Free Motion to Stay - District Court of Federal Claims - federal

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
----------------------------------- X

UNITED STATES OF AMERICA
- against -

SUPERSED.~G INDICTMENT
S 1 05 Cr. 888 (LAK)

JEFFREY STEIN,

JOHN LANNING,

RICHAR SMITH,
JEFFREY EISCHEID, PHILIP WIESNER, LARSON, JOHN ROBERT PFAFF, DAVID AMIR MAKOV,
Ii

LARY DELAP,
STEVEN GREMMINGER, RAYMOND 1. RUBLE, also known as "R.J. Ruble,"

GREGG RITCHIE, .
RANDY BICKHAM, MARK WATSON, CAROL WARLEY,
DA VID RIVKI,

CAR HASTING, RICHARD ROSENTHAL, and
DA VID GREENBERG,

Defendants.
----------------------------------- X

COUNT ONE (Conspiracy)
The Grand Jury charges:

Background

1

J 5
I

.. z EXHIBIT

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Pertnent Entities

1. At all times relevant to this Indictment, KPMG LLP ("KPMG"), a

co-conspirtor not named as a defendant herein, was a limited liability natership
headquarered in New York, New York, and with more than 90 offices nationwide.

KPMG LLP is and was a member fi ofKPMG International, a Swiss cooperative of
which all KPMG firm worldwide are members. At all times relevant to this Indictment,
KPMG was one of the largest auditing firms in the world, providing ~udit services to
many of the largest corporations in the United States and elsewhere. Sixteen of the

defendants are fonner KPMG parers, and one defendant is a fonner KPMG senior
manager.
2. In addition, KPMG was in the business of providing ta serices to

corporate and individual clients, including some of

the wealthiest individuals in the

United States. These tax servces included, but were not limited to, preparng ta returns,

providing tax planning and tax advice, and representing clients in Internal Revenue

Serice ("IRS") audits and Tax Court litigation with the IRS. The porton ofKPMG's
tax practice that specialized in providing tax advice to individuals, including wealthy

individuals, was known as Personal Financial Planning, or "PFP." The KPMG group
focused on designing, marketing, and implementing tax shelters for individual clients
was known at different times as CaTS ("Capital Trasaction Strtegies"), and IS

("Innovative Strategies"). The KPMG group focused on designing, marketing, and

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implementig tax shelters for corporate clients was known as Stratecon. KPMG also had
a deparent withn the tax practice known as Washington National Tax, which was

designed to provide expert ta advice to KPMG professionals in the field, and which
parcipated in designing tå shelters and drftng opinion letters relating to those

shelters.
3. At all times relevant to this Indictment, "Bank A" was a foreign

ban with its pricipal United States branch located in New York, Néw York, and an
audit client ofKPMG. As descrbed below, Ban A parcipated in FLIP, OPIS, BLIPS,

and SOS tax shelter transactions
4. At all times relevant to this Indictment, "Bank B" was a foreign

ban with its pricipal United States branch located in New York, New York and an

audit client ofKPMG. As described below, Ban B partcipated in BLIPS tax shelter

trnsactions.
5. At all ties relevant to this Indictment, "Bank C" was a foreign

ban and an audit client ofKPMG. As described below, Bank C parcipated in BLIPS
ta shelter trsactions.

6. At all times relevant to this Indictment, "Ban D" was a foreign

ban with its principal United States brach located in New York, New York. As
descrbed below, Bank D parcipated in FLIP and OPIS tax shelter trnsactions.
7. At all times relevant to this Indictment, "Bank E" was a foreign

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ban with its principal United States brach located in New York, New York. As
described below, Ban E partcipated in a set of

BLIPS ta shelter transaction.

The Defendants

8. Defendant JEFFREY STEIN, a lawyer with a Master's in tax law,
was a tax parter at KPMG from at leat in or about 1987 through in or about Januar

2004. In or about 1996, STEIN becae the Parer-in-Charge ofKPMG's interational
tax group; in or about March 1998, STEIN became Vice Chainan JTax Operations; in
or about 2000, STEIN became Vice Chairman of

Tax Services;-and in or about April

2002, STEIN became Deputy Chairm ofKPMG.
9. Defendant JOHN LANING, a cerfied public accountant

("CPA"), was a tax parer at KPMG frm at least in or about 1982 though in or about
2000. In or about October 1996, LANNG became Vice Chairman -Tax Operations,

and in or about March 1998, LANG became Vice Chairman of Tax Services.
10. Defendant RICHARD SMITH, a lawyer, was a ta parer at
KPMG from at least in or about 1995 though in or about 2004. He worked in
Washington National Tax, became a leader of

Washigton National Tax, became Area

Managing Parer for the Wester Region ofKPMG's ta practice in Januar 2002, and
then in May 2002 became a Vice Chairan of KPMG in charge oftax.
11. Defendant JEFFRY EISCHEID, a CPA, was a ta parter in

KPMG's Atlanta offce from at least 1997 thrugh in or about 2004. During that period

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of

time, he served as head ofKPMG's Innovative Strtegies group and Parer-in-Charge

ofK.MG's Personal Financial Planning group.
12. Defendant PHILIP WISNER, a lawyer with a Master's in tax law

and a CP A, was a ta parer at KPM G from at least in or about i 984 tlugh in or about
June 2004, and served as Parer-in-Charge of

Washington National Tax during 1998

and a portion of 1999.

13. Defendant JOHN LARSON, a lawyer and a CpA, was a KPMG
senior ta manager based in KPMG's San Francisco, California, office prior to 1997, and

defendant ROBERT PFAFF, a lawyer and a CPA, was a KPMG tax parer based in

KPMG'sDenver, Colorado, office prior to 1997. In or about 1997, LARSON and
PFAFF resigned their positions at KPMG and formed a limited liabilty company with its

principal offce located in San Francisco and a satellte office located in Denver. In or
about 1999, LARSON, PFAFF, and the defendant DAVID AMIR MAKOV formed

another limited liabilty company with its pricipal office located in San Francisco and a
satellte office located in Denver. As detailed more fully below, LARSON, PFAFF,

MAKOV and others, used the two limited liabilty companies described in this

paragraph, and certin related entities (collectively referred to herein as the "Larson/faff
Entities") to parcipate in certain tax shelter transactions as, among other things, the
purported investment advisor.
14. Defendant LARRY DELAP, a CPA, was a KPMG tax parer from

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at least in or about 1974 through in or about September 2002. DELAP was the Parerin-Charge ofKPMG's Deparent of

Professional Practice - Tax from the creation of

that position by the defendant JOHN LANNING in or about 1997 through in or about
September 2002.

