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Opening arguments begin in KPMG tax shelter case
10.15.08, 6:26 PM ET

United States - By Christine Kearney

NEW YORK (Reuters) - Former KPMG accounting firm employees cheated the U.S. government out of hundreds of millions of dollars by selling improper tax shelters for wealthy clients, a U.S. prosecutor said in opening arguments Wednesday.

The arguments came at the trial of three former KPMGemployees and a lawyer, who are charged with conspiring to evade taxes for more than 600 clients in a case that was touted as the largest criminal tax prosecution when it started in 2005 with 19 defendants, but is much smaller now.

The four defendants are former KPMG tax partners David Greenberg and Robert Pfaff, and former senior tax manager John Larson. The fourth defendant is Raymond Ruble, a former partner at law firm Sidley Austin.

"This case is about criminal tax fraud," assistant U.S. attorney John Hillebrecht told the jury in Manhattan federal court, adding the four men lied and cheated "by making the tax bills of some of our nation's richest citizens disappear."

The case has been watched by legal experts as its outcome could have an impact on the U.S. government's continuing investigations into questionable tax shelters.

Prosecutors say that between 1996 and 2005 the defendants put together tax shelters known as FLIP, OPIS, BLIPS and SOS that were designed to generate phony tax losses .

Hillebrecht said the defendants prepared false documents to deceive the government in what he called "an elaborate, fraudulent paper trail."

"Why would they lie and cheat? The evidence will show a simple answer - greed," the prosecutor said. "Their purpose was to generate a phony loss to eliminate a big tax bill."

But Larson's defense lawyer, Thomas Hagemann, began his arguments explaining what is likely to be a challenge for both sides - the complicated "world of taxes" and shelter structures.

"This trial is about what people believed in good faith was allowed under the law. This case is not about a bunch of criminals," Hagemann said, adding his client openly conducted his dealings and acted with "good faith disclosure."

He called one of the government's main witnesses -- David Makov, an investment adviser who was not employed at KPMG but worked with the defendants -- "a liar and perjurer."

Makov pleaded guilty to conspiracy and agreed to cooperate with prosectors. He was the second person indicted in the case to plead guilty. An ex-KPMG partner, David Rivkin, entered a guilty plea in 2006.

The defense lawyers' opening arguments will continue Thursday, with the trial expected to last three to four months. KPMG was not a defendant, agreeing in 2005 to pay $456 million to settle a federal probe.

In July 2007, U.S. District Judge Lewis Kaplan, who is presiding over the case, dismissed criminal charges against 13 former KPMG partners, ruling that the government interfered with their right to counsel.

On Aug. 28 this year, an appeals court upheld the dismissal, saying prosecutors violated the partners' rights by pressuring the accounting firm not to pay their legal bills. (Editing by Tim Dobbyn)

Copyright 2008 Reuters, Click for Restriction

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