Friday, February 26, 2010
Tanina Rostain (New York Law School) presents a chapter of her forthcoming book, Confidence Games: Lawyers, Accountants and the Tax Shelter Industry (MIT Press, 2011) (with Milton C. Regan (Georgetown)), at San Diego today as part of its Tax Law Speaker Series hosted by Karen Burke:
The book describes the historical, economic, and organizational forces that gave rise to the abusive tax shelter market in the United States between 1994 and 2004. After tracing the macro-factors – including the state of tax law enforcement, the booming economy, and the highly competitive atmosphere in which accounting and law firms were operating in the 1990’s – the book will offer a detailed account of the role of the high-profile organizations and individuals that spearheaded the rise of the abusive shelter industry. The accounting firms involved include KPMG, which ultimately paid close to a half billion dollar fine and entered into a deferred prosecution with the federal government; Ernst & Young, four of whose partners were convicted last spring of tax fraud; and BDO Seidman, whose former chair and other principals are currently under indictment.
Confidence Games also focuses on the participation of corporate law firms, including Jenkens & Gilchrist, a former AmLaw 100 firm, which was forced to shut its doors as a result of its participation in the tax shelter market. Among the outside lawyers who played a central role are R.J. Ruble, a former partner at Brown & Wood, who was convicted and received a six year sentence for his involvement a year ago, and Paul Daugerdas, a former partner of Jenkens & Gilchrist, who, with two other partners, is scheduled to stand trial next February. Between the accounting firms and law firms, more than thirty lawyers have been indicted, pleaded guilty, or been convicted for their participation in the shelter market. (Along the way, we describe the role of Deutsche Bank, HVB, First Union, and other financial institutions that developed some of the earliest shelters and provided the funding, structures, and complex financial engineering that were necessary to give shelters a semblance of legitimate business activity.)Our aspiration in the book is to give a detailed account of an important and unrecognized episode in recent business history. We also explore the subtle internal organizational factors that led tax professionals – many of whom had earlier enjoyed distinguished careers at elite firms and the Treasury -- to engage in questionable and even criminal conduct. Our aim is to use this episode to illuminate how professionals working in organizations frame their knowledge and ethical and legal responsibilities.The chapter I am presenting describes Mark Watson's and Steven Rosenthal's attempts, between February through early May 1999, to derail BLIPS, an abusive shelter marketed to high wealth individuals by KPMG in late 1999. The shelter, which was sold to 166 individuals, earned the firm some $150 million in fees, and the firm's activities in designing and promoting the shelter eventually served as a ground for the deferred prosecution agreement between the government and the firm. The incident also formed a basis for indictments against a number of firm principals and other tax professionals. In December 2008, R.J. Ruble, formerly of Brown & Wood, Robert Pfaff, and John Larson, formerly of KPMG, were convicted of tax fraud in connection with their involvement in designing and marketing BLIPS. They subsequently received substantial prison sentences.
The chapter emphasizes the process by which knowledge about the shelter and responsibility for its promotion are fragmented among the various tax professionals involved -- a process that mirrors organizational decision making generally. The chapter also offers an account of the institutional and organizational forces that made it difficult for Watson and Rosenthal from stopping BLIPS.