15. Defendant STEVEN GREMMINGER, a lawyer, was a parer at
KPMG and an associate general counsel in KPMG's Office of

General Counsel from at

least in or about 1998 through in or about 2005. GREMMINGER vias the primary
Office of

General Counsel contact for KPMG's ta practice. -

16. Defendant RAYMOND J. RUBLE, also known as ''R.I. Ruble," a
lawyer, was a ta parter in the New York, New York office of a prominent national law

firm (the "RUBLE Law Firm").
17. Defendant GREGG RITCHIE, a CPA, was a KPMG ta parter

from at least in or about 1987 through in or about September 1998. During his time at

KPMG, RITCHIE was head ofKPMG's CaTs group. In or about September 1998,
RITCHIE left KPMG to work as chief financial officer of a company controlled by a

businessmañfrom Beverly Hils, California (the "Beverly Hils Businessman"), a KPMG
client. RITCHIE worked in this capacity for the Beverly Hils Businessman's company

though the date of this Indictment. While working for the Beverly Hils Businessman,
RITCHIE acted as the liaison between the Beverly Hils Businessman and KPMG with

respect to BLIPS and other ta shelter transactions.

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18. Defendant RANDY BICKHM, a CPA, was senior manager in
KPMG's tax practice prior to July 2000, and from in or about July 2000 through in or

about April 2002, was a KPMG ta parer. BICKH was a member of the
Innovative Strategies group, and worked in KPMG's San Francisco, CA office.

19. Defendant MAR WATSON, a CPA, was a KPMG tax parter and
the Parer-in-Charge of the PFP division of

Washington National Tax from at least June

1998 though July 2000. In or about August 2000, WATSON was Jansferred to a

KPMG affliate partership located in Amsterdam.
20. Defendant CAROL WARLEY, a CPA, was a KPMG tax parer

from in or about 1993 though in or about December 2004. WAREY worked in
KPMG's Houston, TX office, and was a member of

the Innovative Strategies group.

21. Defendant DAVID RIVK, a CPA, was a KPMG tax parter from
in or about July 1999 though in or about April

2004. RIVKI worked in KPMG's San

Diego, CA office, and was a member of the Innovative Strtegies group.
22. Defendant CARL HASTING, a lawyer and a CPA, was a KPMG

tax parer from in or about July 1998 though in or about November 2003. HASTING
worked in KPMG's Woodland Hils, CA office and was a member of

the Innovative

Strategies group.

23. Defendant RICHAR ROSENTHAL, a CPA, was a KPMG tax
parer from at least in or about 1987 though in or about 2004. From in or about 1998

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though in or about July 2000, ROSENTHAL was Area Managing Parer ofK.MG's
western region, from in or about July 2000 through in or about May 2002,

ROSENTHAL was Vice Chainnan - Tax Operations, and from in or about October 2002
though in or about 2004 ROSENTHAL was Chief

Financial Officer ofKPMG.

24. Defendant DAVID GREENBERG, a CPA, was hired by KPMG as

a direct entr ta parer in or about May 1999. GREENBERG was a KPMG tax parer
from in or about May 1999 thrugh in or about August 2003. GREENBERG was a
member of

the Stratecon group and worked in KPMG's Los Aigeles, CA offce.
Tax Shelter Fraud
25. During the period from at least in or about 1996 though at least in

or about 2005, the defendants JEFFREY STEIN, JOHN LANNG, RICHARD
SMITH, JEFFREY EISCHEID, PHILIP WIESNER, JOHN LARSON, ROBERT

PFAFF, DAVID AMIR MAKOV, LARRY DELAP, STEVEN GREMMINGER,
RAYMOND 1. RUBLE, also known as "R.I. Ruble," GREGG RITCHIE, RANDY

BICKHAM, MAR WATSON, CAROL WARLEY, DAVID RIVKI, CAR
HASTING,lUCHAR ROSENTHAL, and DAVID GREENBERG, and others known
and unkown to the Grand Jury (hereinafter their "co-conspirators") parcipated in a
scheme to defrud the IRS by devising, marketing, and implementing fraudulent ta

shelters, by preparng and causing to be prepared, and filing and causing to be filed with

the IRS false and frudulent U.S. individual income tax returns containing the fraudulent

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ta shelter losses, and by frudulently concealing from the IRS those shelters.

26. The conspirators designed and marketed these shelters as a mèans

for wealthy individuals with taable income or gains generally in excesa ~f $1 0 millon

in 1997 and of $20 millon in 1998-2000 frudulently to eliminate or reduce their individual income taes to the IRS on that income or gains. As marketed and
implemented, instead of

the wealthy clients paying U.S. individual income taxes that

were legally owed, generally 20% to 35% of their income or gains, tÍíe client could

choose the amount of ta loss desired, and pay certin of the cOllspirators and others an
all-in cost generally equal to approximately 5 to 7% of the desired ta loss. This "all-in"

cost included the fees ofKPMG, the Laron/faffEntities, the varous law finns that
supplied opinion letters, including RUBLE and the RUBLE Law Finn, the bank

partcipants, and others, as well as a small porton that would be used to execute
purported "investments" that were designed to conceal the tax shelters. The size of

the
the fees to

purported "investments," the timig of

the transactions, and the amount of

certin conspirators and participants were all deterned based on the ta loss to be

generated.
27. In order to conceal the tre nature of

the tax shelter from the IRS, to

attempt to evade the wealthy clients' U.S. individual income taxes, and to shield the

clients frm IRS penalties for underpayment of income taes, KPMG and/or a law firm
provided the clients with opinion lettrs containing false and fraudulent representations

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and statements and claiming that the tax shelter losses were "more likely than not" to
survve IRS challenge. The law in effect from at least in or about August 1997 provided
that if a tapayer claimed a ta benefit that was late~ disallowed, the IR~ ~ould impose

substatial penalties, ranging from 20%-40% of the underayment of tax attbutable to

the shelter, unless the tax benefit was supported by an indepndent opinion relied on by
the tapayer in good faith that the ta benefit was "more likely than not" to survive IRS

challenge. Thus, the conspirators issued false and fraudulent opinioJ'letters with the

intent that the clients would claim the fraudulent ta shelter losses on tax returns and
provide the opinion letter and other false and fraudulent trsactional documents and/or

the false and fraudulent representations and statements contained therein to the IRS if
and when the client was audited.

