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 -

INFORMA TION
05 Cr. ()

KPMG LLP,

Defendant.

,

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___________________________________ X

COUNT ONE (Conspiracy)
The United States Attorney charges:

Background
Pertinent Entities

1. At all times relevant to this Information, KPMG LLP ("KPMG")
was a limited liability partership headquartered in New York, New York, and with more
than 90 offices nationwide. KPMG LLP is and was a member firm of KPMG
International, a Swiss cooperative of

which all KPMG firms worldwide are members. At

all times relevant to this Information, KPMG was one ofthe largest auditing firms in the
world, providing audit services to many of

the largest corporations in the United States

and elsewhere.
2. In addition, KPMG was in the business of

providing tax services to

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corporate and individual clients, including some of the wealthiest individuals in the
United States. These tax services included, but were not limited to, preparing tax returns,

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

Service ("IRS") audits and Tax Court litigation with the IRS. The portion of KPMG's
tax practice that specialized in providing tax advice to individuals, including wealthy
individuals, was known as Personal Financial Planning, or "PFP." The KP.,MG group

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focused on designing, marketing, and implementing tax shelters for individual clients

was known at different times as CaTS ("Capital Transaction Strategies"), and IS

("Innovative Strategies"). The KPMG group focused on designing, marketing, and
implementing tax shelters for corporate clients was known as Stratecon. KPMG also had
a departent within the tax practice known as Washington National Tax, which was

designed to provide expert tax advice to KPMG professionals in the field, and which participated in designing tax shelters and drafting opinion letters relating to those
shelters.
3. At all times relevant to this Information, "Bank A" was a foreign

bank with its principal United States branch located in New York, New York.
4. At all times relevant to this Information, "Bank B" was a foreign

bank with its principal United States branch located in New York, New York.
5. At all times relevant to this Information, "Bank C" was a foreign

bank.

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6. At all times relevant to this Information, "Bank D" was a foreign

bank with its principal United States branch located in New York, New York.
7. In or about 1997, two former KPMG tax professionals, who are co-

conspirators not named as defendants herein, formed a limited liability company with its

principal office located in San Francisco and a satellte offce located in Denver. In or
about 1999, these two individuals and another individual formed another litited liability
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company with its principal office located in San Francisco and a satellite office located in

Denver. As detailed more fully below, the conspirators used the two limited liability
companies described in this paragraph and certain related entities (collectively referred to

herein as "the SF Entities") to participate in certin tax shelter transactions as, among
other things, the purported investment advisor.

Tax Shelter Fraud
8. During the period from at least in or about 1996 through at least in

or about 2003, the defendant KPMG, and others known and unknown (hereinafter the
"co-conspirators"), participated in a scheme to defraud the IRS by devising, marketing,
and implementing fraudulent tax shelters, by preparing and causing to be prepared, and

filing and causing to be filed with the IRS false and fraudulent U.S. individual income
tax returns containing the fraudulent tax shelter losses, and by fraudulently concealing

from the IRS those shelters. This ilegal course of conduct was deliberately approved
and perpetrated at the highest levels ofKPMG's tax management, and involved dozens

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of KPMG parters and other personneL.

9. KPMG and its co-conspirators designed and marketed these shelters
as a means for wealthy individuals with taxable income or gains generally in excess of

$10 milion in 1997 and of $20 millon in 1998-2000 fraudulently to eliminate or reduce
the tax paid to the IRS on that income or gain. As marketed and implemented, instead of
the wealthy clients paying U.S. individual income taxes generally exceeding 20% of

the
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income or gain, the client could choose the amount of tax loss desired and pay certain of
the conspirators and others an all-in cost generally equal to approximately 5 to 7% of the

desired tax loss. This "all-in" cost included the fees ofKPMG, the SF Entities, the
various law firms that supplied opinion letters, including a prominent national

law firm

with offces in New York, New York (the "Law Firm"), the bank participants, and
others, as well as a small portion that would be used to execute purported "investments"
that were designed to make it appear that the shelters were legitimate "investments"
rather than tax shelters. The size of the purported "investments," the timing of the
transactions, and the amount ofthe fees to certain conspirators and participants were all

determined based on the tax loss to be generated.
10. In order to conceal the tre nature of the tax shelter from the IRS

and shield the wealthy clients from IRS penalties for underpayment of

US. individual

income taxes, KPMG and/or a law firm provided the clients with opinion letters

containing false and fraudulent representations and statements and claiming that the tax

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shelter losses were "more likely than not" to survive in court if challenged by the IRS.

