Ernst & Young Pays $123 Million, Avoids Tax Shelter Prosecution
In a deal with the government signed this week, accounting firm Ernst & Young agreed to pay $123 million to the government and admitted to wrongful conduct by some of its partners and employees in connection with the firm’s participation, from 1999 to 2004, in the promotion of abusive tax shelters to rich individuals. In return, the firm itself won’t face criminal charges.
As part of a non-prosecution agreement that U.S. Attorney for the Southern District of New York Preet Bharara announced today, E&Y acknowledged that in league with various law firms, banks and investment advisors, it developed and sold four different tax shelter products designed to save 200 high net worth clients $2 billion in tax. For its efforts, E&Y received gross fees of about $123 million—the amount it’s now forking over to the government. As part of its deal, E&Y agreed to continue to cooperate with prosecutors and to keep certain restrictions on its tax practice. The accounting firm, one of the four largest in the world, has cooperated with the government investigation since 2004, but acknowledged in the agreement that E&Y employees misled the Internal Revenue Service when it first began investigating the shelters.
Four former Ernst & Young employees —three tax lawyers and an accountant–were convicted in 2010 of conspiracy to defraud the government, tax evasion, obstruction of the IRS and false statements to the IRS for their role in developing and defending the shelters. In November, a three-judge panel of the U.S. Court of Appeals for the 2nd Circuit threw out the convictions of two of those attorneys, finding there was insufficient evidence to convict, but upheld the conviction of the two other men. ( Appeals opinion here.) The men had all been members of what E&Y originally called its “VIPER” Group (for “Value Ideas Produce Extraordinary Results”) and later renamed the “Strategic Individual Solutions Group”.
In a statement, E&Y said, it was “pleased to put this matter from a decade ago behind us” adding that “as the settlement with the US Attorney’s office recognizes, these activities represent an isolated period in the firm’s long history of providing ethical and professional tax services.” Indeed, the “Statement of Facts”‘ that is part of the agreement concludes with this nod to E&Y: “The wrongdoing in this case by a small group of professionals at E&Y represented a deviation from the more than 100-year history of ethical and professional conduct by E&Y and its partners.”
The E&Y deal is just the latest in a long line of settlements relating to the promotion of over the edge-tax-shelters during the late 1990s and early 2000s. In 2005, KPMG agreed to pay what was then a record $456 million fine in a deferred prosecution deal covering its role in promoting shelters. Deutsche Bank agreed to pay a record $554 million in a deferred prosecution deal in 2010. And last June, accounting firm BDO USA paid $50 million, and admitted generating $6.5 billion in phony losses in its own deferred prosecution agreement. In a different line of tax abuse cases, in February 2009, Swiss Bank UBS entered into a deferred prosecution deal and paid $780 million in fines, for its role in helping Americans hide assets offshore. Deferred prosecution, also known as pretrial diversion, has been the feds’ preferred method of dealing with wrongdoing by prominent corporations since the Department of Justice came under fire for causing the 2002 collapse of accounting firm Arthur Andersen, which was convicted of obstruction of justice in the Enron scandal. This past January, Switzerland’s oldest bank, Wegelin & Co., went out of business after it was forced to plead guilty to helping to hide $1.2 billion for American tax cheats.
While the E&Y settlement might seem like it was late in coming, both civil and criminal litigation related to the tax shelter craze continues. Just this week, for example, a Louisiana federal judge shot down a shelter Dow Chemical used to create $1 billion in phony deductions between 1993 and 2003. And today, a Manhattan federal judge sentenced Donna Guerin, 52, to eight years for her role in promoting tax shelters while an attorney with the now defunct Jenkens & Gilchrist law firm. Guerin and three co-defendants were convicted of tax fraud in 2011, but later Guerin and two of her co-defendants were granted a mistrial as a result of misconduct by a juror—ironically, a law school graduate who lied about her background. Guerin later decided to plead guilty, while the other two, including former Jenkens & Gilchrist partner Paul Daugerdas, are scheduled to be retried in September.