Three former partners at KPMG in Los Angeles played an active role in creating, marketing and hiding various types of tax shelters from the IRS in order to boost revenues for a lucrative division of the Big 4 accounting firm, according to court papers filed by federal prosecutors in New York.
The shelters are a central focus of investigators who claim that KPMG manufactured $11 billion in tax losses to offset capital gains earned by its wealthiest clients and evade $2.5 billion in taxes.
Last week, prosecutors indicted 17 former executives of KPMG, a New York lawyer and an Israeli investment advisor on charges of conspiracy to commit tax fraud and tax evasion. Included in those charges are claims against three former partners in the Los Angeles and Woodland Hills offices of KPMG.
The highest-level partner, Gregg Ritchie, was in charge of the group that came up with some of the tax shelters until he left in 1998 to work for Beverly Hills-based Global Crossing Ltd., whose founder Gary Winnick was known to use many of the tax shelters. Two other KPMG partners who left in 2003 played key roles in aggressively marketing the shelters to their Los Angeles clients.
The indictments, coming just a few years after the collapse of another major accounting firm, Arthur Andersen LLP, are certain to raise questions about whether the partnership structure is too loose to rein in rogue accountants.
"Individual partners are their own entrepreneurs," said Chris Edwards, director of tax policy at the Cato Institute. "They have a wide latitude as to the advice they can give."
KPMG's partners often operated independently from the firm's Washington National Tax practice, the entity that is charged with creating and approving new tax products, Edwards said. The indictment of partners as far afield as Los Angeles points out how little oversight apparently took place. "They do have a national governing council, but it's impossible for them to follow everything," Edwards said.
KPMG, in an attempt to avoid the fate of Arthur Andersen, agreed to cooperate in the investigation and paid $456 million in August to settle all charges against the firm. As part of the settlement, KPMG admitted that it conspired to commit tax evasion between 1996 through 2002.
"None of these indictments involve any current KPMG personnel," said KPMG in a written statement on Oct. 17. "This matter is now behind us."
But KPMG's settlement agreement leaves its former partners to fend for themselves.
Many of the indictments involve high-level partners who served in executive positions. The rest of the indicted partners were involved in various subgroups of tax services that created, marketed or approved the questionable tax shelters. Ritchie, a former Woodland Hills partner, headed one of those subgroups one focused on providing tax products to wealthy individuals.
He and the other two local partners are accused of drafting false opinion letters assuring clients that the shelters would pass IRS scrutiny. They also came up with ways to hide those shelters from the IRS, according to federal filings.
Ritchie instructed his group not to show clients KPMG's Power Point presentations about the tax shelters "under any circumstances," according to last week's superseding indictment.
In an undated memo written to then-vice chairman of tax operations Jeffrey Stein, Ritchie said he made a "business decision" not to register the shelters with the IRS because the high revenues they generated would outweigh any IRS penalties the firm would have to pay.
Ritchie also misled the IRS into believing the tax shelter losses came from bad stock investments, the indictment says.
Then, in 1998, Ritchie went to work for Winnick. The indictment doesn't name Winnick, saying that Ritchie worked for a "Beverly Hills Businessman" who used one of the KPMG tax shelters on his 1999 tax returns. Those shelters "generated $300 million in phony tax losses, a portion of which was attached to various publicly-traded stocks," the indictment says. Ritchie also used the tax shelters to report $10 million in losses for himself, the indictment says.
Ritchie's lawyer, Michael Horowitz, a partner at Cadwalader Wickersham & Taft LLP, did not return calls.
Ritchie was not alone in marketing the tax shelters locally. He and Carl Hasting, another KPMG partner in Woodland Hills who was a tax manager in the same group, devised a way to hide the tax-shelter transactions on their clients' individual income tax returns, the indictment says.