The law in effect from at least in or about August 1997 provided that if a taxpayer
claimed a tax benefit that was later disallowed, the IRS would impose substantial

penalties, usually at least 20% of the tax deficiency, unless the tax benefit was supported
by a 1 independent opinion relied on by the taxpayer in good faith that the tax benefit was

"more likely than not" to survive IRS challenge. Thus, the conspirators iss,ued false and ;l fraudulent opinion letters with the intent that the clients would provide the opinion letter
and/or the false and fraudulent representations and statements contained therein to the
IRS if and when the clients were audited.

11. Among the fraudulent tax shelter transactions designed, marketed,
and implemented by KPMG, its personnel, and their co-conspirators were FLIP

("Foreign Leveraged Investment Program"), OPIS ("Offshore Portfolio Investment
Strategy"), BLIPS ("Bond Linked Issue Premium Strcture"), SOS ("Short Option

Strategy") and their variants.

12. FLIP was marketed and sold from at least in or about 1996 through
at least in or about 1999 to at least 80 wealthy individuals and generated at least $1.9

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

milion; the Law Firm's gross fees from FLIP transactions were at least $3 millon; the
SF Entities' gross fees from FLIP transactions were at least $3 million.
13. OPIS waS marketed and sold from at least in or about 1998 through

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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

millon; the Law Firm's gross fees from OPIS transactions were at least $7 milion; the SF Entities' gross fees from OPIS transactions were at least $l2 milion.

14. BLIPS was marketed and sold from at least in or about 1999
through at least in or about 2000 to at least 186 wealthy individuals, and g~nerated at
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least $5.1 billion in phony tax losses; KPMG's gross fees from BLIPS transactions were

at least $53 milion; the Law Firm's gross fees from BLIPS transactions were at least $13

milion; the SF Entities' gross fees from BLIPS transactions were at least $123 milion.
15. SOS was marketed and sold from at least in or about 1998 through

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

milion. Among the individuals who used BLIPS and SOS-tye shelters to evade their
own taxes were at least 14 KPMG parters, and other co-conspirators.
16. The total amount of taxes evaded through the use of FLIP, OPiS,

BLIPS, and SOS transactions was at least $2.5 bilion.
The Fraudulent FLIP and OPIS Shelters
17. FLIP and OPiS were substantially similar. 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

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phony capital losses (i.e., in excess of $1 0 milion for FLIP and in excess of $20 milion
for OPIS) through the use of an entity created in the Cayman Islands (a tax haven), for

purposes of the tax shelter transaction. The client purportedly entered into an
"investment" transaction with the Cayman Islands entity by purchasing a purported

warrant or entering into a purported swap. The Cayman Islands entity then made a prearranged series of purported investments, including the purchase from eith~r Bank A or
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Bank D of either Bank A or Bank D stock using money purportedly loaned by Bank A or
Bank D, followed by redemptions of

those stock purchases by the pertinent bank. The

purported investments were devised to eliminate economic risk to the client beyond the
all-in cost and minimize the amount of

the all-in cost used for the investment component.

The purported investments were also devised to last for only approximately i 6 to
approximately 60 days.
18. 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, KPMG

and its co-conspirators implemented and caused to be implemented FLIP and OPIS

transactions and generated and caused to be generated false and fraudulent
documentation to support the transactions, including but not limited to KPMG opinion
letters claiming that the purported tax losses generated by the shelters were more likely

than not to withstand challenge by the IRS. A New York tax partner at the Law Firm,
who is a co-conspirator not named as a defendant herein, also issued "more likely than

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not" opinion letters in return for fees tyically of approximately $50,000 per opinion,
which opinions tracked, sometimes verbatim, the KPMG opinion letter. 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.

19. KPMG and its co-conspirators issued and caused to be issued the
opinion letters although, as they well knew, (i) the tax positions taken were' not more

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likely than not to prevail against an IRS challenge if the tre facts regarding those
transactions were known to the IRS, and (ii) the 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. The opinion letters began by falsely stating that the client requested

KPMG's opinion "regarding the U.S. federal income tax consequences of certain

investment portfolio transactions," when in trth and in fact, the conspirators
targeted wealthy clients based on the clients' large taxable gains and, in return for
substantial fees to KPMG, the SF Entities, the Law Firm, certain 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.
b. The opinion letter continued by falsely stating that the "investment

strategy was based on the expectation that a leveraged position in the Foreign

Bank securities would provide investor with the opportnity for capital

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appreciation," when in truth and in fact the strategy was based on the expected
phony tax benefits promised by certain conspirators.
c. The opinion letters also falsely claimed that the clients "reviewed

the economics underlying the investment strategy and believed it had a reasonable

opportnity to ear a reasonable profit from each of the transactions. . . in excess
of all associated fees and costs and not including any tax benefits th~t may occur"
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when in trth and in fact, there was no such opportnity.
d. The opinions falsely claimed that one of the participants in the
transaction (an owner of

