Shelter Investors File Class Action Suit Against KPMG for Sale of SC2

2. In October 2002, the United States Senate Permanent Subcommittee on Investigations of the Committee on Governmental Affairs ("Subcommittee") began an investigation into the development, marketing and implementation of abusive tax shelters by accountants, lawyers, financial advisors and bankers. In a bipartisan Report ("Senate Committee Report" or "The Report") dated April 13, 2005 entitled "The Role of Professional Firms In The U.S. Tax Shelter Industry," the Subcommittee published its conclusions. The Report was based upon information that the Subcommittee obtained through its investigation and during two days of hearings in November 2003. The Report was also based on a previous report prepared by United States Senator Carl Levin entitled "U.S. Tax Shelter Industry: The Role of Accountants, Lawyers and Financial Professionals, Four KPMG Case Studies: FLIP, OPIS, BLIPS and SC2," Minority Staff Report of the U.S. Senate Permanent Subcommittee on Investigations (11/18/03), the review of over 250 boxes of documents and electronic disks, numerous witness interviews, three depositions, testimony presented by the 20 witnesses at two hearings, and supplemental post-hearing information.

3. The Report stated that the SC2 was directed at individuals who owned profitable corporations organized under Chapter S of the tax code, which means that the corporation's income is attributed directly to the corporate owners and taxable as personal income. The Report stated that SC2 was intended to generate a tax deductible charitable donation for the corporate owner and, more importantly, to defer and reduce taxation of a substantial portion of the income produced by the S Corporation, by "allocating" but not truly distributing the income to a tax exempt organization holding the corporation's stock. With regard to the SC2, the Report indicated that, in early 2000, the head of KPMG's Federal Practice sent an email to KPMG marketing professionals around the country:

5. Under IRS Notice 2004-30, issued on April 1, 2004, the SC2 and similar transactions were identified by the IRS as tax avoidance transactions. The Notice stated that transactions such as the SC2 were designed to artificially shift the incidence of taxation on S Corporation income away from taxable shareholders to the exempt party.

6. KPMG had knowledge, which it recklessly disregarded that SC2 was an unlawful tax shelter that should have been, but was not, registered with the IRS, and was not "more likely than not" to be approved by the IRS if discovered. KPMG knowingly approved and marketed abusive tax shelters such as SC2. As set forth in detail herein, notwithstanding the concerns voiced internally at KPMG concerning the legality of the SC2, KPMG sold the SC2 to Plaintiffs and the Class, all of whom have been substantially injured as a result of KPMG's wrongdoing.

7. Class Members have been subjected to audits of their state and federal tax returns and have been, or will be, assessed millions of dollars in back taxes. Further, Class Members are being forced to tender interest and penalty payments. This is all in addition to the substantial fees paid by each SC2 purchaser to KPMG. Class Members have also incurred significant costs in responding to challenges to the legality of the SC2.

8. The April 28, 2005 edition of the Wall Street Journal reported that KPMG had fired the senior executive who headed KPMG's tax services division during the period when KPMG was promoting and marketing SC2, and had dismissed two other tax partners. The article stated that the dismissals were the "latest personnel change tied to the tax shelter scrutiny."

9. In addition to the Congressional investigation, according to media reports, the United States Attorney's Office for the Southern District of New York is conducting a grand jury investigation to determine whether the sale of generic tax products by KPMG violated criminal laws. The April 28, 2005 edition of the Wall Street Journal, states that the U.S. Attorney's Office has indicated that it believes "indictments will be coming down."

10. On June 16, 2005, KPMG, itself, issued a statement admitting that its conduct in connection with the sale of tax shelters had been wrongful: "KPMG takes full responsibility for the unlawful conduct by former KPMG partners . . . and we deeply regret that it occurred."

11. As a result of KPMG's willful violations of state common law alleged below, Plaintiffs seek damages from KPMG on their own behalf and on behalf of every purchaser of SC2, and seek a judgment declaring that, among other things, Defendant is liable for any penalties or interest assessed by any tax authority, loss of deductions, professional fees and damages.

14. Plaintiff Gilman Sentry Photo, Inc. ("Gilman") is a New York corporation that was incorporated on September 16, 1991 located in Elmsford, New York. Effective September 16, 1991, Gilman also elected to become a Subchapter S Corporation under Subchapter S of the Internal Revenue Code of 1986. Mr. Heumann is the sole shareholder of Gilman.

