Banker’s Guilty Plea May Affect KPMG

A former bank accountant pleaded guilty Thursday to fraud and tax evasion in the first criminal case arising from the federal tax-shelter probe of accounting giant KPMG.

Domenick DeGiorgio, a former managing director of German-owned banking company HVB Group, admitted helping to sell shelters that he knew were designed to generate phony tax losses for wealthy individuals. The shelters resulted in “over $1 billion of false and fraudulent losses being claimed by taxpayer participants” and reaped “extraordinary fees” for HVB and other promoters, according to the charging document filed by federal prosecutors in U.S. District Court in Manhattan.

The 14-page charging document did not name KPMG, but it identified the tax shelter as a “bond linked issue premium structure,” or BLIPS, one of four types of shelters that U.S. Senate investigators have said were created and sold by KPMG.

KPMG, the world’s fourth-largest accounting firm, has been negotiating with Justice Department officials to avoid criminal charges of the kind that destroyed former Big Five accounting firm Arthur Andersen.

Andersen was convicted of obstruction of justice in 2002 for its role as auditor of scandal-ridden Enron Corp. The Supreme Court overturned the conviction this year, but Andersen already had gone out of business with the loss of thousands of jobs.

Besides the federal investigation, KPMG has been hit with a slew of lawsuits filed by former clients facing penalties, interest and back taxes after the Internal Revenue Service declared their KPMG-created tax shelters to be abusive. A federal judge in Arkansas on Thursday rejected one plaintiff’s bid for class-action status, saying the tax shelter customers are wealthy enough to pursue their own individual court cases against KPMG.

In June, in an apparent bid to mollify prosecutors, KPMG issued a public apology, saying it “takes full responsibility for the unlawful conduct by former KPMG partners” and “we deeply regret that it occurred.”

KPMG declined to comment on Thursday’s guilty plea, spokesman Thomas J. Fitzgerald said. A spokesman for HVB also declined to comment, according to Bloomberg News.

DeGiorgio’s guilty plea could raise pressure on KPMG to settle, if the former banker is cooperating with prosecutors. His lawyer, Jason Brown, declined to comment.

Former New York City prosecutor Jeffrey C. Hoffman, now a defense lawyer not involved in the KPMG case, said it was typical in white-collar-crime cases “that people who enter guilty pleas early on are the ones who wind up cooperating.”

Hoffman said it was usual with cooperating witnesses for the government to file a bare-bones charging document, as it did with DeGiorgio, rather than the sort of richly detailed “story” that appears in many criminal indictments. “If the individual is eventually going to be a witness,” he said, “the fewer facts attributed to him, the less the defense has to cross-examine him on.”

DeGiorgio, 42, of Cold Spring Harbor, N.Y., pleaded guilty to crimes committed between 1996 and 2003, when he was co-head of HVB’s New York-based Financial Engineering Group.

According to the charging document, promoters of BLIPS tax shelters marketed them as a seven-year investment program for trading foreign currencies and securities, leveraged by loans from banks such as HVB.

But in fact, as the promoters knew and DeGiorgio admitted, the shelters were designed to be folded up after 60 days, generating large phony tax losses for the clients and hefty fees for the promoters and other participants. For the bankers, the program generated risk-free interest because the “loans” never left the banks and were not actually used in currency trading, according to the charging document.

In addition to admitting that he promoted the fraudulent shelters, DeGiorgio also admitted to diverting for personal use payments meant for his bank and failing to declare on his personal tax returns the hundreds of thousands of dollars he was paid by tax shelter promoters for participating in the scheme.

DeGiorgio testified in November 2003 before the Senate Permanent Subcommittee on Investigations, which was conducting a multi-year investigation of the U.S. tax-shelter industry.

HVB participated in about 30 BLIPS transactions in 1999 and 2000 for KPMG clients, DeGiorgio testified. “We complied with applicable legal and regulatory obligations,” he said.

The panel issued a report this year that was harshly critical of KPMG and other firms involved in developing and marketing questionable shelters.