KPMG Provided Illegal Tax Shelters, Claims Galleon Group

by CFO Innovation Staff, 04 May 2010

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topics:
Accounting and Regulations Tax

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Diversified Group Galleon Group Hontex Hontex International Holdings Internal Revenue Service KPMG lawsuit tax shelter

Reports have surfaced, revealing that KPMG was involved in a 2005 lawsuit filed by Raj Rajaratnam. The Galleon Group LLC co-founder alleged he was duped into investing in an illegal tax shelter, says BusinessWeek.

Four years prior to his arrest for inside trading, Rajaratnam and Galleon co-founder Gary Rosenbach brought a lawsuit against accounting firm KPMG LLP and tax shelter promoter Diversified Group. When the U.S. government’s Internal Revenue Service (IRS) had rejected US $13.5 million in tax transactions from 1999 and 2000, Rajaratnam was required to pay back taxes, interest and penalties of $7.9 million, while $9 million was sought from Rosenbach. Together, the two partners then sued KPMG and Diversified Group.

Rajaratnam had questioned a KPMG partner “numerous times if the shelter he described was ‘legal,’” according to the filed complaint. Allegedly, the partner “repeatedly assured Rosenbach and Rajaratnam that the shelter was legal under the tax laws and that it would be fully supported by a legal opinion letter from a prominent law firm.”

The complaint stated that Rajaratnam was seeking “for damages arising from Defendants’ development, promotion, sale, and implementation of a fraudulent tax shelter strategy. This strategy was aggressively marketed and sold to Plaintiffs as a legitimate tax saving tool, and Plaintiffs utilized this strategy in connection with their 1999 and 2000 federal income tax returns, not knowing it was contrary to law.”

When the tax returns were audited by the IRS, Rajaratnam and Rosenbach were informed that “they were liable for back taxes, penalties, and interest in excess of $35.5 million for the years 1999 and 2000.”

Specifically, the lawsuit against KPMG and Diversified Group sought to recover at least $15 million in interest, penalties and fees paid to the IRS, but not the taxes. Court records show that in 2009, Rajaratnam and Rosenbach won an arbitrators’ judgment against Diversified and its president for $5.8 million, including $69,000 for arbitration panel costs.

However, it is not known whether KPMG had made a payment.

KPMG was dismissed of criminal tax charges in 2007 after paying a $456 million fine. Later, two former KPMG executives and a lawyer were convicted and sentenced for federal charges of selling illegal shelters. Lawsuits from other clients subsequently followed.

Rajaratnam claims in his lawsuit against the accounting giant that he and at least 350 other wealthy individuals had been sold shelters from 1997 to 2001. KPMG had allegedly guided the plaintiffs to invest in an Option Partnership Strategy (OPS).

Original Article URL:

Galleon’s Rajaratnam Said He Was Duped in Illegal Tax Shelter
Galleon Rajaratnam Sued KPMG In 2005, But Did KPMG Pay?

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