15. Defendant KPMG is a limited liability partnership with its principal place of business in New York, New York. KPMG is the third largest accounting firm in the United States, and is a member of KPMG International, which is one of the largest accounting firms in the world, with over 700 offices in 152 countries. KPMG is a worldwide firm of certified public accountants, auditors and consultants that provides accounting, auditing and consulting services.

16. The Report states that several senior KPMG tax professionals interviewed by the Subcommittee staff, indicated that the firm made a significant change in direction in the late 1990s, when it made a formal decision to begin devoting substantial resources to developing and marketing tax shelter products that could be sold to multiple clients. One senior KPMG tax professional told the Subcommittee staff that some KPMG partners considered it "important" for the firm to become an industry leader in producing generic tax shelter products.

17. The Report states that in 1997, KPMG established the Tax Innovation Center whose sole mission was to push the development of new KPMG tax shelter products. The Tax Innovation Center encouraged KPMG tax professionals to propose new shelter tax product ideas and then provided administrative support to develop the proposals into approved tax products and move them into the marketing stage.

18. The Report indicates that KPMG compiled and scoured prospective client lists, pushed its personnel to meet sales targets, closely monitored their sales efforts, advised its professionals to use questionable sales techniques, and even used cold calls to increase business. The Report states that KPMG marketed tax shelters to persons who appeared to have little interest in them or did not understand what they were being sold, and likely would not have used them to reduce their taxes without being approached by KPMG.

19. KPMG's Federal Tax manager also called specific KPMG offices to urge them to increase their SC2 sales. In addition to phone calls and visits urging tax professionals to sell their tax shelter products, KPMG's marketing plan included deployment teams used to increase SC2 sales. A member of one of the SC2 deployment teams sent an email to a group of 60 tax professionals urging them to try a new, more appealing version of SC2. In a paragraph subtitled, "Why Should You Care The wrote:

21. The Report states that the list compiled by KPMG produced thousands of potential SC2 clients, and through telemarketing and other calls, KPMG personnel made uncounted contacts across the country searching for buyers of SC2. In April of 2001, KPMG's Department of Practice and Professionalism apparently sent word to SC2 marketing teams to stop using telemarketing calls to find SC2 buyers, but almost as soon as the no-call policy was announced, some KPMG tax professionals were attempting to circumvent the ban asking, for example, if telemarketers could question S Corporations about their eligibility and suitability to buy SC2 without scheduling future telephone contacts. In December 2001, after being sent a list of over 3,100 S Corporations targeted for telephone calls, a senior KPMG tax professional sent an email to the head of KPMG's Washington, D.C. National Tax Division complaining that the list appeared to indicate "the firm is intent on marketing the SC2 strategy to virtually every S corp with a pulse."

22. To help boost sales, KPMG provided written advice to its tax professionals on how to answer questions about a tax product, respond to objections or convince a client to buy a product. KPMG sponsored a meeting for KPMG "SC2 Team Members" across the country and emailed documents providing Answers for Frequently Asked Shareholder Questions" and "Suggested Solutions" to "Sticking Points and Problems." The "Sticking Points" document provides the following advice to KPMG tax professionals trying to sell SC2 to prospective clients:

24. The Report states that KPMG took on the task of locating and convincing appropriate charities to participate in SC2 transactions. The Report cites one KPMG SC2 document which warns KPMG personnel not to look for a specific charity to participate in a specific SC2 transaction until after an engagement letter was signed with a client because: [i]t is difficult to find qualifying tax exempts. . . . [O]f those that qualify only a few end up being interested and only a few of those will accept donations. . . . We need to be able to go to the tax-exempt with what we are going to give them to get them interested."

25. KPMG failed to identify to the Subcommittee any of the charities it contacted about SC2 or any of the charities that actually participated in SC2 stock donations. The Report states that the Subcommittee was able to identify and interview two charitable organizations that were involved in the SC2. The Report states that these two charities participated in more than half of the 58 SC2 transactions KPMG arranged.

