Stakes suddenly rising in U.S. tax shelter inquiry

By Jonathan D. Glater The New York Times

NEW YORK For accountants, lawyers and financial executives whose role in the sale of some questionable tax shelters in the United States has been under investigation, the stakes have suddenly risen sharply.

With a former bank executive's guilty plea on Thursday to conspiracy to commit tax shelter fraud, among other charges, U.S. prosecutors have put considerable pressure on potential defendants who worked at KPMG, the accounting firm that sold the shelters, and at the banks and law firms involved. Now prosecutors have a cooperating witness, creating an incentive for others who might have been involved to cut their own deals with the government.

"Getting one person to cooperate is clearly the first step," said Daniel Horwitz, a former local prosecutor who is now at Carter, Ledyard & Milburn in New York. "Typically, in a case where the government has a menu of people to choose from, they can play people against each other, so that the first people in the door are the ones that will get the benefit of a cooperation agreement. And for those who don't cooperate, as they say in the business, the train may have left the station."

Negotiations between prosecutors and KPMG appear to have set aside an indictment that could have been disastrous for that firm's business. Talks have focused instead on penalties and changes in practice.

A federal grand jury in New York has spent about 18 months investigating a number of tax shelters sold from 1996 to 2002. Investigators say the shelters cost the government as much as $1.4 billion in tax revenue. Nobody has been indicted despite the admission of guilt by Domenick DeGiorgio, who had been co-head of financial engineering for the New York operation of HVB Group, parent of HypoVereinsbank, based in Munich. He told the court he had essentially stolen money from his employer.

The prosecutors' filing in the case does not name KPMG, nor does it name any former partners at the firm or any lawyers or other executives at other financial institutions that had a role in creating the shelters, most of which the Internal Revenue Service has deemed invalid for purposes of tax deductions. To date, no court has ruled that the particular shelters described in the court filings were illegal.

The filing does repeatedly mention other people involved in marketing the shelters, including "tax shelter boutiques from California that devised or helped devise the tax shelter transactions and thereafter endeavored to market, or sell, the tax shelters to United States taxpayers; accounting firms; and other individuals who assisted in devising and marketing the transactions."

The document refers to "a partner at the accounting firm promoter" of a particular shelter transaction, as well as to "a New York, New York, attorney" who was also a promoter. It mentions a meeting DeGiorgio had "with a tax shelter promoter from San Francisco," as well as payments made by a California shelter promoter to cover some of DeGiorgio's personal expenses.

DeGiorgio, who is presumably cooperating with prosecutors, may well implicate those unnamed individuals, and that changes the way anyone who worked directly with him must think about a legal defense.

If DeGiorgio ever ends up testifying for the government, defense lawyers will almost certainly attack his motives and truthfulness. He has every reason to incriminate others, they will say, and in addition, he has pleaded guilty to crimes not directly related to the tax shelters that reflect poorly on his credibility, like tax evasion.

Accountants, financial executives and lawyers who worked on the tax shelters are likely to spend considerable time trying to anticipate what prosecutors could learn from DeGiorgio, how damaging his testimony could be and how best to minimize the risks they face.

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