KPMG LLP will appear in a New York courtroom tomorrow morning and admit to participating in a broad criminal conspiracy over tax shelters the firm peddled to clients during the economic boom, according to sources familiar with the deal.
Despite criticism from Internal Revenue Service officials and a federal judge for failing to produce documents during the course of the investigation, KPMG will not face criminal charges for obstructing justice, a significant victory for the nation's fourth largest accounting firm. The stigma of such a charge could have sent many of the firm's 1,600 partners and 1,000 publicly traded audit clients, including General Electric Co. and Citigroup Inc., heading for the exits.
But in a detailed and lengthy statement of facts, KPMG will admit to developing and selling questionable tax deals to hundreds of wealthy clients from 1996 to 2002. The firm also refers to executives in the highest levels of KPMG's tax leadership who authorized them, although it does not name them.
Indictments against some of these former executives, as well as officials at investment and law firms who helped structure the deals, could be unveiled by federal prosecutors at a Washington press conference tomorrow. With the demise of Arthur Andersen LLP after its conviction, the Justice Department increasingly has deferred prosecuting companies such as Computer Associates International Inc. and Bristol-Myers Squibb Co., while targeting former executives at those firms with indictment.
As part of the agreement, KPMG is to pay $456 million and submit its tax unit and its compliance efforts to stringent 16-month review by former Securities and Exchange Commission chairman Richard C. Breeden. Breeden, who interpreted his mandate broadly while serving as a monitor at Ashburn's MCI Inc., will have the authority to make personnel decisions about workers responsible for the shelters and to initiate his own investigations, according to the sources, who spoke on condition of anonymity because they were not authorized to reveal terms of the pact.
KPMG's new leaders already have fired or pressured to resign about 30 partners who played a role in the shelter deals as part of an effort to cooperate with prosecutors and avert an indictment. They also issued a statement apologizing for "unlawful" activity by former partners and pledged to cooperate with investigators as they sought to avoid indictment.
The KPMG case is part of a far wider criminal probe of accounting firms, investment advisers, banks, and lawyers who helped taxpayers avoid large bills on stock gains or sales of their businesses. Ernst & Young LLP remains under grand jury investigation in New York for its role in the tax shelter scheme.
KPMG is expected to concede that one of the shelters, known as BLIPS, broke the law, giving new ammunition to plaintiffs in civil lawsuits against the firm. KPMG lawyers are defending the firm in court papers by arguing that the taxpayers who bought the shelters generally knew what they were getting into and that they made false representations to the authorities.
The firm's admission about BLIPS would mark the second time parties involved in the deals said they amounted to a sham. On Aug. 11, former HVB Group banker Domenick DeGiorgio pleaded guilty to tax evasion and other charges, telling a judge that the deals were designed to create huge paper losses and help clients avoid taxes.
KPMG continues to insist that other shelters, known as FLIPS and OPIS, did not run afoul of the tax code. The firm reaped $124 million in fees for its work on the deals, according to a path-breaking inquiry by the Senate permanent subcommittee on investigations that served as a road map for prosecutors.
Details of KPMG's agreement with federal prosecutors have been hammered out by lawyers for both sides over the past three months, culminating in long negotiations in New York earlier this week between U.S. Attorney David N. Kelley and defense lawyers Robert S. Bennett and Carl Rauh, along with KPMG's new leaders. The exact amount of the monetary settlement was first reported in the New York Times.
"Under this new leadership, KPMG will not only survive, but it will flourish," Bennett, lead counsel for KPMG and a partner in the District office of the Skadden Arps law firm, said yesterday.
KPMG has agreed to curtail offering a couple of tax products to individual clients and to enhance standards on its tax practice as a whole, according to the terms of the deal.
Federal prosecutors in New York recommended earlier this year that KPMG itself face indictment. But senior Justice Department officials, concerned about the potentially fatal impact such a move would have on the firm, pushed negotiations instead.
The Supreme Court in May reversed Arthur Andersen's 2002 obstruction of justice conviction related to its work for client Enron Corp. Since Andersen collapsed, industry analysts have fretted that public companies are limited to only a few firms that can perform audits of large global businesses.