26. The Report states that the two charities interviewed by the Subcommittee staff indicated that they first learned of SC2 when contacted by KPMG personnel. Both charities stated that KPMG contacted them "out of the blue." Both charities indicated that KPMG personnel explained SC2 to them, convinced them to participate, introduced the potential SC2 donors to the charity, and supplied the draft transactional documents to them. Both charities indicated that, with KPMG acting as a liaison, they then accepted S Corporation stock donations from out-of-state residents whom they never met and with whom they had never had any prior contact.

27. KPMG also distributed to its personnel a document entitled, "SC2 Implementation Process," listing a host of implementation tasks they should complete in each transaction. These tasks included technical, administrative, and logistical chores. For example, KPMG personnel were told they should evaluate the S Corporation's ownership structure and incorporation documentation; work with an outside valuation firm to determine the corporation's enterprise value and the value of the corporate stock and warrants; and physically deliver the appropriate stock certificates to the charity accepting the client's stock donation.

28. The two charities interviewed by the Subcommittee said that KPMG often acted as a go-between for the charity and the stock donor. KPMG also drafted and supplied draft transactional documents to the S Corporations and corporate owners. One of the charities informed the Subcommittee staff that, when one corporate donor needed to re-take possession of the corporate stock due to an unrelated business opportunity that required use of the stock, KPMG assisted in the mechanics of selling the stock back to the donor.

29. The documents reviewed by the Subcommittee also show that KPMG assisted SC2 donors in developing a tax transaction that could be used by the S Corporation owner to further reduce or eliminate their tax liability when they re-took control of the S-Corporation and distributed some or all of the income that had built up within the company while the charity was a shareholder. A senior KPMG executive wrote the following to more than twenty of his colleagues working on SC2:

31. The Report indicates that KPMG was available to assist clients in preparing their tax returns. In addition, whether a client's tax return was prepared by KPMG or someone else, KPMG supplied the client with a tax opinion letter explaining the tax benefits that the SC2 provided. With regard to the SC2, KPMG also had law firms lined up to issue a second favorable opinion letter if necessary.

32. The Report finds that with regard to SC2, a senior tax professional warned against mass marketing the product to prevent the IRS from getting "wind of it":

33. Among its many conclusions, the Senate Committee Report concludes as follows:

(1) The sale of potentially abusive and illegal tax shelters is a lucrative business in the United States, and some professional firms . . . have been major participants in the development, mass marketing, and implementation of generic tax products sold to multiple clients.

(2) During the period 1998 to 2003, KPMG devoted substantial resources and maintained and extensive infrastructure to produce a continuing supply of generic tax products to sell to clients, using a process which pressured its tax professionals to generate new ides, move them quickly through the development process, and approve, at all times, illegal or potentially abusive tax shelters.

(3) KPMG used aggressive marketing tactics to sell its generic tax products by turning tax professionals into tax product salespersons, pressuring its tax professionals to meet revenue targets, using telemarketing to find clients, developing an internal tax sales force, using confidential client tax data to find clients, targeting its own clients for sales pitches, and using tax opinion letters and insurance policies as marketing tools.

(4) KPMG was actively involved in implementing the tax shelters which it sold to its clients, including by enlisting participation from banks, investment advisory firms, and tax exempt organizations;. preparing transactional documents; arranging purported loans; issuing and arranging opinion letters; providing administrative services; and preparing tax returns.

(5) KPMG took steps to conceal its tax shelter activities from tax authorities, including by claiming it was a tax advisor and not a tax shelter promoter, failing to register potentially abusive tax shelters, restricting file documentation, imposing marketing restrictions, and using improper tax reporting to minimize detection by the IRS or others.

34. Documents reviewed as part of the creation of the Report indicate that KPMG was aware of flaws in the technical merits of SC2. In an email announcing SC2's approval for sale, reviewed as part of the creation of the Report, the head of KPMG's Department of Practice and Professionalism wrote the following regarding the SC2:

35. According to the Report, KPMG tax professionals identified more technical problems with the SC2 than were discussed in the documents provided to clients. KPMG tax professionals discussed problems with identifying a business purpose to explain the structure of the transaction -- why a donor who wanted to make a cash donation to a charity would first donate stock to the charity and then buy it back, instead of simply providing a straightforward cash contribution. KPMG professionals also identified problems with establishing the charity's "beneficial ownership" of the donated stock, since the stock was provided on the clear understanding that the charity would sell the stock back to the donor within a specified period of time. KMWG professionals identified other technical problems as well involving assignment of income, reliance on tax indifferent parties and valuation issues.

