Ernst & Young partners charged in tax fraud case

NEW YORK (Reuters) - Federal prosecutors on Wednesday charged two current and two former partners of accounting firm Ernst & Young ERNY.UL with tax fraud conspiracy arising out of the sale of tax shelters.

The defendants, who pleaded not guilty at U.S. District court in Manhattan, are accused of creating and marketing tax shelters at the "Big Four" accounting firm from 1998 through 2004 based on fraudulent scenarios that allowed wealthy individuals to reduce the federal taxes they would have to pay.

The indictment comes after years of investigations into the sale of aggressive tax shelter strategies. Sixteen former partners at rival "Big Four" firm KPMG KPMG.UL are also facing trial in September.

The four men accused on Wednesday include Robert Coplan, former National Director of Ernst & Young's Center for Family Wealth Planning; Martin Nissenbaum, the firm's former national director of Personal Income Tax and Retirement Planning; former Ernst & Young partner Richard Shapiro and Brian Vaughn, a former senior manager at the firm.

A lawyer for Shapiro, John Tigue, said his client has cooperated with the government's inquiry for the last five years.

"He intends to vigorously defend himself," Tigue said in a statement.

At a hearing before U.S. District Judge Sidney Stein, Copland, Shapiro and Nissenbaum were released on $1 million bail with travel restrictions, while Vaughn was released on $300,000 bail with travel restrictions.

If convicted of the charges, Coplan, 54, could face 18 years in prison; Nissenbaum, 51, could serve as many as 13 years, while Shapiro, 58, and Vaughn, 39, could each face 10.

Defense lawyers maintained their clients were innocent.

"We have provided them (the U.S. attorney's office) over the past year with evidence that Mr. Nissenbaum did not engage in any unlawful activity," Brian Linder, an attorney for Nissenbaum said in a statement.

Vaughn's attorney, Peter Barrett, said his client "looks forward to trial in this case, to his acquittal, and complete exoneration of all of these allegations."

A lawyer for Coplan would not comment.

NEW TACTIC

Prosecutors allege the four schemed to defraud U.S. tax authorities by deceiving the Internal Revenue Service (IRS) about tax shelters marketed to clients with incomes higher than $10 million or $20 million.

The indictment also charges that Coplan, Nissenbaum and Shapiro used tax shelters in 2000 to evade their own taxes and arranged for eight other Ernst & Young partners to participate, evading $3.7 million in taxes.

Ernst & Young was not named in the suit, suggesting a change in government strategy since the conviction of now- defunct accounting firm Arthur Andersen was overturned by the Supreme Court, a legal expert said.

"The lesson the government has learned is to go for a precision strike against individuals," said Anthony Sabino, a law professor at St. John's University's Tobin College of Business. "You can't prove the whole firm is guilty."

The attempted prosecution of the firm also lengthened the KPMG tax shelter case, Sabino said.

In 2005, KPMG agreed to pay $456 million, accept an outside monitor and admit to wrongdoing to resolve a federal investigation into questionable tax shelters it sold to wealthy individuals. But the settlement with the firm resulted in difficulties about who would pay the legal fees of KPMG's former partners in that case.

Ernst & Young said it has made changes to its tax practice.

"The individuals who were indicted are two former partners and two partners who have been on administrative leave," Ernst & Young spokesman Charles Perkins said in a statement. "They were part of a small group within the firm, disbanded years ago

... Ernst & Young has cooperated with the government from the beginning of its investigation, and we will continue to do so."

In July 2003, Ernst & Young agreed to pay $15 million to the IRS to end an investigation of tax shelter marketing.

(Additional reporting by Martha Graybow)