* Settlement part of wider tax shelter prosecution
* Criminal prosecution deferred under agreement
By Dena Aubin
NEW YORK, June 13 (Reuters) - Accounting firm BDO USA has agreed to pay $50 million to settle charges of selling tax shelters that generated $6.5 billion in phony tax losses for wealthy clients, U.S. prosecutors said on Wednesday.
The penalty is part of a wide-ranging, nearly decade-old government case against illegal tax shelters. Big Four accounting firm KPMG narrowly avoided an indictment in 2005 over its sale of tax shelters and was fined $456 million.
BDO, formerly known as BDO Seidman, admitted to criminal wrongdoing and reached an agreement to have criminal prosecution deferred if certain conditions are met, the U.S. Attorney's Office in Manhattan said in a statement.
The tax shelters resulted in evasion or attempted evasion of about $1.3 billion in taxes between 1997 and 2003, the U.S. Attorney's Office said.
Ranked as the seventh-largest U.S. accounting firm in 2011, BDO has also agreed to permanent controls on its tax practice, prosecutors said.
"This is the latest step in the federal government's investigations of numerous national accounting, law and financial services firms, which began almost 10 years ago," the firm said in a statement. "BDO is pleased that these matters have been brought to a resolution."
BDO said it had cooperated with the Internal Revenue Service in the case.
Former BDO Chief Executive Officer Denis Field was indicted in June 2009 for his participation in the tax schemes and is awaiting retrial.
The tax shelters, designed to appear to be investments, were in fact "a series of pre-planned steps that assisted BDO's high-net-worth clients to evade individual income taxes," the IRS said in a statement
The shelters were known as spread options, currency option investment strategies, distressed asset debt, and other names, the IRS said.