28. Among the frudulent ta shelter transactions designed, marketed,
and implemented by the defendants JEFFREY STEIN, JOHN LANNG, RICHARD
SMITH, JEFFREY EISCHEID, PHILIP WISNER, JOHN LARSON, ROBERT

PFAFF, DAVID AMIR MAKOV, LARY DELAP, STEVEN GREMMINGER,
RAYMOND J. RUBLE, also known as "R.J. Ruble," GREGG RITCHIE, RANDY

BICKHAM, MAR WATSON, CAROL WAREY, DAVID RIVKI, CAR
HASTING, RICHAR ROSENTHAL, and DAVID GREENBERG and their coconspirators were FLIP ("Foreign Leveraged Investment Progrm"), OPIS ("Offshore
Portfolio Investment Strategy), BLIPS ("Bond Linked Issue Premium Strcture"), SOS

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("Short Option Strtegy") and their variants.

29. FLIP was marketed and sold from at least in or about 1996 though
at least in or about 1999 to at least 80 wealthy individuals and generatea ~t least $ 1.9
billon in phony tax losses; KPM G' s gross' fees from FLIP transactions were at least $17

milion; the RUBLE Law Firm's gross fees from FLIP transactions were at least $3
millon; the Larson/faffEntities' gross fees from FLIP transactions were at least $3

milion.

Ii

30. OPIS was marketed and sold from at leastí:i or about 1998 though

at least in or about 1999 to at least 170 wealthy individuals, and generated at least $2.3

bilion in phony tax losses; KPMG's gross fees from OPIS transactions were at least $28

milion; the RUBLE Law Firm's gross fees from OPIS trnsactions were at least $7
millon; the Lar on/ faff

Entities' gross fees from OPIS transactions were at least $12

milion.
31. BLIPS was marketed and sold from at least in or about 1999
though at least in or about 2000 to at least 186 wealthy individuals, and generated at
least $5.1 bilion in phony ta losses; KPMG's gross fees from BLIPS trsactions were

at least $53 milion; the RUBLE Law Firm's gross fees from BLIPS trnsactions were at
least $13 milion; the Larson/faffEntities' gross fees from BLIPS trsactions were at

least $134 milion.
32. SOS was marketed and sold from at least in or about 1998 through

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at least in or about 2002 to at least 165 wealthy individuals, and generated at least $1.9

bilion in phony tax losses; KPMG's gross fees from SOS transactions were at least $17

millon.
33. Among the individuals who used BLIPS and SOS-tye shelters to

evade their own taxes were the defendants JOHN LARSON, ROBERT PFAFF , DAVID

AMIR MAKOV, GREGG RITCHIE, RICHARD ROSENTHAL, and DAVID

GREENBERG, at least 14 KPMG parers, and other co-conspirato&.
The Fraudulent FLIP and OPIS Shelters
34. In all material respects, FLIP and OPIS were the same. FLIP and

OPIS were generally marketed only to people who had capital gains in excess of $10

milion for FLIP and $20 milion for OPIS. These shelters were designed to generate
substantial phony capital

losses (i.e., in excess of $1 0 milion for FLIP and in excess of

$20 milion for OPIS) though the use of an entity created in the Cayman Islands (a tax

haven). The client purportedly entered into an "investment" trnsaction with the Cayman

Islands entity by purchasing a purprted warrnt or enterng into a purported swap. The
Cayman Islands entity purportedly made a pre-aranged series of purported investments,

including the purchase from either Bank A (which at the time was a KPMG audit client)

or Bank D of either Bank A or Bank D stock using money purportedly loaned by Ban A
or Bank D, followed by a repurchase of that stock by the pertinent bank at a prearranged

price. For the FLIP and OPIS ta shelter transactions in which the Larson/faff entities

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parcipated, the defendant JOHN LARSON directed the transactions purportedly

executed by the Cayman Islands entity. The purported investments were devised to

elimiate economic risk to the client beyond the all-in cost and minimie the portion of
the client's all-in cost used for the investment component. The purported investments
also were devised to eliminate economic risk to the ban and to guarantee the fees of

KPMG, the defendant RAYMOND J. RUBLE, also known as "R.J. Ruble" and the
RUBLE Law Firm, and others. The tax shelter trsactions were de~sed to last for only

approximately 16 to approximately 60 days, and the minimum duration of the shelter was

determined by KPMG and the RUBLE Law Finn, rather than by investment performance
or strategy.

35. In return for fees totaling approximately 7% of

the desired ta loss,

including a fee to KPMG equal to approximately 1.25% of the desired tax loss, the

defendants JEFFREY STEIN, JOHN LANNING, JEFFREY EISCHEID, JOHN LARSON, ROBERT PFAFF, LARRY DELAP, STEVEN GREMMINGER, GREGG
RITCHIE, RANDY BICKHAM, MARK WATSON, CAROL WARLEY, DAVID

RI, CARL HASTING, and RICHARD ROSENTHAL, and their co-conspirators
implemented and caused to be implemented FLIP and OPIS trnsactions and generated

and caused to be generated false and frudulent documentation to support the
transactions, including but not limited to KPMG opinion letters claiming that the

purported ta losses generated by the shelters were more likely than not to withstad

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challenge by the IRS. The defendant RAYMOND J. RUBLE, also known as "R.J.

