Justice Dept. Levies $75M Tax Shelter Fine

The Justice Department last week announced that, as part of an agreement with the Texas-based law firm, Jenkens & Gilchrist, it will not seek a criminal indictment of the firm for its involvement in the creation and sale of aggressive tax shelters and that the firm will pay a fine of $75 million to the Internal Revenue Service.

One former partner in Jenkens & Gilchrist’s Chicago office, Paul Daugerdas, earned $93 million in fees from tax shelter work, making him one of the single wealthiest participants in the tax shelter business, according to the New York Times.

Jenkens & Gilchrist, which will close its doors at the end of April, will also admit to criminal wrongdoing in the shelters, and will cooperate with the government in its continuing investigations. It was not clear whether Mr. Daugerdas and other colleagues were cooperating, the Times reports.

The agreement with Jenkens & Gilchrist is expected to assist in a wider probe of firms, including Ernst & Young, Deutsche Bank, and Sidley Austin Brown & Wood, and former tax partners with KPMG who were involved in the creation and marketing of the tax shelters.

Law firms have paid fines over the years, but have managed to avoid major damage from scandals involving their clients. Arthur Andersen was indicted in the collapse of Enron, but the company’s outside law firm, Vinson & Elkins, LLP, was not charged.

The main reason is that much of what attorneys do for their clients remains out of sight, according to Stephen Gillers, a legal-ethics professor at New York University School of Law, the Wall Street Journal reports. “Documents are kept confidential, . . . and prosecutors – have a hard time discovering potential wrongdoing by lawyers.”

But the fallout from the original Enron indictments continues. The Securities and Exchange Commission (SEC) announced last week that it is suing two former Enron corporate attorneys for participating in the massive fraud. Jordan H. Mintz, former general counsel, advised the business unit operated by Andrew Fastow, according to the Washington Post. Rex R. Rogers, also named in the suit, is former associate general counsel and a former SEC enforcement lawyer. He reviewed Enron’s public disclosures and securities filings.

The meltdown of Jenkens & Gilchrist, which numbered 600 partners in 2002, has not been as dramatic as the collapse of Andersen, but within a year of the announcement of the investigation in 2004, the firm’s revenue had fallen by 30 percent as partners left taking their clients with them. Only about200 partners remain with the firm, the Journal says.

Gerald Welch, a former Jenkens partner, said that the criminal investigation and the large number of civil lawsuits brought by investors “just became too much of a burden for them to overcome,” according to the Times.

“It became a question of the name,” he said.

A Jenkens’ spokesperson assigned blame to the Chicago office, according to a statement issued by New York prosecutors, the Times reports. “Those responsible for overseeing the Chicago tax practice placed unwarranted trust in the judgment and integrity of the attorneys principally responsible for that practice and failed to exercise effective oversight and control over the firm’s tax shelter practice.”

The firm’s Chicago office issued legal opinion letters blessing the shelters to 1,400 clients according to the IRS. It charged $50,000 apiece for these letters.

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