36. The Report further indicates that, by December 2001, another KPMG tax professional expressed concern about the widespread marketing of SC2 because the IRS would likely mount a successful challenge to the product:

40. Also included in this packet was a section entitled:

43. The Report states that KPMG documents and communications, some of which were authored by or included Mr. Manth, as well as the actual SC2 transactions examined by the Subcommittee, contradict Mr. Manth's testimony that a resolution limiting or suspending distributions was not an element of SC2. The Senate Committee Report concludes that given Mr. Manth's active involvement in the development, sale and implementation of the SC2 product, he should have known that his testimony on the matter was not accurate.

44. At the Subcommittee hearings, Mr. Manth also testified regarding the role of warrants in the SC2 transactions. The Senate Committee Report indicates that in every SC2 transaction examined by the Subcommittee, the transfer of S Corporation shares to a tax exempt entity was preceded by the creation and distribution to the existing S Corporation shareholders of thousands of warrants, enabling these shareholders to purchase additional S Corporation shares. If exercised, these warrants would give the holders additional shares representing 85%-90% of the S Corporations' entire stock, and significantly dilute the percentage and value of the shares held by the tax exempt, as well as the percentage of distributions to which the tax exempt entity would have been entitled. If these warrants were used as a means to ensure that the tax exempt entity would re-sell the S Corporation shares to the original owner, as planned in the SC2 transaction, this tactic would provide evidence that the original owner had no real intent to donate the S Corporation shares to the tax exempt entity, but only to temporarily shift the shares to a tax exempt entity, thereby deferring and mitigating the tax liability of the original, and subsequent, owner of the shares. Regarding the planned use of warrants in the SC2 transactions, Mr. Manth testified at the Subcommittee hearings as follows:

49. After Mr. Heumann and Gilman were qualified by a KPMG representative, Mr. Heumann met with representatives of KPMG at his offices. KPMG provided Plaintiffs with an engagement letter. The engagement letter signed and dated October 6, 2000 states that Plaintiffs engaged KPMG LLP to assist them in implementing the SC2 through the provision of "tax consulting services" related to the planned charitable contribution of Gilman stock and potential income and estate tax consequences. Pursuant to the engagement letter, KPMG was also to assist Plaintiffs in contacting the qualified tax exempt organization identified to receive Gilman stock as a charitable contribution; assist in reviewing the instruments drafted by legal counsel to confirm they operate in conformity with the goals of the SC2; and provide him with an opinion letter that addresses the income and estate tax issues associated with the implementation of the SC2. All of these activities fell under the larger term "tax consulting services" which KPMG used to describe the assistance it was to provide Plaintiffs.

50. Although the engagement letter states that it was Plaintiffs' responsibility to separately engage an attorney and independent valuation firm to execute the SC2, in fact, KPMG directed all aspects of the SC2 for Plaintiffs. KPMG told Plaintiffs which law firm, appraiser and tax exempt entity to use to implement the SC2. Plaintiffs followed KPMG's advice throughout the transaction. Plaintiffs retained counsel and an independent valuation firm expending significant fees in doing so. Plaintiffs paid its outside counsel in excess of $15,000.00. Plaintiffs expended more than $20,000.00 in retaining the independent valuation firm. Plaintiffs, like the Class, relied on KPMG's size, experience, reputation and documentation in engaging in the SC2. If not for KPMG's well organized and coordinated efforts, Plaintiffs would not have entered into the SC2.

51. The engagement letter states that Plaintiffs would pay a fixed fee of $300,000.00 plus out of pocket expenses. The engagement letter states that KPMG anticipated issuing a final opinion letter within 60 days after Plaintiffs contributed the stock to the tax exempt entity. Plaintiffs paid this $300,000.00 fee and additional expenses in excess of $5,000.00 to KPMG. Under KPMG's analysis provided to Plaintiffs, Plaintiffs would be saving approximately $2,000,000.00 in the first 24 months by entering into the SC2.

