Judge Declines To Approve KPMG Tax Shelter Settlement

by Glen Shapiro, LawAndTax-News.com, New York

11 October 2005

US District Judge Dennis Cavanaugh on Friday declined to approve the $225 million settlement proposed by KPMG to compensate investors who made use of its tax sheltering arrangements.

It emerged earlier this month that KPMG and US law firm Sidley Austin Brown & Wood LLP had reached the preliminary $225 million settlement in a class-action agreement with about 275 former tax-shelter clients.

The proposed settlement was designed to cover former clients who participated in the tax shelters known as Blips, Flip, Opis and Short Option Strategy. These are the shelters that were the subject of KPMG's settlement agreement with federal prosecutors in August under which KPMG agreed to pay $456 million in penalties, but won't face criminal prosecution as long as it complies with the terms of its agreement.

However, following 90 minutes of arguments on Friday, in which objectors to the settlement argued that there had been collusion between the two sides and that lawyers had ignored conflicts of interest, Judge Cavanaugh announced that:

"Frankly, I am just not comfortable approving the settlement preliminarily at this time," going on to qualify the remark by adding that:

"I am not at all suggesting that the settlement offered won't turn out to be an excellent settlement."

A further hearing has been scheduled for October 28 to allow evidence of the alleged collusion to be presented.

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