NEW YORK (CN) — Former Sprint CEO William Esrey claims in court that the government took money to allow a Sprint auditor to avoid a tax penalty, which Esrey says indirectly cost him his job.
Fourteen years ago, the IRS began to investigate the promotion of tax shelters by Ernst & Young LLP, Sprint's auditor, according to a lawsuit filed Friday against the United States in New York Federal Court.
William Esrey and Ronald LeMay, at the time Sprint Corporation's CEO and COO, respectively, claim they were both sold tax shelters by Ernst & Young, which they purchased to avoid paying taxes on more than $100 million in gains on stock options.
Both became targets of an IRS audit, and were allegedly asked to leave their positions at Sprint.
But the former executives claim they had no idea at the time that Ernst & Young (EY) was also embroiled in an IRS investigation, and had agreed to pay extra to "sweeten the deal" so that it would not be assessed a "penalty."
"In July 2003, EY settled the civil audit of its tax shelter promotion activities for $15 million, which — unbeknownst to Esrey and LeMay at the time — included a $1.4 million additional payment to induce the IRS not to call the $15 million a 'penalty' in the IRS press release," the complaint states.
The firm also allegedly entered into a non-prosecution agreement with prosecutors in Southern New York in 2013, under which it agreed to pay $123 million.
The former Sprint executives say that EY's investigation by the IRS created a conflict of interest in the duties it owed them as clients.
They claim the firm did not reveal the extent of seriousness of the IRS's investigation, and Esrey and LeMay believed that EY would be able to favorably settle their individual audits.
"The IRS knew of EY's fiduciary duties to plaintiffs, and of EY's conflict of interest, but nonetheless helped EY to hide information from plaintiffs knowing that such information would have been critical to plaintiffs' evaluation of whether to trust EY and whether to continue to tell Sprint that EY was trustworthy and devoted to helping plaintiffs resolve their tax audits with the IRS," the 12-page lawsuit states.
Esrey and LeMay claim they were forced to resign from Sprint in 2003 because they were unable to hold EY responsible for the illegal tax shelters they were sold.
Beginning in 2002, Sprint's board allegedly required Esrey and LeMay to certify every quarter that they had no intention of suing the company's auditor.
"Esrey and LeMay could not defend themselves against allegations by Sprint and Sprint shareholders regarding their participation in the EY-promoted transactions. For instance, plaintiffs were unable to tell Sprint that EY's tax shelter promotion activities were being criminally investigated," the complaint states. "Instead, the blame for the tax shelters fell on plaintiffs and they were ultimately forced to resign from Sprint."
The New York Times called Esrey's 2003 ouster a "hard fall from grace," but noted that there were performance reasons to justify his ouster.
Esrey and LeMay want $159 million from the government for aiding and abetting EY's breach of fiduciary duty.
They are represented by Daniel Rosen with Baker & McKenzie in New York City.
Sprint spokeswoman Michelle Boyd told Courthouse News that the company is not commenting on this lawsuit.
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