Filings Show L.A. Link in KPMG Case
Federal prosecutors have identified a former partner in KPMG’s Woodland Hills office as having participated in an alleged conspiracy to devise phony tax shelters used by prominent figures, including the founders of Guess Inc., former gubernatorial candidate Bill Simon Jr. and Global Crossing Ltd. founder Gary Winnick, documents show.
A federal grand jury’s recent indictment of eight former KPMG executives in connection with illegal tax shelters listed seven unnamed individuals as unindicted co-conspirators. One of the unnamed individuals helped devise a scheme to keep tax shelters under the Internal Revenue Service’s radar, according to the Aug. 29 indictment.
The indictment did not name the person, instead referring to him as unindicted co-conspirator No. 1. However, the filing said he was the author of two key memos -- dated May 26, 1998, and June 8, 1998 -- in connection with the shelters. Those memos were previously released by Senate investigators, who identified the author as Gregg W. Ritchie, a former tax partner in KPMG’s Woodland Hills office.
Ritchie declined to comment.
Ritchie now works for Winnick, the Beverly Hills investor whose GKW Unified Holdings used KPMG-approved tax shelters, according to court papers filed in a related case. Winnick’s staff declined to disclose Ritchie’s title.
The Justice Department declined to say why certain alleged co-conspirators were not indicted. Joseph Bankman, a tax fraud specialist and law professor at Stanford University, said it was common to have unindicted co-conspirators at early stages of a tax fraud investigation.
“Maybe they are going to indict them later and they’re still building up evidence, maybe they’re cooperating, or maybe they’re just small fries,” Bankman said.
“Even if somebody is unindicted, their actions can be used during trial in the story of the conspiracy. At that point, they would be named, whether or not they were indicted.”
In announcing the indictments in August, prosecutors said they planned to bring charges against as many as a dozen other people. A New York federal judge has asked prosecutors to file any additional indictments by Oct. 17.
The federal indictment alleges that KPMG executives devised illegal schemes to dodge taxes by falsely creating the appearance of enormous investment losses and then marketing these shelters to hundreds of wealthy individuals.
The indictment did not name any of KPMG’s wealthy clients, but dozens were identified in a series of lawsuits filed against the federal government in U.S. District Court in San Francisco in the spring.
The suits, filed by investment firm Presidio Growth of San Francisco, contended that the IRS improperly rejected deductions for losses claimed in connection with tax shelters it said had been approved by KPMG.
Presidio said it was acting on behalf of its investors who bought the shelters, naming participants including Guess founders and co-Chairmen Paul and Maurice Marciano; Gary C. Wendt, a former top executive with Conseco Inc. and General Electric Co.; and David Saperstein, the founder of Metro Networks Inc. and once the largest shareholder in radio programmer Westwood One Inc.
Bill Simon Jr., who lost to Gray Davis in the 2002 California gubernatorial race, was also listed as an investor, as was his late father, former Treasury Secretary William E. Simon.
Ritchie also is named in the Presidio suit as a representative of GKW, the investment firm owned by Winnick and his family.
The suit says the shelter was legitimate because it was intended to produce a profit for investors through complicated foreign securities transactions.
In its indictment against KPMG, the government contends that the shelters were frauds that generated $11 billion in phony tax losses. KPMG admitted to criminal wrongdoing and agreed to pay $456 million in fines, penalties and restitution for promoting four shelters, which allegedly cost the government at least $2.5 billion in lost tax revenue.
Under the terms of the settlement, no criminal charges would be filed against KPMG as long as it complied with conditions including cooperating with the government and reforming its practices. But criminal charges were filed against an outside attorney and eight former KPMG executives, including former Deputy Chairman Jeffrey Stein and Jeffrey Eischeid, former head of the firm’s Innovative Strategies marketing group.
Charges were also filed against former KPMG executive John Larson, who left the accounting firm to form Presidio. Stein, Eischeid, Larson and the other individual defendants have pleaded not guilty.
None of the investors who bought the shelters were named in the complaint. Simon, Winnick, Saperstein, Wendt and the Marciano brothers either declined to comment or could not be reached.
Ritchie’s role in the tax shelters was made public in 2003, when his e-mails were released by the Senate Permanent Subcommittee on Investigations as part of its probe into tax shelters.
In a May 26, 1998, e-mail to Stein and others, for example, Ritchie said KPMG should not register one of its tax shelters with the IRS, contending that the fees the firm would earn from the transactions would outweigh potential penalties from the IRS.
The e-mail said “the rewards of a successful marketing” effort for the shelter “and the competitive disadvantages which may result from registration far exceed the financial exposure to penalties.”
The Aug. 29 indictment cited a May 26, 1998, memo from co-conspirator No. 1, also known as “CC1,” advising Stein and others not to register the shelter because it would put KPMG at a “severe competitive disadvantage in marketing tax shelters.”
A June 8, 1998, e-mail from Ritchie to Eischeid and other executives emphasizes the need to keep a PowerPoint presentation on one of the shelters out of the hands of clients.
“Please be reminded that you should NOT leave this material with clients or targets under any circumstances,” the e-mail said. “Not only will this unduley [sic] harm our ability to keep the product confidential, it will DESTROY the chance the client may have to avoid the step transaction doctrine.”
The step transaction doctrine refers to a principle that allows the IRS to disallow tax breaks for entities created for the sole purpose of avoiding taxes.
The Aug. 29 indictment said CC1 sent a June 8 memo to marketing team members, directing them not to leave shelter marketing materials “with clients or targets under any circumstances” because doing so “will DESTROY any chance the client may have to avoid the step transaction doctrine.”
The language is virtually identical, although the Senate version said “the chance” and the indictment said “any chance,” which may have been a transcription error.
Prosecutors have not said whether any clients of the shelters face scrutiny. Tax experts say prosecutors would need to act soon if they intended to prosecute clients, because there is a six-year statute of limitations on tax crimes and most of the KPMG shelters occurred in 1999 and 2000.
Sandra Brown, head of the tax crimes division of the U.S. attorney’s office in Los Angeles, declined to comment on the KPMG case but confirmed that the statute of limitations for prosecuting most tax crimes is six years from the filing of a return.
Times staff writer Josh Friedman contributed to this report.
