Tax Shelters Put BDO Seidman in Middle of Firestorm with Federal Prosecutors
June 14, 2011 (Chicago Tribune) CHICAGO - Denis Field has become the newest member to join the rogues' gallery of accountants. The former chief executive of Chicago-based accounting firm BDO Seidman was found guilty last month of participating in a fraud that generated billions of dollars in bogus tax benefits.
Other former top partners at BDO Seidman pleaded guilty in the scheme. Given how pervasive the wrongdoing was at the firm, some have questioned why federal prosecutors never indicted BDO Seidman, one of the 10 largest U.S. accounting firms.
But in looking at how the U.S. Department of Justice has dealt with corporate crime in the post-Enron era, the lack of charges against BDO Seidman can be explained. The Justice Department is compelling more businesses to cooperate with investigations or risk being indicted. An indictment can have severe economic consequences and be the death of a company, as the nation witnessed when accounting giant Arthur Andersen, which had been based in Chicago, was charged with obstruction of justice in the Enron scandal.
"The fallout from Andersen heightened the degree of care of how to proceed in future criminal cases," said Dan Richman, a professor at Columbia Law School who's an expert in federal criminal law. "Certainly in recent years, the announced focus has been on individuals wherever possible."
Still, that doesn't mean BDO Seidman will escape enforcement action, even though it has cooperated with the U.S. attorney's office in Manhattan in its long-running criminal investigation of illegal tax shelters.
Federal prosecutors have exacted stiff financial penalties from businesses such as KPMG and Deutsche Bank that set up fraudulent tax shelters, in addition to prosecuting individuals at those firms.
"I would think BDO would be in a similar category as the other firms that have settled to avoid prosecution," said Milt Regan, a Georgetown University Law Center professor who is writing a book about tax shelter fraud that focuses on lawyers and accountants. "My sense is that BDO is the only major remaining loose end (in the investigation)."
A BDO Seidman spokesman declined to comment, as did the U.S. attorney's office in Manhattan.
The investigation into BDO Seidman stems from an earlier inquiry into the law firm of Jenkens & Gilchrist, whose lawyers wrote legal opinions for wealthy clients that effectively blessed the shelters. Chicago tax lawyer Paul Daugerdas, who once worked at Andersen and the Altheimer & Gray law firm, helped develop tax shelters and took his business to Jenkens in 1998. Daugerdas worked with BDO and other accounting firms to market the shelters.
Field, 53, was a tax partner in BDO's New York office who rose to prominence within the accounting firm in the late 1990s by creating a niche practice of selling tax shelters to wealthy individuals. Inside the firm, the group selling shelters was known as the "wolf pack" because of its aggressive marketing tactics.
Field's success led to his promotion to chief executive and chairman in 2000. The two other leaders of the tax-shelter group, Charles Bee Jr. and Adrian Dicker, also joined the board.
Tax services accounted for nearly half of BDO Seidman's $420 million in U.S. revenues in 2002, up from 28 percent in 1998. Dicker, Field and Bee, who was the firm's vice chairman, enjoyed the spoils more than other partners, each receiving 10 percent of the net profits from the tax-shelter business, according to court documents. As a result Bee's compensation, for example, increased from $640,000 in 1999 to about $7.15 million in 2000.
The staggering pay increases and other management issues created unrest among the partners. In October 2003 Field was relieved of his executive positions and placed on indefinite leave. Dicker resigned from the board. Field and Bee left in 2004.
In the aftermath of their departures, BDO Seidman was besieged by lawsuits from clients who were sold shelters that the Internal Revenue Service had started questioning. The company has spent tens of millions of dollars on civil settlements, legal fees and penalties because of its tax-shelter deals, according to court papers its attorneys prepared in September 2008.
The U.S. attorney's office in Manhattan served a subpoena on BDO Seidman on Feb. 16, 2006, seeking documents as part of an investigation into Daugerdas and another Jenkins lawyer, Donna Guerin. At the time neither BDO nor its employees were the focus of the probe.
The grand jury investigation, however, expanded to include BDO principal Michael Kerekes and partner Robert Greisman in October 2007. Field and Bee became targets in November 2008 and Dicker in 2009. BDO Seidman was included in the investigation in January 2010, according to court documents.
BDO Seidman said in court documents that it did not learn until 2007 that the leaders of the tax-shelter group had concealed information from the rest of the partnership. An outside law firm hired by BDO had expressed concerns about the way the shelters were marketed, but its critical opinions were edited out of a report provided to management.
Kerekes, 48; Greisman, 60; Bee, 65; and Dicker, 56, all pleaded guilty in 2009 and have cooperated with prosecutors.
Bee, Dicker and Greisman testified against Field in the trial, which started in March. Field, Daugerdas and Guerin each were convicted of a variety of charges, including conspiracy and tax evasion. One other defendant, a onetime Deutsche Bank broker, also was convicted of criminal charges in the case.
"These privileged professionals wove an intricate web of deceit that spanned nearly a decade, enabling them to enrich themselves and their well-heeled clients to the tune of hundreds of millions of dollars," said Preet Bharara, the U.S. attorney in Manhattan.
Jenkens closed its doors in 2007 after the firm entered into a non-prosecution agreement with prosecutors and agreed to pay a $76 million IRS penalty.
Federal prosecutors had alleged that the scheme had generated $18 million in illicit profits for Field.
"Mr. Field, who left BDO in February of 2004, was one of several former partners in a group that marketed tax shelter products," the firm said in a statement on May 24. "That group was dissolved by the firm eight years ago. BDO has cooperated fully with the government's tax shelter investigation."
While BDO Seidman distanced itself from Field and cooperated with investigators, one possible complication is that the firm has a history with the Justice Department.
In 2002, BDO entered into a deferred prosecution agreement with the U.S. attorney's office in the southern district of Illinois and paid a $16 million fine. The settlement stemmed from an investigation of certain BDO partners in St. Louis who had allegedly helped a client steal money from trust funds during the 1990s. The term of the agreement was 18 months.
While the agreement has expired, the government is not going to overlook previous wrongdoing, Regan said. "Past behavior is relevant in deciding how to proceed."