The Work

September 15, 2008 6:27 PM

Lawyers Waiting for Next Tax Shelter Chips to Fall

Posted by Zach Lowe

On Sept. 11, the investigation of fraudulent tax shelters at Ernst & Young and elsewhere snagged another Am Law 200 casualty: former Arnold & Porter partner Peter Cinquegrani, who pleaded guilty to tax fraud charges in a deal that caps his prison sentence--to be determined in December--at five years.

Today, several sources close to the case say they are waiting to see if the Justice Department indicts two other private lawyers: Paul Daugerdas, a former partner at the defunct Jenkens & Gilchrist who brought in hundreds of millions of dollars in fees by approving bogus shelters, and R. Brent Clifton, a current Locke, Lord, Bissell & Liddell partner who got the firm involved in the Ernst tax shelter business in 1999.

Jenkens paid the IRS $76 million to avoid criminal penalties linked to Daugerdas's tax shelters, but Daugerdas himself has never been indicted. Locke is known to be one of four unnamed firms cited in the Justice indictment of six Ernst employees (available below), and Clifton is mentioned throughout deposition transcripts in a civil suit taxpayers filed against Locke in 2004.

Daugerdas could not be reached for comment. His lawyer, Larry Black of Austin, did not immediately return messages seeking comment. Clifton did not return a phone call or an e-mail from The Am Law Daily; a Locke spokesman says the firm is cooperating with the federal investigation.

Prosecutors declined to comment on the case, saying only that it is ongoing.

The alleged scam worked like this: Ernst set up illegal tax shelters for wealthy citizens seeking to hide income or conceal it as capital gains. They asked friendly law firms to write opinion letters assuring the taxpayers that the shelters were "likely" to pass muster should the IRS investigate their legality. In return, the firms received a fixed fee for each case--usually $50,000, but at times up to $150,000, according to court records.

Ernst came to Locke Lord in 1999, according to an internal firm memo included in the civil suit several taxpayers filed against the firm. Clifton sent the memo outlining the arrangement and its pros and cons. The pros were obvious: up to $1 million in annual revenue and high-level contacts at Ernst. The cons? Possible malpractice suits from burned taxpayers.

The civil case is scheduled to head to trial in November, court records show.

In other tax shelter trial news, the case against former Sidley Austin tax partner Raymond Ruble goes to trial in federal court in New York this Thursday, says Ruble's attorney, Jack Hoffinger. Ruble allegedly pulled the tax shelter scam for KPMG. He earned $50,000 a pop for more than 600 letters blessing allegedly illegal tax shelters. Sidley paid the IRS $39.4 million to avoid criminal charges.

Hoffinger says Ruble and the KPMG execs were guilty only of "greed."

Download the EY indictment (pdf).

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