the Cayman Islands entity) was a foreign person

unrelated to the other participants, when in trth and in fact this foreign person
was simply a nominee who received a fee to assist KPMG, other co-conspirators,

and other participants in generating the phony tax losses, and one of the foreign
persons had an ownership interest in the SF Entities, which participated in many
of these transactions.
e. The opinion letters falsely stated that money was paid by the FLIP

and OPIS clients for an "investment" component of

the transactions (a warrant or

a swap), when in trth and in fact that money constituted fees paid to KPMG, the
Law Firm, the bank participant, the nominee foreign person, and other
participants, as well as money that was temporarily parked in the deal but
ultimately returned to the client.

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f. The 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

particular manner, when in trth and in fact, there was such a plan, and the
transactions in fact were completed in that particular manner which was designed
to generate the tax loss.
g. The opinion letters stated that the clients were "more L.rkely than not"
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to survive an IRS challenge to the transactions based on the "step transaction
doctrne" - a legal doctrne permitting the IRS to disregard certain trnsactions

having no economic substance or business purpose and the purported tax effects
of

those disregarded transactions. This assertion was false, as the conspirators

well knew. Indeed, a co-conspirator not named as a defendant herein ("CC 1 "),

who at the time was in charge of CaTS, instrcted KPMG parters involved in
marketing OPIS not to permit KPMG clients who were pitched OPIS to retain a

copy ofKPMG's PowerPoint presentation describing the transaction "under any
circumstances" because to do so would "DESTROY any chance the client may

have to avoid the step transaction doctrne."
The Fraudulent BLIPS Shelter

20. BLIPS was designed to generate substantial capital and ordinary tax
losses through a series of pre-arranged transactions that involved the client purportedly
borrowing money from one of

three banks - Bank A, Bank B, or Bank C - in order to

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

the United States dollar. The bank involved in the purported loan also served as the
counterpar on all of

the purported currency and other transactions involved in BLIPS.

The transaction was designed by KPMG and its co-conspirators so that after a short
peri( ,d of

time (virtally always approximately 67 days), the client would exit the
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purported BLIPS transaction and trgger the desired tax loss.

21. 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 SF Entities equal to approximately 2.75% of

the desired tax loss, and a fee to the Law

Firm generally equal to approximately $50,000 per transaction, KPMG and its coconspirators and others implemented and caused to be implemented the transactions and

generated and caused to be generated false and fraudulent documentation to support the
transactions, including but not limited to KPMG and the Law Firm opinion letters
claiming that the purported tax losses generated by the shelters were more likely than not

to withstand challenge by the IRS. In general, all of these opinion letters were identical,
except for the names of the clients and entities involved, the dates, and the dollar
amounts involved in the transactions.

22. KPMG and its co-conspirators issued and caused to be issued the
opinion letters although, as they well knew, (i) the tax positions taken were not more

likely than not to prevail against an IRS challenge if the tre facts regarding those

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transactions 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:
a. BLIPS was falsely and misleadingly described as an investment

program, when in trth and in fact, BLIPS was designed, marketed, and
implemented to generate phony tax losses in order to eliminate inconie taxes for

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wealthy clients and garer substantial fees and income for KPMG, the SF Entities,

the Law Firm, certain co-conspirators, and others.

b. BLIPS was falsely described as a three-stage, seven-year investment
program, when in truth 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, KPMG and its co-conspirators caused the opinion letters to
contain a false representation (which BLIPS clients adopted) that the duration of
the client's participation in the three-phase, seven-year investment program was

dependent upon the performance of the program relative to alternative
investments, when in trth and in fact, the duration of

the client's paricipation

was dependant on the client's desire to obtain the phony tax losses to be
generated.
c. BLIPS was falsely described as a "leveraged" investment program,

when in trth and in fact, the purported loan transactions that were par of BLIPS

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(and were the aspect of

BLIPS that purported to generate the tax 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 one of

the banks did not fund the

loans at all - it neither set aside from its 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 "investm~t" program /
involving trades relating to pegged currencies but, instead, were used only to

generate a phony tax loss. The only money used in making and securing the

trades involving pegged currencies as part of BLIPS was money contrbuted by
the client as part of the 7% all-in cost.
d. The BLIPS opinion letters falsely stated that the client (based on the

client's purported "independent review") as well as the SF Entities "believed there
was a reasonable opportnity to earn a reasonable pre-tax profit from the (BLIPS)

transactions," when in trth and in fact, there was no "reasonable likelihood of
earning a reasonable pre-tax profit" from BLIPS, and instead the "investment"
component of BLIPS was negligible, unrelated 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 tax shelter fraud.
e. The opinion letters and other documents were misleadingly drafted

to create the false impression that KPMG and others were independent service

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providers and advisors, rather than co-promoters and designers ofthe BLIPS
shelter. Thus, for example, the KPMG BLIPS opinion letter misleadingly claims

