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Prosecutor John Hillebrecht had a simple message Wednesday for the jury who will decide if four men conspired to defraud the Internal Revenue Service by marketing bogus tax shelters through KPMG. “Ladies and gentlemen, you can’t lie to get out of paying taxes,” Hillebrecht said during opening statements in the courtroom of Southern District of New York Judge Lewis A. Kaplan. Hillebrecht said the four defendants, former KPMG partner David Greenberg, investment consultants Robert Pfaff and John Larson, and Raymond J. Ruble, a former partner at Brown & Wood, which became Sidley Austin, played a critical role in marketing tax shelters that allowed some of America’s richest people to declare paper losses to offset real capital gains. In doing so, he said, they “pulled the wool over the eyes of the U.S. government” and cost taxpayers hundreds of millions of dollars by marketing shelters the government would prove were “shams and false.” Hillebrecht, a senior trial counsel in the Southern District of New York U.S. Attorney’s Office, warned the jury in what is expected to be a four-month trial that the complexities of the tax code should not obscure what was in essence a straightforward case involving what he termed a “magical tax elimination machine.” There were three kinds of tax shelter transactions, he said, “all designed to generate millions of dollars in losses” and “each disguised to look like real investments” but all were, in fact, “out and out frauds.” “These defendants went far beyond aggressive tax planning … this is a case about intentional lying,” he said, adding that the motive for accomplished professionals, lawyers and accountants for lying and cheating was a simple one — “greed.” The four men are all that are left of 19 defendants who were indicted in the Southern District in 2005 in what was then billed as the largest criminal tax fraud prosecution in U.S. history. Two of the 19 pleaded guilty and are cooperating with the government. Judge Kaplan dismissed charges against 13 defendants in 2007, finding that their rights were violated by prosecutors who pressured KPMG to abandon its customary policy of paying legal fees for partners and employees. KPMG, he said, withheld fees to demonstrate its cooperation with the government and ultimately reach a nonprosecution agreement that saved the firm. Hillebrecht Wednesday detailed how Larson and Pfaff, both law school graduates, left KPMG in 1987 to form Presidio Advisory Services and “make a fortune on tax shelters.” They relied on “hundreds of opinion letters” from Ruble, who also helped Larson and KPMG design the shelters. Ruble was paid $50,000 per opinion letter so each client would have the assurance they were protected if the IRS ever questioned the legality of the shelters. Ruble, Hillebrecht told the jury, also received “hundreds of thousands of dollars under the table in secret side payments” from Presidio, money that was intended to keep the opinion letters coming, and money he hid from his partners at the law firm. ‘GOOD FAITH’ DEFENSE Thomas A. Hagemann of Gardere Wynne Sewell in Houston, Texas, representing Larson, gave an opening statement in which he mocked the complexity of the tax code and spoke of an alternative universe called “tax world” where all is gray instead of black and white. He took the jury through the 1990s, when people were making “ridiculous amounts of money” and professionals could be involved in “tax loss generating” without running into trouble with the Internal Revenue Service. Hagemann promised the jury that this trial was “about what people believed in good faith was allowed under the law, not about a bunch of criminals.” Then, brandishing one of several green-covered volumes of the tax code that he had stacked up on the defense table, Hagemann also warned the jury that they would have to learn at least a little something about “what we will all come to love, to know, to learn, and to hate … the world of taxes.” Hagemann also stressed that the letters Ruble signed off on were “concurring” letters that essentially confirmed the judgment of four top partners at KPMG that the shelters were legitimate. These “four people, whose judgment was considered unimpeachable,” signed off on the shelters, Hagemann said, adding that “for these tax products, this is where the buck stopped.” He then walked over behind Larson and placed his hands on his client’s shoulders, saying Larson was “entitled to rely on their good faith judgment.” The attorneys for Pfaff, Ruble and Greenberg are expected to give opening statements today. Ruble is represented by Jack S. Hoffinger and Susan Hoffinger of Hoffinger, Stern & Ross and Stuart Abrams of Frankel & Abrams. David B. Pitofsky and Richard M. Strassberg of Goodwin Procter represent Greenberg. Pfaff is represented by David C. Scheper of Overland Borenstein Scheper & Kim in Los Angeles, Calif. The prosecution team also includes Assistant U.S. Attorneys Kevin Downing and Margaret Garnett. SHAKY START TO TRIAL The long-awaited trial almost came off the tracks before it began Wednesday when a juror who had assured the court that she could be fair changed her story to say that she would “vote guilty from day one.” The 12 jurors and six alternates had already been seated when the juror raised her hand and indicated to Judge Kaplan that she could not be objective. Kaplan then directed the other jurors to leave the room so he could question the woman. He reminded the juror that during individual questioning of prospective jurors on Tuesday she had told the judge and lawyers for both sides she had read newspaper articles about the case but could remember nothing of what she had read. But under questioning Wednesday, she told Kaplan she could recall some of the articles, could no longer be fair and impartial and would “vote guilty from day one.” Left with no choice but to dismiss the juror, the angry judge told her he was directing the U.S. Attorney’s Office to investigate her for perjury or obstruction of justice. He then consulted with the attorneys, earning laughter when he said, “You can tell how pleased I was.” Strassberg who represents Greenberg, said, “This is very serious and, frankly, from my perspective, I don’t know if it’s savable or not.” Kaplan then called the remaining jurors back. He told them that the one thing he had learned in almost 15 years as a judge was “you don’t have to be a genius to duck jury duty if you really want to do it.” Kaplan said he was persuaded that the juror was indeed ducking jury duty. He then polled the panel and the alternates to be sure they were not influenced by her comments and could respect the presumption of innocence. Satisfied, he directed the seating of another juror and said opening arguments could proceed.

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