52. On November 30, 2000, pursuant to KPMG's advice, Gilman underwent a corporate recapitalization in which Mr. Heumann contributed 900 shares of nonvoting common stock of Gilman to the Austin Firefighters Relief and Retirement Fund. The purpose of this transfer was to generate a tax deductible charitable donation of Plaintiffs and, more importantly, to defer and reduce taxation of a substantial portion of the income produced by Gilman, essentially by allocating, but not actually distributing the income to the Austin Firefighters Relief and Retirement Fund. No income was to be distributed to the Austin Firefighters Relief and Retirement Fund. The contribution of the shares was intended to be temporary and Plaintiffs relied on the terms of opinion letter and KPMG's representations that this transaction was valid and lawful. On January 29, 2001, KPMG issued the Opinion Letter to Plaintiffs. The letter stated that: "it is more likely than not" that Plaintiffs would prevail if challenged by the IRS.

53. In early 2002, KPMG informed Plaintiffs of a recently announced IRS voluntary disclosure program and recommended that Mr. Heumann participate in this program. The voluntary disclosure program provided KPMG tax shelter clients who identified themselves and made certain required disclosures by April 23, 2002 might obtain protection against certain penalties in the event an audit were to show that a tax underpayment had occurred based on their participation in SC2 and other transactions. On April 16, 2002, Plaintiffs entered into a new engagement agreement with KPMG, pursuant to which, Plaintiffs retained KPMG to provide tax consulting services to Plaintiffs with respect to the new IRS voluntary disclosure program.

54. On April 5, 2005, Plaintiffs received a letter from the Internal Revenue Service regarding the resolution of issues presented in Notice 2004-30. Under IRS Notice 2004-30, issued on April 1, 2004, the SC2 and similar transactions were identified by the IRS as tax avoidance transactions. The letter stated that the IRS proposed to resolve issues related to the SC2. The letter states that the offer to resolve needed to be accepted within thirty days. On April 30, 2005, Plaintiffs signed an agreement with the IRS. Pursuant to this agreement, Plaintiffs will be forced to pay millions of dollars in back taxes and interest.

55. Plaintiffs have also expended significant additional funds, including legal and accounting fees in excess of $40,000.00, related to the resolution of further issues that developed from their participation in the SC2.

57. The members of the Class are so numerous that joinder of all members is impracticable. Members of the Class may be identified from records maintained by Defendant and may be notified of the pendency of the action by mail, using a form of notice similar to that customarily used in class actions.

58. Plaintiffs' claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by Defendant's wrongful conduct in violation of law that is complained of herein.

59. If brought and prosecuted individually, each of the Class members would necessarily be required to prove their claims upon the same material and substantive facts, and upon the same remedial theories.

60. The claims and remedial theories pursued by Plaintiffs are sufficiently aligned with the interests of the Class to ensure that the Class' claims will be prosecuted with diligence and care by Plaintiffs as representatives of the Class.

61. Plaintiffs will fairly and adequately protect the interests of the other members of the Class. Plaintiffs have retained counsel competent and experienced in class action litigation. Plaintiffs. have no interests antagonistic to, or in conflict with, the Class they seek to represent.

62. Plaintiffs' and the Class' claims have a common origin and share a common legal and factual basis. All Class Members' claims originate from the same fraudulent transactions promoted and implemented by Defendant.

63. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

66. For the purpose of inducing Plaintiffs and the Class to pay millions of dollars in aggregate fees, the Defendant made numerous knowingly false affirmative representations and intentional omissions of material facts, including but not limited to:

68. In reasonable reliance on Defendant's false affirmative representations and intentional omissions of material facts regarding the SC2, Plaintiffs and the Class paid substantial fees to Defendant for tax advice, and for implementation of the SC2 strategy. Plaintiffs, and the Class also filed improper tax returns resulting from the implementation of the SC2.

69. But for Defendant's intentional misrepresentations and material omissions described above, Plaintiffs and the Class would never have hired Defendant for advice on SC2, implemented SC2, claimed the purportedly resulting tax benefits on their tax returns; filed and signed their tax returns as prepared in reliance on Defendant's advice.

70. As a result of Defendant's conduct as set forth herein, Plaintiffs and the Class have suffered injury in that: (1) they paid Defendant millions of dollars in fees; (2) they engaged in improper transactions with third parties to effectuate the SC2; (3) they have, or may in the future, incur tax penalties and interest; (4) they lost the opportunity to avail themselves of other business opportunities and (5) they have incurred and continue to incur substantial additional costs in rectifying the circumstances created by their participation in the SC2.

