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KPMG Clients Can Sue Lawyers & Accountants

(CN) - A pair of former KPMG clients can sue lawyers and accountants who were part of a fraudulent tax-shelter scheme run by accounting firm, a California appeals court ruled.

KPMG admitted in 2005 that it had helped high net-worth investors evade billions of dollars in federal income tax in the previous decade. It agreed to pay $456 million in fines, restitution to the IRS and penalties.

Investor Steven Goldman sued KPMG for fraud and breach of fiduciary duty. He sought the millions of dollars he had to pay when the government rejected his tax deductions. He paid KPMG $2.1 million in order to generate a $60.1 million tax loss.

Jeffrey Haines filed a similar lawsuit, as he paid $1 million to generate a $16 million tax loss.

The tax-shelter scheme involved the formation of limited liability companies. Those companies had operating agreements containing broad arbitration clauses, which KPMG tried to enforce instead of going to trial.

The trial court ruled that because KPMG and its attorneys were not signatories to the arbitration agreements, they could not enforce them. Justice Rubin of the Los Angeles-based appeals court agreed.

"The Goldman/Haines claims against KPMG and (its attorneys) are unrelated to any of the operating agreements, which were merely a procedural and collateral step in the creation of the fraudulent tax shelters," Rubin wrote.

The court affirmed denial of the defendants' motions to compel arbitration.

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