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In the wake of damning federal reports about abusive tax shelters, the founders of and investors in a Boca Raton, Fla., technology company are accusing accounting giant KPMG and a major Chicago-based law firm of duping them into investing in bogus tax-avoidance schemes. In a June 29 complaint in state trial court in West Palm Beach, attorneys Edward Ricci and Benjamin Salzillo allege on behalf of their clients that KPMG and the law firm Sidley Austin Brown & Wood misled the officers and investors of Best Communications into investing millions of dollars in fraudulent tax shelters. The suit in Palm Beach County Circuit Court alleges fraud, conspiracy, and legal and accounting malpractice. The plaintiffs seek compensatory damages and have reserved the right to add claims for punitive damages. KPMG is alleged to have devised and marketed two bogus shelters and offered a tax opinion supporting investment in another shelter developed by accounting firm PricewaterhouseCoopers. Brown & Wood, which merged with Sidley Austin in 2001, allegedly helped in the marketing by issuing legal opinions orchestrated by KPMG to support the accounting firm’s aggressive sales effort. The Internal Revenue Service subsequently declared the three highly complex shelters “potentially abusive” and assessed the investors back taxes and interest. Ricci said his six clients also may face monetary penalties. Salzillo said the plaintiffs’ losses were “significant” and were “still being calculated.” The complaint alleges that in just one set of transactions, the accountants and lawyers were paid fees of $10 million. KPMG on Thursday declined comment. A spokesman for Sidley Austin said the firm does not comment on matters in litigation. Also named as defendants in the suit are two firms created by former KPMG employees, Texas company TX Presidio Advisors LLC and California company Presidio Growth LLC, which allegedly served as advisers on the tax shelters. Presidio Advisors and Presidio Growth could not be located. Ricci is the managing partner at Ricci Leopold in Palm Beach Gardens, and Salzillo is an associate at the firm. COST TREASURY BILLIONS Much of the plaintiffs’ case relies on a 2003 study of KPMG tax shelters by the minority staff of the U.S. Senate Permanent Subcommittee on Investigations, chaired by Sen. Carl Levin, D-Mich. Among their findings, the investigators said that KPMG “devoted substantial resources to, and obtained significant fees from, developing, marketing, and implementing potentially abusive tax shelters … costing the Treasury billions in lost tax revenues.” Regarding Sidley Austin Brown & Wood, the investigators wrote that the lawyers’ “close, ongoing, and lucrative relationship [with KPMG] raises serious questions about the independence of both parties and the value of their opinion letters.” Ricci said the Senate committee findings have spawned lawsuits against KPMG in numerous other state courts across the United States. According to the complaint, plaintiffs Scott Adams and William Nesbit founded Hiway Technologies, a Web hosting service, in 1995 with $8,000 in capital. Two years later, with the assistance of investors Steven Umberger and Arthur Cahoon, the firm hit $6 million in annual revenues. In May 1998, the firm merged with a California company run by David Buzby and James Zarley. Three months later, the merged company was purchased for $350 million in cash and stock by Englewood, Colo.-based telecommunications giant Verio. The plaintiffs allege that following the announcement of Hiway’s sale, they were contacted by Marcel Maier, a senior manager in KPMG’s Fort Lauderdale office, and Tracie Henderson, in KPMG’s Boca Raton office. Maier and Henderson, along with a representative of Presidio Advisors, allegedly induced Adams, Nesbitt and Umberger to participate in a KPMG tax shelter called Offshore Portfolio Investment Strategy (OPIS). The lawsuit does not specify how much they invested in the shelter. In 1999, the three men realized $198 million in total capital gains from the Verio sale. Cahoon, who realized $52 million in capital gains in 2000, allegedly was induced to invest in a KPMG shelter called Bond Linked Issue Premium Structure (BLIPS). He, Buzby and Zarley also allegedly paid $225,000 for KPMG tax opinions on which they relied to invest in a PricewaterhouseCoopers shelter known as FLIP, for Foreign Leveraged Investment Program. The company discontinued marketing its own version of FLIP in 1997. ‘SMOKE AND MIRRORS’ The plaintiffs allege that KPMG and Presidio sold the shelters despite the accounting firm’s knowledge that the tax strategies were legally defective. That allegation is supported by KPMG internal memos discovered by U.S. Senate investigators and quoted in the complaint. A February 1998 memo from one KPMG analyst discussing OPIS refers to the plan as “smoke and mirrors” and to one feature of the plan as “a sham.” An August 1999 e-mail from another KPMG analyst expresses “skepticism” that the BLIPS plan “would actually be sustained by a court if challenged by the IRS.” Indeed, in September 2000, the IRS issued reports that disallowed all capital losses claimed by taxpayers participating in BLIPS. In August 2001, the agency announced it would disallow losses claimed by participants in OPIS. “KPMG’s salesmen were blowing off the warnings of the firm’s own tax analysts,” Ricci said in an interview. “My clients weren’t even looking for tax shelters when KPMG approached them.” The plaintiffs claim that Sidley Austin Brown & Wood is liable because it prepared supposedly independent legal opinions that, in fact, were “jointly developed” with KPMG and “specifically written” to corroborate the accounting firm’s “erroneous tax opinions.” According to the complaint, the law firm traded on its “stellar reputation in the legal community” to obtain from KPMG “$50,000 for every instance that its name was mentioned” during the accounting firm’s marketing to a potential client.

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