As KPMG attempts to finalize a deferred prosectution agreement with federal prosecutors that would avoid an Arthur Andersen-type indictment and probable meltdown, now they have another front on the criminal battlefield to be worried about:

Mississippi likely will file criminal charges against accounting giant KPMG because it created a tax strategy the state says illegally let WorldCom, now called MCI Inc. shield billions of dollars from taxes, sources close to the case said on Friday.
Although a few other states have also weighed this strategy, Mississippi Attorney General Jim Hood is the most determined and his state would be the first to take this step, said the sources, who requested anonymity.
Under Mississippi law, “any person who willfully attempts in any manner to evade or defeat any tax . . . or assists in the evading of that tax or payment thereof” can be found guilty of a felony, one of the sources said. Penalties can be up to five years in prison, while fines can be as much as $500,000.
Analysts say Congress and corporate America would not want another of the nation’s biggest accounting firms put out of business because the industry would be overly concentrated.
Mississippi might not share the federal government’s concern that there could be too few auditors if KPMG collapsed, experts said, so KPMG might have less leverage in any talks with the state.

Hat tip to Ellen Podgor for the link to the Mississippi action.

Doug Berman points out that Thursday was a busy day in New Orleans as the Fifth Circuit Court of Appeals issued over 160 published and unpublished decisions that appear mostly to involve rejection of various Booker sentencing claims. It’s safe to say that the release of that many decisions sets a federal appellate record for the number of opinions issued by a court on one day.
Lost amidst all that activity, however, is the fact that the Fifth Circuit still has not ruled on the appeal in the sad case of Jamie Olis, even though oral argument in that appeal occurred on January 30 of this year. And while that appeal has been pending, Mr. Olis has been moved — due to the absurd length of his 24 year sentence — from a minimum-security prison in Bastrop, Texas to a medium-security prison at Oakdale, La., where prison gangs are common and many prisoners are serving multiple life sentences.
The Fifth Circuit’s reputation in business cases took a serious hit with its Arthur Andersen decision, which was resoundingly rejected by a unanimous Supreme Court earlier this year. The Fifth Circuit has an opportunity to begin redeeming its reputation in business cases in the Olis appeal, but justice delayed is often justice denied. Here’s hoping that a decision in the Olis appeal is forthcoming any day now.

Following on this post from last week regarding a plea deal of a former banker who had promoted KPMG’s tax shelters, this Wall Street Journal ($) article provides more information on the involvement of several banks — namely UBS AG, Deutsche Bank AG and HVB Group — in providing billions of dollars in credit lines to KPMG clients — and, in turn, earning substantial bank fees — in connection with KPMG’s promotions of tax shelters to its clients.
According to the WSJ article, Deutsche Bank, which happens to be a KPMG audit client, earned almost $80 million in bank fees from the Opis and Blips transactions that are at the heart of the questionable tax shelter vehicles. HVB, which is also a KPMG audit client, earned 5.5 million on Blips transactions in just three months during 1999 and millions more in 2000. UBS participated in 100 to 150 transactions in 1997-1998, but the amount of UBS’ fees are unclear.
Interestingly, the article points out that Deutsche Bank lawyers cautioned the company’s bankers that Blips transactions posed substantial risks for the bank’s reputation. Nevertheless, the CEO of Deutsche Bank’s U.S. unit at the time approved the bank’s participation in the transactions so long as “any customer found to be in litigation be excluded from the product . . . and that a low profile be kept on these transactions.”
I think it’s safe to say that the low profile has been blown.

This post from awhile back noted one of the by-products of the current trend toward criminalizing merely questionable business transactions — i.e., the government’s destruction of good reputations in its quest to obtain convictions against unpopular defendants.
Along those lines, this U.S.A. Today article from yesterday catches up with Mark Belnick, the former Paul Weiss partner and Tyco general counsel who was indicted and acquitted in connection with the prosecutions of former Tyco executives after he had coordinated the company’s cooperation with the criminal investigation of former Tyco executives Dennis Kozlowski and Mark Swartz. Here is a longer New York Magazine article on Mr. Belnick’s ordeal.
In the article, Mr. Belnick discusses with the reporter the misery that he endured during a prosecution that was based upon grand larceny charges for compensation that was Tyco’s CEO and CFO indisputably approved:

“When I was threatened with grand larceny, I thought, ‘What did I steal — my stock bonus?’ ” says Belnick. “I didn’t even understand what the theory of grand larceny could be here.”

