KPMG Provided Illegal Tax Shelters, Claims Galleon Group

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).
OPS was allegedly developed by KPMG as a way to generate fees for the firms. Court records also stated that “in late August or early September of 1999, Schrier (a tax attorney working at KPMG) in 1999 set up a meeting with Rosenbach and Rajaratnam at Galleon’s offices in New York City. Schrier described the OPS shelter and represented that it would generate a large tax savings for both Rosenbach and Rajaratnam by generating large paper losses to offset against their gains,” reported
“The OPS shelter was essentially an illegal basis-shifting scheme which -- unbeknownst to plaintiffs -- relied upon a disingenuous reading of the federal tax code,” wrote his lawyers.
The narrative further went on to say that in the OPS shelter, “a taxpayer purchases and writes options and transfers these option positions to a partnership so as to create a substantial increased basis in the partnership interest. As a result of these trades and transfer, the taxpayer claims that the basis of the taxpayer’s partnership interest is increased by the cost of purchased call options, but is not reduced as a result of the partnership’s assumption of the taxpayer’s obligation with respect to the written call options.”
The fifty-two-year-old Rajaratnam is the central figure in an insider trading scandal involving charges against 21 people, of whom 11 who have pleaded guilty. Rajaratnam had allegedly used secret tips from hedge fund executives, corporate officials and other insiders to gain millions of dollars from illegal stock trades.
Rajaratnam, who has plead not guilty, is being charged with a maximum prison term of 185 years.
In Asia, KPMG Hong Kong was also recently embroiled in scandal, where a senior manager was charged with bribery in connection with mainland China sports clothing firm Hontex International Holdings. Hong Kong's Independent Commission Against Corruption is investigating whether the manager had bribed a subordinate "as a reward for preparing the accountant's report for the global offering of Hontex."


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