KPMG Trying to Cut Deal
on Liabilities, Filing States
By Gretchen Morgenson
New York Times
Thursday, June 23, 2005
KPMG, the big accounting firm under federal scrutiny over questionable tax shelters it developed and helped sell in the late 1990's, has been quietly working to limit its liability from civil suits filed by clients who bought the shelters, according to documents filed in Federal District Court in Arkansas late yesterday.
The move by KPMG to cap its liabilities came to light less than a week after it apologized for its involvement in the sale of the dubious shelters and acknowledged that they were "unlawful." Its admissions, which were seen as a way for the firm to avert a federal indictment like the one that devastated a former rival, Arthur Andersen, seemed to open the door to significant civil suits.
Behind the scenes, however, according to the court documents, the firm recently began negotiating with Milberg Weiss Bershad & Schulman, a law firm that does not represent any former KPMG clients and therefore has no fiduciary duties to them. The negotiations were intended to reach a "prepackaged settlement" with those who were harmed by the shelters, the filing said. Under the terms of the deal, KPMG would pay $195 million, the documents said. Recoveries to those who purchased the shelters would be 20 percent to 75 percent of their losses.
The legal brief that disclosed the negotiations was filed by Bernstein Litowitz Berger & Grossmann, the law firm overseeing the only class action that has been filed on behalf of people who bought the abusive shelters recommended by KPMG.
The case, which is in the United States District Court in Hot Springs, Ark., includes as members anyone who bought a shelter from January 1998 to Oct. 31, 2000. Other defendants in the class action are Presidio, an investment advisory firm started by former KPMG partners; Deutsche Bank; and Sidley Austin Brown & Wood, a law firm that issued opinion letters favoring the shelters.
Asking the court to put a stop to the negotiations, the filing stated: "The reasons for this maneuver are obvious: by dealing with friendly lawyers who have assumed no duty to achieve the maximum possible recovery for the class, KPMG could minimize its exposure and quietly sweep these problems away."
Gerald H. Silk, a lawyer at Bernstein Litowitz, said KPMG's negotiations with Milberg Weiss seemed to be an attempt to circumvent the firm's representing investors who have sued the firm.
"We view this as an extremely troubling development which, if it is as bad as we fear, is a serious miscalculation for KPMG, a firm that should be trying to put its troubles behind it in a legitimate and above-board manner," he said.
Mr. Silk said that the firm had learned of the KPMG negotiations on June 17 from one of the class members in the lawsuit.
George Ledwith, a KPMG spokesman, declined to comment, saying that the firm had not yet had a chance to review the court filing.
Melvyn I. Weiss, a co-founder of Milberg Weiss, declined through a spokeswoman to comment on the negotiations with KPMG.
The abusive tax shelters that were sold by KPMG used a series of loans and other transactions to produce huge tax losses that offset legitimate capital gains, according to a 2003 report by the staff of the Senate subcommittee on investigations. The report added that one of the shelters reduced federal tax receipts by $1.4 billion. The Internal Revenue Service later ruled that the shelters were abusive.
KPMG sold the tax shelters from 1997 to 2001, the Senate report said, generating some $124 million in fees.