Ernst & Young, Two Law Firms Face $1-Billion Suit

Former clients have sued accounting firm Ernst & Young and two law firms for more than $1 billion for allegedly convincing them to enter into illegal tax shelters, the law firm representing the plaintiffs said in a statement Monday.

The lawsuit alleged that the firms convinced more than 50 clients to enter into currency option trades to create paper capital losses that offset real capital gains on which they would have had to pay taxes, law firm Fensterstock & Partners said.

The suit, seeking $1 billion in punitive damages, was filed by 10 former clients in federal court in Manhattan on Friday against Ernst & Young and the law firms Jenkens & Gilchrist and Sidley Austin Brown & Wood.

The suit also alleged that against the wishes of its clients, Ernst & Young disclosed their names to the Internal Revenue Service, which had served summonses on the firm seeking information about the tax shelters.

A plaintiffs’ lawyer said his clients may owe millions of dollars in back taxes to the IRS. He said he knows of no other case where the beneficiaries of a tax shelter turned around and sued the accounting firm and law firms that promoted the vehicle.

“This is the first suit, I believe, of its kind -- allegations that a major accounting firm, with a law firm, put together a canned package of a tax shelter that they knew or should have known was a sham,” said lawyer Blair Fensterstock.

Ernst & Young and Sidley Austin spokesmen were not immediately available to comment.

“While we have not had the opportunity to look at it thoroughly, even at this stage it is obvious that it is without merit and we will vigorously defend against it,” Dallas-based Jenkens & Gilchrist said in a statement.