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Big tax-shelter law firm to fold, pay $76 million fine

The Baltimore Sun

Jenkens & Gilchrist, once a high-flying Texas law firm with a national reach, will shut its doors for good and pay the Internal Revenue Service a $76 million fine as part of a deal announced yesterday with the Justice Department over questionable tax shelters.

Jenkens & Gilchrist, only six years ago among the largest, highest-earning law firms in the nation, becomes the latest casualty in the government's growing crackdown on aggressive tax shelters.

The agreement is also likely to bolster a wider criminal investigation by federal prosecutors into the web of firms and individuals that made and sold aggressive shelters from the late 1990s through recent years.

Those firms include Deutsche Bank AG, the accounting firm Ernst & Young and the national law firm of Sidley Austin Brown & Wood, as well as former employees of the accounting firm KPMG, who are set to stand trial in September.

Under the terms of the agreement, the Justice Department will not indict Jenkens & Gilchrist over criminal tax violations involving the creation and sale of aggressive shelters.

In exchange, Jenkens admitted to criminal wrongdoing with certain shelters, including one known as digital options, which is the focus of the broader inquiry. It also pledged to cooperate with investigators in the continuing inquiry into other firms.

The firm will close its last office, its flagship headquarters in Dallas, "at the end of the month," according to a statement announcing the agreement from the U.S. attorney's office in Manhattan, which is overseeing the tax shelter investigation.

The demise of Jenkens appeared increasingly inevitable in recent years, as many of its lawyers defected to other firms, morale declined and revenues plunged.

The firm and employees in its former Chicago office, the former heart of its tax shelter business, have been under scrutiny by the Internal Revenue Service and the Justice Department since 2004.

In its admission, Jenkens reversed previous assertions that it had done nothing wrong, and assigned blame squarely to the Chicago office, as well as indirectly blaming the firm's overall leadership.

"The firm's tax-shelter practice was spearheaded by tax practitioners in J&G;'s Chicago office who are no longer with the firm," Jenkens was quoted as saying in the statement issued by New York prosecutors.

"Those responsible for overseeing the Chicago tax practice placed unwarranted trust in the judgment and integrity of the attorneys principally responsible for that practice, and failed to exercise effective oversight and control over the firm's tax shelter practice. Unfortunately, that misplaced trust and reliance extended to our initial response to the IRS and led to public statements we issued in support of our legal opinions."

Patrick E. Mitchell, the firm's chairman since January, said yesterday that "from our standpoint, we are glad to put this behind us."

According to two former Jenkens partners, the remaining Dallas office has been in talks in recent weeks for another law firm, Hunton & Williams, to hire its partners. A spokeswoman for Hunton & Williams declined to comment yesterday.

In the statement announcing the deal, prosecutors said that their decision not to indict the firm was based in part on "its inability to continue practicing law as a firm," in addition to its admission of wrongdoing and its payment of the IRS fine.

Founded in 1951, the predecessor of Jenkens & Gilchrist catered to wealthy Texas oilmen and cattle-ranchers. In recent years the firm had offices across Texas, as well as in New York, Chicago, Law Vegas and other cities, with about 600 lawyers.

Only the Dallas flagship office remains - and only for a few days - with about 124 lawyers.

In 2005, the firm's gross revenue had plunged 30 percent from the previous year, to $179 million, according to the most recent data available from The American Lawyer, a trade publication. At its peak in 2001, the firm took in $312 million.

The now-defunct Chicago office of Jenkens churned out cookie-cutter legal opinion letters, costing $50,000 apiece and blessing the shelters as valid, to more than 1,100 investors.

The office brought in $267 million in fees from its tax shelter work from 1999 through 2003, according to previously reported documents. Lawyers have said that the top leadership at Jenkens in Dallas had to have known where the money was coming from.

The Chicago tax practice was headed by Paul M. Daugerdas, a former partner, whose share of those fees was $93 million in fees, making him one of the single wealthiest participants in the tax shelter business, according to previously reported documents.

It is not clear whether Daugerdas and his former colleagues are cooperating with the government. Lawyers for the individuals did not return phone calls.

A former Jenkens partner, Gerald Welch, said that the cloud cast by the criminal investigation of the firm and the landslide of civil lawsuits brought in recent years by aggrieved investors "just became too much of a burden for them to overcome."

"It became a question of the name," he said.

Last January, Jenkens won final approval of an $81 million class action settlement with investors whose shelters were found invalid by the IRS.

Blair C. Fensterstock, a New York lawyer who has sued Jenkens & Gilchrist on behalf of certain investors, called the firm's demise "a sad day for the legal profession."

"It's sad when a tax group can bring an entire firm down," he said.

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