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.

According to the plea bargain, Mr. DeGiorgio had been responsible for supervising HVB’s participation in various shelter transactions that allowed wealthy individuals claim more than $1.3 billion in fake tax losses. Those transactions included a KPMG tax shelter known as “Bond Linked Issue Premium Structure” (“Blips), which the government has characterized as a fraudulent shelter. The investigation appears to be focusing on that shelter, which the plea bargain described the shelter in the following manner:

An essential part of creating reported tax losses depended on the bank purporting to provide a loan structured in a particular way,” he said. “The loan proposed by the Blips promoters was a sham because, among other things, as designed, no money ever left the bank, and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans.
Blips was falsely represented to be a three-stage, seven-year investment program when, in reality, it was a short-term transaction designed to create tax losses.

In a prepared statement, the government stated the following regarding the plea bargain:

Our self-reporting tax system can not tolerate the fraudulent acts of bankers, accountants and lawyers who, under the guise of “sophisticated tax planning,” create elaborate structures that have no purpose but to mislead and defraud the IRS, at the cost of billions of dollars to the U.S. Those who seek to devise, implement, and profit from these fraudulent structures should understand that we will devote whatever resources it takes to put a stop to them.

Mr. DeGiorgio’s guilty plea turns up the heat on KPMG noted in yesterday’s post as it negotiates the with prosecutors over a deferred adjudication agreement that would head off an indictment against the firm that would likely cause an Arthur Andersen-type meltdown of the firm. In that regard, look for a number of former KPMG tax professionals to be indicted in the coming weeks.