Ruble" also issued "more likely than not' opinion letters iii return for fees tyically of
approximately $50,000 per opinion, which opinions tracked, sometimes_ ~erbati the

KPMG opinion lettr. In general, all of

these opinion letters were identical, except for

the names of the clients, the names of the entities, the dates, and the dollar amounts
involved in the transactions.
36. The defendants JEFFREY STEIN, JOHN LANJING, JEFFREY

EISCHEID, JOHN LARSON, ROBERT PFAFF, LARY DELAP, STEVEN
GREMMINGER, RAYMOND 1. RUBLE, also known as "RJ. Ruble," GREGG
RITCHIE, RANDY BICKHAM, MARK WATSON, CAROL WARLEY, DAVID

RI, CAR HASTING, and RICHARD ROSENTHAL, anØ their co-conspirators
issued and caused to be issued opinion letters although, as they well knew, (i) the tax
positions taen were not more likely than not to prevail against an IRS challenge if the
tre facts regarding those transactions were known to the IRS, and (ii) opinion letters and

other documents used to implement FLIP and OPIS were false and fraudulent in a
number of ways, including but not limited to the following:
a. FLIP and OPIS were falsely and misleadingly described as

investment programs, when in trth and in fact, FLIP and OPIS were designed,
marketed, and implemented to generate phony tax losses in order to evade income
taes for wealthy clients and garer substatial fees and income for KPMG, the

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LaronlfaffEntities, the RUBLE Law Finn, the defendats JEFFREY STEIN,
JOHN LANNING, JEFFREY EISCHEID, JOHN LARSON, ROBERT PFAFF,

LARRY DELAP, STEVEN GREMMINGER, RAYMOND J. RUBLE, also

~I . -

known as "R.J. Ruble," GREGG RITCHIE, RAY BICKH, MA
WATSON, CAROL WAREY, DAVID RI, CARL HASTING, RICHAR
ROSENTHAL, cerain co-conspirators, and other.
b. Opinion letters began by falsely stating that thetlient requested
KPMG's opinion "regarding the U.S. federal income ta consequences of certin

investment portolio transactions," when in trth and in fact, the conspirators
targeted wealthy clients based on the clients' large taable gains and in retu for

substantial fees to KPMG, the LarsonlfaffEntities, RUBLE and the RUBLE
Law Finn, certin co-conspirators, and others, offered to generate phony tax
losses to eliminate income tax on that gain, and offered to provide a "more likely

than not" opinion letter.
c. Opinion letter contiued by falsely stating that the "investment

strategy was based on the expectation that a leveraged position in the Foreign
Ban securities would provide investor with the opportnity for capital

appreciation," when in trth and in fact the clients executed the strategy to obtain

the expected phony ta benefits promised by certin conspirators.

d. Opinion letter also falsely claimed that the clients "reviewed the

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economics underlying the investment strtegy and believed it had a reasonable

opportnity to ear a reaonable profit frm each of the trsactions. . . in excess
of all associated fees and costs and not including any tax benefi~ ~at may occuf'

when in trth and in fact, there was no such opportity.
e. Opinion letters falsely claimed that one of the parcipants in the
trsaction (an owner of

the Cayman Islands entity) was a foreign person

unrelated to the other parcipants, when in trth and in fact tifese foreign persons

wer simply nominees controlled by the defendats JOHN LARSON and
ROBERT PFAFF. In fact, one of

the foreign persons involved was an owner of

Laron/faff entities.
f. Opinion letters falsely stated that money was paid by the FLIP and

OPIS clients for an "investment" component of

the trnsactions (a warant or a

swap), when in trth and in fact that money constituted fees paid to KPMG, the
Laron/faff entities, the RUBLE Law Firm, the bank partcipant, and the

nominee foreign person, and other partcipants, as well as money that was

temporarily parked in the deal but ultiately returned to the client.

g. Opinion letters also falsely claimed that there was no. evidence of a
"firm and fixed" plan to complete the steps making up the shelter in a partcular

manner, when in trth and in fact, there was such a plan, and the trnsactions in
fact were completed in the particular manner designed to generate the tax loss.

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h. Opinion letters stated that the clients were "more likely than not" to

survive an IRS challenge to the transactions based on the "step transaction
doctrne" - a legal doctrne permittng the IRS to disregard ce~i~ transactions

having no economic substance or business purpose and the purported ta effects

of those disregarded trsactions. Ths asserton was false, as the conspirators
well knew. Indeed, the defendat GREGG RITCHIE, who at the time was in

charge of CaTS, instrcted KPMG parers involved in mar~ting OPiS,

including the defendants JEFFREY EISCHEID, RAY BICKH, and
MAR WATSON, not to permit KPMG clients who were pitched OPIS to retain
a copy ofKPMG's powerpoint presentation describing the transaction "under any
circumstaces" because to do so would "DESTROY any chance the client may

have to avoid the step transaction doctrne."

37. The defendants created and caused to be created this false and
frudulent documentation in order to assist clients in claiming the phony tax shelter
losses on tax returns and in evading taxes.

The Fraudulent BLIPS Shelter

38. BLIPS was designed to generate any amount of capital and ordinary
tax losses though a series of pre-arranged transactions that involved the client

purportedly borrowing money from one of four banks - Ban A, Bank B, Bank C, or
Bank E, three of

which were audit clients ofKPMG at the time - in order to make

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purported foreign currency investments including currencies that were "pegged" to the

UnÍted States dollar. The ban involved in the purorted loan also served as the
counterpart on all of the purorted currency and other transactions involved in BLIPS.

The trnsaction was designed by the defendats RICHARD SMITH, JEFFREY
EISCHEID, PHILIP WIESNER, JOHN LARSON, ROBERT PFAFF, DAVID AMIR

MAKOV, LARRY DELAP, RAYMOND J. RUBLE, also known as "R.I. Ruble,"

RANDY BICKHAM, MARK WATSON, under the supervsion of d'efendats JEFFREY

STEIN and JOHN LANNG, and their co-conspirators, and others, so that after a short
period of

time (virtally always approximately 67 days), the client would exit the

purported BLIPS trsaction and trgger the desired tax loss. BLIPS also included a
nominal investment component tht used only cash contrbuted by the client and that was
not funded or secured by the purported loan.
39. In return for fees totaling approximately 7% of

the desired tax loss,

including a fee to KPMG equal to approximately 1.25% of

the desired tax loss, a fee to

the LarsonlfaffEntities equal to approximately 2.75% of

the desired tax loss, and a fee

to RUBLE äiid the RUBLE Law Firm generlly

equal to approximately $50,000 per

transaction, the defendants JEFFREY STEIN, JOHN LANNG, RICHARD SMITH,
JEFFREY EISCHEID, PHILIP WIESNER, JOHN LARSON, ROBERT PFAFF,
DAVID AMIR MAKOV, LARRY DELAP, STEVEN GREMMINGER, RAYMOND J.

