HOUSE OF 'CARDS'
Fling With Tax Shelters Haunts Silicon Valley
Funded by Tech Barons, MyCFO Inc. Sold Deal The IRS Later
By Peter Waldman
The Wall Street Journal
Tuesday, March 6, 2007
John Doerr is the dean of Silicon Valley venture capitalists,
one who helped launch tech icons like Google and Sun
Microsystems. A billionaire, he works with rock star Bono to
fight poverty in Africa and with others to increase aid for
education and medical research.
Mr. Doerr is less well known for one investment that didn't pan
out. Called myCFO Inc., the firm set out to provide rich people
a full menu of financial services, from wealth management to
estate planning. It succeeded with only one: tax shelters that
helped clients shield hundreds of millions of dollars from
taxes. Less than two years after myCFO began selling them in
2000, the Internal Revenue Service said they were bogus.
MyCFO ceased independent operations five years ago, but it still
casts a shadow. A bank that underwrote some of its tax deals has
admitted that they were shams. Former clients, hit with back-tax
bills, are fighting the IRS. Two ex-clients have alleged that
myCFO's tax deals were fraudulent.
Two lawyers who worked with myCFO are under tax-fraud indictment
for their work on similar tax shelters. The Manhattan U.S.
attorney's office, which has charged more than a dozen people in
connection with tax shelters, said in a court filing last April
that it had "an ongoing criminal investigation" involving
"various former employees of myCFO."
The financial backers and board members of myCFO were Silicon
Valley royalty. They included James H. Clark, co-founder of
Netscape Communications and Silicon Graphics; John Chambers of
Cisco Systems Inc.; Thomas Jermoluk, former chairman of
Excite@Home; and former Netscape boss James Barksdale. The
firm's outside legal counsel was Larry Sonsini, lawyer to
Silicon Valley's stars.
The firm was Mr. Clark's idea. Mr. Doerr led its financing and
took a leading role on the board. In typical Silicon Valley
fashion, board members were closely involved with strategy and
operations, according to company documents and legal papers
reviewed by The Wall Street Journal. The documents show that
directors pushed ahead with the tax-shelter business despite
signs that all wasn't right with the product.
Mr. Doerr praised the head of the firm's tax-strategies group in
a 2001 email for "not only delivering on your original
[business] plan, but going beyond to make up the revenue
shortfall from the recurring business." MyCFO "has my full
support, and the full support of [my] partners" at Kleiner
Perkins Caufield & Byers, the venture-capital firm that financed
myCFO, he added.
MyCFO's story shows how the sudden wealth spawned by the
technology boom had hidden impacts that still echo in Silicon
Valley. "There were 30-year-old clients making hundreds of
millions of dollars -- it was intoxicating," says James
Phillips, myCFO's former chief investment officer. "The
accountants and CPAs wanted their share, too."
At the time, tax shelters were a lively business. Dozens of
national law and accounting firms sold these strategies --
Byzantine transactions that often involved foreign currencies
and offshore middlemen. MyCFO selected a few tax shelters and
refined them for a clientele dripping in capital gains.
Some of California's leading industrialists were customers. Ray
Irani, chief executive of Occidental Petroleum Corp., did a tax
deal through myCFO, company records show. So did Ariba Inc.
co-founder Boris Putanec and Val Vaden, co-founder of financier
Mr. Jermoluk, the former Excite@Home chairman, was both a
founding financier of myCFO and a shelter customer. For fees of
about $2.4 million, he acquired ostensible losses to offset as
much as $50 million of taxable income, according to company
documents and a deposition by his former accountant, Kevin
Mr. Jermoluk declined to be interviewed about myCFO, as did
Messrs. Doerr and Chambers. Messrs. Clark and Barksdale didn't
respond to email and phone requests for interviews. A lawyer for
the former directors told a tax client last October that they
"categorically denied...misconduct or malfeasance of any sort."
The lawyer, David York, predicted myCFO's main tax package
ultimately "will survive a substantive tax law analysis" in
A spokeswoman for Mr. Sonsini said his law firm did basic legal
work for myCFO that didn't include reviewing its tax offerings.
Messrs. Vaden and Putanec declined to comment, while Occidental
said Dr. Irani wouldn't comment "on what is clearly a personal
MyCFO's main tax shelter, sold to 17 clients, was called Cards,
for Custom Adjustable Rate Debt Structure. Each involved an
ostensible 30-year bank loan to a foreign party for $50 million
to $100 million. MyCFO's client then assumed the loan and, after
some complex swapping of collateral, claimed a loss for tax
purposes of nearly the full amount of the loan. Others besides
myCFO also marketed Cards.
