Ernst & Young Partners Charged
Thursday, May 31, 2007
Four current and former Ernst & Young partners were charged yesterday with conspiracy and other crimes, accused of peddling abusive tax shelters to the accounting firm's moneyed clients in the latest advance in the government's largest-ever tax fraud investigation.
Federal prosecutors did not definitively resolve the probe of Ernst, one of the nation's four biggest audit firms, leaving open the prospect that the firm could be subject to possible financial penalties and other punishment. But high-ranking officials, including three lawyers, face more than a decade in prison if they are convicted.
Authorities singled out Robert Coplan, former director of Ernst's Center for Wealth Planning and a onetime official at the Internal Revenue Service; Martin Nissenbaum, who leads Ernst's personal income tax and retirement planning practice; Richard Shapiro, a tax partner; and Brian Vaughn, a former tax partner.
Each of the men worked in an Ernst unit known as VIPER, an acronym for Value Ideas Produce Extraordinary Results. From 1998 to 2004, they helped wealthy individuals slash or eliminate taxes they owed by creating off-the-shelf tax products that brought Ernst millions of dollars, government lawyers said.
Three of the men used a tax shelter in 2000 to evade their own taxes, according to Michael J. Garcia, the U.S. attorney in the Southern District of New York. In all, that shelter helped them and eight other Ernst executives skirt nearly $4 million in tax liabilities.
Garcia said that activity by the Ernst executives "far exceeds the bounds of legitimate tax planning and reflects flagrant disregard of the law."
Ernst & Young, which paid $15 million to settle related allegations with the IRS in 2003, said it had long ago disbanded the unit involved in the shelter work. Two of the partners charged yesterday had been on paid administrative leave under the terms of the firm's partnership agreement since August 2006, according to Ernst spokesman Charles Perkins. Two others had already departed the firm.
"Ernst & Young has cooperated with the government from the beginning of its investigation," the firm said in a statement. "We have voluntarily made many changes and enhancements to our tax practice."
Each of the men pleaded not guilty in proceedings before a federal judge in New York yesterday afternoon. Lawyers for the executives said they were disappointed by the government's decision to proceed with the case.
Ernst generated nearly $125 million in fees through the sale of four tax strategies mentioned in the indictment, prosecutors said. The executives allegedly worried about putting some of the deal terms in writing and leaving PowerPoint presentations in the hands of clients, according to memos and e-mail messages cited in the indictment.
They allegedly worked in tandem with willing law firms that blessed the tax strategies in exchange for fees of $50,000 to $100,000 apiece. The deals were designed to look like money-losing investments that would create phony losses for people facing taxable income of $10 million or $20 million, according to the indictment.
Coplan and Vaughn are also charged with misleading IRS investigators as part of a 2002 audit the agency conducted into Ernst's sale of tax shelters.
Criminal charges against Ernst itself appear unlikely given recent decisions by federal prosecutors in New York, who expressed concern that an indictment could drive key accounting and law firms out of business.
But the firm could face other sanctions. For instance, the government reached a $456 million settlement with accounting firm KPMG in 2005, but it has also filed criminal charges against 16 former officials there in a case that has yet to go to trial.
Last week, Garcia announced he would not seek an indictment of Chicago law firm Sidley Austin for its role in approving abusive tax shelters for clients.