During the trial, the prosecution described Belnick as a “man who lost his moral compass” and accepted excessive compensation that he knew was a payoff for his silence about wrongdoing committed by Messrs. Kozlowski and Swartz. This, of course, after the same prosecutor had received Mr. Belnick’s assistance in uncovering the alleged wrongdoing by Messrs. Kozlowski and Swartz.
So it goes in the continuing criminalization of agency costs.

Vic Fleischer over at the Conglemerate blog continues his campaign to increase the business of the white collar criminal defense bar with a couple of posts (here and here) in which he suggests that “financial engineering” of the type that KPMG was involved with in regard to its tax shelters should be criminalized. Vic differentiates such financial engineering from transaction cost engineering, which creates value by reallocating risk and, in Vic’s world, is just fine. Vic’s theory is really just an extension of one that was propounded by former Enron Task Force prosecutor-turned-law professor John Kroger in a law review article, Enron, Fraud and Securities Reform: An Enron Prosecutor’s Perspective.

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J.P. Morgan Chase & Co. and Toronto-Dominion Bank announced yesterday that they had agreed to pay about $420 million to settle their parts of the “Megaclaims” lawsuit that the Enron bankruptcy estate filed against 10 banks for allegedly aiding and abetting accounting fraud that Enron alleged prompted the company’s collapse into chapter 11 at the end of 2001. Morgan Chase will pay $350 million of the total and Toronto-Dominion the balance.
Three other banks have already settled the Megaclaims litigation, so with the most recent settlements the aggregate amount of settlements in the litigation is approaching three quarters of a billion dollars for the Enron bankruptcy estate. The settling banks have also agreed to waive claims against the Enron estate in an aggregate amount in excess of $3 billion. The five banks that remain in the Megaclaims litigation are Citigroup Inc., Credit Suisse Group’s Credit Suisse First Boston Inc., Deutsche Bank AG, Merrill Lynch & Co. and Barclays PLC.
The Megaclaims litigation is seperate from the Enron securities fraud class action case against the same banks that is pending in Houston and has already resulted in settlements in excess of $7 billion. Frankly, compared to the amounts that the settling banks have paid to date in that litigation, the amounts being paid to settle the Megaclaims litigation are practically nuisance value.

The highly-publicized lawsuits by California-based utilities against Houston-based Reliant Energy Inc. over allegations that Reliant pumped up trade volumes and revenues during the 2000-01 energy crisis in Western states died with a whimper yesterday as Reliant agreed to pay $150 million cash and waive another $300 million in claims to settle the utilities’ lawsuits.

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The KPMG tax shelter saga has been a common topic on this blog over the past year or so, and this recent post observed that — even if KPMG fades a criminal indictment — it is by no means clear that the firm will be able to survive the after-effects of entering into a deferred prosecution agreement to settle the criminal probe.
Along those lines, Peter Henning passes along this extraordinary open memorandum that nine anonymous (and frustrated) current and former KPMG partners recently sent to several media outlets, the Justice Department and the KPMG board. The memo describes in detail the demoralizing effects of KPMG management’s moves to avoid a criminal indictment at all costs and the devastating impact that the Justice Department’s criminalization of agency costs has had on KPMG. Indeed, the memo outlines a number of the adverse effects of criminalizing agency costs that have been noted here, such as the following:

Bludgeoning employees into plea bargains;
Criminalization of conduct that is not even clearly improper in a civil context — much less criminal — through “indictment via media” (also here);
Serving up sacrificial lambs and firing key partners who were simply doing their jobs;
The cost to owners of rolling over in the face of the investigation as opposed to standing up and fighting it; and
The high price of “cooperation” and the illusory attorney-client privilege.

Interestingly, the authors of the memo believe that KPMG can absorb the financial impact of a hefty fine and damage awards resulting from civil litigation over the tax shelters, but are less sanguine about the prospects for KPMG’s survival because of the damage to partner morale resulting from management’s handling of the tax shelter probe.