KPMG Revises Terms of Payout In Big Tax-Shelter Settlement
By David Reilly
The Wall Street Journal
Thursday, March 23, 2006
Accounting giant KPMG LLP and law firm Sidley Austin LLP took a
fresh stab at settling a class-action lawsuit related to the
sale of questionable tax shelters.
The firms last month shelved a previous version of the
settlement, which called for a $195 million payout to those who
had bought the tax shelters, because too many people had opted
out of the agreement.
Under the new version of the settlement, filed yesterday in
federal court in New Jersey, KPMG and Sidley Austin would pay no
more than, but most likely far less than, the $195 million
originally envisaged, as well as up to $30 million in legal
KPMG, which sold the questionable tax shelters, will bear the
brunt of this cost, while Chicago-based Sidley Austin, which
gave legal advice on the shelters, will pay about 20%.
The revised settlement terms would reduce the amount the firms
will pay based on the number of plaintiffs who opt out. The
amounts to be received by individuals won't necessarily decline
because of this reduction. They would depend on the specific
claims of each individual investor.
In a statement, a KPMG spokesman said, "The amendment of the
original settlement allows us to continue pursuing a fair and
reasonable settlement of this matter."
Melvin Weiss, senior and founding partner at Milberg Weiss
Bershad & Schulman LLP, which is lead counsel for the
class-action plaintiffs, said that individuals who think they
can get a better deal on their own can "go try. I think quite
frankly that this is a very fair settlement from a lot of
A spokeswoman for Sidley Austin declined to comment on the case.
If the new agreement successfully revives the proposed
settlement, it could be another important step by a major
accounting firm to put behind it troubles stemming from the
go-go days of the late 1990s. The Big Four firms --
PricewaterhouseCoopers LLP, Deloitte & Touche LLP, KPMG and
Ernst & Young LLP -- have spent millions to make amends for
misdeeds from this period.
In KPMG's case, the price of putting the past behind it has been
particularly high. The revised tax-shelter settlement follows a
deferred-prosecution agreement the firm entered into last year
with the Justice Department that called for KPMG to pay $465
million. Plus, the firm still faces damage claims from
tax-shelter clients who opted out of the settlement and plan to
pursue their cases individually.
Still, the potential settlement would bring closure to most of
the tax-shelter issues KPMG faces and allow the firm to start
moving beyond that chapter in its history.
The ultimate amount to be paid by KPMG and Sidley Austin under
the new settlement agreement will be based on a formula that
fluctuates depending on the number of tax-shelter buyers who
agree to take part. Of the 284 who originally joined the
class-action suit, 61 had opted out of the previous settlement,
claiming it didn't pay enough.
The new settlement addresses some technical objections raised by
some of those who opted out, but doesn't increase the amount on
offer. That means some investors are likely to continue opting
"The proposed amount to be paid is entirely insufficient," said
Michael Avenatti, a lawyer at Greene Broillet & Wheeler LLP who
represents two investors who earlier opted out of the proposed
settlement and who won't rejoin the agreement. Mr. Avenatti
said his clients disagreed with the settlement because KPMG
could expect to pay much more if it tried cases individually.
The attorney estimated that, under the proposed new payment
formula, KPMG and Sidley Austin could shell out between $130
million to $150 million. He estimates the legal fees alone for
trying the cases individually would amount to $500 million, and
any punitive damages would cost the accounting and law firm
KPMG declined to comment on the projected payout.
In addition to possibly lowering the amount KPMG and Sidley
Austin will pay, attorneys for the class-action plaintiffs could
also receive less than the $30 million fee set aside under the
Write to David Reilly at