Helter Shelter

Helter Shelter

By Francis X. Gilpin

Associate Editor

GunnAllen Financial Inc. took three years to turn a profit. But when it did in 1999, Richard A. Frueh and Donald J. Gunn Jr., co-founders of the Tampa investment firm, were making so much money that they started pondering tax shelters.

They went to a wealth manager at what was then First Union National Bank. Wachovia Corp. acquired the bank in 2001.

First Union managed the wealth of Frueh and Gunn so well that the partners are now being dunned by the Internal Revenue Service for millions of dollars in back taxes and penalties.

Frueh and Gunn, chief executive and president of GunnAllen, respectively, say they are among a legion of victims of supposedly reputable accountants, bankers and lawyers who have been caught peddling questionable tax-avoidance schemes while raking in huge fees that they seldom disclose to their affluent clients.

A federal grand jury in New York is looking into the particular chain of financial and legal advisers that allegedly took Freuh and Gunn. Among the apparent targets of the grand jury are the Big Four accounting firm KPMG LLP, the First Union wealth-management operation inherited by Wachovia and a New York law firm formerly known as Brown & Wood LLP.

Frueh, Gunn, and two other GunnAllen principals, David K. Savage and Ralph C. Johnson, are among the first of Tampa Bay area's business elite to confirm publicly that they participated in KPMG-recommended tax shelters that the IRS has deemed abusive.

$2 million in back interest

The GunnAllen executives are in company with other prominent figures. Last year, citing an IRS court filing, The Wall Street Journal reported that 29 well-known American corporations, including Clear Channel Communications Inc. and Washington Mutual Inc., attempted to reduce their federal tax liability by a combined $1.7 billion through just one of KPMG's elaborate gambits.

GunnAllen doesn't quite play in the billion-dollar leagues yet. But the 9-year-old investment firm paid $9.5 million last year to buy the Tropical Sportswear International Corp. headquarters to house an expanding base of operations in Tampa. At the time of the purchase, Freuh told The Tampa Tribune that GunnAllen planned to spend another $3.5 million to install a trading floor and other amenities.

GunnAllen advertises more than a dozen services for clients. Among them is tax planning.

According to a lawsuit the GunnAllen executives filed last month, the men owe the IRS more than $2 million in back interest alone, an amount that increases at an annual rate of 9% as they haggle with tax collectors.

How did GunnAllen's top executives get into tax trouble?

During the early 1990s, Frueh was a Tampa executive for two brokerages, Chatfield Dean & Co. and Sovereign Equity Management Corp., which ran into regulatory problems. In 1996, Frueh and Gunn went out on their own and started GunnAllen. Their subsequent success is one reason they began searching for ways to shelter their growing incomes from federal taxation.

Inexperienced about tax matters

Tampa securities attorney Scott C. Ilgenfritz, who filed their fraud and professional malpractice suit in Hillsborough County circuit court, portrays the GunnAllen principals as innocents.

"Frueh, Gunn, Savage and Johnson have been and are successful businessmen," Ilgenfritz states in the court complaint. But the shareholder in the Tampa office of Johnson Pope Bokor Ruppel & Burns LLP goes on to note: "None of the individual plaintiffs are knowledgeable or experienced about tax-related matters."

Ilgenfritz and his clients didn't respond to calls from the Gulf Coast Business Review before the newspaper's deadline.

The big earners at GunnAllen began considering the tax shelters when one of their bankers made a presentation to them in 1999.

Rick Simonetti, a regional managing director for First Union at the time, was once Savage's certified public accountant and formerly did audit work for Deloitte & Touche USA LLP.

On Sept. 1, 1999, Simonetti hooked up Frueh, Gunn and Savage with a trio of financial consultants via conference call from First Union's downtown Tampa office.

Simonetti talked up a convoluted financial transaction called a "contingent deferred swap," which the lawsuit claims he termed a conservative investment strategy adopted by "numerous similarly situated investors in the Tampa area."

Two representatives of another Big Four accounting firm, PricewaterhouseCoopers LLP, were present to assure the GunnAllen men that the swap could convert their ordinary income into capital gains that would be taxed at lower rates. Phrases such as "tried and true," "bulletproof," "smart thing to do," and "no-lose situation" were heard throughout the discussion, according to the lawsuit.

A U.S. Senate investigations subcommittee reported in February that First Union/Wachovia helped identify and reel in wealthy clients for KPMG, PwC and Ernst & Young LLP. The three Big Four accounting firms then introduced the clients to attorneys who issued boilerplate opinions endorsing the legality of whatever tax shelter the banks and accounting firms were pushing.

First Union/Wachovia representatives told Senate investigators last year that KPMG and PwC typically paid the bank $100,000 for each referral of a rich client for tax advice. Between 1997 and 2002, First Union/Wachovia estimated it collected about $13 million in referral fees from the accounting firms.

A maze of partnerships

In 2000, Simonetti returned with another plan for the GunnAllen men after selling them a modified version of the 1999 swap. The GunnAllen crew was working on a proposed outdoor amphitheater for Tampa at the time. Simonetti told Savage that a certain complicated loan product could finance the project while creating tax losses for the next 12 years.

Simonetti, who now works for Wachovia, declined to comment.

Clear Channel ended up developing an amphitheater in Tampa. GunnAllen sponsors a VIP club at the Ford Amphitheatre.

KPMG and company joined the swap and the loan together through a maze of funds and partnerships. The lawsuit says KPMG took a $1.5 million investment from the GunnAllen principals and used it to help Union Bank of Switzerland, better known as UBS AG, and others create $29 million in tax losses.

With KPMG handling the paperwork, the GunnAllen executives were apportioned a share of the losses to declare on their personal income tax returns, according to the lawsuit.

Senate investigators later unearthed an internal UBS memorandum that labeled the whole maneuver as "an illegal capital gains tax evasion scheme" for American citizens. "I am concerned that once IRS comes to know about this scheme," a UBS capital markets executive wrote, "they will levy huge financial/criminal penalties on UBS for offering tax evasion schemes."

Employees warned

First Union and KPMG weren't going to tell.

Another document discovered by Senate investigators shows employees of the bank and the accounting firm were warned in 1999 that supplying additional information to "customers or anyone else" beyond what was in their marketing materials would result in forfeiture of their commissions and their future exclusion from similar lucrative sales efforts.

A spokesman for KPMG declined comment on the lawsuit. A Wachovia spokeswoman couldn't be contacted before the Review's deadline.

By the summer of 2002, the IRS began auditing the 1999 tax returns of Frueh, Gunn, Savage and Johnson. The following spring, IRS auditors added the men's returns for 2000 and 2001 to their to-do list.

First Union sent letters to the men urging a defiant stance with the IRS. "Incredible, if not criminal, advice," is how their attorney Ilgenfritz now characterizes that counsel.