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Seattle company is subject of criminal inquiry by U.S.

Saturday, April 28, 2007

Last updated May 3, 2007 3:24 p.m. PT

Seattle company is subject of criminal inquiry by U.S. Quellos' tax shelter work draws scrutiny

THE NEW YORK TIMES

Editor's Note: This article reported that federal prosecutors in Seattle were conducting a criminal inquiry into Quellos Investments, a hedge fund group, over its design and sale of questionable tax shelters. It said that the investigation became public because of a related civil lawsuit.

The article cited court papers that referred to sworn testimony by two Quellos senior executives, Jeffrey Greenstein and Norm Bontje, that certain company shelters involved the generation of artificial losses and fake loans through sham companies in the Cayman Islands and Isle of Man, two offshore tax havens.

In fairness, the article should have made clear that those court papers were filed on behalf of Stephen Puckett, a North Carolina businessman, who is suing Quellos. The article also should have included a response from Mr. Greenstein and Mr. Bontje, who dispute the documents' characterization of their testimony. The company and the two executives say that they acted appropriately in regard to the tax shelters.

The article also misstated the role of the auditor KPMG. While KPMG and a former partner, Jeffrey Eischeid, performed some client work with Quadra, KPMG was not the auditor of Quadra or its heir, Quellos.

Federal prosecutors in Seattle are conducting a criminal inquiry into Quellos Investments, a prominent money manager for pension funds, over its design and sale of questionable tax shelters to wealthy investors. The inquiry signals a widening of a federal investigation into tax shelters promoted by banks, accounting firms and law firms in recent years.

The scrutiny of Quellos, by the U.S. Attorney's Office in Seattle, where Quellos is based, began in February. It was first revealed publicly on Thursday in a court hearing related to a civil lawsuit filed by a businessman in Charlotte, N.C., against Quellos and others.

Separately, court papers filed last week in connection with that lawsuit contain new accusations about tax shelter work that Quellos carried out with the accounting firm KPMG and First Union, a bank since bought by Wachovia. The papers cite sworn testimony by two senior Quellos executives -- the chief executive and co-founder, Jeffrey Greenstein, and the chief financial officer, Norm Bontje -- that certain shelters, though not the one involved in that lawsuit, involved generating artificial losses and fake loans through sham companies in the Cayman Islands and Isle of Man, two offshore tax havens.

Quellos manages $20 billion on behalf of major institutional investors, including the North Carolina retirement system's pension fund.

Quellos, one of the nation's largest sellers of funds that invest in hedge funds, is already under investigation by a New York grand jury and by the Internal Revenue Service for its work with certain aggressive tax shelters.

The Seattle investigation focuses on a different tax shelter altogether, known as Point, a Quellos spokesman, Michael Gross, said.

Quellos and Point were the subject of a hearing in August 2006 by the Senate Permanent Subcommittee on Investigations, which concluded that the company helped five wealthy investors shield $2 billion from taxes through Point.

The subcommittee found that Quellos and its predecessor, Quadra, had formal arrangements with KPMG and PricewaterhouseCoopers, among others, to make and sell two abusive shelters known as Flip and Opis. In both hearings, Greenstein said the firm did nothing wrong.

The late 1990s were a boom time for purveyors of questionable shelters that helped thousands of wealthy investors keep tens of billions in owed taxes from the Treasury. Sixteen former KPMG employees are scheduled to stand trial in New York next January on charges that they made and sold four kinds of abusive tax shelters, though not including Point.

In recent years, Quellos has been sued by dozens of wealthy investors after tax shelters it designed and sold in tandem with other firms, including KPMG, were considered invalid by the IRS.

One case was filed by a Charlotte businessman, Stephen Puckett. It was through papers filed in his lawsuit that the existence of the federal investigation in Seattle was first publicly revealed.

Puckett first filed a complaint against Quellos, KPMG, Wachovia Bank/First Union, three former KPMG employees and another individual in 2004. He said that the defendants worked together to sell him Flip in 1998 to improperly shield from taxes $13 million in gains stemming from the sale of his company, MedCath Medical. KPMG prepared his tax returns claiming the shelter-related deductions.

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