Shelter Probe Yields First Charges, Plea

NEW YORK, Aug. 11 -- Federal prosecutors Thursday lodged the first criminal charges in a long-running investigation of abusive tax shelters, striking a plea agreement with a banker who admitted to taking part in fraudulent deals that helped wealthy investors create phony tax losses of more than $1 billion.

Former HVB Group employee Domenick DeGiorgio, 42, pleaded guilty to four counts of conspiracy, wire fraud and tax evasion. DeGiorgio said he knew the tax structure, known as BLIPS, lacked economic justification and was described as misleadingly in key documents. Yet, with unidentified shelter promoters in California and a major accounting firm, he said, he participated in dozens of what he called "sham" transactions from 1996 to 2003.

"Did you know what you were doing was wrong and illegal?" U.S. District Judge Barbara S. Jones asked.

DeGiorgio replied, "Yes, I did."

Neither prosecutors nor defense lawyer Jason Brown directly said DeGiorgio was helping the government with its ongoing investigation. But federal prosecutors announced his plea agreement at a critical time, during discussions with accounting firm KPMG LLP and several of its former partners who are seeking to avert indictments for their roles in marketing the tax shelters. Federal prosecutors also are investigating Ernst & Young LLP.

Assistant U.S. Attorney Stanley J. Okula Jr. told the judge that under advisory sentencing guidelines, DeGiorgio could be sentenced to as long as 15 years in prison. He could receive far less if he cooperates with authorities and provides evidence against others who took part in the deals.

U.S. Attorney David N. Kelley said, "Those who seek to devise, implement and profit from these fraudulent structures should understand that we will devote whatever resources it takes to put a stop to them."

"These transactions went well beyond aggressive tax planning," Internal Revenue Commissioner Mark W. Everson said in a written statement. "Our American tax system depends on the integrity of accountants, attorneys and financial institutions. This is part of a larger and very sad story about criminal activity driven by greed, plain and simple."

The criminal investigation has gained momentum since a 2003 tax probe by the Senate permanent subcommittee on investigations. Lawmakers, led by Sen. Carl M. Levin (D-Mich.), scrutinized the role of prominent accounting firms, law firms and investment firms, including KPMG, Sidley Austin Brown & Wood LLP, and Deutsche Bank AG. Four shelters including BLIPS cost the government $1.4 billion in unpaid taxes, investigators said.

KPMG continues to negotiate with prosecutors to avoid an indictment, and as many as 20 former partners at the firm have been notified they could face criminal charges over their roles in selling the tax shelters, misleading investigators and failing to promptly turn over documents to the IRS. A resolution of the case against KPMG could come within days, according to sources close to the case who spoke on condition of anonymity because of the delicate stage of negotiations.

KPMG has said it is cooperating with prosecutors, as is Germany-based HVB, according to bank spokesman Scott Sobel.

Defense lawyers for former senior-level KPMG officials have argued that BLIPS and other shelters did not break the law at the time they were sold. Proving the shelters were invalid could be a challenge, in part because the tax code is filled with loopholes and because the deals were vetted by lawyers and other advisers, legal experts said. A civil case against the IRS in California is challenging the agency's interpretation that BLIPS violated the tax code.

The government's case against DeGiorgio centers on far more targeted allegations of personal impropriety. Prosecutors said DeGiorgio helped tax promoters to conceal their profit by funneling them into offshore accounts. He also defrauded his employer by taking payments from an unnamed tax shelter promoter and pocketing hundreds of thousands of dollars from HVB to pay for construction work on his Long Island home. DeGiorgio failed to report such payments on his personal income taxes from 1997 to 2000, court papers said.