RUBLE, also known as "R.I. Ruble," GREGG RITCHIE, RANDY BICKHM, MAR

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WATSON, CAROL WAREY, DAVID RI, CAR HASTING, and RICHAR
ROSENTHA, and their co-conspirators, and others, mareted and caused to be
marketed, and implemented and caused to be implemented the transactions and generated

and caused to be generated false and frudulent documentation to support the
trsactions, including but not limited to opinion letters ofKPMG and the RUBLE Law

Firm that claimed that the purported tax losses generated by the shelters were more likely

than not to withstad challenge by the IRS. In general, all of these ofinion letters were
identical, except for the names of the clients and entities involved, the dates, and the
dollar amounts involved in the trnsactions.

40. The defendants JEFFREY STEIN, JOHN LANNING, RICHAR
SMITH, JEFFREY EISCHEID, PHILIP WIESNER, JOHN LARSON, ROBERT

PFAFF, DAVID AMIR MAKOV, LARY DELAP, STEVEN GREMMINGER,
RA YMOND 1. RUBLE, also known as "R.I. Ruble," GREGG RITCHIE, RANDY

BICKHAM, MARK WATSON, CAROL WARLEY, DAVID RIVK, CAR
HASTING, and RICHARD ROSENTHAL, and their co-conspirators issued and caused
to be issued tle opinion letters although, as they well knew, (i) the ta positions taen
were not more likely than not to prevail against an IRS challenge if the tre facts
regarding those trnsactions were known to the IRS, and (ii) the opinion letters and other
documents used to implement BLIPS were false and fraudulent in a number of

ways,

including but not limited to the following:

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a. BLIPS was falsely and misleadingly described as an investment

program, when in trth and in fact, BLIPS was designed, ma.keted, and
implemented to generate phony tax losses in order to eliminate income taxes for

wealthy clients and gamer substatial fees and income for KPMG, the

Laron/faffEntities, the RUBLE Law Finn, the defendants JEFFRY STEIN,

JOHN LANNG, RICHAR SMITH, JEFFREY EISCHEID, PHILIP
WISNER, JOHN LARSON, ROBERT PFAFF, DAVID AMIR MAKOV,

LARY DELAP, STEVEN GREMMINGER, RAYMON J. RUBLE, also
known as "RJ. Ruble," GREGG RITCHIE, RANDY BICKHAM, MARK
WATSON, CAROL WARLEY, DAVID RIVK, CAR HASTING, and

RICHAR ROSENTHA, cerin co-conspirators, and others.
b. BLIPS was falsely described as a three-stage, seven-year investment
progr, when in trth and in fact, all participants were expected to withdraw at
the earliest opportnity and within the same tax year in order to obtain their tax

losses. Indeed, the defendants JEFFREY STEIN, JOHN LANNG, RICHAR
SMITH, JEFFREY EISCHEID, PHILIP WIESNER, JOHN LARSON, ROBERT

PFAFF, DAVID AMIR MAKOV, LARRY DELAP, RAYMOND J. RUBLE,

also known as "RJ. Ruble," RANDY BICKHAM, and MARK WATSON, caused
the opinion letters to contain a false representation (which was adopted by BLIPS

clients, including the defendant GREGG RITCHIE and clients to whom the

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defendants CAROL WAREY, DAVID RI, and CAR HASTING sold
BLIPS) that the duration of

the client's parcipation in the the-phase, seven-year

investment program was dependent upon the pedonnance of the .P!ogram relative
to alternative investments, when in trth and in fact, the duration of

the client's

parcipation was dependant on the client's desire to obtain the phony ta losses to
be generated.

c. BLIPS was falsely described as a "leveraged" iJ.(estment progr,
when in trth and in fact, the purported loan transactions that were par of

BLIPS

(and were the aspect of BLIPS that purported to generate the ta loss) were shams

- no money ever left the bank and none of the banks assigned any capital cost to
these purported BLIPS loans. Indeed, at least two of the banks did not fund the

loans at all - they neither set aside from their own funds nor obtained from the
market any money to cover these purported "loans" and "loan premiums." In
addition, the sham loans were not in any way used in the purported "investment"

program involving trdes relating to pegged currncies but, instead, were used
only to generate a phony ta loss. The only money used in makng and securing
the trades involving pegged currencies as par of

BLIPS was money contrbuted

by the client as part of the 7% all-in cost.
d. The BLIPS opinion letter falsely stated that the client (based on the

client's purported "independent review") as well as the Larson/faffEntities

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''believed there was a reasonable opportnity to ear a reasonable pre-ta profit

from the (BLIPS) transactions," when in trth and in fact, there was no

"reasonable likelihood of earing a reasonable pre-ta profit" fro~ BLIPS, and
instead the "investment" component of BLIPS was negligible, unrlated to the
large sham "loans" that were the key elements of

the purported tax benefits of

BLIPS, and was simply window dressing for the BLIPS ta shelter fraud. Indeed,
the defendant MAR WATSON, calculated that because non~ of

the purported

"loan" proceeds were used in any investments, the sma1I-"investment' component
funded with a porton of the 7% all-in cost would have to generate a 240% anual

return in order to cover a porton of the large fees paid to the bank, and would

reuire an even higher return to cover fees paid to KPMG and other conspirators
and parcipants, just to break even. WATSON performed this calculation and

distrbuted it to others involved in designing, reviewing, and approving BLIPS
prior to the implementation of any BLIPS transaction and prior to the issuance of
any KPMG BLIPS opinion letters.
e. The opinion letters and other documents were misleadingly drafted

to create the false impression that KPMG, the Larson/faffEntities, the RUBLE
Law Firm, and the banks were all independent service providers and advisors,

when in trth and in fact they jointly developed and maketed the BLIPS shelter.
Thus, for example, the KPMG BLIPS opinion letter misleadingly claimed that the

