Confidential Settlement Reached In Tax Shelter Lawsuit Against KPMG
Attorneys Jim Butler and Mickey Mixson stood up against the nationwide accounting firm after it sold an illegal tax shelter scheme that resulted in substantial fines from the IRS.
(ATLANTA, GA)- In the 1990s KPMG, like some other huge international accounting firms, decided to get into the very profitable business of pushing its clients to buy tax strategies to minimize their tax liability when they sold companies they owned. KPMG told its clients its tax strategies were legal and would work. There’s nothing wrong with minimizing one’s tax liability – no one has a duty to pay taxes they don’t owe. But KPMG knew its very complex tax strategies were not legal and would not work and concealed that truth from its clients.
KPMG took advantage of its reputation as a ‘Big Four’ international accounting firm to push these tax strategies on its clients. KPMG boasted that it had the best tax experts in the world, in its “Washington Tax Office,” and even told clients those experts came from the IRS and the Department of the Treasury.
KPMG’s clients believed what KPMG told them. In fact, KPMG even had a ‘script’ for its partners to use to convince reluctant clients that the tax strategies were not ‘too good to be true.’
When the IRS began to unravel the complex tax strategies starting in 2000, other firms quit selling them. KPMG did not. KPMG continued to insist its strategies were legal. KPMG also decided to stonewall investigations by the IRS and the U. S. Senate Permanent Subcommittee on Investigations (PSI). Ultimately KPMG was forced to divulge internal documents to the IRS and to the PSI. Those documents proved KPMG’s own partners knew the strategies would not work and would not pass muster with the IRS if discovered by the IRS.
KPMG had been the long-time accountants and auditors for Chris Cohan of San Francisco and his businesses, including Sonic Communications, a cable company. When KPMG found out Cohan was considering selling Sonic, it reached out to him to convince him to do so using KPMG’s tax strategies. KPMG promised its strategy would provide “permanent tax savings.” Cohan accepted and followed KPMG’s advice, and sold Sonic based on KPMG’s tax strategy. As late as 2003 – after the IRS began its audit of Cohan – KPMG was still insisting to Cohan that its strategy was sound.
Over 40 clients ultimately sued KPMG – the exact number is unknown to Mr. Cohan’s counsel. None of those cases have gone to trial.
In 2005, cornered by the IRS and the Department of Justice (DOJ), KPMG was faced with criminal prosecution. Seventeen KPMG partners and lawyers were indicted. KPMG brokered a deal with the DOJ. It complained that a criminal prosecution would be the ‘death penalty,’ much like that suffered by Arthur Andersen in the wake of the Enron scandal, and that eliminating another big accounting firm would be bad for the economy. The DOJ eventually relented, and agreed to let KPMG sign a “Deferred Prosecution Agreement” (DPA), in which KPMG admitted criminal and fraudulent misconduct and tax evasion, agreed to work under a DOJ-appointed “monitor” for five years, and paid a $456 million fine. The DPA was signed on August 26, 2005. KPMG had to agree that a “criminal information” would be filed in federal court in New York.
To get help dealing with the DOJ, KPMG hired a headhunter firm out of Chicago to find someone who might influence the DOJ. In March 2005, KPMG hired a federal judge from Tulsa OK named Sven Erik Holmes. He was made “Vice Chair – Legal.” His pay went from $160,000 per year to $1.7 million his first year with KPMG. He was involved in the negotiations which led to the DOJ letting KPMG enter the DPA to avoid a criminal indictment.
Because it knew civil lawsuits would result from signing the DPA, and that the DPA would be used against it, KPMG got the DOJ to agree to let KPMG inject some words into the DPA. KPMG caused the DPA to state that KPMG merely “assisted high net worth individuals” – KPMG’s own clients – to evade taxes and that the clients “knew” the representations about the tax strategies in the opinion letters KPMG drafted were false. The clients knew no such thing – that was opposite of what KPMG had told them, and KPMG made no effort of find out if any clients knew any such thing. Then KPMG defended civil lawsuits brought against it by clients by claiming the clients were “in pari delicto” – which means “in on the fraud.” For example, KPMG claimed in the Cohan case that Mr. Cohan should have known the KPMG tax strategies were fraudulent – even thought KPMG told him precisely the opposite.
In the Cohan case, we proved KPMG injected those words into the DPA to set up that false defense. We uncovered, for the first time in any litigation against KPMG, internal KPMG documents which KPMG had concealed from discovery. Those documents admitted such things as KPMG “pushed” its own clients to buy the tax strategies – and that the clients would never have done so had they known the truth and but for the fact KPMG had such a strong reputation as a ‘Big Four’ accounting firm.
We also proved that, prior to signing the DPA, KPMG even deceived its own expert witnesses, whom KPMG hired to testify for KPMG in cases all across the country. Those expert witnesses testified that the KPMG strategies were legitimate. In the Cohan case, we won a court Order to depose, over KPMG’s objection, a former KPMG expert witness who had defended KPMG in 14 cases. That witness testified that KPMG deceived him too, and concealed from him the internal KPMG documents that proved KPMG knew its tax strategies were fraudulent. He testified that had KPMG told him the truth, he would never have testified in defense of KPMG. Contrary to KPMG’s argument in the Cohan case that Mr. Cohan should have seen the fraud in KPMG’s tax strategies, that expert witness was himself a “certified fraud expert,” and he testified he did not detect the fraud in KPMG’s complex tax strategies.
Trial was to start January 13. On the afternoon of Monday, January 6, the judge had scheduled hearings on evidentiary motions (called “motions in limine”) to decide what arguments could be made at trial and what arguments could not be made. On Tuesday morning, January 7, we were to take the deposition of Holmes, whom KPMG had belatedly named as a witness who would testify at trial. KPMG settled the case on the morning of Monday, January 6.
Because he relied on KPMG’s advice and followed its advice, Mr.Cohan ended up paying over $200 million in taxes, penalties, and interest – more than he netted from the sale of his company Sonic, plus he lost his company, which Plaintiffs’ corporate valuation expert testified would have been worth $450 million in 2013 had it not been sold in reliance on KPMG’s advice.
Mr. Cohan and his counsel were very pleased with the settlement. “It’s the most challenging case-and the most fun I’ve had-in 36 years of practicing law,” Butler said.
Lead counsel was James E. Butler, Jr. of Butler Prather LLP, 2719 Buford Highway, Atlanta GA. Along with Butler, Plaintiffs were represented by George W. Fryhofer III and John C. Morrison of Butler Prather LLP, and by Mickey Mixson, Lisa Strauss, Tiana Mykkeltvedt, John Rains, and Sachin Varghese of Bondurant Mixson & Elmore, Atlanta.
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