As noted in this earlier post, Big Four accounting firm KPMG is the subject of a Manhattan federal grand jury investigation into the sale of tax shelters to corporations and wealthy individuals who used them to escape at least $1.4 billion in federal taxes. This investigation comes on the heels of an earlier IRS petition to enforce summons against KPMG. Today, the Wall Street Journal ($) has a front page story on KPMG’s management decisions that led the firm into the tax avoidance promotion business. The entire article is well worth reading, and here is an example of the deals that KPMG was promoting:

KPMG marketed a range of shelters known by cryptic acronyms. In 1997, it sold Joseph J. Jacoboni a strategy called FLIP. That year, Mr. Jacoboni faced a capital gain of more than $28 million from the sale of his software-support business in Orlando. With KPMG’s guidance, he initially invested $4.7 million in a series of transactions in late 1997, according to filings in federal court in Orlando. He bought stock in a Swiss bank and an expensive warrant from a private Cayman Island company, which in turn bought shares in the Swiss bank. He also bought “put” options and sold “call” options.
As a result of this activity, Mr. Jacoboni’s 1997 tax return showed more than $30 million in capital losses, erasing roughly $7.5 million in tax liability on the sale of his company. His actual cost, after factoring in the return on his investment, was only $2.4 million. The cost included a fee of $437,500 for KPMG. In 2001, the IRS started an audit of Mr. Jacoboni’s 1997 return. He then sued KPMG for fraud and negligent misrepresentation — allegations the firm denies. A trial is scheduled for next month.
FLIP, OPIS and another shelter called BLIPS are under scrutiny by federal prosecutors in the criminal-fraud investigation. The three strategies combined earned KPMG fees of almost $100 million from 1996 through 2000, according to the Senate subcommittee report.

In this post from last week, it was noted the plaintiff in the landmark Roe v. Wade abortion case had sought Fifth Circuit review of a District Court order denying her Fed. R. Civ. P. 60(b) motion that attempted to reopen that controversial case. Today, the Fifth Circuit cancelled oral argument, which is not surprising because the Court often does not grant oral argument on appeals that are subject to summary disposition. Inasmuch as the appellant’s appeal in this case is a long shot, my sense is that the Fifth Circuit is preparing to affirm the District Court’s denial of the appellant’s motion and dismiss the appeal. Thanks to Howard Bashman for the tip on this development.

The Wall Street Journal ($) reports that Martha Stewart‘s legal team is seriously considering not putting Martha on the stand during her defense of the criminal case against her. The Stewart defense team apparently thinks that the prosecution’s laborious month long presentation of its case against Martha chloroformed the jury. Accordingly, the defense team is considering a minimalist defense that could be done by the end of the week.
Although understandable given the prosecution’s apparent mishandling of this case, not putting Martha on the stand is a risky strategy. Particularly in white collar prosecutions, jurors want to hear from the defendant. If the case is a closer call than what it appears, then Martha’s failure to defend herself on the stand could tilt jurors against her.

According to this refreshing piece, it appears that O.J. Simpson may have a bit of trouble collecting his fee for appearing at an autograph show in St. Louis.

As noted in this earlier post, the legislative reaction to the corporate scandals over the past few years has had unintended consequences–i.e., exorbitant compliance costs.
In this article, UCLA corporate law professor Stephen Bainbridge decries the lack of legislative cost-benefit analysis that was done in connection with enacting the onerous Sarbanes-Oxley Act (SOX). As Professor Bainbridge notes:

As an investor, I don’t want my portfolio companies spending a dollar on “good corporate governance” unless doing so adds at least a buck to the bottom line. I don’t have any voice in how much to spend on corporate governance, however. The board of directors and top management make that decision (as they should, of course). Unfortunately for the bottom line, however, directors and management have a strong incentive to over-invest in corporate governance consultants and so on.
Why? The answer lies in the incentive structures of the relevant players. Who pays the bill if a director is found liable for breaching his federal or state duties? The director. If the director has adequately processed decisions and consulted with advisors, will the director be held liable? Unlikely. Who pays the bill for hiring corporate governance consultants, lawyers, investment bankers, auditors, and so on to advise the board? The corporation and, ultimately, the shareholders.