Thursday, August 18, 2005
KPMG's aggressive tax shelter business has triggered a flurry of lawsuits by former clients of the firm who have run afoul of the IRS for claiming deductions for shelters that were declared abusive. Having admitted that tax partners engaged in "unlawful conduct" in creating and selling the tax shelters, KPMG is now in the delicate position of seeking to settle the criminal investigation while resisting the civil suits, which could cost the firm as much, if not more, than any fine or civil penalty paid as part of a deferred prosecution agreement. How do you admit criminal liability and then deny it? Why, the in pari delicto defense (when in doubt, always use a Latin phrase to sound intelligent)! A New York Times article (here) discusses the firm's response to a lawsuit filed in Texas by two tax shelter purchasers, the brothers R. Cary and D. Calhoun McNair, investors with large capital gains they wanted to shelter and, more importantly, the sons of the owner for the NFL's Houston Texans. KPMG's response to the lawsuit states that the McNairs were aware of problems iwth the tax shelter when they filed their returns, and the firm is asking for information about advice given to the McNairs by law firms and an investment adviser. KPMG's answer also includes a claim for contribution from their advisers if the firm is found liable. An earlier post (here) discussed the firm's position in Florida litigation with a former client in which it asserted that the phrases "unlawful conduct" and "KMPG partners," which it used in its mea culpa (there's that Latin stuff again) to the Department of Justice, were "vague and ambiguous."
The in pari delicto or "unclean hands" defense often comes across as a bit unseemly because the party asserting it claims that while it did wrong, the other person was just as bad -- the classic grade school excuse to the teacher. When it's used in a lawsuit, it can sound like the party is talking out of both sides of its mouth. The defense essentially turns the case into a contest in which one party tries to hurl as much mud at the other so that both look equally bad, and therefore it would be inequitable for either party to recover from the other. The defense is often seen in cases in which a company's senior managers engage in wrongdoing, conduct that is attributable to the company, and when new managers or the trustee in bankruptcy take over, they sue the outside advisers -- the lawyers, accountants, and investment bankers -- for not preventing the wrongdoing that harmed the entity. The defendants argue, with quite a bit of success, that the company is just as responsible for the harm, and therefore should not be allowed to recover for its own misconduct. The defense is certainly not a pleasant one to advance, but it allows a party to both admit to some impropriety and at the same time defend itself. It shouldn't come as much of a surprise that KPMG is fighting the civil suits while trying to settle the criminal case, but it certainly makes for some delicate PR and seeming contradictions to blame others while accepting blame at the same time. (ph)