It had been billed as the “largest tax fraud ever” by the feds and the trial was set to teach those that set up illegal tax shelters a lesson. And then it all went very, very badly.
Defendants in the case asked the judge to throw out the charges against them when it was revealed that prosecutors had engaged in misconduct. The alleged constitutional violations by prosecutors resulted in the dismissal of charges against thirteen of the defendants; an appeal to the 2nd Circuit was unsuccessful. Two of the remaining defendants took a plea. And with just four of the original nineteen defendants remaining, the prosecution moved ahead with their case.
During the trial, a juror skipped out, annoying the judge, and defendants again moved for dismissal, claiming that they were blindsided by the prosecution’s change of strategy. The judge did not grant the motion and the trial proceeded. Prosecutors then suffered another serious blow when one of their star witnesses, Steven Acosta, was called out on the witness stand as a liar.
Nonetheless, three and a half years after I originally blogged this story, it has an end:
One defendant, David Greenberg, was acquitted on all charges. It was likely a relative consolation as Greenberg had served five months in jail before trial. Greenberg’s acquittal was thought to have been tied to the flawed Acosta testimony, testimony which embarrassed the prosecution on cross-examination and which the judge referred to as “an injustice.”
Greenberg’s three co-defendants were not so lucky (if you want to call what happened to him lucky). Raymond Ruble was convicted on 10 counts of tax evasion and investment consultants Robert Pfaff and John Larson were each convicted on 12 counts of tax evasion.
Sentencing for Ruble, Pfaff and Larson will be in March of this year. Each count could bring up to five years of jail time.
With that, the “largest tax fraud ever” is over. What was planned as a spectacular prosecution turned instead into a spectacular failure.
Check in later today for my thoughts on what it all means (did you expect any different?).
I can’t wait for Hollywood to see the potential in this KPMG tax shelters mess. I predict movie gold!
There’s nothing waiting in the wings yet (so far as I know) but the live coverage is just as good. After declaring the KPMG lead tax evasion scandal as the “largest tax fraud ever“, overzealous prosecutors outmaneuvered themselves into having many of the charges dropped.
Four defendants remain for the current set of charges. They are former KPMG partner David Greenberg, investment consultants Robert Pfaff and John Larson, and Raymond J. Ruble, a former partner at Brown & Wood, now Sidley Austin. The four are charged with marketing a scheme that allowed wealthy tax payers to declare manufactured paper losses to offset real capital gains. hey relied on “hundreds of opinion letters” from Ruble, who also helped Larson and KPMG design the shelters. Ruble was paid $50,000 per opinion letter so each client would have the assurance they were protected if the IRS ever questioned the legality of the shelters.
Prosecutor John Hillebrecht claims that while the Tax Code is complicated, the rules are simple:
Ladies and gentlemen, you can’t lie to get out of paying taxes.
The feds charge that Larson and Pfaff created a company to market their scheme. Clients relied on “opinion letters” written by Ruble, which were supposed to protect clients from the IRS. Ruble was reportedly paid $50,000 per opinion letter, plus hundreds of thousands of dollars from Larson and Pfaff’s company.
The trial began on yesterday, just as a sitting juror advised the judge that she could no longer continue. She claimed that she would “vote guilty from day one” after reading articles about the trial, despite earlier assurances to the contrary.
Federal Judge Lewis Kaplan, who is presiding over the trial, questioned the juror. She was dismissed from the trial and advised that the U.S. Attorney’s Office would investigate her for perjury or obstruction of justice.
Kaplan told the remaining jurors, “you don’t have to be a genius to duck jury duty if you really want to do it.” It’s vaguely reminiscent of that great line from one of my favorite TV shows, Designing Women: “Juries scare me. I don’t want to put my faith in 12 people who weren’t smart enough to get out of jury duty.” (Of course, this in no way implies that you should skip out on jury duty…)
The remaining jurors agreed that they were willing to serve and that they could be impartial. The dismissed juror was replaced by an alternate. The trial resumes today.
Wow. And just like that, the largest criminal tax case in the US is over. Well, for now.
Judge Lewis A. Kaplan, of Federal District Court in Manhattan, has dismissed the charges against thirteen defendants (Randy Bickham, Larry DeLap, Jeffrey Eischeid, Steven Gremminger, Carl Hasting, John Lanning, Gregg Ritchie, Richard Rosenthal, Richard Smith, Carol Warley, Mark Watson, Philip Wiesner and Jeffrey Stein) because of alleged constitutional violations by prosecutors. Charges against three defendants (former KPMG partner David Greenberg, and two former KPMG employees, Robert Pfaff and John Larson) still stand since those employees could not prove that KPMG would have paid their legal fees in the first place.
In June, defendants asked the judge to throw out the charges based on allegations that prosecutors overstepped their roles by pressuring KPMG not to pay legal fees for the accused. Judge Kaplan obliged, writing that he made his decision “only with the greatest reluctance.”
The most damaging evidence came in the form of a voice mail from then-KPMG Chief Executive Officer Gene O’Kelly who said any “present or former members of the firm asked to appear will be represented by competent counsel at the firm’s expense.” Later, the firm bowed to pressure from the government to stop paying legal costs for the defendants in the criminal matter; KPMG continued to pay the legal fees for many of the same defendants in civil matters. This, the judge ruled, was a violation of substantive due process even if the government did not intentionally set out to do harm.
It was immediately clear that the government will pursue an appeal. In a statement, Southern District U.S. Attorney Michael Garcia said that the government “respectfully disagrees with Judge Kaplan as to whether there was any constitutional violation in this case…We will continue to pursue appellate review.” And why wouldn’t they? This was their big “we’ll show you” moment and they apparently blew it.
digg_url = ‘http://www.digg.com/business_finance/The_Largest_Tax_Fraud_Ever_Over’;
