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Levi to Get Second Tax Opinion

Apparel maker retains an outside law firm to look into allegations of irregularities.

June 03, 2003|Leslie Earnest | Times Staff Writer

Levi Strauss & Co. said Monday that it has hired another outside law firm to conduct a second examination of tax and accounting practices questioned by former employees in a lawsuit accusing the jeans maker of tax fraud.

The San Francisco-based company also said it discussed issues raised in the suit with the Securities and Exchange Commission in an informal meeting last month.

Filed in April by two former Levi tax managers, the suit claims the company used fraudulent tax schemes to enhance its financial results and give the impression its turnaround was on track.

Levi has denied the allegations. But it decided after reviewing the claims that it was prudent to seek the second opinion of a legal firm with tax expertise, spokeswoman Linda Butler said.

Shortly after the suit was filed, Levi said a "thorough and independent investigation with outside legal counsel" had determined that the company's "treatment of taxes was completely legal and appropriate." But that investigation -- conducted last year by the Legal Strategies Group, which has represented Levi in more than 100 trademark cases -- was limited and didn't examine some issues raised by the former employees in the lawsuit, including tax practices related to overseas subsidiaries, Butler said.

"We are very comfortable with the tax positions we've taken and feel they're reasonable," she said. "This is just to absolutely ensure there are no issues there that we are unaware of."

The current review by Steven Todrys, head of the tax department at Simpson Thacher & Bartlett in New York, began in late April.

Todrys said his investigation, first reported in the Wall Street Journal, is focusing on all "substantive tax issues" raised in the lawsuit. He declined to comment further.

Levi acknowledged Monday that it had unresolved issues with the Internal Revenue Service about tax returns stretching back to 1986. The issues include the timing of deductions involving a Brazilian partnership and when a foreign currency gain is taxable, Butler said.

"It's an open issue we're working through that we've taken appropriate reserves" for, in case Levi is required to pay additional taxes, she said.

In mid-April, the company said it paid the IRS $90 million to settle most of the agency's questions regarding tax returns between 1990 and 1995. An IRS spokesman wouldn't comment on the settlement or the pending tax issues.

In their wrongful termination lawsuit, former tax managers Robert Schmidt and Thomas Walsh -- who were fired in December -- contend that between 1995 and 2002 the maker of Levi jeans and Docker slacks engaged in financial tricks, some involving overseas tax shelters, that were meant to inflate the company's income and lower its tax rate.

Levi declared a pretax income of about $50 million last year, when it would have logged a loss of at least $336 million had it complied with U.S. tax laws and proper accounting standards, the suit alleges.

It contends that Schmidt and Walsh were fired after they refused to obey orders to mislead the IRS and KPMG, Levi's auditor.

Levi filed a countersuit last month, portraying the two men as liars conspiring to damage the reputation of the jeans maker and its executives. The Levi suit says the two "failed to perform their duties in a truthful and competent manner."

Another suit by Levi alleges that the men broke contracts and confidentiality pledges.

The 150-year-old company has been attempting to turn itself around after several years of losses and weak sales. Last year, its net income sank 84% to $25 million while sales slipped 3% to $4 billion. The company is privately held but reports earnings because some of its debt is publicly traded. On Monday, Levi's most active corporate bonds were little changed at $97.51.

For the first quarter ended Feb. 23, Levi reported a $24-million loss, contrasted with a profit of $42 million the previous year.

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