The two former Sprint Corp. executives who were caught up in a tax shelter scandal in 2003 that led to their departure from the Overland Park-based telecommunications company are seeking almost $160 million in combined damages.
William T. Esrey, a former chairman and chief executive officer, and Ronald T. LeMay, a former president and chief operating officer, sued the U.S. government Friday for allegedly concealing its investigation into accounting firm Ernst & Young LLP’s promotion of tax shelters sold to the executives.
The lawsuit says the former executives were unfairly forced out of the company after disclosing they were being audited over the use of the shelters that deferred taxes from stock option profits.
In the complaint filed in New York, Esrey and LeMay allege that Ernst & Young LLP, which sold them the shelters, “withheld material information” about civil and criminal investigations into the tax strategies and that the Internal Revenue Service also “helped hide information” about the probes from the executives.
“As a result of (Ernst & Young’s) breach of fiduciary duty and of the IRS’ active concealment of the criminal investigation and the truth about the tax shelter promoter audit, Esrey and LeMay could not defend themselves against allegations by Sprint and Sprint shareholders” over the tax shelters, the executives said in the complaint.
Esrey and LeMay have demanded relief in the sums of $42.5 million and $116.8 million, respectively.
Amy Call Well of Ernst & Young had no comment on the complaint. Representatives of the Justice Department didn’t respond to a request for comment.
Esrey and LeMay stepped down from Sprint as government scrutiny of the tax shelters mounted.
Serving as an adviser to the executives, Ernst & Young helped them engage in contingent deferred swap and add-on transactions from 1999 through 2001, according to the complaint. At the time, Ernst & Young was separately also employed as Sprint’s public accountant.
The former Sprint executives say the IRS helped the accounting firm disguise the seriousness of an investigation into the shelters by striking the word “penalty” from language in a press release describing a civil settlement in 2003.
The IRS did so in exchange for an extra $1.4 million included in the $15 million accord to “sweeten the deal,” according to the complaint.
Not until a decade later did the full extent of Ernst & Young’s knowledge of the probe come to light, according to the complaint. In February 2013, federal prosecutors in New York reached a $123 million settlement with Ernst & Young to resolve the criminal probe.
The following month, prosecutors issued an announcement “touting (Ernst & Young’s) cooperation with the government investigation into the tax shelters since approximately 2003,” the executives alleged.
Bloomberg News and Reuters contributed to this report.