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client "requested our opinion regarding the U.S. federal income tax consequences

of certin investment transactions that have been concluded" but the opinion
letters, which falsely descrbed a purported seven-year investme~t program and a
withdrawal from that program based on the purported investment perormance of

the program, were drfted prior to the commencement of any BLIPS transaction.
f. Similarly, the KPMG engagement letter used for BLIPS contained

the following false and frudulent statements, among others, (t) that the client had
engaged KPMG "to provide tax consulting services. . . with respect to
partcipation in an investment program involving investments in foreign currency

positions," when in trth and in fact KPMG marketed a ta shelter to the clients,
and the clients engaged KPMG to assist the clients in generating phony tax losses
using the tax shelter; (ii) that KPMG ''understands that Client intends to engage"
the Laron/faff Entities "to provide Client with investment advisory services and

trading strategies," when in trth and in fact, the LarsonlfaffEntities were
engaged to assist the clients in generating phony tax losses using a tax shelter; (ii)

that the Larsonlfaff Entities "had advised the Client that the utilization of a high

degree ofleverage is integrl to the Investment Program," when in trth and in
fact, the purported "leverage" was a sham loan designed only to support the
creation of

phony tax losses; and (iv) that KPMG's fees would not be dependent

on "the amount of any tax savings projected," when in trth and in fact the

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amount ofKPMG's fee, as well as the size of

the nominal investment made as par

ofthé fraudulent tax shelter, and fees for the Larson/faffEntities and other
parcipants in the trsaction were all determed by the amount. of phony ta -

losses desired by the client to offset income or gain received frm other sources.

41. The defendants created and caused to be created this false and
fraudulent documentation in order to assist clients in claiming the phony ta shelter
losses on tax returns and in evading taes.
42. At various points durng the development of

f!

BLIPS, the defendants

RICHARD SMITH, PHILIP WIESNER, LARRY DELAP, and MARK WATSON, their

co-conspirators, and others, identified varous significant defects of BLIPS, including
that the description of BLIPS and the factual representations contained in the BLIPS

opinion letter and in other documents were false, but nevereless in 1999, SMITH,
WIESNER, DELAP, and WATSON, and their co-conspirators, approved the marketing
of

BLIPS. When Washington National Tax approved the BLIPS documentation in

August 1999, the defendant RADY BICKHAM, who helped devise BLIPS wrote to
the defendant RAYMOND J. RUBLE, also known as "R.J. Ruble": "We have received

our 'get out ofjaIl free card' frm (Washington National Tax)."
43. On or about February 11,2000, a law firm representing certain

prospective BLIPS clients ("Law Firm 2") sent a memorandum (the "Law Firm 2

Memo") to defendant DAVID RIKI stating, in substance and in part, that the drft

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BLIPS opinion letter to be issued by KPMG and the RUBLE Law Finn (i) omitted
material facts, and (ii) contained false and rIìsleading factual statements and
representations. At the time, Law Fin 2 had an ongoing and long-stading attorney-

client relationship with KPMG, although not with respect to the BLIPS trsaction. The

Law Firm 2 Memo was forwarded at least to the defendants JEFFREY EISCHEID,

STEVEN GREMMINGER, RAYMOND J. RUBLE, also known as "R.J. Ruble,"

RANDY BICKH, and MARK WATSON. 11
44. In or about Februar 24, 2000, the defendant PHILIP WIESNER

wrote to the defendants JEFFREY STEIN, JOHN LANNING, LARRY DELAP, MA
WATSON, and others that (a) of

the BLIPS trnsactions implemented in 1999, all clients

terinated the transaction at their earliest opportnity and prior to year-end 1999, and (b)

questioned whether the factual representations in future BLIPS transactions would be
credible, but neverteless recommended that BLIPS opinion letters for the 1999
trsactions be issued without revision.

45. In addition, in or about March 2000, and prior to the issuance of any

BLIPS opiniön letters to clients, during a meeting attended by the defendants JEFFREY

STEIN, JOHN LANING, RICHAR SMITH, JEFFREY EISCHEID, LARY
DELAP, and STEVEN GREMMINGER, and others, DELAP told the other partcipants
in substace and in par that if

the IRS litigates BLIPS in court, the client would "lose."

In addition, another member ofKPMG's tax leadership informed the partcipants at the

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meetig, in substace and in part, that the tax position taen in BLIPS was "close to

frvolous." Durig that meeting, the parcipants also discussed the risks of proceeing
with ta shelter transactions like BLIPS, including the risk of criminal i~~estigation, civil
penalties, civil liabilty for frud, action by the IRS's Director of

Professional Practice,

and action by state Boards of Accountacy. Nevertheless, and despite the obviously
frudulent nature of

BLIPS and the warnings conveyed, the defendants JEFFREY

STEIN and JOHN LANG, and other, decided not to refund BLtpS fees and to
proceed (i) with the issuance of "more likely than not' opinion ietters on all of the 1999
trnsactions with the intent that BLIPS clients would claim the phony BLIPS losses on

1999 tax return, and (ii) continued to implement more BLIPS tax shelter transactions in

2000 and, in 2001, to issue opinions to support those transactions and the claimng of
those BLIPS losses.
46. In addition, in or about March 2000, the defendant STEVEN
GREMMINGER telephoned KPMG's relationship parer at Law Finn 2 about the Law

Finn 2 Memo and stated that Law Firm 2 was intererng with a KPMG tax transaction
and that senior ta parer at KPMG were irate.
The Fraudulent SOS Shelter

47. These shelter were designed to generate substantial capital and
ordinar tax losses though a series of pre-aranged transactions that involved the clients
enterng into virtally offsettng foreign currency option positions with a bank, including

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but not limited to Ban A, sometimes transferg the offsettg positions to a parership

or other entity, and then withdrawing from the transaction, claimng a loss in the desired
amount. These shelters were referred to by various names, including S~~rt Option

