Ernst & Young escapes federal prosecution


May 31, 2007|By New York Times News Service

New York -- Federal prosecutors have decided not to bring criminal charges against the accounting firm of Ernst & Young over its work with questionable tax shelters, but will instead bring criminal charges against four employees, people briefed on the situation said yesterday.

The four employees, Robert Coplan, Richard Shapiro, Martin Nussbaum and Brian Vaughan, were were arrested and charged yesterday.

Lawyers for the men could not immediately be reached. Two of the men are no longer at the firm, and two others are still technically employed by the firm but are not active partners.

The decision not to charge Ernst & Young, which has been under criminal investigation since at least mid-2004, is significant because it signals that the Justice Department is revising its strategy amid a broad federal investigation of the banks, accounting firms, law firms and investment boutiques that created and sold questionable shelters in recent years.

Ernst & Young has pledged to cooperate with the continuing federal investigation.

In 2005, a rival accounting firm, KPMG, narrowly averted indictment for its work with shelters and instead reached a $456 million deferred prosecution agreement with the Justice Department. That deal expired last year, with prosecutors dropping the charges.

In addition, federal prosecutors in Manhattan have narrowed the charges against the four Ernst & Young employees to cover just one questionable tax shelter, known as Cobra.

Cobra, which stands for currency options bring reward alternatives, has never been considered valid for deductions by the Internal Revenue Service.

In 2003, Ernst & Young reached a $15 million civil settlement with the IRS over its shelters, but barely one year later it fell under the criminal investigation by Manhattan prosecutors.

The firm, which is among the nation's Big Four largest accounting firms, has said that it stopped selling the shelters that the IRS considers abusive by the first half of 2002.

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