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.

This post from earlier this week addressed the wide-ranging negative effects of the Sarbanes-Oxley legislation that was supposed to curb and correct the corporate fraud that supposedly prompted the bursting of the stock market bubble earlier in the decade.
Meanwhile, Krispy Kreme‘s (previous posts here) board released earlier this week a summary of an internal investigation that detailed over $25 million in accounting errors and related management failures that occurred as the trendy company was rapidly expanding and fascinating investors. When rumors of those management failures became public last fall, Krispy Kreme’s stock price tumbled.
Before enactment of Sarbanes-Oxley, revelations of such management failures would have almost certainly resulted in an internal board investigation and a shareholders’ deriviative lawsuit. Reviewing all of this within the lottery framework of criminalizing agency costs, Larry Ribstein observes wryly:

[M]ost of the stuff at Krispy Kreme happened after Sarbanes-Oxley. And it?s getting fixed by a special committee and a derivative suit that the company has allowed to proceed. So what is it, exactly, that we are getting from Sarbanes-Oxley?

Given that American Insurance Group, Inc. restated $3.9 billion of profit earlier this year, had various government investigations wipe out about $60 billion of market capitalization, was sued by regulators, and unceremoniously dumped its longtime chairman and CEO Maurice “Hank” Greenberg, you would think that its leaders would at least acknowledge that the company’s year has been about as bad as that of Mike Lamb.
Not so, and the reason is that the cost of the foregoing setbacks was merely the price of forging a productive relationship with the Lord of Regulation and other government regulators, as current AIG interim Chairman Frank G. Zarb told AIG shareholders yesterday in the company’s annual meeting:

“A.I.G. in recent months has forged a productive, constructive, professional relationship with our regulators. This company is committed to working openly, without reservation.”

Thus, the foregoing statement makes clear that AIG has changed its tune toward regulators from the position espoused by Mr. Greenberg, who once observed that regulators turn “foot faults into murder charges.” It remains decidedly unclear whether that relationship will prove as valuable for AIG’s shareholders as Mr. Greenberg’s management of the company.

On the heels of this post from yesterday, this NY Times article reports on the plea bargain of Domenick DeGiorgio, a 42 year old former managing director at the New York branch office of Munich-based HVB, (formally known as Bayerische Hypo & Vereinsbank) under which he pled guilty to fraud, conspiracy and tax-evasion charges in the federal government’s first criminal conviction in its investigation of allegedly fraudulent tax shelters that KPMG LLP created and promoted. Here are the previous posts on the KPMG tax shelter saga.

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