The IRS in March 2002 ruled Cards invalid. Largely as a result,
myCFO sold its name and client list and liquidated its tax
The IRS said Cards failed a basic test of legitimacy: It lacked
any real economic purpose other than to lower taxes. The agency
added that clients were never really at risk for the supposed
$50 million or more in loans.
Most myCFO shelter clients are challenging the IRS's action, in
federal court in San Jose. But two broke ranks and alleged the
shelters were fraudulent, in civil racketeering suits they filed
against big banks that underwrote their Cards deals. They claim
they were misled to believe the shelter's loan structure was
actually a viable credit facility.
From the start, there were internal warnings. Mr. McAuliffe, a
former Ernst & Young tax partner who was one of myCFO's first
hires, said that when the firm was just gearing up in 1999, some
of its accountants wanted to shun tax "elimination" deals. He
warned Mr. Jermoluk and Chief Executive Art Shaw that myCFO was
relying too heavily on tax shelters for revenue, Mr. McAuliffe
said in a 2005 deposition for a tax client's lawsuit in San
Francisco Superior Court. But he said the founders were talking
about an initial public offering, and his warnings went unheeded
amid IPO "fever." Mr. Shaw, CEO of advertising firm Netblue
Inc., didn't return calls seeking comment.
MyCFO had obtained the Cards strategy from a San Francisco
investment boutique called Chenery Associates, which also
provided it to others. Chenery had done a Cards deal for an
aircraft-leasing company, which registered it with the IRS as a
tax shelter. The IRS requires corporations to register such
tax-driven deals. Its rules for when individuals must register a
deal they're using as a shelter are less strict.
MyCFO officials said their clients would never accept a
transaction they had to register as a tax shelter, Chenery
Associates owner Roy Hahn later testified in a deposition for
San Francisco Superior Court. A lawyer for Chenery removed the
obstacle. He wrote an analysis saying that Cards wasn't a tax
shelter under relevant IRS rules.
The lawyer, Graham Taylor, then at LeBoeuf, Lamb, Greene &
MacRae, wore multiple hats. He also represented myCFO in
refining the tax strategy, court documents show. And when myCFO
signed up Cards clients, it arranged for them to hire Mr. Taylor
as their lawyer. For fees of roughly $85,000 per client, he
supplied many of them with letters saying that if the IRS found
their deductions invalid, they shouldn't owe penalties because
they had relied on "an opinion from reputable counsel."
That counsel, it turned out, was a co-inventor of Cards, Raymond
J. Ruble, then at law firm Brown & Wood. The law firm got
$250,000 each time a client used Cards. Chenery paid this out of
its share of the tax client's fee.
Chenery also agreed to pay 20% of its own fee into a Ruble
family trust, according to court records and Mr. Hahn's
MyCFO directors had several briefings about tax shelters,
minutes of board meetings show. One in mid-2000 led to a
marketing delay while the firm's general counsel reviewed the
matter. Three months later, the IRS, in connection with a
similar shelter, warned that "an artificial loss lacking
economic substance is not allowable." Within weeks, myCFO
decided to go ahead with marketing Cards.
It quickly signed up 10 clients for fees totaling $16 million.
As those deals were closing in late 2000, Mr. Ruble from Brown &
Wood emailed myCFO an article in which a prominent tax analyst
called Cards a blatant tax dodge. Mr. Ruble said the analyst had
"totally missed the boat on business purpose," which he said lay
in financing opportunities.
As the tech bubble deflated, myCFO imposed layoffs and spending
cuts, but not on the tax-strategies group. MyCFO's growing
reliance on tax shelters for revenue was discussed at a board
meeting in August 2001. At that meeting, the board's
compensation committee, Messrs. Doerr and Clark, approved stock
options for 94 employees -- giving a third of them to the firm's
top two tax strategists.
One director asked if myCFO would have an obligation to refund
clients' fees if the tax deals were unwound. "It was basically,
'Gosh, is this kosher?' " says someone who was there. "Then they
read the attorneys' comfort letters and everyone shut up."
Mr. Doerr was a booster for the firm's tax strategists. In
response to Mr. Doerr's 2001 email lauding the tax team for its
performance -- which he sent on Sept. 11, 31 minutes before the
first plane struck the World Trade Center -- the tax team's
leader reported landing $4.5 million more in fees. Five days
after 9/11, Mr. Doerr replied: "This is AWESOME news,
particularly during a week marred by national tragedy.... Please
keep me posted."