71. As a proximate cause of the foregoing, Plaintiffs and the Class have been injured in an actual amount to be proven at trial, and should be awarded punitive damages in accordance with the evidence, plus attorneys' fees and costs.

73. Defendant, as Plaintiffs' and Class Members' financial and tax advisor, was a fiduciary to Plaintiffs and the Class, and thus owed Plaintiffs and the Class the duties of honest, loyalty, care and compliance.

74. In providing tax consulting services, Defendant breached its fiduciary duty to Plaintiffs and the Class by advising Plaintiffs and the Class to implement the SC2 and to sign and file the tax returns in reliance on the Defendant's advice, representations, recommendations, instructions and opinions, which Defendant knew or should have known to be improper and illegal, for the purpose of generating huge fees for Defendant.

75. Defendant breached its fiduciary duty to Plaintiffs and the Class by, among others, the following acts and/or omissions:

(1) Taking advantage of a relationship of trust and confidence and using its knowledge of Plaintiffs' and the Class Members' finances and business to solicit Plaintiffs and the Class for the SC2;

(2) Taking advantage of a relationship of trust and confidence in recommending the SC2;

(3) Pressuring Plaintiffs and the Class to engage in the SC2 by, among other things, informing Plaintiffs and the Class that engaging in the strategy was time sensitive;

(4) Advising and recommending Plaintiffs and the Class engage in the SC2;

(5) Charging and collecting unreasonable, excessive and unethical fees;

(6) Failing to fully explain the details of the SC2 and assure that Plaintiffs and the Class understood the strategy before inducing Plaintiffs and the Class to enter into the SC2;

(7) Representing to the Plaintiffs and the Class that the tax savings of the SC2 would be significant and far outweigh the amount of fees and costs incurred by Plaintiffs and the Class;

(8) Creating, designing, implementing, promoting, advising, recommending, and/or selling an illegal, improper and invalid tax shelter that is disallowed and/or prohibited by the IRS;

(9) Recommending, advising, instructing and/or assisting Plaintiffs and the Class in implementing and carrying out all phases of the SC2;

(10) Failing to advise Plaintiffs and the Class of other legitimate tax-savings opportunities available to them.

76. As a result of Defendant's conduct set forth herein, Plaintiffs and the Class have suffered injury in that (1) they paid Defendant substantial fees, (2) they unnecessarily implemented the SC2; (3) they have incurred tax penalties and interest and disallowance of certain deductions; (4) they lost the opportunity to avail themselves of other business opportunities and (5) they have incurred substantial additional costs in rectifying the circumstances created by their participation in the SC2.

77. As a proximate cause of the foregoing, Plaintiffs and the Class have been injured in an actual amount to be proven at trial, and should be awarded punitive damages in accordance with the evidence, plus attorneys' fees and costs.

79. Plaintiffs and the Class and KPMG entered into one or more agreements under which KPMG agreed to, among other things, satisfactorily perform professional tax consulting services, and render opinions, and tax return assistance for Plaintiffs and the Class. Plaintiffs and the Class bargained for KPMG's contractual obligations and paid KPMG millions of dollars for such services.

80. Under the terms of the engagement agreement that KPMG entered into with each member of the Class, KPMG obligated itself to provide each of them with an opinion letter that addresses the income and estate tax issues associated with the implementation of the SC2 "based on your facts and circumstances."

81. KPMG materially breached its obligations under the engagement letter by failing to provide the Plaintiffs and the Class an opinion based on each Plaintiff's "facts and circumstances." Instead, KPMG provided Class Members generic opinion letters.

82. Further, under the terms of Plaintiffs' and the Class Members' contractual dealings with KPMG, KPMG had an obligation not to engage in fraudulent and/or reckless and/or negligent behavior, but rather to act in good faith, to deal fairly and honestly, and to act reasonably and with due care toward Plaintiffs and the Class.

83. KPMG materially breached its obligations under the engagement letter by devising, implementing and executing a worthless, abusive tax shelter, and by not informing Plaintiffs and the Class of the very substantial risks associated with SC2 and that Plaintiffs and the Class could not rely on the opinions and advice provided them. Further, KPMG failed and neglected to exercise due care, by failing to act in good faith and by acting fraudulently to deprive Plaintiffs and the Class of their property through deception.

