Accounting Giant KPMG Faces Florida Trial For Deceiving Investors

Accounting Giant KPMG Faces Florida Trial For Deceiving Investors

Edward Ricci and Benjamin Salzillo, from the law firm Ricci~Leopold, P.A. in Palm Beach Gardens, Florida, recently filed a complaint on behalf of their client, officers and investors of Best Communications, a Boca Raton technology company, against the behemoth accounting and consulting firm of KPMG and Sidley Austin Brown & Wood, a major Chicago-based law firm, of deceiving them into investing millions of dollars in falsified tax shelters.

The suit filed in Palm Beach Circuit Court alleges fraud, conspiracy, and legal and accounting malpractice. Ricci-Leopold's client seeks compensatory damages in the matter. Best Communications has also asked the courts to grant them the right to add claims for punitive damages.

KPMG is accused of having developed and promoted two fake shelters and offered a tax opinion supporting investment in another tax shelter developed by accounting firm PricewaterhouseCoopers. Brown & Wood (which merged with Sidley Austin in 2001) are accused of aiding in the marketing of the shelters by submitting legal opinions orchestrated by KPMG to support the accounting firm's sales effort.

The Internal Revenue Service consequently stated the three highly complex shelters were "potentially abusive" and has assessed the investors back taxes and interest. "Our client's losses were significant and are still being calculated," stated Salzillo. The complaint addresses that in just one set of transactions accountants KPMG and lawyers at Sidley Austin Brown & Wood were paid fees of $10 million.

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Two firms created by former KPMG employees are also named in the suit as defendants; Texas based company TX Presidio Advisors LLC and California based company Presidio Growth LLC, Both are named in the suit as serving as advisers on the tax shelters.

Most of the plaintiff's case is based on a 2003 study of KPMG tax shelters conducted by the United States Senate. Among the findings was the opinion that KPMG devoted substantial resources to, and collected significant fees from the development of marketing and the implementation of what are now considered potentially abusive tax shelters. These shelters have cost the U.S. Treasury literally billions of dollars in lost tax revenue. The study wrote that the lawyers (Sidley, Austin et al) "close, ongoing, and lucrative relationship with KPMG raises serious questions about the independence of both parties and the value of their opinion letters."

"The Senate committee findings have spawned lawsuits against KPMG in numerous other state courts across the United States," said Ricci. "Typically an individual, small business, foundation, corporation and the like would place the utmost confidence and trust in the counsel of a firm of the size and experience of KPMG. Obviously they were completely misled."

Scott Adams and William Nesbit founded Hiway Technologies, a Web hosting service with just $8,000 of initial operating capital in 1995. Two years later with investors Steven Umberger and Arthur Cahoon, Hiway reported $6 million in annual revenues. In 1998 the firm merged with a California based firm led by David Buzby and James Zarley. Two months later the merged company was purchased for $350 million in cash and stock by telecommunications giant Verio. Following the announcement of Hiway's sale, Marcel Maier a senior manager at KPMG's Fort Lauderdale office, and Tracie Henderson of the firm's Boca Raton office contacted owners.

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Maier and Henerson with a representative of Presidio Advisors the suit states induced Adams, Nesbitt and Umberger to participate in a KPMG tax shelter titled "Offshore Portfolio Investment Strategy (OPIS). In 1999, the three men shared $198 million in total capital gains from the Verio sale. Cahoon, who realized $52 million in capital gains in 2000, was advised to invest in a KPMG shelter titled Bond Linked Issue Premium Structure (BLIPS). Cahoon, David Buzby and James Zarley paid $225,000 to KPMG for tax opinions on which they relied and were advised to invest in a PricewaterhouseCoopers shelter titled Foreign Leveraged Investment Program (FLIP).

The suit alleges that KPMG and Presidio marketed and sold the shelters with the knowledge that the tax strategies were not legal. "That allegation is fully supported by KPMG internal memos discovered by the Senate investigators," stated Ricci. A February 1998 memo written by a KPMG analyst refers to the OPIS shelter as "smoke and mirrors" and to a particular component of the plan as a "shame." An August 1999 e-mail from a second KPMG analyst states "skepticism" that the BLIPS shelter "would actually be sustained by a court if challenged by the U.S. Internal Revenue Service."

In 2000, the IRS issued an order that disallowed all capital losses claimed by taxpayers participating in BLIPS. In August of 2001, the Service announced it was disallowing all losses claimed by participants of in OPIS.

"KPMG's were completely disregarding the warnings and red flags of the firm's tax analysts. Our clients were not looking for tax shelters when KPMG approached them. However, like many business people they trusted a firm of this size of reputation and went forward," added Ricci.

The suit claims that Sidley Austin Brown & Wood is liable because if rendered what investors were led to believe was "independent legal opinions" that in fact, again according to Senate investigators "jointly developed" with KPMG and written to corroborate the huge

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accounting and consulting firm's "erroneous tax opinions." The suit states that Sidley Austin Brown & Wood traded on its "stellar reputation in the legal community" to obtain $50,000 from KPMG for "each time its name was mentioned" and a sale accomplished.

"These investors trusted the reputation of this accounting firm and its experts as well as the law firm and its counsel to provide honest, careful and independent representation, when in fact both KPMG and the law firm it would appear from documents from the investigation simply just wanted the fees and income," said Salzillo. "Our clients suffered millions in losses due to this greed and unscrupulous activity," Ricci concluded.

Edward M. Ricci is managing partner in the law firm of Ricci~Leopold, P.A. and Benjamin Salzillo is an associate at the firm. Ricci~Leopold, P.A. was founded in 1982, has five attorneys and is headquartered in Palm Beach Gardens, Florida, with offices located at 2925 PGA Blvd. Edward Ricci can be contacted at 561-684-6500. Additional information about Ricci~Leopold, P.A. may be obtained from the firm's website at www.riccilaw.com.