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

consequences of certain investment trnsactions that have been concluded" but the
opinion letters, which falsely describe a purported seven-year investment program
and a withdrawal from that program based on the purported investient
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performance of

the program, were drafted prior the commencement of

any BLIPS

trnsaction.
f. Similarly, the KPMG engagement letter used for BLIPS contained

the following false and fraudulent statements, among others, (i) 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 tax 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 SF Entities "to provide Client with investment advisory services and trading

strategies," when in trth and in fact, the SF Entities were engaged to assist the
clients in generating phony tax losses using a tax shelter; (iii) that the SF Entities

"had advised the Client that the utilization of a high degree ofleverage is integral
to the Investment Program," when in truth and in fact, the purported "leverage"

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was a sham loan designed only to support the creating 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 amount ofKPMG's fee, as well as the
size of the nominal investment made as part of

the fraudulent tax shelter, and fees

for the SF Entities and other participants in the transaction were all determined by
the amount of phony tax losses desired by the client to offset incomio or gain
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received from other sources.
23. At various points during the development of BLIPS, KPMG

personnel and others identified various 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 neverteless KPMG approved the issuance
of BLIPS opinion letters. When Washington National Tax approved the BLIPS
documentation in August 1999, one of

the KPMG tax shelter salesmen who helped devise

BLIPS (a co-conspirator not named as a defendant herein) wrote another co-conspirator
not named as a defendant herein "We have received our 'get out of

jail free card' from

(Washington National Tax)."
24. In addition, in or about March 2000, and prior to the issuance of any

BLIPS opinion letters to clients, during a meeting attended by members ofKPMG tax
leadership, a representative from KPMG' s offce of general counsel, and others, a top

KPMG technical expert involved in reviewing the KPMG BLIPS opinion told the other

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participants in substance and in part that if the IRS were to litigate BLIPS in court, the
BLIPS participants would "lose." In addition, another

member ofKPMG's tax

leadership informed the paricipants at the meeting, in substance and in part, that the tax

position taken in BLIPS was "close to frvolous," During that meeting, the paricipants
also discussed the risks of proceeding with tax shelter transactions like BLIPS, including
the risk of criminal investigation, civil penalties, civil

liability for fraud, action by the

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IRS's Director of

Professional Practice, and action by state Boards of Accountancy.

Nevertheless, and despite the obviously fraudulent nature of

BLIPS and the warnings

conveyed, KPMG leadership decided to (i) proceed with the issuance of "more likely

than not" opinion letters on all of the 1999 transactions, and (ii) continue to implement
more BLIPS tax shelter transactions in 2000.

The Fraudulent SOS Shelter

25. SOS and its variants were designed to generate substantial capital
and-ordinary tax losses through a series of pre-arranged transactions that involved the

clients entering into virtally offsetting foreign currency option positions with a bank,
including but not limited to Bank A, transferrng the offsetting positions to a partership

or other entity, and then withdrawing from the transaction, claiming a loss in the desired

amount. KPMG's Washington National Tax office considered whether KPMG should

issue "more likely than not" opinions regarding SOS-tye transactions, and concluded
that the phony losses generated by those transactions were not more likely than not to

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withstand IRS challenge. Nevertheless, between 1998 and 2002, certain KPMG tax
parters assisted in implementing SOS-tye transactions for KPMG clients for a fee to
KPMG generally equal to 1 % of

the tax losses to be generated, and prepared and caused

to be prepared tax returns based on the phony SOS tax losses. For many of these SOS-

tye transactions, KPMG did not issue an opinion letter, but instead certin lawyers
issued "more likely than not" opinion letters with respect to those transacti()ns. The SOS /
opinion letters, and other associated documents, were false ànd fraudulent in a number of
ways well known to KPMG and the KPMG tax parters involved, including the

following:
a. They misrepresented SOS as an investment, when in trth and in

fact, it was a tax shelter designed to generate tax losses in order to eliminate

income taxes for wealthy clients and garner substantial fees and income for
KPMG, certain 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 truth

and in fact, the clients would not have entered into those positions absent the
anticipated tax 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 necessary step in the tax shelter, was

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executed for the purpose of generating the tax loss, and was not executed to
"diversify" any "investment."
d. They falsely claim that the client entered into the offsetting option

positions for "substantial non-tax business reasons," and contrbuted the option

positions to the partership or other entity for "substantial non-tax business
reasons," when in trth and in fact, the transactions were undertaken in order to
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generate the phony tax losses SOS purported to generate and not for any

