HVB Ex-Official
Pleads Guilty
Over Tax Shelters
By JONATHAN WEIL and KARA SCANNELL
Staff Reporters of THE WALL STREET JOURNAL
August 12, 2005; Page A3
A former executive of the German bank HVB pleaded guilty to fraud, conspiracy and tax-evasion charges, marking the federal government's first criminal conviction in its investigation of allegedly fraudulent tax shelters promoted by accounting firm KPMG LLP.
The charges against Domenick DeGiorgio could land the 42-year-old accountant in prison for 12 to 15 years under federal sentencing guidelines, federal prosecutors said at the hearing in U.S. District Court in Manhattan. From 1996 through 2003, Mr. DeGiorgio was a managing director at the New York branch office of Munich-based HVB, formally known as Bayerische Hypo & Vereinsbank. He had been responsible for supervising HVB's participation in various shelter transactions that helped wealthy individuals claim more than $1.3 billion in fake tax losses, according to court documents filed by prosecutors.
[Domenick DeGiorgio]
Domenick DeGiorgio leaves court yesterday after pleading guilty.
Those transactions included a KPMG tax shelter known as "Bond Linked Issue Premium Structure," or Blips. In its criminal information describing the four felony charges against Mr. DeGiorgio, the government called Blips a fraudulent shelter. In addition to pleading guilty to conspiring with Blips' promoters to defraud the U.S. Treasury, Mr. DeGiorgio also pleaded guilty to stealing money from his former employer. An HVB spokesman in New York said the bank "has and will continue to cooperate fully with authorities" but declined to comment further.
Mr. DeGiorgio's guilty plea comes as KPMG is negotiating with federal prosecutors to head off a potential indictment against the firm over past sales of Blips and other tax shelters. Lawyers familiar with the talks say the two sides are close to settling on a deferred-prosecution agreement that could include penalties of $400 million to $500 million, a strict government-supervision plan and new restrictions on KPMG's tax practice. However, the government hasn't ruled out an indictment, these lawyers say, and the two sides have yet to reach a final agreement.
Separately, a number of former KPMG tax professionals are expected to be indicted in the coming weeks, attorneys involved in the matter say. KPMG declined to comment. In a statement, David N. Kelley, the departing U.S. attorney for Manhattan, said: "Our self-reporting tax system can not tolerate the fraudulent acts of bankers, accountants and lawyers who, under the guise of 'sophisticated tax planning,' create elaborate structures that have no purpose but to mislead and defraud the IRS, at the cost of billions of dollars to the U.S. Those who seek to devise, implement, and profit from these fraudulent structures should understand that we will devote whatever resources it takes to put a stop to them."
Mr. DeGiorgio entered his pleas before the same federal judge who moments earlier had sentenced Scott Sullivan, WorldCom Inc.'s former chief financial officer, to five years in prison for his role in the company's accounting fraud. At his court appearance, Mr. DeGiorgio provided U.S. District Judge Barbara Jones a brief description of how the Blips shelter worked.
"An essential part of creating reported tax losses depended on the bank purporting to provide a loan structured in a particular way," he said. "The loan proposed by the Blips promoters was a sham because, among other things, as designed, no money ever left the bank, and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans."
Mr. DeGiorgio added: "Blips was falsely represented to be a three-stage, seven-year investment program when, in reality, it was a short-term transaction designed to create tax losses."
The tax-evasion charge against Mr. DeGiorgio, who testified on HVB's behalf at public hearings on tax-shelter promoters before the Senate Permanent Subcommittee on Investigations in 2003, doesn't appear to stem from any use by him of Blips. Rather, the government charged, Mr. DeGiorgio failed to report payments he received over several years from tax-shelter transactions in which HVB participated, and failed to report fees he siphoned from HVB through fraud. The government said he used some of that money to pay for the cost of construction on his Long Island, New York residence.
Me thinks there are some very frightened people out there.
