KPMG LLP will pay about $450 million and open up its operations to independent review as part of a deal with federal prosecutors to avoid a criminal indictment that could have sent the nation's fourth-largest accounting firm into a death spiral, according to sources familiar with the pact.
The deal, struck with the U.S. attorney for the Southern District of New York after weeks of intense negotiation, is expected to be presented for a judge's approval Monday.
At the same time, federal prosecutors are also expected to unveil criminal charges against multiple former KPMG partners, including several who once occupied senior-level management positions at the firm, the sources said. Legal and tax advisers at other companies also could be charged for their role in the deals, which lawmakers estimate were used to shelter more than $1.4 billion from tax collectors.
As part of their effort to avoid a potentially fatal indictment of the firm, new leaders at KPMG fired or pressured to resign nearly 30 former partners who played a role in selling questionable tax shelters to wealthy clients in the 1990s. The firm is expected to agree to a lengthy factual statement admitting responsibility for illegal acts, and it also must submit to stringent outside review, the sources said.
KPMG reaped $124 million in fees between 1997 and 2001 through sales of the tax shelters, according to an April report by the Senate permanent subcommittee on investigations. The deals generally helped wealthy clients generate large tax losses on paper, used to offset profit from selling businesses or blocks of stock.
Criminal charges over tax shelters are unusual, experts said, in part because the tax code is complex and filled with loopholes. But prosecutors used e-mails, memos and other documents gathered in the course of the Senate investigation to build their case.
Internal Revenue Service Commissioner Mark W. Everson had criticized KPMG for failing to respond to requests for information from the agency. Accounting industry analysts fretted over possible charges against KPMG, fearing they would essentially put another audit firm out of business. Arthur Andersen LLP collapsed in 2002 after being convicted of obstruction of justice related to client Enron Corp. The U.S. Supreme Court overturned Andersen's conviction May 31. But by then, the firm's partners and clients had scattered and it was unable to recover.
To date, former HVB Group banker Domenick DeGiorgio, who pleaded guilty Aug. 11, is the only person involved in the tax shelters to face criminal charges. DeGiorgio faces 12 to 15 years behind bars but could receive leniency at sentencing time if he cooperates with prosecutors.