But Hasting says he never came up with the idea for the tax shelters, according to a suit he filed last month against KPMG. He says he was "not involved in any aspect of the products' conception, design, development or approval," which all occurred in the firm's Washington Tax Practice, the suit says.
He is seeking unpaid legal bills associated with the federal probe. His lawyer in the civil suit, Marc Fenster, a partner at Russ August & Kabat, declined comment, and his criminal lawyer, Russell Gioiella, a partner at Litman Asche & Gioiella LLP, did not return calls.
Hasting also has been named in a $10 million lawsuit filed by Howard Ruby, chairman of Los Angeles-based corporate housing and apartment developer Oakwood Worldwide. Ruby and his lawyer, Dale Kinsella, a partner at Greenberg Glusker Fields Claman Machtinger & Kinsella LLP, did not return calls.
According to that suit, Hasting met with Oakwood representatives at Ruby's offices in Los Angeles in 1999 to assure them that the tax shelter stood a "better than 50 percent" chance of surviving IRS scrutiny, the suit says.
Ruby paid $2.9 million to KPMG and Presidio Advisory Services, a San Francisco-based investment firm founded by two former KPMG partners, John Larson and Robert Pfaff, who were indicted last week. Presidio, acting on behalf of several high-profile clients that included Guess Inc. founders and co-chairmen Paul and Maurice Marciano and former gubernatorial candidate Bill Simon Jr., has sued the federal government for rejecting its clients' tax-loss deductions created by the shelters.
A third local partner, David Greenberg, worked out of KPMG's Los Angeles office as a tax partner from 1999 to 2003. Greenberg worked in a different subgroup than Ritchie and Hasting that focused on business taxes, not individual income taxes.
He is the only partner among the 17 indicted who was arrested and remained in custody last week. A federal prosecutor has asked a Los Angeles judge to deny bail to Greenberg, who allegedly told a witness in the case, "If I'm indicted I'm going to take $16 to $20 million in an account in my ex-wife's name that no one else can touch and I'm taking off," the Los Angeles Times reported.
Greenberg has asked the judge to release him on $10 million bail.
His lawyer, John Nassikas, a partner at Arent Fox PLLC, did not return calls.
According to the indictment, Greenberg arranged for at least 14 fellow KPMG partners to use one of the tax shelters on their returns. For himself, Greenberg received $1.6 million in income from KPMG in the tax years 1999 through 2001, but claimed losses of about $1.6 million and "therefore fraudulently understated his taxable income and paid virtually no tax on the money he received from KPMG," the indictment says. He reported $185,000 in income on his individual tax returns.
He also set up a deal with an Orange County law firm to hide many of the tax shelters from the IRS by using attorney-client privilege, according to the indictment.
Greenberg's name first surfaced in a defamation claim made by a former Los Angeles KPMG tax manager, Michael Hamersley, against the firm two years ago. Hamersley, who says he was placed on administrative leave because he refused to participate in the tax shelters, was a key whistleblower who testified before the U.S. Senate Finance Committee about tax shelter practices two years ago. The Congressional investigation, completed earlier this year, eventually led to the federal probe.
In his suit against KPMG, Hamersley said that in late 2001 he told an individual who worked for Greenberg to "keep her distance from the tax shelters that Mr. Greenberg was selling." He referred to Greenberg as "reputedly one of KPMG's leading promoters of aggressive tax shelters," the suit says.
Hamersley was later reprimanded by a senior tax partner who told him, "You better shut up about this tax shelter stuff or those guys will keep you from getting promotions or salary increases." Hamersley, who withdrew his suit against KPMG, now works for the abusive tax shelter task force at the California Franchise Tax Board.
One former senior partner at a competing Big 4 accounting firm said he often heard Greenberg pitch KPMG tax shelters at meetings in Los Angeles.
He would say, "'We'll issue an opinion out of our L.A. office on this transaction', and the client would say, 'What about an opinion coming out of your national office?'" the former partner said. "The word back was, 'We don't want to involve them.'"
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