Opening Statements in KPMG Trial Today

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The long-delayed trial of KPMG executives charged with selling fraudulent tax shelters has at last begun, three years after the indictment. Jury selection began yesterday in federal court in Manhattan, and opening arguments are scheduled for today. The trial is expected to continue into early 2009.

Out of 19 original individuals in the indictment, four now remain: Robert Pfaff, John Larson and David Greenberg from KPMG, along with former Sidley partner Raymond Ruble. (Full disclosure: the author is a former Special Associate of Sidley Austin.) Judge Kaplan dismissed indictments against 13 of the individuals last year, finding that the prosecution violated their rights by threatening to indict KPMG itself if it paid their legal fees. The 2d Circuit upheld that decision, which has caused the Justice Department to issue two significant memos ostensibly ending that practice. Two other defendants have pled guilty: David Rivkin in 2006, and David Makov of Presidio Advisory Services, whose plea inculpated Ruble, in 2007.

The defendants are accused of putting together tax shelters designed to create fake capital losses, reducing clients’ taxes by more than two and a half Billion dollars. The scheme is alleged to have been concealed from the IRS by opinion letters from KPMG or a law firm, making false representations about the underlying transactions.

The defense team has been trying to exclude summary charts, based on IRS data, from the government’s case in chief. The defense claims that the underlying IRS data was not made available, and so the charts summarizing that data should not be admitted. The court has not yet ruled on this. The IRS is subject to confidentiality rules that prohibit the disclosure of such data, unless the individual taxpayer is under formal IRS scrutiny. The New York Times reports that “many taxpayers sought to strike deals with the IRS to prevent formal scrutiny by the agency.”

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