Strategy, Spread Option Strategy, Split Option Strtegy, SOS, Binar Option, Digital
Option, Gain Mitigator, Loss Genertor, COINS, BEST, FX Transaction (hereinafter
"SOS"). KPMG's Washington National Tax office and the defendant RICHARD
SMITH considered whether KPMG could issue "more likely than ndt" opinions
regarding SOS trsactions, and they concluded that the phony-losses generated by those

transactions were not more likely than not to withstad IRS challenge. Moreover,

KPMG's Washington National Tax office and the defendat RICHAR SMITH
reviewed draft "more likely than nof' SOS opinion letters prepared by the defendant
RAYMOND J. RUBLE, also known as "RJ. Ruble," and other firm, and deterned

that the trnsactions described therein were not more likely than not to withstad IRS
challenge. Nevereless, between 1998 and 2002, the defendats JEFFREY STEIN,

RICHA SMITH, JEFFREY EISCHEID, LARRY DELAP, STEVEN
GREMMINGER, RAYMOND J. RUBLE, also known as "R.J. Ruble," RANDY

BICKHAM, CAROL WARLEY, CAR HASTING, and RICHARD ROSENTHAL,

and their co-conspirators, assisted in maretig and implementing SOS transactions for
KPM G clients for a fee to KPM G generally not less than 1 % of the tax losses to be

generated, and prepared and caused to be prepared ta returns based on the phony SOS

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tax losses. For many of

these SOS transactions, KPMG did not issue an opinion letter,

but instead certin lawyers, including RUBLE, issued "more likely than not" opinion

letter with respect to those transactions so that clients would claim the frudulent SOS
losses and evade taes.

48. In addition, frm at least in or about 1999 through at leat in or
about 2002, the defendant DAVID GREENBERG, with the approval of

members of

KPMG's tax leaderhip, including the defendants JEFFREY STEINtlRICHARD

SMITH, and RICHARD ROSENTHA, marketed and implemented dozens of SOS
transactions to KPMG clients, often charging fees well in excess of 1 % of

the phony tax

loss to be generated. GREENBERG also aranged SOS transactions for at least 14

KPMG parters, including for the defendant RICHARD ROSENTHAL. In connecton
with the SOS transactions aranged by GREENBERG, GREENBERG issued KPMG
opinion letter or caused others to issue opinion letters that falsely claimed that the tax
losses purportedly generated by SOS were more likely than not to withstand IRS
challenge, so that KPMG parers and GREENBERG's other clients would claim the

frudulent SOS losses and evade taxes.

49. SOS opinion letter, and other associated documents, were false and
fraudulent in a number of ways well known to the conspirators, including the following:
a. They falsely and misleadingly describe SOS as an investment, when

in trth and in fact, it was a tax shelter designed and marketed to generate ta

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losses in order to eliminate income taxes for wealthy clients and garer substatial

fees and income for KPMG, the RUBLE Law Firm, certin co-conspirators, and
others.
b. They falsely claimed that the client would have entered into the

option positions independent of the other steps that made up SOS, when in trth
and in fact, the clients would not have entered into those positions absent the

anticipated ta loss to be generated. (¡
c. They falsely claim that the option positions were contrbuted to a

partership or other entity to "diversify" the client's "investment" when in trth
and in fact, the contrbution was simply a necessar step in the ta shelter, was
executed for the purose of generating the ta loss, and was not executed to

"diversify" any "investment."
d. They falsely claim that the offsetting option positions were entered

into for "substantial non-ta business reasons," and were contrbuted to the
partership or other entity for "substantial non-tax business reasons," when in

trth -and in fact, the trsactions were underten in order to generate the phony
tax losses SOS purported to generate and not for any "substatial non-tax business

reason."

50. The defendats created and caused to be created this false aIld
fraudulent documentation in order to assist clients in claiming the phony tax shelter

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losses on ta returns and in evading taes.
51. Many of the SOS transactions marketed by the defendants CAROL WAREY, CAR HASTING, DAVID GREENBERG and others at KPMG to KPMG
clients were arnged and implemented by a tax shelter firm located in New York, New

York (the "Shelter Boutique"). In addition, the defendant RICHARD ROSENTHAL's
SOS transaction was arranged with the Shelter Boutique. The principal of the Shelter

Boutique is a co-conspirator not named as a defendat herein ("CC ¡Ú").

Side Payments to RUBLE
52. In addition to the fees collected by the RUBLE Law Firm for the

issuance of opinion letters on SOS and other tax shelter trsactions, RUBLE accepted
side payments for his benefit from the Shelter Boutique and other entities controlled by

CC 10. The CC- lO-related side payments to RUBLE totalled over $3 milion. The CC10-related side payments were not reported to the IRS by CC 10 or any entity controlled
by CC 10, and RUBLE failed to report to the IRS over $700,000 of

these side payments.

In addition, the defendants JOHN LARSON and ROBERT PFAFF caused nominee

entities to make side payments to RUBLE for his parcipation in ta shelter transactions.
The LARSON and PFAFF side payments to RUBLE totalled approximately $500,000,
and they were not reported to the IRS by LARSON, PFAFF, or RUBLE, or by any
entities controlled by LARSON, PFAFF, or RUBLE.
53. Although, during the period 2001 through 2003, RUBLE received

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millons of dollar in side payments relating to his partcipation in devising, marketing,
and implementing ta shelters, RUBLE falsely stated to the RUBLE Law Firm that he
had no outside income.
Fraudulent Concealment of

Tax Shelters

54. In addition to preparing and causing to be prepared false and

frudulent documentation relating to and implementig the shelter transactions, and in
addition to preparng and causing to be prepared ta returns that fraJaulently

incorporated the phony tax shelter losses, the defendants JEFFREY STEIN, JOHN

LANNING, RICHAR SMITH, JEFFREY EISCHEID, PHILIP WIESNER, JOHN
LARSON, ROBERT PFAFF, DAVID AMIR MAKOV, LARRY DELAP, STEVEN GREMMINGER, RAYMOND J. RUBLE, also known as "R.J. Ruble," GREGG

RICHIE, RANDY BICKHAM, MA WATSON, CAROL WAREY, DAVID
RIKI, CAR HASTING, RICHAR ROSENTHAL, and DAvin GREENBERG
and their co-conspirators employed various means fraudulently to conceal from the IRS

the frudulent tax shelters they designed, marketed and implemented, including but not
limited to the" following: (i) not registering the tax shelters with the IRS as required by

law; (ii) preparng and causing to be prepared tax retus that fraudulently concealed the
phony losses from the IRS; (iii) attempting to conceal from the IRS the ta shelter losses

and transactions with sham attorney-client privilege claims; and (iv) obstrcting IRS and
Senate investigations into their tax shelter activities.