84. As a result of KPMG's conduct, as set forth herein, Plaintiffs and the Class have suffered injury in that (1) they paid Defendant millions of dollars in fees; (2) they entered into unlawful and unnecessary transactions with third parties; (3) they have, or may in the future, incur tax penalties and interest; (4) they lost the opportunity to avail themselves of other business opportunities and (5) they have and will continue to incur substantial additional costs in rectifying the circumstances created by their participation in the SC2.

85. By reason of the foregoing, Plaintiffs and the Class are entitled to recover actual damages, including interest, and to have exculpatory provisions in KPMG's contracts declared illegal, void and unenforceable.

87. As a professional tax consultant, defendant owed Plaintiffs and the Class a duty of care, loyalty and honesty, a duty to comply with the applicable standard of care, and a duty to comply with any applicable code of professional responsibility.

88. During the course of its provision of services to Plaintiffs and the Class, Defendant made numerous knowingly or negligently false affirmative representations, and intentional or negligently misleading omissions of material fact, and gave numerous negligent recommendations, advice, instructions and opinions to Plaintiffs and the Class, including, but not limited to:

(1) Taking advantage of a relationship of trust and confidence and using its knowledge of Plaintiffs' and the Class' finances to solicit Plaintiffs and the Class to engage in the SC2;

(2) Taking advantage of a relationship of trust and confidence in recommending the SC2;

(3) Advising and recommending that Plaintiffs and the Class engage in the SC2;

(4) Charging and collecting unreasonable, excessive and unethical fees;

(5) Failing to fully explain the details of the SC2 and assure that Plaintiffs and the Class understood the SC2 before inducing Plaintiffs and the Class to enter into the SC2;

(6) Representing to the Plaintiffs and the Class that the tax savings of the SC2 to Plaintiffs and the Class would be significant and far outweigh the amount of fees and costs incurred by Plaintiffs and the Class;

(7) Creating, designing, implementing, promoting, advising, recommending, an/or selling an illegal, improper, and invalid tax shelter that is disallowed and/or prohibited by the IRS;

(8) Failing to disclose to Plaintiffs and the Class that if they filed tax returns based on transactions entered into as part of the SC2 they could be liable for penalties and interest;

(9) Recommending, advising, instructing and/or assisting Plaintiffs and the Class in implementing and carrying out all phases of the SC2;

(10) Providing an improper and unreliable opinion letter regarding the SC2;

(11) Advising the Plaintiffs and the Class that the SC2 was not an improper tax shelter;

(12) Advising, recommending, instructing and assisting Plaintiffs and the Class in entering into transactions that, unbeknownst to the Plaintiffs and the Class, were illegal and improper and would be disallowed and held invalid by the IRS;

(13) Failing to advise Plaintiffs and the Class of other legitimate tax-savings and business opportunities available to them.

89. Defendant knew or should have known that its representations, recommendations, advice, instructions, and opinions were inaccurate, improper, wrong and/or false. In addition, the rendering of such representations, recommendations, advice, instructions and opinions, as well as the failure to advise Plaintiffs and the Class of the omissions set forth above, among others, was negligent, grossly negligent and reckless. Accordingly, Defendant failed to exercise the standard of care required of it as a tax consultant.

90. In reasonable reliance on the Defendant's advice regarding the SC2, Plaintiffs and the Class paid substantial fees to Defendant, paid additional fees to execute the SC2 and filed federal and state tax returns that have now been declared improper.

91. But for the Defendant's failure to meet the applicable standard of care and the intentional and/or negligent misrepresentations and material omissions described above, Plaintiffs and the Class would never have hired Defendant for advice of the SC2, engaged in the SC2, and filed federal and state tax returns that have now been declared improper.

92. After discovering Defendant's misrepresentations, Plaintiffs and the Class have incurred and will continue to incur substantial additional costs in hiring new tax and legal advisors to rectify the situation.

93. Defendant's conduct set forth above proximately caused injury and damages to Plaintiffs and the Class in that (1) they paid Defendant substantial fees; (2) they unnecessarily entered into the SC2 transaction; (3) they have incurred tax penalties and interest and disallowance of certain deductions; (4) they have lost the opportunity to avail themselves of other business opportunities and (5) they have and will continue to incur substantial additional costs in rectifying the circumstances created by their participation in the SC2.

94. As a proximate result of the foregoing, Plaintiffs and the Class have been injured in an actual amount to be proven at trial, and should be awarded punitive damages in accordance with the evidence, plus attorneys' fees and costs.