"substantial non-tax business reason."
26. In addition, from at least in or about 1999 though at least in or

about 2002, a KPMG parter, who is a co-conspirator not named as a defendant herein
("CC 2"), with the approval of

members ofKPMG's tax leadership, marketed and

implemented dozens of SOS-tye transactions to KPMG clients, often charging fees well
in excess of 1 % of the phony tax loss to be generated. CC 2 also arranged SOS-tye

transactions for at least 14 KPMG parters so that those parters could evade their own

taxes. In connection with the SOS-tye transactions arranged by CC 2, CC 2 issued
KPMG opinion letters 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. These opinions were false and fraudulent in a number of ways well known to

CC 2 and his co-conspirators, including but not limited to the following:
a. They misrepresented SOS as an investment, when in trth and in

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fact, it was a tax shelter designed to generate tax losses in order to eliminate

income taxes for wealthy clients and gamer substantial fees for KPMG, certain coconspirators, 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 apsent the '/ anticipated tax 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 necessary step in the tax shelter, was
executed for the purpose of generating the tax loss, and was not executed to

"diversify" any "investment."
d. They falsely claim that the client entered into the offsetting option

positions for "substantial non-tax business reasons," and contrbuted the option
positions to the partership or other entity for "substantial non-tax business

reasons," when in trth and in fact, the transactions were undertaken in order to
generate the phony tax losses SOS purported to generate and not for any

"substantial non-tax business reason."

Fraudulent Concealment of Tax Shelters
27. In addition to preparing and causing to be prepared false and

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fraudulent documentation relating to and implementing the shelter transactions, and in

addition to preparing and causing to be prepared tax returns that fraudulently
incorporated the phony tax shelter losses, KPMG and its co-conspirators employed

various means fraudulently to conceal from the IRS the fraudulent 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) preparing aid causing to i
be prepared tax returns that fraudulently concealed the phony losses from the IRS; (iii) attempting to conceal from the IRS the tax shelter losses and transactions with sham

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

Failing to Register Tax Shelters
28. Under the law in effect at all times relevant to this Information, an

organizer of a tax shelter was required to "register" the shelter by fiing 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 registration number. Notwithstanding these legal
requirements, KPMG and its co-conspirators decided not to register as required any of
the tax shelters KPMG devised, marketed and implemented, and thereby ensured that

registration numbers would not be included on returns relating to unregistered shelters.

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29. Thus, KPMG decided not to register FLIP, OPTS, or BLIPS based

on a "business decision" that to register the shelters would hamper KPMG's ability 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 selling unregistered tax shelters.

Indeed, CC 1 wrote a memorandum to a member ofKPMG's tax leadership arguing that,
assuming OPIS was required to be registered, KPMG should make a "busi~ess decision" /

not to register OPIS because (i) registering the shelters would put KPMG at a
competitive disadvantage as compared to other accounting firms, law firms, and other

firms that were promoting tax shelters; and (ii) sellng unregistered shelters would be so
lucrative that the benefits outweighed the risk of civil penalties that might be imposed.

Moreover, KPMG's office of general counsel, among others, advised that by deciding
not to register tax shelters, KPMG risked criminal prosecution, but like the CaTS group,

advised that KPMG's tax leadership could nevertheless "make a business decision to not
register the activity as a tax shelter."

Fraudulently Concealing Shelter Losses and Income on Tax Returns
30. The conspirators would and did prepare and cause to be prepared ta

returns that were false and misleading and were intended fraudulently to conceal the fraudulent tax shelters from the IRS in a number of ways, including but not limited to the
following:

a. Although the law requires that an individual's items of income, gain,

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and loss be reported on an individual income tax return, KPMG personnel their
co-conspirators advised certain clients that the phony 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 of "nettng" pursued by the conspirators in
order fraudulently to hide the tax shelter transactions from the IRS ii;volved using i
a "grantor trst." A grantor trst is a trst that, because of certain features

enumerated in the tax code, is disregarded as an entity for federal income tax

purposes. CC 1 and his co-conspirators devised a scheme to insert a grantor trst
into a tax shelter transaction, and then, rather than disregarding the grantor trust as required by the tax code, reporting the large phony tax shelter loss and the taxable

gain or income those losses were used to offset only on the grantor trust
information return, while reporting only the small net of those numbers on the
client's individual income tax return. Although members of

the Innovative

Strategies group were notified 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 tax returns, KPMG permitted its parters to decide for themselves whether
to engage in grantor trust nettng. As a result, dozens of tax returns for FLIP,

