LOS ANGELES (CN) – Equity groups say they lost $50 million by relying on the duplicitous advice of accounting firm KPMG, which sold them fraudulent tax shelters, though it knew the IRS probably would deny the deductions. KPMG pushed the shelters in order to rake in millions in fees, say plaintiffs, leaving them owing millions in taxes and interest.
KPMG also allegedly talked the plaintiffs into selling FSR Brokerage, a business the plaintiffs ran for 30 years, “in order to ‘benefit’ from a tax strategy KPMG and other defendants knew was a sham,” according to the Superior Court complaint.
The plaintiffs are Camden Equity Holdings, Alpine Equity Holdings, Bedford Equity Holdings, Vintage Capital Group, and Fred C. Sands and two Sands Trusts.
KPMG claimed that the plaintiffs would be better off selling the business in 2000, so the plaintiffs say they sold FSR on Nov. 30, 2000 at a lower than optimal price. But the plaintiffs say KPMG stood to benefit from a rushed sale, since it could charge an extra fee to include the plaintiffs in its fraudulent “Redemption Note Transaction” tax shelter for 2000.
The plaintiffs say KPMG knew they would have been better off waiting until 2001 to sell FSR at its market value, since they could have taken advantage of 2001’s lower capital gains tax rate.
The plaintiffs say KPMG repeatedly assured them that the tax shelters were “more likely than not” to be upheld by a tax court, and were a “not to be missed” investment opportunity, despite growing internal concern from KPMG’s tax specialists.
The plaintiffs say they filed this lawsuit on the heels of 2005 criminal proceedings in which KPMG admitted it created fraudulent tax shelters; KPMG negotiated a deferred prosecution agreement with federal investigators.
KPMG allegedly admitted hiding the real effects of its tax shelters from clients, and using fake attorney-client privilege claims to conceal its knowledge from investigators. The criminal indictment against KPMG also accuses the firm of lying to a 2003 Senate investigative panel.
The plaintiffs claim that KPMG started a “Tax Innovation Center” in 1997, where it encouraged specialists to push the fraudulent shelters in order to increase its flat fee revenues. Before, KPMG had largely made its money through hourly fees.
KPMG is the third-largest accounting firm in the United States, with estimated annual revenue of more than $4 billion, according to the complaint.
The plaintiffs demand more than $50 million, and punitive damages. They are represented by Michael Avenatti with Eagan O’Malley & Avenatti of Newport Beach.