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Failng to Register Tax Shelter
55. Under the law in effect at all times relevant to this Indictment, år
organizer of a tax shelter was required to "registet' the shelter by filing .a_ form with the

IRS describing the transaction. The IRS in turn would issue a number to the shelter, and
all individuals or entities claiming a benefit from the shelter were required to include

with their income tax returns a form disclosing that they had participated in a registered

tax shelter, and disclosing the assigned registrtion number. Notwit,"standing these legal
requirements, the defendants JEFFREY STEIN, JOHN LANNING, JEFFREY

EISCHEID, JOHN LARSON, ROBERT PFAFF, DAVID AMIR MAKOV, LARRY
DELAP, STEVEN GREMMINGER, RAYMOND 1. RUBLE, also known as "R.I.

Ruble," GREGG RITCHIE, RAY BICKHAM, and DAVID GREENBERG and their
co-conspirators caused the entities with which they were associated not to register as

required any of the tax shelter they devised, marketed and implemented, and thereby

ensured that registrtion numbers would not be included on returns relating to
unregistered shelter.

56. The defendants JOHN LANNG and JEFFRY STEIN and their
co-conspirators decided not to register FLIP, OPIS, or BLIPS based on a "business
decision" that to register the shelters would hamper KPMG's abilty to sell them, and

that

the IRS penalties applicable to a failure to register would be dwarfed by the lucrative fees

KPMG stood to collect from sellng unregistered tax shelters. Indeed, the defendant

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GREGG RITCHIE, the head of the CaTS practice, wrote a memorandum to the defendant JEFFREY STEIN arguing that, assuming OPIS was required to be registered,
KPMG should make a "business decision" not to register OPIS because. Q) registerg the

shelter would put KPMG at a competitive disadvantage as compared to other accountig

firm, law firms, and other firm that were promoting tax shelters; and (ii) sellng
unregistered shelter would be so lucrative that the benefits outweighed the risk of civil
penalties that might be imposed. Moreover, the defendant STEVEN'IaREMMINGER,
among others, advised that by deciding not to register tax shelters, KPMG risked
criminal prosecution, but advised that KPMG's tax leadership could nevereless "make

a business decision to not register the activity as a ta shelter." The defendant LARY
DELAP concurred in this advice.
Fraudulently Concealin~ Shelter Losses and Income on Tax Returns
57. The conspirators would and did prepare and cause to be prepard ta

returns that were false and misleading and were intended frudulently to conceal the
frudulent tax shelters frm the IRS in a nwnber of

ways, including but not limited to the

following:
a. Although the law requires that an individual's items of

income, gain,

and loss be reported on an individual income ta return, the defendants JEFFREY
EISCHEID, JOHN LARSON, DAVID AMIR MAKOV, GREGG RITCHIE, and

CARL HASTING, and their co-consirators advised certin clients that the phony

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tax shelter losses and the income or gains that were to be sheltered should not be

reported on the client's individual income tax return, and instead only the net of

those two figures should be reported on the return. One method ~r "nettng"
pursued by the conspirators in order fraudulently to hide the ta shelter

transactions from the IRS involved using a "grtor trst." A grtor trst is a

trst that, because of certin features enumerated in the tax code, is disregarded as

an entity for federal income ta puroses. RITCHIE and his go-conspirators
devised a scheme to insert a grntor trst into a tax shelter transaction, and then,
rather than disregarding the grntor trst as required by the ta code, reportng the

large phony ta shelter loss and the taxable gain or income those losses were used
to offset only on the grtor trst information return, while reportng only the

small net of

those number on the client's individual income ta return. Although

the defendant MARK WATSON notified other members of the Innovative

Strategies grup, including the defendants JEFFREY EISCHEID, RANDY
BICKHAM, DA VID RIVKI, and CARL HASTING, as well as the defendant

LARRY DELAP, that to pursue this "grantor trst netting" scheme was not a

proper reporting position, and in fact would result in the fiing of false income ta

returns, EISCHEID instrcted KPMG parer that each could decide for himself
or herself whether to engage in grntor trst netting. As a result, dozens of tax

returns for FLIP, OPIS, and BLIPS clients used grantor trsts fraudulently to hide

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the tax shelter losses (and the gains they were designed to shelter) on the clients'

individual income tax returns.
b. In order to conceal tax shelter losses from the IRS, the defendats

CAROL W ARLEY~ DAVID AMIR MAKOV and others, advised at least one

client that phony tax shelter losses could be concealed and made to look like

losses from the sale of a number of publicly traded stocks. In order to so conceal

the losses, the Larson/faff Entities purchased publicly tradedtstock on behalf of
the shelter client, and then distrbuted those stocks to the-client upon the client's

withdrawal from the trsaction. WARLEY and others then advised that the
shelter could be concealed on the client's tax return and instead reported as losses
resulting from the sale of

the stock so distrbuted. In order to fuer conceal the

phony ta shelter losses from the IRS, in some instaces WARLEY, the defendant

GREGG RITCHIE and other selected stocks that had already suffered large

losses durig the year as the stocks to which the shelter losses would be attched,
in order to mislead the IRS into believing that the losses resulted from those
stockS' poor performance, rather than from the fraudulent tax shelters.

Concealing Shelters with Sham Attorney-Client Privilege Claims
58. The conspirators also attempted to conceal their fraudulent ta

shelter activities by attempting to cloak communications regarding those activities and
certin of the activities themselves with the attorney-client privilege, although the

35