KPMG Countersues Ex-Clients

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KPMG is getting tough with former clients and even using some federal evidence against them as evidence for their defense. The Big Four accounting firm is still speaking with federal prosecutors concerning their possible indictment for selling overly aggressive tax shelters.

Two of those ex-clients are R. Cary McNair and his brother, D. Calhoun. They are the wealthy sons of Robert C. McNair, oilman and owner of the NFL Houston Texans. In December 2000, both brothers sued KPMG in state court on grounds that the accounting firm knowingly sold them sham tax shelters.

In 2004, the IRS offered a settlement program in which the two brothers participated. The brothers were among over 1,200 investors that paid the IRS over $3.7 billion. The brothers were advised by two independent tax attorneys, James F.Martens & Associates and Chamberlain, Hrdlicka, White, Williams, & Martin. The brother's lawsuit names Deutsche Bank, the law firm of Sidley Austin Brown & Wood and the investment advisory firm, Presidio Advisory Services in its fraud and conspiracy allegations.

After examination of court papers, KPMG has filed a related lawsuit against their investment advisor and one of the two law firms involved in the purchase of the shelters. Both law firms also advised the brothers on the use of the deductions on their 2000 tax returns.

In countering their ex-clients' lawsuits, KPMG is seeking to prove that its ex-clients and their advisors were at least partly to blame for any of their problems with the Internal Revenue Service (IRS). These people and advisors were sophisticated enough to understand the risks of buying these tax shelters.

These tax shelters are known as BLIPS for bond-linked issue premium strategy. Artifical losses are generated by purpose-created partnerships and these losses are then offset legitimate income. These shelters were evaluated and banned officially in September 2000. The Internal Revenue Service (IRS) estimates at least 1,800 individuals used these types of shelters to evade taxes to the tune of about $1.4 billion in unpaid taxes.

Before buying the shelters, an investment advisor, the Redstone Companies, and one of the two law firms in the KPMG suit, Holland, Johns, Schwartz & Penny, advised the brothers to buy the shelters. Then the two brothers claimed the losses from these tax shelters on their 2000 tax returns after being advised by the two Texas law firms, Andrews Kurth and Holland, Johns, Schwartz & Penny to take the deductions without disclosing the actual use of the shelter that is a violation of IRS rules. The investment advisor and the two law firms aim to vigorously defend themselves.

KPMG attorneys are seeking to obtain documentation and communications showing details of the timeline of how the brother's outside accountants, attorneys, and other advisors came to advise them to participate in the IRS settlement for BLIPS investors according to court filings.

KPMG is using points within one of the first government investigations in its own defense. The Senate subcommittee report calls out a quietly made fact that certain individual investors are partly to blame for their troubles and effectively lied to the government about what they had done. The judge assigned to both brothers' cases will be setting their trial dates in the coming weeks.

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