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A federal judge on Monday gave preliminary approval to a $225 million settlement that accounting giant KPMG LLP and a law firm have reached with about 275 former clients who used its tax shelters, lawyers in the case said. The approval came after U.S. District Judge Dennis M. Cavanaugh heard two days of testimony in an unusual hearing prompted by objectors’ claims that the settlement negotiations were flawed by ethical violations by some lawyers for the clients. The Internal Revenue Service found the tax shelters — which helped taxpayers who bought them elude $2.5 billion in taxes — to be “abusive.” A grand jury in New York has indicted 19 people, including KPMG’s former chief financial officers, former KPMG tax professionals and a former lawyer at Sidley, Austin, Brown & Wood, which worked with KPMG, in connection with the shelter sales. Cavanaugh scheduled a fairness hearing, a standard procedure in a class action settlement, for Feb. 24. A lawyer for objectors, Kevin H. Marino, said they would appeal the preliminary approval. He has maintained that negotiations were marred by collusion and conflicts of interest. He noted that Milberg Weiss filed the class action suit about a year after settlement negotiations began. He said Milberg Weiss had an apparent conflict of interest during the talks because it was representing an individual client, Mark Kottler of Boca Raton, Fla., in a suit against KPMG. Cavanaugh ruled after hearing testimony Monday from Melvyn I. Weiss, a noted class action lawyer whose firm negotiated the settlement with KPMG. Weiss said he denied that talks were tainted. “My testimony was that we acted in good faith and in the best interests of our clients and other class members in an arms-length and vigorous negotiation,” Weiss said. Cavanaugh heard similar assertions Friday from the two retired judges who mediated between KPMG and Milberg Weiss. The settlement would provide $195 million compensation to former clients of KPMG and Sidley Austin who participated in the tax shelters known as Blips, Flip and Opis, as well as some former clients who participated in a shelter called Short Option Strategy. Awards would be a portion of the transaction fees the taxpayers paid to arrange the shelters. By law, the award cannot cover back taxes and IRS penalties. The average payout would be $750,000, Weiss said. Taxpayers without statute of limitation issues would get about 65 percent of their fees, while those with such issues would get 25 percent, he said. The remaining $30 million would go to Milberg Weiss Bershad & Schulman. The four shelters were the subject of KPMG’s settlement agreement with federal prosecutors in New York in August. Under that agreement, KPMG admitted criminal wrongdoing in creating fraudulent tax shelters and agreed to pay $456 million in penalties. But KPMG won’t face criminal prosecution as long as it complies with the terms of its agreement with the government. The case before Cavanaugh is among dozens of lawsuits brought by former KPMG clients in state and federal courts around the nation. According to KPMG’s deferred-prosecution agreement with federal prosecutors, KPMG sold the four shelters to about 600 wealthy people from 1996 to 2002. Copyright 2005 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.

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