While the rest of the world hurried to prepare for the Christmas holidays, lawyers and public relations specialists at Big Four firm Ernst & Young kicked into overtime to respond to the filing of a $1 billion lawsuit filed against the firm late last week.
Four Indiana residents who, along with 45 other clients, allege that the firm induced them to enter into illegal tax shelters in 1999 filed the suit. The shelter in question utilized currency option trades to create paper losses that offset real capital gains on which the clients would have had to pay taxes.
According to the lawsuit, the IRS disallowed this type of shelter but E&Y indicated to clients that they could get opinion letters from two law firms indicating that everything was legitimate. The two law firms are also named in the suit. As a result of the IRS opening an investigation into abusive tax shelters earlier this year, these E&Y clients must pay back the tax, interest and penalties. The suit is asking for $75 million in compensation and $1 billion in punitive damages.
Ernst & Young and the two law firms have indicated that they will strongly defend themselves in this suit. "While we have not had the opportunity to look at it thoroughly, even at this stage it is obvious that it is without merit and we will vigorously defend against it," said a spokesperson for Jenkens & Gilchrist, one of the law firms named in the lawsuit.