Scott London’s Other Crime: Tax Fraud

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Former KPMG audit Partner Scott I. London brought great shame to the accounting profession this week by being charged with conspiracy to commit securities fraud through insider trading. After nearly 30 years with KPMG, London went down in flames after being caught passing insider information on audit clients of the Los Angeles office to his “friend,” Bryan Shaw.

Proving once again that there is no honor among thieves, Shaw got caught first, and then sold out his friend Scott to the Feds.  He helped them get a gorgeous trail of evidence, including phone calls and photographs of the crime.  Both are now charged with insider trading. Continue reading

Auditor Malpractice: How to Sue an Audit Firm and Win

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Last week, Reuters printed an interesting and enlightening interview with Steven Thomas, the managing partner of Thomas, Alexander & Forrester … an attorney known for suing large auditing firms for malpractice… and winning!

Recent big wins include $520 million and $130 million judgments against BDP Seidman, on behalf of Espirito Santo and Batchelor Foundation, respectively. Auditors Ernst & Young (E&Y) and KPMG have been on the losing sides of large cases, and Deloitte, E&Y, KPMG, and McGladrey & Pullen are all current defendants.

So how does Thomas (or any plaintiff’s attorney) win a case against an auditing firm when there is a sizeable fraud (such as the Koss Corp. embezzlement) or the collapse of a Ponzi scheme (such as the Bernie Madoff case)? Continue reading

Financial Statement Fraud: Olympus Makes It Look Easy

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What is a company to do when it wants to hide losses? Manipulation of the financial statements is the obvious first choice. It’s not hard. Sure companies have “internal controls,” which are supposed to include policies and procedures which ensure that financial information is properly recorded. But companies of all sizes have problems with their internal controls, such that it’s not terribly difficult to issue fraudulent financial statements.

Michael Woodford was dismissed in October as CEO of Olympus, and subsequently disclosed that he was fired because he raised questions about some acquisitions by the company. He alleges that Olympus paid incredibly high prices for companies it acquired, and also paid huge “advisory fees” to agents who supposedly represented Olympus in the transactions. The purpose behind these transactions? To cover up investment losses that were decades old without drawing any attention to the issue. Continue reading

KPMG Trial Delayed

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he trial of KPMG executives charged with creating and marketing illegal tax shelters has been delayed. 13 accused executives had all charges dropped after a judge recently ruled that it was illegal for the government to pressure KPMG to not pay the legal fees of the 13.In this latest twist, the trial is being delayed because of a claim that one of the defense lawyers has a conflict of interest. Judge Lewis Kaplan delayed the case (that was to begin on Tuesday) and removed Steven Bauer of Latham & Watkins, who was representing John Larson.

Larson did not waive his right to have an attorney without a conflict of interest. The alleged conflict came about because Bauer was the attorney for David Makov, formerly charged in the case. Makov is going to testify for the government in the case, so this may be a conflict in representing Larson.

Deferred Charge Against KPMG is Dismissed

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A deferred criminal charge against KPMG related to the sales of tax shelters has been dismissed by a federal judge. In August 2005, a deferred prosecution agreement was agreed to by the parties in the case against KPMG, which accused the audit firm of creating and selling the tax shelters to help people avoid paying U.S. income taxes.

Under the deferred prosecution agreement, KPMG paid a $456 million fine, submitted to outside monitoring, and gave up some of its tax businesses. The agreement called for the government to dismiss the deferred charges if KPMG was in compliance through December 31, 2006.

Had KPMG been indicted for those charges, it might have led to the firm’s demise. In the agreement, KPMG admitted being involved in a conspiracy to defraud the U.S. government and the Internal Revenue Service.

While the firm is off the hook, 17 former KPMG executives were criminally charged with fraud and tax evasion related to the tax shelters. One has pleaded guilty and the others are expected to be on trial in September. Jeffrey Stein, the former deputy chairman of KPMG, opposed the dismissal of the charges against KPMG.

Prosecutors Can’t Pressure Companies to Stop Paying Legal Fees For Indicted Employees

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The federal judge in the KMPG accounting fraud case in New York ruled that federal prosecutors cannot pressure companies to stop paying legal fees for indicted employees. In doing so, the government would get an unfair advantage and violate due process for the indicted employees.

Companies such as KPMG, Enterasys, and HealthSouth have not paid legal fees  for certain indicted executives after prosecutors told the companies that their payment of legal fees on behalf of those employees would signal non-cooperation.

A key document in this issue is a 2003 memo from former Deputy Attorney General Larry D. Thompson that advises U.S. attorneys to “scrutinize the authenticity of a corporation’s cooperation” when deciding whether or not to issue criminal charges against a corporation.

Defense lawyers have said that withholding legal fees is really pressure by the government to get defendants to plead guilty. A guilty plea would save the employee huge legal bills. Prosecutors deny trying to get employers to stop paying the legal bills, and the government is expected to appeal this ruling.