KPMG Class-Action Settlement Terms Approved

by Leroy Baker, for LawAndTax-News.com, New York

06 June 2006

A federal judge has granted final approval to a settlement proposed by accounting firm KPMG to compensate investors who made use of its tax sheltering arrangements.

Under the settlement approved by U.S. District Court Judge Dennis M. Cavanaugh on June 2, the approximately 200 clients would receive $153.9 million to cover transaction costs for the tax shelters, but not back taxes and penalties.

The average payout would be $825,000, with the class-action counsel Milberg Weiss Bershad & Schulman netting $24.6 million.

The proposed settlement is designed to cover former clients of KPMG and the law firm of Brown & Wood (now part of Sidley Austin) 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.

The settlement is less than the initial proposal which totaled $225 million approved last October after about 50 tax shelter clients declined to participate in the deal. These litigants can pursue claims against KPMG and the Sidley firm on their own.

Judge Cavanaugh ruled that the offer was "fair, reasonable, and adequate," and was keen to draw a line under the case which he stated could extend "for at the very least another few years.”

In a related case pending in New York, 19 defendants, including several senior KPMG employees and lawyers with Sidley Austin, face criminal charges for their roles in selling the tax shelters which were deemed "abusive" by the Internal Revenue Service. The agency has estimated that the tax shelters helped investors avoid some $2.5 billion in taxes.

So far, only one of the defendants has entered a guilty plea; in March, David Rivkin, a San Diego partner in KPMG's "innovative strategies," group surprisingly changed his plea, and admitted to one count of tax evasion and one count of conspiracy.

Court documents described how Rivkin's clients were advised to invest money though Cayman Islands entities or through foreign currency transactions.

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