The nine individuals named in the indictment were: On 17 October 2005, another ten individuals were indicted on criminal conspiracy and tax evasion charges: The four tax shelters at issue were known as BLIPS, or bond linked issue premium structure; Flips, or foreign leveraged investment program; OPIS, or offshore portfolio investment strategy and a variant of Flips; and SOS, or short option strategies.
In August 2005, former official of the German bank Bayerische Hypo-Und Vereinsbank AG (HVB) Domenick DeGiorgio, who worked with KPMG to sell the shelters, pleaded guilty to tax evasion and fraud charges.
[4] On 10 March 2006, U.S. District Judge Lewis A. Kaplan released former KPMG accounting executive David Greenberg on $25 million bail.
On 28 March 2006, David Rivkin pleaded guilty to charges of conspiracy and tax evasion in U.S. District Court in Manhattan.
In his opinion, Judge Kaplan agreed with the defendants' contention that KPMG was improperly pressured not to pay their legal expenses, "because the government held the proverbial gun to its head."
In the meantime, related rulings were handed down in a civil case that had been brought against the Internal Revenue Service in late 2004 by two Texas lawyers, Harold W. Nix, and C. Cary Patterson.
On 20 July 2006, Judge T. John Ward of the United States District Court for the Eastern District of Texas ruled that the use of BLIPS by Nix and Patterson was essentially legitimate, because the IRS's application of tougher Treasury Department rules in 2003 to liabilities that occurred in BLIPS was "ineffective" and "not enforceable" because it was retroactive.
In response to this ruling, prosecutors in the KPMG case have indicated that they will argue that the BLIPS shelter itself was technically valid, but that the way the defendants carried it out was fraudulent.
[8] This settlement came a year after US DOJ prosecutors in Manhattan announced their investigation of Deutsche Bank's role in questionable tax shelters.
John Larson and Robert Pfaff, the other two former partners still facing charges, left KPMG eight years before the criminal action was filed and did not initially seek to have the accounting firm pay their legal bills.
On 20 August 2007, the prosecutors announced that one of the aiders and abettors of tax fraud, David Amir Makov, agreed to plead guilty and cooperate with prosecution of his former colleagues.
[12] In the preceding week, the federal court in Manhattan received $150,000 from Mr. Makov as part of a bail modification agreement that allows him to travel to Israel.
Makov gave a brief explanation on the workings of BLIPS, or Bond Linked Issue Premium Structure, which he said he helped create.
According to Makov's testimony, the BLIPS shelters were created to generate artificial losses that were then used by wealthy investors to offset gains in legitimate income.
The Presidio entities that Makov formed, owned and operated with co-defendants Robert Pfaff and John Larson, both former KPMG employees, made at least $134 million selling BLIPS.
Makov claimed that although he initially thought that BLIPS were legitimate, "as part of the deception" he was eventually "asked by representatives of Bank A," among others, "to come up with an investment rationale."
However, on 18 October 2007, Judge Kaplan postponed indefinitely the trial set to begin in five days, discharging jurors he had already selected to hear the case, and removing Steven Bauer of Latham & Watkins, a lawyer for former KPMG executive John Larson.
The Court held that the government prosecutors "unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment...." by pressuring KPMG to refrain from paying their legal fees.
Assistant U.S. attorney John Hillebrecht told the jury in Manhattan federal court that the four men lied and cheated "by making the tax bills of some of our nation's richest citizens disappear."
Raymond Ruble's lawyer Jack S. Hoffinger told jurors that it was impossible to conclude that the defendants purposefully tried to break the law in helping at least 600 wealthy people trim their taxes since they did not try to hide what they were doing from the Internal Revenue Service or others.
His acquittal came as a result of Steve Acosta, a key government witness, being "utterly incapable of giving a straight answer on cross-examination", as conceded by Assistant U.S. Attorney John Hillebrecht in closing arguments.
Six people, including former KPMG tax partner David Rivkin; David Amir Makov, a one-time currency and fixed-income derivatives trader at Presidio; and Domenick DeGiorgio, a former managing director at German bank HVB, or Bayerische Hypo & Vereinsbank, have pleaded guilty to criminal charges in the matter.
In 2004, a PBS Frontline documentary episode scrutinized the use of tax shelters by corporations and wealthy individuals, as well as the role of accounting firms in facilitating these arrangements.