But some of myCFO's accountants and client-service people were
in revolt, according to Mr. McAuliffe's deposition. In late
2001, he and several colleagues refused to sign shelter clients'
tax returns until myCFO agreed to indemnify them for any
personal liability. One client was claiming a tax loss greater
than his net worth. "It was only a matter of time until the IRS
came down pretty hard," Mr. McAuliffe testified.
In January 2002, the IRS offered a broad tax-shelter amnesty: It
would waive penalties for any taxpayer who owned up to using a
MyCFO staffers disagreed over what to tell clients about this
and whether to discourage them from taking the amnesty.
Ultimately, the firm sent out what General Counsel Steve
Debenham, in an email about a draft to a colleague, called "a
CYA letter," for "cover your a -- ." It said the IRS appeared to
be focusing on the packages offered by major accounting firms,
which "may be less credibly supported by a substantive economic
Mr. McAuliffe mocked that distinction in an email to colleagues.
"Same law firms, similar or same promoters, same tax effect," he
said, wondering if myCFO was "smoking our own dope again?"
He also dismissed the idea that myCFO's clients were
penalty-proof for relying on reputable counsel. "You bought your
opinion. You bought your comfort-level letter," he said later in
his deposition. Mr. Debenham and Mr. McAuliffe both declined to
Two months later, the IRS ruled that Cards was an improper
shelter. MyCFO's board discussed the ruling by phone. MyCFO by
this time was little more than a tax-shelter brokerage,
according to documents prepared for the meeting. If it closed
its shelter business, it would forgo $10 million in revenue in
the next three months and be in the red.
Instead of closing the tax business, myCFO tried to revive it by
hiring a veteran of KPMG, an accounting firm that was especially
active in selling tax shelters. The employee, Randall Bickham,
brought a pipeline of tax deals worth a projected $7 million in
The board also explored selling the company. MyCFO documents
AG, which had worked with myCFO on several Cards deals,
expressed interest in acquiring the firm for $200 million to
$300 million, but backed away, citing potential tax-shelter
Bank of Montreal
agreed to buy myCFO for $90 million but it, too, backed out over
the same concern, myCFO documents show. In October 2002 Bank of
Montreal finally purchased just myCFO's name, client list and
some other assets. It paid $30 million, about a third of the
sums the Kleiner Perkins founders and others had put in. Bank of
Montreal now has a private-banking unit called Harris myCFO
Inc., which declined to comment.
Directors assigned the rest of myCFO to a liquidator. They gave
Mr. Bickham, the former KPMG man, a $1.4 million contract, paid
in advance, to maintain files and assist clients in "controversy
issues" with the IRS.
In 2005, Mr. Bickham was among those charged by the Manhattan
U.S. attorney with tax evasion and conspiracy to defraud the
IRS. The charges relate to work he did while at KPMG. He has
pleaded not guilty and declined to comment.
Also charged was Mr. Ruble, the Cards co-inventor. He was cited
for tax-shelter work he did for others, mostly KPMG. Mr. Ruble's
law firm had fired him, after discovering the deal he had with
Chenery to funnel 20% of Chenery's fees into a Ruble family
By that time, Mr. Ruble was at Sidley Austin, which had absorbed
Brown & Wood. Sidley Austin and KPMG both faced civil litigation
over tax shelters, which they settled last year for $179
million, including legal fees.
Mr. Taylor -- the lawyer who helped myCFO refine the shelters
and assisted its shelter clients -- was indicted in a
tax-shelter matter in Utah. Both he and Mr. Ruble have pleaded
not guilty, and both declined to comment.
Federal prosecutors also investigated a German bank that helped
arrange some of myCFO's tax shelters. In a deferred-prosecution
deal reached last year, the bank, Bayerische Hypo-und
Vereinsbank AG, or
agreed to a $30 million penalty and admitted that the Cards deal
contained "fraudulent and illegal elements."
The bank's confession didn't mention myCFO. But it said "all
parties involved" knew the Cards credit facility wasn't a
legitimate long-term loan and would be unwound in about a year
to generate "the phony tax benefits sought." Said HVB, in a
Statement of Admitted Facts: "The transactions were prearranged
by the promoters... and had no purpose other than generating tax
benefits for the clients involved."
Write to Peter Waldman at