OPiS, and BLIPS clients used grantor trusts fraudulently to hide the tax shelter
losses (and the gains they were designed to shelter) on the clients' individual

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income tax returns.
b. In order to conceal tax shelter losses from the IRS, a KPMG tax

parter who is a co-conspirator not named as a defendant herein ("CC 3"), 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 SF Entities purchased publicly ;traded stock

/

on behalf of the shelter client, and then distrbuted those stocks to the client upon
the client's withdrawal from the transaction. CC 3 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 further

conceal the phony tax shelter losses from the IRS, in some instances CC 3 and
others purchased stocks that had already suffered large losses during the year as

the stocks to which the shelter losses would be attached, 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
31. The conspirators also attempted to conceal their fraudulent tax

shelter activities by attempting to cloak communications regarding those activities and
certain of

the activities themselves with the attorney-client privilege, although the

communications in question were not privileged. For example, CC 2 attempted to

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conceal his activities in this manner by purporting to have KPMG clients engage a law

firm to provide legal advice, which law firm would then purport to engage KPMG to
work under the direction of

the law firm. Under United States v. Kovel, communications

by non-lawyer professionals such as accountants are protected under the attorney-client

privilege when the accountant is in fact working under the direction of an attorney.
Numerous Kovel arrangements established by CC 2 were sham arrangemeats because the

/

clients did not directly engage the law firm, in many instances never even spoke to the
lawyers whom they had purportedly engaged, and CC 2's work was done outside of

the

purported lawyer-client privilege. The purpose of this fraudulent conduct was to enable
the client, with the assistance of CC 2 and the law firm, to conceal the fraudulent tax
shelter from the IRS by attempting to cloak all of the work for the shelter in the attorneyclient privilege.

Obstrction of IRS and Senate Investil2ations
32. Despite the conspirators' efforts to prevent IRS scrutiny of

these

fraudulent tax shelters, in or about September 200 i the IRS initiated an examination of
KPMG for its failure to register the transactions with the IRS. As part of

this

examination, in early 2002 the IRS issued 25 summonses to KPMG calling for
information relating to numerous tax shelters with which KPMG may have been

involved. In addition, the IRS summonses required KPMG to designate a

knowledgeable person to testify under oath at the IRS. KPMG designated a co-

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conspirator not named as a defendant herein ("CC 6") , who at the time was the partner

in charge ofKPMG's Personal Financial Planning group, to testify. CC 6's testimony
was false, misleading, and evasive. Indeed, after one day of

testimony, another KPMG

parter who attended the testimony reported in an email to a KPMG tax leader that
KPMG's Office of General Counsel and outside counsel "determined that the best
strategy was 'the less said the better,''' and that CC 6 "felt that he had no cboice but to be /

'forgetfuL.' And so the record wil reflect repeated 'I don't knows', 'I don't recalls,' and
'I was out of

the loops' - the rope-a-dope/Enron defense."

33. IRS summonses called for production of documents relating to SOS
tax shelters, among other things. One of

the KPMG tax leaders directing KPMG's

response to the IRS summonses, who is a co-conspirator not named as a defendant herein

("CC 7") was aware ofKPMG's involvement in promoting SOS transactions.
Nevertheless, none of

the SOS tax shelters marketed or implemented by KPMG, or in

which KPMG personnel participated, were disclosed to the IRS and on a number-of
occasions, CC 7 and others caused KPMG falsely to claim to the IRS that the production
of documents and information relating to the summonses was substantially complete.
34. In addition, when the IRS in May 2003 specifically inquired about

KPMG's failure to produce SOS information, CC 6 intentionally caused KPMG's
representatives to falsely respond that KPMG was not involved in SOS, but may have
prepared a couple of

tax returns containing SOS losses.

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35. In January 2003, a Subcommittee of

the United States Senate issued

a subpoena to KPMG calling for documents and information relating to its tax shelter
activities, including a specific request for documents relating to tax shelters used by

KPMG parters to evade their own taxes. The subpoena specifically named CC 2 as well
as at least two KPMG parters who, in fact, had used SOS transactions to evade their
own taxes. CC 7 was among the KPMG personnel directing KPMG's response to the
('

Senate investigation. In addition, CC 7 was aware of at least one KPMG parter who
used an SOS-tye shelter to offset the parter's own income or gain, and was aware of

related documents responsive to the Senate subpoena. However, CC 7 and his coconspirators caused KPMG's representatives falsely to respond to the subpoena as

follows: "to the best of its knowledge and belief, after reasonable inquiry to date, the
firm has not yet identified any documents that are responsive to this request."

