Federal Authorities indict three, claim to have uncovered one of the largest tax schemes ever.

The Los Angeles Times is reporting from Seattle that U.S. attorneys have indicted two executives and a Los Angeles attorney in what could be one of the largest tax fraud schemes ever.

According to the article, two principals of the Quellos Group created 1.3 billion in fraudulent losses for clients. The clients did not know of the fraud, and had been offered tax opinion letters from well-known law firms and their tax attorneys that the transactions were legal.

The indicted are accused of setting up a complex series of sham transactions through a shell company on the Isle of Man. Gains of wealthy investors' earnings were offset with an equal number of stock losses to avoid owing capital gains taxes. According to the indictment, the losing stocks didn't exist, and that the company that acquired the stocks had no employees or earnings and the blended investment vehicles were a fraud.

The participants reportedly received tax opinion letters from the law firms of Cravath, Swaine & Moore of New York, the second-oldest law firm in the U.S., and Bryan Cave, an international firm that specializes in corporate transactions. Their written opinions affirmed that it was "more likely then not" that the plan would produce favorable tax consequences.

According to a 2006 investigation by the U.S. Senate's permanent subcommittee on investigations, Bryan Cave made more than $1 million in fees but disavowed knowledge of how the paper portfolio was formed.

To read the article in its entirety, see http://www.latimes.com/business/la-fi-quellos5-2009jun05,0,3888434.story