Rejecting the argument that the KPMG tax shelter scandal was the result of the “gray” world of a tax code that is always open to gaming and subjective interpretation, Southern District of New York Judge Lewis A. Kaplan Wednesday denied leniency for the three men convicted in the case.
Kaplan sentenced investment advisors and former senior KPMG executives John Larson and Robert Pfaff to serve 10 years and one month and eight years and one month in prison, respectively. The judge also ordered former Brown & Wood partner Raymond Ruble to 6 1/2 years in prison for his role in giving opinion letters that endorsed the shelters and helped KPMG’s wealthiest clients claim bogus losses to offset their massive capital gains.
Quoting Judge Learned Hand, Kaplan said there was nothing wrong with people trying their hardest to pay the minimum amount of taxes due the U.S. Treasury, but that these men had concocted a scheme that was “so raw, so brazen, so outrageous” that it was clearly on the wrong side of the line separating poor or ineffectual tax planning from crime.
The trio were convicted in a trial that ended in December, one in which Kaplan delivered a jury charge he said Wednesday was designed to make sure the government was held to a very high standard on “economic substance” — the need to prove that the tax shelters in question had no viable investment purpose and were merely created to avoid paying taxes. “I called all the close ones for the defendants,” he said.
Southern District Assistant U.S. Attorneys John Hillebrecht and Margaret Garnett had argued for sentences in excess of 20 years, with Hillebrecht reminding the court that, until they were forced to pay it back, the shelters used by the KPMG clients cost the government $1 billion. But the judge dismissed that sentencing request as “so huge” as to be lacking in perspective.
Kaplan alluded to the Bernard L. Madoff scandal, saying this was not a case in which people were blindsided by someone they trusted and left ruined. Nor, he said, was it on the same scale as the crimes of people who brought down big companies, costing people their jobs and wrecking communities.
Kaplan said his sentence was meant in part to address the need for general deterrence and what he said was “a symptom of something that is all too common in our society.” He said he wanted sentences that “will say to quick buck artists — not so fast.”
Kaplan also refused to accept arguments from defense lawyers that the sentences should be lower because of government misconduct in the case. They were referring to the pressuring of KPMG by prosecutors to stop paying the legal fees of KPMG personnel that led the judge to dismiss 13 people from the original indictment. “The 13 defendants were dismissed because the government violated the constitutional rights of those defendants,” he said, and there is “no reason” these defendants should “benefit from the government’s misconduct.”
Ruble was allowed to stay free pending appeal. Larson and Pfaff were remanded, but will be allowed to renew bail arguments before Kaplan at a later date.
Larson was represented by Steven M. Bauer of Latham & Watkins.
Ruble was represented by Jack S. Hoffinger of Hoffinger, Stern & Ross.
Pfaff was represented by David C. Scheper of Overland Borenstein Scheper & Kim in Los Angeles.