the indictment, has not been apprehended; and as to him the charges in the indictment remain merely accusations and he is presumed innocent unless and until found guilty. In addition, Peter
Cinquegrani, a former Arnold & Porter partner who provided opinion letters on E&Y tax shelters, pleaded guilty on Sept. 11, 2008, to conspiracy to commit tax fraud, aiding and abetting tax evasion, and aiding in the submission of
false and fraudulent documents to the IRS. And on June 14, 2007, Belle Six, a former E&Y employee who was involved primarily in sales and marketing, and later went to work for entities that implemented shelters for E&Y clients, pleaded guilty to conspiracy to commit tax fraud.

Mr. Dassin praised the work of the Criminal Investigation Division of the Internal Revenue Service and the Department of Justice Tax Division in assisting in the investigation and prosecution of the case.

Coplan, Nissenbaum, Shapiro, and Vaughn are scheduled to be sentenced on Sept. 10, 2009, before United States District Judge Sidney H. Stein, who presided over the trial.

Assistant United States Attorneys Lauren Goldberg and Marshall A. Camp, and Special Assistant United States Attorney John E. Sullivan, from the Tax Division of the Department of Justice, are in charge of the prosecution.

SOURCE U.S. Department of Justice
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Charge Against KPMG Dropped

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Firm Cooperated Over Tax Shelters, Prosecutors Say
By Carrie Johnson, Washington Post Staff Writer

A federal judge dismissed a criminal conspiracy charge yesterday against the accounting firm KPMG after prosecutors said it had complied with an August 2005 deal that helped it avoid a possible death sentence.

U.S. District Judge Loretta A. Preska’s action puts KPMG a step further from a scandal over the sale and marketing of abusive tax shelters that once threatened to put the firm out of business. A 2002 obstruction-of-justice indictment of accounting rival Arthur Andersen hastened that firm’s demise and reduced competition in the audit industry, raising the stakes in the KPMG case.

In August 2005, after frenzied negotiations, KPMG eventually reached a deal with the U.S. attorney’s office in the Southern District of New York, opening its operations to scrutiny by former Securities and Exchange Commission leader Richard C. Breeden and agreeing to pay the government $456 million to settle.

KPMG, the nation’s fourth-largest accounting firm, still must submit to special oversight until September 2008, a term that could be extended if KPMG violates the terms of the deal, Manhattan U.S. Attorney Michael J. Garcia said in a statement.

“We regret the past activities that led to these charges,” KPMG Chairman Timothy P. Flynn said in a statement. “The 20,000 people of KPMG today are focused on maintaining ethics and compliance programs that will serve as a role model for the profession.”

Under Flynn and Executive Vice Chairman Sven Erik Holmes, the firm has cleaned house, imposing what it calls permanent changes in its tax operations and putting fresh leaders in charge of its key service units. KPMG also developed a new compliance and ethics program with the help of District-based law firm Williams & Connolly, where Holmes, a former federal judge, once worked as a partner.

Preska agreed to drop the conspiracy count despite protest from Jeffrey Stein, KPMG’s former deputy chairman who was indicted in 2005 alongside more than a dozen other partners for their role in peddling tax shelters to help wealthy clients avoid or reduce tax payments. Stein’s lawyer argued that KPMG had reneged on an agreement to pay his legal fees. The scheme cost the United States more than $2.5 billion in evaded taxes, according to Justice Department officials, who called it the largest tax prosecution ever.

Defense lawyers for the former partners say they followed laws then on the books and asserted that they were the victims of intense government pressure, an argument that has received support from U.S. District Judge Lewis A. Kaplan. He is overseeing the case against the former partners.

Last year, Kaplan ruled that the government had violated the former KPMG officials’ constitutional rights by forcing the firm to stop paying attorneys’ fees. An appeals court has yet to rule on that issue. The trial of the individual KPMG partners has been postponed, pending resolution of the fee appeal.

The case has touched off a debate in the business and legal communities over government tactics to combat fraud. In part because of the fallout from the KPMG prosecution, Deputy Attorney General Paul J. McNulty last month rolled out changes to guidelines that prosecutors use when deciding whether to indict corporations.

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KPMG Nears Agreement On Tax-Shelter Abuses

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By Carrie Johnson, Washington Post Staff Writer

KPMG LLP is nearing agreement on a deal with federal prosecutors that would avert an indictment against the nation’s fourth-largest accounting firm for its sale of abusive tax shelters, according to sources familiar with the pact.

The agreement calls for KPMG to pay between $300 million and $500 million and to open its operations to independent review as a condition for avoiding prosecution, according to people briefed on the deal. The sources spoke on condition of anonymity because the settlement, known as a deferred prosecution, has not been publicly announced.

Under the conditions of the settlement, KPMG must stay out of trouble for a set period of time. If the firm succeeds, the charges will be dropped by the U.S. Attorney for the Southern District of New York. A federal judge in Manhattan must approve the agreement, which is likely to be presented in court later this week.

The deal would mark an end to months of intense negotiations among prosecutors and KPMG leaders, who took the unusual step of issuing a public statement in June that said the firm took “full responsibility for the unlawful conduct by former KPMG partners.”

Several of those former partners could face criminal charges by a New York grand jury within the next few days related to their work on the shelters, which brought the firm $124 million in fees between 1997 and 2001, according to Senate investigators.

KPMG officials aggressively peddled tax-avoidance strategies to wealthy clients, ultimately helping them create more than $1.4 billion in tax losses, according to an April report by the Senate permanent subcommittee on investigations.

This month, former HVB Group bank official Domenick DeGiorgio, who worked with KPMG to sell the shelters, pleaded guilty to tax evasion and fraud charges, becoming the first executive involved in the tax shelters to be charged with a crime. If he cooperates with prosecutors, DeGiorgio could receive far less time than the 12- to 15-year prison term he now faces.

Defense lawyers for former senior-level KPMG partners say that the tax shelters they sold did not break the law and that they did their work in the open, not intending to violate the tax code. They point out that no federal court has declared the shelter known as BLIPS, which is at the heart of DeGiorgio’s guilty plea, to be improper.

The prospect of criminal charges against KPMG itself generated widespread debate. Federal prosecutors convicted Arthur Andersen LLP of obstructing justice in 2002, and the firm eventually went out of business, leaving just four audit firms to review the books of large, publicly traded clients. The U.S. Supreme Court reversed Andersen’s conviction May 31.

Defense lawyer Robert S. Bennett had implored senior-level Justice Department officials in Washington not to bring an indictment against the firm. KPMG has fired or forced the retirement of more than a dozen tax officials, has capped its own payments of attorneys’ fees for those executives and has “undertaken significant change in its business practices,” according to the firm’s June 16 news release.

KPMG spokesman Tom Fitzgerald declined to comment yesterday, as did Herbert Hadad, a spokesman for U.S. Attorney David N. Kelley in New York.

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