Tax Shelter Litigation

A Multinational Investment Bank and Financial Services Company Settles U.S. Tax-Shelter Lawsuit

A multinational investment bank and financial services company have` reached a settlement with hundreds of wealthy investors to whom it sold aggressive U.S. tax shelters, a major shift in how it is dealing with the legal woes surrounding its tax-shelter work. 

The bank aggressively fought the civil claims until early January and reached an agreement with the investors' lawyers several weeks ago, the lawyers said Wednesday. The size of the settlement was not disclosed but is likely to be at least tens of millions of dollars. 

The bank was a major creator and seller of the tax shelters from the late 1990s through recent years and is the focus of a widening U.S. criminal investigation. The bank has yet to reach an agreement with U.S. government prosecutors in New York and with the U.S. Justice Department. Two tax lawyers said Wednesday that the bank could potentially face a criminal penalty of up to $1 billion, as well as a requirement to admit to criminal wrongdoing. 

It was unclear whether the bank’s sudden settlement of the bulk of its civil claims presaged a settlement of its criminal case 'With the government. A spokesman from the bank acknowledged the settlement on Wednesday but declined to provide details. 

Prosecutors contend the bank worked with accounting, law and financial firms to make and sell questionable tax shelters that improperly deprived the U.S. Treasury of billions of dollars in taxes. 

Last quarter, in a supplemental filing with the U.S. Securities and Exchange Commission, the bank said that for its previously filed earnings for the fourth quarter of 2006, it had increased "additions to provisions for legal exposures" by about €350 million, or about $455 million. In March, it reduced its 2005 earnings by nearly $300 million to cover what it called "newly discovered" legal costs related to its tax-shelter work. Neither the bank nor lawyers for investors have disclosed the size or terms of the civil settlement, citing a confidentiality agreement. 

The deal covers about 340 investors, approximately half of whom filed a total of about 60 lawsuits against the bank in state and federal courts after the U.S. Internal Revenue Service had disallowed their deductions, said the lead lawyer for the investors, David Deary of Dallas. The settlement could potentially be higher than the tens of millions of dollars if the civil settlements with other tax-shelter promoters are a guide. Deary declined to provide details on Wednesday, saying only that "my clients are very pleased," and that he had filed motions seeking to have the bank dismissed as a defendant in the lawsuits. 

Deary's clients paid fees ranging from millions of dollars to tens of millions of dollars to promoters. Each shelter sought to shield income ranging from several million dollars to $200 million from U.S. income taxes. The lawsuits alleged that the tax shelters typically involved fake loans and fake trades to generate artificial losses that were then used to offset taxable income from legitimate sources. 

Investors began to sue the bank around 2004. In response, it filed scores of procedural motions seeking to force the investors to submit to arbitration and to have the cases dismissed. But with some of the civil cases nearing trial in state and federal courts, and with current and former bank employees facing the prospect of being deposed or testifying, the bank dropped its counteroffensive. The bank still faces some civil claims from investors. At least one lawyer for those investors, Blair Fensterstock of NewYork, said Wednesday that he was not negotiating with the bank for a settlement. 

Back to Top