36. In or about November 2003, CC 6, CC 7, other co-conspirators, and
others testified before the Senate Subcommittee investigating tax shelter activities of

KPMG and others. CC 6 and other KPMG personnel testified together in panel format.
During this testimony, among other things, CC 6 falsely denied that KPMG's fee was a

percentage of the tax loss to be generated by the shelters. In addition, when asked by a
Senator whether FLIP, OPIS and BLIPS were "designed and marketed primarily as tax

reduction strategies," CC 6 falsely stated "Senator, I would not agree with that

characterization." In addition, among other false and misleading testimony presented at

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the hearing, CC 7 gave evasive testimony regarding KPMG's involvement in designing,
marketing, and implementing tax shelters.
Statutory AIIeeations

37. From at least in or about 1996 through at least in or about 2003,

KPMG, the defendant, and its co-conspirators, unlawfully, wilfully and knowingly, did
combine, conspire, confederate and agree together and with each other to clefraud the /

United States and an agency thereof, to wit, the Internal Revenue Service ("IRS") ofthe
United States Departent of

Treasury, and to commit offenses against the United States,

to wit, violations of

Title 26, United States Code, Sections 7201, 7206(1), and 7206(2).
Objects of the Conspiracy
38. It was a part and an object of

the conspiracy that KPMG, the

defendant, and its co-conspirators, unlawfully, willfully and knowingly would and did
defraud the United States of America and the IRS by impeding, impairing, defeating and

obstrcting the lawful governmental functions of the IRS in the ascertainment,
evaluation, assessment, and collection of income taxes.
39. It was further a part and an object of

the conspiracy that KPMG, the

defendant, and its co-conspirators, unlawfully, wilfully and knowingly would and did
attempt to evade and defeat a substantial part of the income taxes due and owing to the
United States by tax shelter clients and others, in violation of

Title 26, United States

Code, Section 7201.

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40. It was further a part and an object of

the conspiracy that KPMG, the

defendant, and its co-conspirators, unlawfully, wilfully and knowingly would and did (a)

make and subscribe, and cause others to make and subscribe United States individual,
corporation, and partership income tax returns, which returns contained and were

verified by written declarations that they were made under the penalties of

perjury, and

that the defendants and their co-conspirators did not believe to be tre and torrect as to -('

every material matter; and (b) aid and assist in, and procure, counsel, and advise the

preparation and presentation under, the internal revenue laws, of certain United States

individual, corporation, and partership income tax returns which were fraudulent and
false as to material matters, in violation of Title 26, United States Code, Section 7206.
Means and Methods of the Conspiracy
4 i. Among the means and methods by which KPMG, the defendant, and

its co-conspirators would and did carr out the conspiracy were the following:

a. They would and did concoct tax shelter transactions and false and

fraudulent factual scenarios to support them so that wealthy United States citizens

would pay certain of the conspirators and other participants in the transactions
approximately 5 to 7% of income or gain instead of paying federal and state taxes
on that income or gain.
b. They would and did prepare false and fraudulent documents to

deceive the IRS, including but not limited to, engagement letters, transactional

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documents, representation letters, and opinion letters.
c. They would and did conceal the contents of tax shelter sales

presentations in order to prevent the IRS from discovering the true facts regarding
those shelter transactions.

d. They would and did prepare and provide to their clients false and

fraudulent representations that the clients were required to make in 9rder to obtain
'(

opinion letters that purported to justify using the phony tax shelter losses to offset

income or gain. At times, the conspirators presented to their clients these false
and fraudulent client representations after the all-in costs of approximately 5 to 7% of the desired tax loss were collected from the tax shelter clients.

e. They would and did prepare and cause to be prepared tax returns
that were false and fraudulent because, among other things, they incorporated the phony tax losses and therefore substantially understated the tax due and owing by
the shelter clients.

f. They would and did (i) fraudulently omit on certain tax returns the
losses and the gain or income they sheltered; and (ii) disguise the shelter losses on certain tax returns in a manner intended to deceive the IRS.

g. They would and did take varous steps to prevent the creation and
retention of documents that might reveal to the IRS the tre facts regarding the

fraudulent tax shelters as well as certain conspirators' role in designing,

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marketing, and implementing them, including but not limited to concealing from
the IRS that the opinion letters provided by KPMG, the Law Firm, and other firms

were not independent and were instead prepared by entities involved in the design,
marketing, and implementation of the tax shelters.
h. They would and did take various additional steps to conceal from
the IRS the existence of

the shelters, their tre facts, and certain con,spirators' role
('

in designing, marketing, and implementing the shelters, including, but not limited
to, failing to register the shelters, using sham attorney-client privilege claims, and

concealing documents and providing false and misleading information in response
to IRS and Senate investigations.
Overt Acts

