Tax Shelter Litigation
Deutsche Bank settles U.S. tax-shelter lawsuits
Article from The New York Times
Deutsche Bank has 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, the largest in Germany, 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.
Deutsche 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 inNew 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 Deutsche Bank's sudden settlement of the bulk of its civil claims presaged a settlement of its criminal case 'With the government. A Deutsche Bank spokesman 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 potentiallybe higher than the tens ofmillions ofdollars ifthe 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 Deutsche Bank dismissed as a defendant in the lawsuits. Finns including Ernst & Young, BDO Seidman and a unit of American Express are still defendants in the cases.
Deary's clients paid fees ranging from millions of dollars to tens ofmillions ofdollars topromoters, including Deutsche Bank, for shelters with names like Cobra, Homer, Blips, Pica and Pops.
Each shelter sought to shield income ranging from several million dollars to $ 2 0 0 millionfrom 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 Deutsche 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 Deutsche Bank employees facing the prospect ofbeing deposed or testifying, the bank dropped its counteroffensive.
U.S. government prosecutors looking into the tax shelters have also gone after KPMG, which reached a $465 million deferred-prosecution agreement in 2005, the largest ofits kind; Ernst & Young, which is still under criminal investigation; and the law firm Sidley Austin Brown & Wood, as well as an array ofother accounting, financial and law finns, according to various civil lawsuits filed against the bank in recent years.
Deutsche Bank still faces some civil claims from investors. At least one lawyer for those investors, Blair Fensterstock ofNewYork, said Wednesday that he was not negotiating with the bank for a settlement.