KPMG, the accounting firm under investigation for selling questionable tax shelters, will pay $456 million and accept an outside monitor of its operations under terms of an agreement with prosecutors that heads off an indictment of the firm, people briefed on the deal said yesterday.
The agreement means that KPMG has dodged a potentially fatal indictment and avoided the fate of Arthur Andersen, the accounting firm that collapsed after prosecutors charged it with obstruction of justice in their investigation of Enron, an Andersen client.
The KPMG settlement, which is expected to be announced on Monday, moves KPMG closer to finishing a painful chapter in its history, after having grappled with a federal investigation for more than a year and a half.
"That's a big victory for a company," said Jonathan S. Feld, a former federal prosecutor who practices at Katten Muchin Rosenman in Chicago and who is not involved in the case. "Especially in light of the problems that we witnessed with Andersen with a criminal indictment, you've avoided a significant accusation that could potentially undermine an entire accounting firm."
Still, the agreement preserves the possibility of criminal charges for KPMG in the event the firm violates the terms and it includes a strong acknowledgment of wrongdoing, according to people briefed on the deal. But importantly, these people said, the firm will not name any former partners involved in the tax shelter transactions, several of whom may face criminal charges that could be announced as early as Monday.
The settlement is the latest step in the government's investigation of questionable shelters, which were created and sold by accounting firms in the late 1990's, and allowed wealthy investors to evade billions of dollars in taxes. The stock market boom had minted quick riches and clients eager to shield their gains from taxes. Regulators soon caught up to the new tax schemes - typically complex swap transactions to create losses on paper - and several accounting firms settled. KPMG, at first, resisted regulators.
In 2003, a Senate subcommittee report on four KPMG shelters found that the firm sold the shelters to some 350 people from 1996 to 2002, depriving the Treasury of at least $1.4 billion in unpaid taxes. KPMG earned fees of $124 million on those sales, the Senate report said.
Prosecutors have indicated that their investigation is continuing, suggesting that others involved in the transactions - banks, law firms, other accounting firms and possibly individual taxpayers who bought the shelters - may face criminal charges in the future.
Prosecutors have already increased pressure on former KPMG partners with the guilty plea this month by an executive in the New York office of HVB, one of Germany's largest banks. The executive, Domenick DeGiorgio, told a federal judge in Manhattan that he participated in a conspiracy to commit tax fraud that involved some transactions of the type sold by KPMG, and that he committed other tax-related crimes. Mr. DeGiorgio is almost certainly assisting prosecutors in their investigation of former KPMG partners and perhaps others, as well.
Under the terms of the agreement expected to be announced on Monday, a former chairman of the Securities and Exchange Commission, Richard C. Breeden, will serve as an independent monitor of KPMG's operations, according to people briefed on the deal. The agreement would also impose restrictions on the scope of its tax practice.
A spokesman for the United States attorney's office in Manhattan declined to comment, as did a spokesman for KPMG.
KPMG's tax business expanded rapidly in the late 1990's, at a time that all of what were then the Big Five accounting firms were adding to revenue by offering businesses other than audits, including technology consulting and, of course, tax services. (KPMG spun off its consulting arm, now known as Bearingpoint, through a public stock offering in 2001.)
In the wave of corporate scandals that followed the collapse of Enron late in 2001, KPMG had its share of trouble with audit clients. The firm paid $22.5 million to settle S.E.C. charges that it helped executives at the Xerox Corporation - one of its audit clients - manipulate and distort financial statements, and in October, the firm agreed to pay $10 million to settle regulators' charges that it and four of its accountants did not properly audit the financial statements of Gemstar-TV Guide International.
KPMG also audited Fannie Mae, which was forced by regulators to restate earnings dating back to 2001.
The specter of the Andersen prosecution - and the Supreme Court's decision this summer reversing the firm's conviction - has loomed over the tax shelter investigation.
Some lawyers not involved in the case said from the beginning that prosecutors could not risk reducing the number of big accounting firms further, from four to three. In turn, the perception that the government was hamstrung put pressure on prosecutors to prove the contrary and to impose stringent requirements on the accounting firm.
"They've already destroyed one accounting firm, and I didn't think they were going to set about destroying another," said Jerry Bernstein, a former federal prosecutor. "The threat was always there. If KPMG had not been sufficiently conciliatory and cooperative, then there was a realistic chance that they would've been indicted."
The firm's acknowledgment of wrongdoing will complicate defense arguments by individual former KPMG partners who worked on the shelters and who may still face criminal charges. A corporate mea culpa may also be used against the firm if KPMG violates the terms of the agreement and prosecutors decide to bring criminal charges against the firm at a future date. People briefed on the settlement's terms said that the deferred prosecution agreement would run until Dec. 31, 2006, by which time the firm will also have to pay the $456 million penalty.
KPMG early on agreed to limit how much financial assistance with legal fees it would provide to partners who had a role in sales of the shelters, identified by acronyms like Blips and Opis, and who were forced out during the investigation.
KPMG also issued a remarkable statement in June in which the firm said that it took "full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred."
That statement, which would appear to support the claims of taxpayers who bought the shelters - some of whom have sued the accounting firm - angered lawyers for former partners. They question how KPMG could describe the conduct by partners as "unlawful," before any court has actually ruled on whether the shelters at issue were improper.
The issue of the propriety of the shelters may first be addressed by a federal judge in California overseeing a lawsuit against the government by companies involved in the shelter transactions; a potentially decisive hearing in that case is scheduled for Nov. 3.
Lynnley Browning contributed reporting for this article.
- 186 Financial Services, Insurance and Banking