Federal prosecutors are investigating three lawyers at a prominent Dallas law firm, Jenkens & Gilchrist, in a widening of an investigation into questionable shelters that shielded billions of dollars from taxes, according to people briefed on the inquiry.
The criminal investigation of the lawyers, now being heard by a grand jury in Manhattan, is a clear sign that the government is extending the investigation of tax shelters that it considers abusive beyond the case involving the accounting firm KPMG.
There is no indication that Jenkens & Gilchrist itself is a target of the investigation. Petri Darby, a spokesman for Jenkens & Gilchrist, said yesterday, ''We are cooperating fully with the investigation.''
Instead, the investigation is focused on three current and former tax lawyers based in the firm's Chicago office, the heart of its tax practice. They are Paul M. Daugerdas (pronounced DOG-er-dus), Erwin Mayer and Donna M. Guerin, according to the people who have been briefed on the investigation.
The three lawyers wrote hundreds of legal opinion letters in recent years blessing aggressive tax shelters sold by accounting firms and, in some cases, by the law firm itself, that did not pass muster with the Internal Revenue Service, according to separate civil litigation against the firm. Investors used those legal opinion letters, often costing $75,000 or more each, as a form of protection that they thought guaranteed their tax shelters were legitimate.
Mr. Daugerdas in particular became among the richest of those who participated in the tax shelter business, according to court papers in the separate civil proceedings.
In the civil litigation, Jenkens & Gilchrist has argued that what it did was proper at the time, and the firm has generally sought to settle cases or have them dismissed.
Lawyers for Mr. Daugerdas, Mr. Mayer and Ms. Guerin declined to comment yesterday.
The criminal investigation of the lawyers indicates that the government's focus on questionable tax shelters has broadened beyond KPMG.
In the KPMG case, the firm agreed to pay a $456 million penalty, accept an independent monitor of its operations and acknowledge wrongdoing to avoid an indictment. Seventeen former KPMG tax professionals, an outside lawyer and an investment adviser have been indicted on charges of defrauding the I.R.S. through the creation and sale of four shelters. All 19 are fighting the charges.
At the time of the original indictment, prosecutors indicated that the investigation was continuing and that they would be looking at the law firms, advisory firms and banks that the government contends helped accounting firms create and sell aggressive tax shelters in recent years. Such shelters, which in the eyes of the I.R.S. are illegitimate tax dodges, have deprived federal coffers of tens of billions of dollars in revenue. A Senate subcommittee that conducted hearings on abusive tax shelters in 2003 identified several banks, including Deutsche Bank, law firms and others that worked together to create and sell questionable tax shelters.
According to civil lawsuits against it, Jenkens & Gilchrist sold legal opinions attesting to the acceptability of tax shelters with names like Cobra, Homer and Bart. The firm also helped design certain questionable tax shelters, according to the lawsuits.
Jenkens & Gilchrist, with about 270 lawyers, has been struggling in recent years as it defends itself in more than a dozen lawsuits over its work on tax shelters.
Partners and clients have left the firm. An $82 million settlement between Jenkens & Gilchrist and about 1,100 wealthy investors who bought invalid tax shelters using its opinion letters is still awaiting court approval.
In December, Jenkens & Gilchrist did not renew the contracts of Mr. Daugerdas and Mr. Mayer; it had previously stripped both men of their stakes in the firm. Ms. Guerin is still employed by the firm, but she is no longer an equity partner sharing in profits.
Lawyers for the three Jenkens & Gilchrist lawyers are expected to argue that the amount of money that Mr. Daugerdas was earning for himself and the firm through his tax shelter work was well known to the firm's top leadership.
The opinion letters written by all three lawyers typically bore the co-signatures of tax partners in the Dallas office of Jenkens & Gilchrist, according to a person who has seen the letters.
Mr. Daugerdas earned $93 million in fees from 1999 through 2003 by selling opinion letters for questionable shelters and by designing and selling certain shelters, according to persons who have seen sealed documents filed in connection with a previous class-action civil settlement between Jenkens & Gilchrist and investors.
That figure would make Mr. Daugerdas one of the wealthiest single participants in the tax shelter business. The Chicago tax practice that Mr. Daugerdas led in the late 1990's generated $267 million in fees from its work on tax shelters, according to the people who have seen the settlement documents.
Of that amount, about a third went to the general coffers of Jenkens & Gilchrist, while the rest went to other partners, including Mr. Mayer and Ms. Guerin, and accounting and financial firms with which the law firm worked on tax shelters. Mr. Mayer's work on questionable shelters earned him about $28 million from 1999 through 2003, while Ms. Guerin made around $4 million, according to the people who have seen the sealed settlement papers.
Jenkens & Gilchrist has been in the sights of the I.R.S. and Justice Department since at least 2003. That year, in the first case of its kind involving a law firm, the Justice Department petitioned a federal court in Illinois to enforce several I.R.S. summonses and petitions that sought to force the law firm to turn over the names of 600 investors who bought aggressive shelters. Jenkens & Gilchrist eventually complied.
The grand jury investigating the three Jenkens lawyers was impaneled by the United States attorney's office in Manhattan sometime last summer, according to the people briefed on the investigation. It is the second to examine the illicit tax shelter industry.
The first grand jury on tax shelters was impaneled in early 2004 to investigate KPMG. Its findings led federal prosecutors to recommend to the Justice Department that KPMG be indicted. KPMG and Justice reached a deferred-prosecution agreement in late August.
Copyright 2006 The New York Times Company