96. Defendant knew that, rather than receiving valuable professional services, Plaintiffs and the Class were actually sold illegitimate tax products that the IRS was not likely going to approve.

97. Defendant made numerous knowingly false affirmative representations and intentional omissions of material facts that misled Plaintiffs and the Class, including:

(a) Representing to Plaintiffs and the Class that SC2 was a lawful strategy as part of the Class members' overall income and estate tax plan;

(b) Representing to Plaintiffs and the Class that SC2 would more likely than not be approved by the IRS;

(c) Failing to disclose to Plaintiffs and the Class that Defendant had formulated a plan whose purpose was to develop, market and implement tax products, such as SC2, when Defendant knew that SC2 was an abusive tax shelter;

(d) Failing to disclose that Defendant developed, marketed and implemented the tax products, such as SC2, for the sole purpose of generating fees;

(e) Failing to disclose that Defendant knowingly traded on its reputation as a respected member of its profession to induce Plaintiffs and the Class to engage Defendant to implement the SC2 when Defendant knew that SC2 was an abusive tax shelter;

(f) Failing to disclose that the fees Defendant was collecting was unreasonable, excessive and unethical;

(g) Failing to advise Plaintiffs and the Class that Defendant had already prepared "form" opinion letters approving SC2;

(h) Failing to advise Plaintiffs and the Class that Defendant was illegally promoting and selling an unregistered tax shelter by marketing and selling SC2 to Plaintiffs and the Class;

(i) Failing to disclose to Plaintiffs and the Class that if they filed tax returns based on the advice given by Defendant they would be liable for penalties and interest;

(j) Recommending, advising, instructing and/or assisting Plaintiffs and the Class members in locating qualified charitable organizations to carry out SC2;

(k) Recommending, advising, instructing and assisting Plaintiffs and the Class in carrying out each of the steps of SC2;

(l) Providing erroneous tax opinions and advice, including representing that SC2 was not a tax shelter, that it was a legitimate tax avoidance strategy and was "more likely than not" to withstand IRS scrutiny.

98. Defendant's materially deceptive conduct extended beyond the initial tax consulting services provided to Plaintiffs and the Class. Defendant continued to represent, through acts and omissions, that the SC2 was a legitimate strategy until the IRS declared it unlawful in 2004.

99. As a proximate result of the foregoing, Plaintiffs and the Class have been injured in an actual amount to be proven at trial, and should be awarded punitive damages in accordance with the evidence, plus attorneys' fees and costs.

101. In connection with SC2, Defendant charged Plaintiffs and the Class fees, purportedly for, among other purposes, the provision of professional services. Defendant knew that, rather than receiving valuable professional services, Plaintiffs and the Class were actually sold illegitimate tax products that the IRS was not likely going to approve.

102. The amount of fees received by Defendant was not related to the amount of time and effort it expended in providing its professional tax consulting services.

103. Accordingly, Defendant was unjustly enriched at Plaintiffs' and the other Class members' expense by virtue of the fees charged to Plaintiffs and the Class in connection with SC2. Defendant is not entitled to retain any of the fees received from Plaintiffs or the Class. Moreover, equity mandates that the Defendant return the fees to the Plaintiffs and the Class.

A. Determining that this action is properly maintained as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure;

B. Certifying Plaintiffs as the class representatives and undersigned counsel as class counsel;

C. Awarding Plaintiffs and the Class members actual and punitive damages in an amount which may be proven at trial, together with interest thereon;

D. Awarding Plaintiffs and the Class members pre-judgment and post-judgment interest, as well as their reasonable attorneys' fees, expert witness fees and other costs;

E. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and pursuant to Rules 64 and 65 of the Federal Rules of Civil Procedure and any appropriate state law remedies to assure that the Class has an effective remedy;

F. Declaring that Defendant is liable to Plaintiffs and the Class members for the penalties, interest, loss of deductions, costs, professional fees, expenses and damages they have incurred;

G. Declaring that the agreements that Plaintiffs and the Class Members entered into with Defendant are void and unenforceable and are, in any event, inapplicable in all respects to the claims asserted herein; and

H. Awarding such other, further, and different relief as the Court deems just and proper under the circumstances.

Dated: August 1, 2005