The Association of U S West Retirees



KPMG Revises Terms of Payout In Big Tax-Shelter Settlement
By David Reilly
The Wall Street Journal
Thursday, March 23, 2006

Accounting giant KPMG LLP and law firm Sidley Austin LLP took a fresh stab at settling a class-action lawsuit related to the sale of questionable tax shelters.

The firms last month shelved a previous version of the settlement, which called for a $195 million payout to those who had bought the tax shelters, because too many people had opted out of the agreement.

Under the new version of the settlement, filed yesterday in federal court in New Jersey, KPMG and Sidley Austin would pay no more than, but most likely far less than, the $195 million originally envisaged, as well as up to $30 million in legal fees.

KPMG, which sold the questionable tax shelters, will bear the brunt of this cost, while Chicago-based Sidley Austin, which gave legal advice on the shelters, will pay about 20%.

The revised settlement terms would reduce the amount the firms will pay based on the number of plaintiffs who opt out.  The amounts to be received by individuals won't necessarily decline because of this reduction.  They would depend on the specific claims of each individual investor.

In a statement, a KPMG spokesman said, "The amendment of the original settlement allows us to continue pursuing a fair and reasonable settlement of this matter."

Melvin Weiss, senior and founding partner at Milberg Weiss Bershad & Schulman LLP, which is lead counsel for the class-action plaintiffs, said that individuals who think they can get a better deal on their own can "go try.  I think quite frankly that this is a very fair settlement from a lot of angles."

A spokeswoman for Sidley Austin declined to comment on the case.

If the new agreement successfully revives the proposed settlement, it could be another important step by a major accounting firm to put behind it troubles stemming from the go-go days of the late 1990s.  The Big Four firms -- PricewaterhouseCoopers LLP, Deloitte & Touche LLP, KPMG and Ernst & Young LLP -- have spent millions to make amends for misdeeds from this period.

In KPMG's case, the price of putting the past behind it has been particularly high.  The revised tax-shelter settlement follows a deferred-prosecution agreement the firm entered into last year with the Justice Department that called for KPMG to pay $465 million.  Plus, the firm still faces damage claims from tax-shelter clients who opted out of the settlement and plan to pursue their cases individually.

Still, the potential settlement would bring closure to most of the tax-shelter issues KPMG faces and allow the firm to start moving beyond that chapter in its history.

The ultimate amount to be paid by KPMG and Sidley Austin under the new settlement agreement will be based on a formula that fluctuates depending on the number of tax-shelter buyers who agree to take part.  Of the 284 who originally joined the class-action suit, 61 had opted out of the previous settlement, claiming it didn't pay enough.

The new settlement addresses some technical objections raised by some of those who opted out, but doesn't increase the amount on offer.  That means some investors are likely to continue opting out.

"The proposed amount to be paid is entirely insufficient," said Michael Avenatti, a lawyer at Greene Broillet & Wheeler LLP who represents two investors who earlier opted out of the proposed settlement and who won't rejoin the agreement.  Mr. Avenatti said his clients disagreed with the settlement because KPMG could expect to pay much more if it tried cases individually.

The attorney estimated that, under the proposed new payment formula, KPMG and Sidley Austin could shell out between $130 million to $150 million.  He estimates the legal fees alone for trying the cases individually would amount to $500 million, and any punitive damages would cost the accounting and law firm more.

KPMG declined to comment on the projected payout.

In addition to possibly lowering the amount KPMG and Sidley Austin will pay, attorneys for the class-action plaintiffs could also receive less than the $30 million fee set aside under the original agreement.

Write to David Reilly at