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It was a festive day for Sven Erik Holmes. Family, friends and colleagues surrounded him in the Tulsa, Okla., federal courthouse last March as his official portrait was unveiled. It was the last day on the job for Holmes, who was retiring as chief federal judge for the Northern District of Oklahoma after 10 years on the bench. Five months later, Holmes was back in a federal court, without his robes, and under drastically different circumstances. This time, the U.S. attorney for the Southern District of New York looked on as Holmes, now the chief legal officer for KPMG LLP, signed a document to keep the Big Four accounting firm from being criminally prosecuted. Afterward Holmes remembers someone quipping: “It used to be the full force of the U.S. government behind your signature. Now it’s on top of your signature.” A lifesaver The deal was a lifesaver for the New York-based company, which is caught up in what the government calls “the largest-ever tax shelter fraud.” The document allowed KPMG to enter a so-called deferred prosecution agreement: The feds agreed to defer prosecuting KPMG on one count of conspiracy to defraud the Internal Revenue Service until Dec. 31, 2006. If the accounting firm adheres to the terms, the charge will be dropped. Holmes describes the deal as KPMG’s last resort, adding, “Society has a very real interest in [punishing] this kind of wrongful conduct.” As part of the agreement, KPMG had to admit to a lengthy list of illegal actions: from creating and selling shady tax shelters that saved wealthy clients millions of dollars in taxes to trying to cover up the scheme by lying under oath. And it had to pay $456 million in penalties. The tax shelters, with names like FLIP (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy), BLIPS (Bond Linked Issue Premium Structure) and SOS (Short Option Strategy), funneled money through foreign accounts to create phony investment losses. All told, the firm’s clients dodged at least $2.5 billion in taxes, according to court documents. The auditing firm also agreed to curtail its tax business, including ceasing its private-client tax service. And it promised to institute an array of ethics and compliance reforms, under the auspices of former Securities and Exchange Commission chairman and corporate cleanup monitor Richard Breeden. Among them: setting up a hot line for whistleblowing employees to reach Holmes’ office. With the firm on probation, any hint that it is trying to hide something from the Internal Revenue Service in the next year could make the government pursue the charge that has been deferred. Holmes had nothing to do with the criminal behavior-he wasn’t around when KPMG was selling the shelters from 1997 to 2002. But he has everything to do with the company’s hopes of changing its image as an arrogant and deceitful rogue that raked in $128 million in ill-gotten profits while thumbing its nose at the law. With his sterling reputation-as a partner at Williams & Connolly in Washington, he was known to “fire” corporate clients rather than defend behavior he saw as unethical-and his sober, judicial demeanor, he’s exactly the kind of top lawyer a firm like KPMG needs right now. According to corporate law professor Deborah DeMott of Duke Law School, it’s especially important for companies to turn to someone with a reputation for honesty and credibility when they’re under the gun from regulators. Holmes’ appointment as chief legal officer over the company’s general counsel, Claudia Taft, “signals the market and the regulators” that the company is ready to change its culture and practices, DeMott said. (Taft, who remains GC at KPMG, according to a spokesperson, declined to comment for this story.) So how did Holmes go from sitting in judgment of felons to seeking mercy for a wayward corporation? For the 54-year-old, the summer of 2004 brought a midlife yearning for something new after a “comfortable” decade as a federal judge. A Clinton appointee, he knew there was little chance he’d be elevated to a higher court during the Bush administration. “I wasn’t bored or tired,” Holmes says, but he and his wife kept discussing “what-ifs” about the rest of their lives. So he began exploring if there might be “something unique and challenging” for him beyond the bench.

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