KeyCorp Investors Sue Executives over Illegal Tax Schemes, According to Law360

On November 24, 2010, Law360 reported that KeyCorp investors, represented by Robbins Umeda LLP,* filed a consolidated suit on behalf of the company against certain current and former executives.  The shareholder derivative action seeks damages resulting from the defendants’ participation in unlawful tax shelter schemes, which subjected the company to liability for approximately $2 billion in unpaid taxes, penalties, and interest.  Filed Monday in U.S. District Court for the Northern District of Ohio, the suit consolidates two similar suits accusing KeyCorp directors of violating federal securities laws, unlawful insider stock sales, breach of fiduciary duty, and gross mismanagement.

The derivative action alleges that the company’s directors approved dozens of equipment/facilities leasing tax shelter schemes known as sale-in/lease-outs, or SILOs, that were, for taxation purposes, no different from lease-in/lease-out, or LILO, schemes outlawed by the IRS in 1999.  KeyCorp’s executives continued the practice for several years until 2008, when the IRS won a key test case.  KeyCorp was required immediately to post nearly $2 billion in escrow to satisfy claims for back taxes, penalties, and interest, and wrote down hundreds of millions of dollars in related assets, resulting in a liquidity crisis from which the company has yet to recover.  KeyCorp is a recipient of TARP funds, and is among the banks that have yet to pay back those loans.

The illegal tax schemes are alleged to have permitted defendants materially to overstate years of earnings.  The shareholder plaintiffs claim that the defendants breached their fiduciary duties by engineering this illegal scheme, reporting misleading financial results, and failing to disclose and to create adequate reserves to cover the Company’s multi-billion dollar contingent tax liability, despite years of warnings from the IRS.  KeyCorp continues to face lawsuits from several state tax agencies, with estimated penalties totaling $61 million.

The case is Monday et al. v. Meyer et al., case number 1:10-cv-01838, in the U.S. District Court for the Northern District of Ohio.

* The firm name changed from Robbins Umeda LLP to Robbins Arroyo LLP on January 1, 2013.

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