42. In furtherance of

the conspiracy and to effect the illegal objects

thereof, KPMG, the defendant, and its co-conspirators, committed the following overt
acts, among others, in the Southern Distrct of

New York and elsewhere:

a. On or about July 18, 1997, a co-conspirator not named as a

defendant herein prepared a memorandum to KPMG tax leaders discussing how
KPMG and the SF Entities should jointly devise, market, and implement tax
shelter transactions and how their fees should be divided.
b. In or about September 1997, KPMG and the SF Entities executed an

"operating agreement" regarding joint marketing and implementation of FLIP

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transactions.
c. On or about June 8, 1998, CC 1 advised the KPMG team marketing

OPIS not to leave the OPIS PowerPoint presentation "with clients or targets under

any circumstances" because doing so "wil DESTROY any chance the client may

-have to avoid the step transaction doctrne."
d. On or about September 10, 1998, the defendant CC 6 sent an email
('

to a KPMG tax leader and others proposing an "alliance" with a competitor of the
SF Entities to implement OPIS transactions and noting that "we have very little

time to work with if we are going to execute trades such that our clients can

generate the desired benefits in calendar 1998."
e. On or about January 22, 1999, CC 6 instrcted KPMG parters that

each parter should decide for himself or herself whether to attempt to conceal
losses from the IRS using a grantor trst.

f. In or about September or October 1999, Domenick DeGiorgio, a

co-conspirator not named as a defendant herein, met at the offices of Bank B in
the Southern Distrct of New York with personnel of

the SF Entities and others.

g. In or about 1999, in the Southern Distrct of

New York and

elsewhere, Banks A, B, and C prepared and caused to be prepared transactional
documents relating to BLIPS tax shelter transactions.
h. On or about December 8, 1999, a KPMG parter who is a co-

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conspirator not named as a defendant herein advised other KPMG personnel involved in marketing and implementing BLIPS that a document on which the
client selected how much of

the BLIPS loss should be ordinar and how much

should be capital should not be kept in the file because "if the IRS were to
discover such a document it could look very bad for the client."
1. On or about March 7, 2000, members ofKPMG tax l~adership, a
'('

representative from KPMG's offce of general counsel, and others met in the
Southern Distrct of New York to discuss, among other things, the risks of civil
penalties and criminal investigation associated with completing the
implementation of 1999 OPiS and BLIPS transactions.
J. On or about March 21, 2000, a KPMG tax parter who is co-

conspirator not named as a defendant herein advised other KPMG personnel

involved in marketing BLIPS that they should "NOT put a copy of' an email in

their BLIPS fie because "it is a roadmap for the taxing authorities to all the other
listed transactions."
k. In or about 1998, 1999, and 2000, in the Southern Distrct of

New

York and elsewhere, KPMG and other participants in FLIP and OPIS tax shelter
transactions, who are co-conspirators not named as defendants herein, prepared,

signed and fied tax returns that falsely and fraudulently claimed over $4.2 bilion
in phony tax losses generated by FLIP and OPIS transactions.

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L. In or about 2000 and 2001, in the Southern Distrct of

New York

and elsewhere, KPMG and other parcipants in BLIPS tax shelter transactions,
who are co-conspirators not named as defendants herein, prepared, signed and

fied tax returns that falsely and fraudulently claimed over $5.1 bilion in phony
tax losses generated by BLIPS transactions.

m. In or about 1999,2000, and 2001, KPMG and other p~rticipants in .~
SOS tax shelter transactions, who are co-conspirators not named as defendants
herein, prepared, signed and fied tax returns that falsely and fraudulently claimed

over $1.9 bilion in phony tax losses generated by SOS.
n. On or about February 12,2002, CC 6 provided false and misleading

testimony under oath to the IRS.
o. On or about October 2,2002, CC 7, on behalf ofKPMG, sent a

letter to the IRS in the Southern District of

New York falsely claiming that

"KPMG has at this time virtally completed its compliance with the summonses"
although as CC 7 well knew, KPMG had produced no documents or information
regarding its involvement in marketing and implementing SOS trnsactions.
p. On or about February 19, 2003, KPMG caused its representatives

falsely to represent to the Senate that "after reasonable inquiry to date, the firm has

not yet identified any documents" relating to shelter transactions used by KPMG
parters to shelter their own income or gains, KPMG well knew that it had various

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documents responsive to this subpoena request.
q. On or about November 18,2003, CC 6 provided false and
misleading testimony under oath to a Subcommittee of

the United States Senate.

r. On or about November 18, 2003, CC 7 provided evasive testimony

under oath to a Subcommittee of the United States Senate.

(Title 18, United States Code, Section 371.)

~h.~
DAVIDN. KELLEY
United States Attorney

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