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Los Angeles-Sidley Austin is expected to pay $30 million to settle a class action next month filed by more than 200 investors who lost money on illegal tax shelters that the law firm approved. But the nation’s seventh-largest firm isn’t out of the woods yet. Investors in about 55 cases have opted out of the class action settlement, which includes claims against KPMG LLP, the accounting firm that sold the shelters. The shelters are now the subject of a federal criminal investigation. Lawyers representing those opt-outs say KPMG and Sidley Austin could end up paying hundreds of millions of dollars in separate settlements with their clients. “The settlement is wholly insufficient and is a drop in the bucket on average for the individual claimants,” said Michael Avenatti, a lawyer at Santa Monica, Calif.-based Greene, Broillet & Wheeler who represents three investors. He said liability costs associated with the opt-out cases could exceed $500 million against KPMG and Sidley Austin, which has agreed to pay a 20% share of the recent settlement. “Sidley would be responsible for $100 million.” Sidley Austin Chairman Thomas Cole, a partner in Chicago, did not return calls seeking comment. Since last year, federal prosecutors have indicted 19 individuals, including several former KPMG partners and Raymond J. Ruble, a former Sidley Austin partner in the firm’s Chicago office, of defrauding the Internal Revenue Service by selling and approving the illegal tax shelters, called Flip, Opis, Blips and SOS. U.S. v. Jeffrey Stein, No. 05cr00888 (S.D.N.Y.). Prosecutors say the shelters allowed investors to seek more than $11 billion in fake tax losses and short-changed the government by $2.5 billion in taxes. The government’s investigation began after a U.S. Senate subcommittee staff report in 2003 raised questions about the shelters. In August, KPMG agreed to pay $456 million in a deferred-prosecution agreement as part of the criminal probe, which is set for trial this fall. While KPMG faces the highest total in the civil cases, the fact that Sidley Austin prepared the opinion letters stating that the tax shelters would survive Internal Revenue Service scrutiny could go against the firm at trial. “It’s just as strong,” said Edmundo Ramirez, a partner at McAllen, Texas-based Ellis, Koeneke & Ramirez, of Sidley’s liability in the civil suits. Ramirez, who has settled about a half-dozen cases for investors in the KPMG tax shelters, said, “Their principal witness is under indictment, Mr. Ruble, the gentleman who churned out the 600-plus opinions. So it would be very difficult to defend a case.” Opt-out cases In November, an original settlement worth $195 million fell apart after more than 60 of 284 potential investors opted out, according to court papers. Marvin Simon v. KPMG LLP, No. 05-03189 (D.N.J.). Under the revised settlement, which was reached in March, investors would receive an average payout of between $700,000 to $750,000, primarily based on 65% of the fees they paid both firms to participate in the tax shelters, according to lawyers in the cases. In late April, investors in 55 cases opted out of the revised settlement. Given that number, the revised settlement, if approved, would total less than $155 million, of which Sidley is expected to pay about 20%, or about $30 million. No exact figures were given in court documents. “They basically worked out a provision that the settlement would be reduced based on the number of opt-outs and the transaction costs involved with those opted out,” said Steven Toll, managing partner at Washington-based Cohen, Milstein, Hausfeld & Toll, who represents investors in the settlement. A hearing on the revised settlement is scheduled for May 26. Brad Friedman, one of the lawyers at Milberg Weiss Bershad & Schulman who drafted the settlement on behalf of the plaintiffs, did not return calls. Calls were not returned by Kevin Clark, a partner at Willkie Farr & Gallagher who represents KPMG in the settlement, or Ronald Meyer, a partner at Munger, Tolles & Olson who represents Sidley Austin. Still, having so many opt-outs could prove costly to Sidley Austin and KPMG. “If you take them through the litigation process, it would not surprise me at all if they pay larger recovery than the class action,” Ramirez said. The investors who opted out intend to pursue their claims individually in separate courts across the nation. One lawyer, who requested anonymity, said his four investors who opted out of the settlement are seeking more than $33 million in their individual case against KPMG and Sidley Austin. Toll said the revised settlement includes only investors’ transaction costs, which leaves open the possibility of seeking much higher damages related to investment or tax losses.

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