Two former KPMG managers received prison terms and multimillion-dollar fines in a long-running tax shelter case.

Former senior tax manager John Larson was sentenced to serve more than 10 years in prison and pay a $6 million fine. Former tax partner Robert Pfaff received an eight-year sentence and was ordered to pay a $3 million fine by Judge Lewis Kaplan of the U.S. District Court in Manhattan.

Another defendant, attorney Raymond Ruble, a former partner at the law firm Sidley Austin, received a six-and-a-half-year sentence. “These men knew they were on the wrong side of the line,” said Kaplan.

The three men were among 19 defendants in a case that was once billed as the biggest tax shelter case ever prosecuted. However, Judge Kaplan dismissed charges against 13 of the original defendants in July 2007, including former deputy chairman Jeffrey Stein, after he ruled that prosecutors had exerted undue pressure on KPMG to stop paying for their defense, thereby limiting their legal options and violating their constitutional rights.

Two other defendants have pleaded guilty in the case. Another defendant, former KPMG tax partner David Greenberg, was acquitted in December (see Three Defendants Convicted in KPMG Tax Case).

At the trial, prosecutors argued that KPMG marketed a variety of tax shelter strategies to wealthy clients that enabled them to avoid paying billions of dollars in taxes. KPMG agreed to pay $456 million in 2005 to avoid prosecution and to change its operations.

Separately, KPMG has been sued by the bankruptcy trustee for New Century Financial for the firm’s audits of the collapsed subprime lender. New Century filed for bankruptcy in April 2007. The firm was accused of negligence in its audits of the company in a report by the court-appointed examiner last May (see KPMG Blamed in New Century Collapse).

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