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KPMG Defendant Pleads Guilty In Tax Shelter Case

by Glenn Shapiro,, New York

12 September 2007

One of the five remaining defendants in the KPMG tax fraud case has pleaded guilty and agreed to cooperate with the United States government against the other defendants due to stand trial next month.

David Makov, a former investment advisor who did not work for KPMG, entered a guilty plea on Monday to one count of conspiracy to commit tax fraud. In a statement read out in the in the federal district court in Manhattan, Makov also implicated three other defendants, John Larson, Robert Pfaff and R.J. Ruble.

Makov also agreed to pay a $10 million penalty as part of the plea agreement, and he is scheduled to be sentenced at a later date.

Makov's plea is expected to strengthen the government's case against the three men, as well as against Deutsche Bank, which it suspects of assisting in the creation of dubious tax shelters. Deutsche Bank, however, was not named in the court proceedings on Monday.

The government's pursuit of what has been billed as the largest criminal case in US legal history was rather embarrassingly derailed in July, when Judge Lewis Kaplan of the Manhattan federal district court dismissed charges against 13 of the 18 defendants (all but two of which were former KPMG employees), ruling that the government had denied them their constitutional right to counsel by pressuring their former employer to cut off payment of legal fees.

While Judge Kaplan stated that his ruling had been made "with the greatest reluctance", he decided that the Justice Department had "foreclosed these defendants from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice".

"This is intolerable in a society that holds itself out to the world as a paragon of justice," Kaplan wrote.

The former KPMG employees and the two other defendants were accused of helping to deprive the Treasury of some $2.5 billion in tax revenues by selling illegal tax shelters to wealthy clients, such as Bond Linked Issue Premium Structure, or Blips, which helped these clients create huge paper losses.

During Monday's hearing, Makov described his involvement in crafting and selling the Blips strategies to clients. He told the judge that the creation of "paper losses and large fees for the participants, including myself was the sole purpose of these transactions".

Makov is the second defendant to change his plea to guilty in the case. In March 2006, David Rivkin, a San Diego partner in KPMG's "innovative strategies" group, told Judge Kaplan that he was pleading guilty to one count of tax evasion and one count of conspiracy.

Rivkin admitted to conspiring to help clients with more than $20 million each in income or capital gains to "keep the money for themselves instead of paying taxes they owed", and wrote letters for clients testifying to the legitimacy of the shelters in the event of an IRS inquiry. The tax revenues lost to the government as a result of shelters he sold to nine clients is believed to amount to about $235 million.

In August 2005, KPMG agreed to pay $456 million in penalties to cover former clients who participated in the tax shelters, which also included strategies known as Flip, Opis and Short Option Strategy.

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