I know, I know. This doesn’t even feel like news. We’ve seen it coming for awhile now, ever since this little gem appeared on the Jenkens & Gilchrist web site in 2007:
At the time of the closing, Jenkens agreed to pay a civil penalty of $76 million and cooperate with the IRS and the feds in exchange for the firm not being prosecuted. The firm. We all knew what that meant: individual members of the firm were going down. We just weren’t sure who, though we had a pretty good idea.
Now, we have the official word. Seven tax professionals were charged yesterday in a massive tax evasion scheme. The Jenkens attorneys who were indicted are Paul Daugerdas, Erwin Mayer and Donna Guerin. Also indicted were Denis Field and Robert Greisman, originally from BDO Seidman and Raymond Craig Brubaker and David Parse, formerly of “Bank A.” Though no one is naming “Bank A” in the indictment, where it is identified only as a “foreign bank with U.S. headquarters in New York”, most believe the bank to be Deutsche Bank.
The indictment charges all defendants with conspiracy to defraud the IRS and to evade taxes. Additionally, each of the defendants but Parse is charged with multiple counts of tax evasion in connection with tax shelters. Daugerdas and Mayer are also accused of using these tax shelters to illegal reduce their personal income taxes.
Why these tax professionals? Why now? Lev L. Dassin, the acting U.S. Attorney for the Southern District of New York, has written:
We are dedicated to holding accountable tax and financial professionals whose deceit and fraud cost this country millions in tax revenues. The allegations contained in the indictment reflect a brazen disregard for the law.
In other words, the feds want to use these guys as an example. And considering the amount of money thought to be at stake, they’re pretty high profile examples.
My guess is that the timing of the indictment stems from mistakes made in the KPMG case. I am sure that the feds are determined not to let that happen again.
If you’re curious (admit it, you are), you can read the entire indictment here. It downloads as a pdf – and it’s 78 pages long. You’ve been warned.
The crackdown on tax shelters continues with a Manhattan jury finding four members of the Ernst & Young accounting firm guilty of all criminal charges following a ten week trial. The four, Robert Coplan, Martin Nissenbaum, Richard Shapiro, and Brian Vaughn, worked in the SISG (Strategic Individual Solutions Group) set up by Ernst & Young in 1998. Three of the four are attorneys (Vaughn is a CPA). Interestingly, Coplan was at one time a Branch Chief in the IRS’s Legislation and Regulations Division.
Federal prosecutors alleged that the four defendants engaged in conspiracy, tax evasion and other charges related to the design, marketing and implementation of tax shelters sold by Ernst & Young. The tax shelters created by the four helped wealthy clients avoid paying between 1998 and 2006.
As part of their scheme, Coplan, Nissenbau, Shapiro and Vaughn helped clients manufacture losses within the tax shelters. The four then solicited opinion letters from law firms that claimed that the tax shelter losses or deductions would “more likely than not” survive IRS challenge, or “should” survive IRS challenge. The IRS claimed that the four defendants were aware that the transactions did not meet those standards.
Charges as between the defendants varied. In addition to tax evasion charges, there were claims that the defendants interfered with the investigation. Coplan was charged with “corruptly endeavoring to impede the due administration of the Internal Revenue laws by instructing E&Y individuals to destroy documents related to the COBRA transaction when he knew of a pending IRS audit of the transaction.” Coplan and Vaughn were both charged with making false statements to the IRS.
The defendants had pleaded not guilty. Charles Bolton, initially charged as a co-defendant with the four, had already pleaded guilty earlier in the year.
Each of the conspiracy, tax evasion, and false statements counts carries a maximum sentence of five years in prison and three years of supervised release. Each obstruction of justice count carries a maximum sentence of three years in prison and one year of supervised release. In addition, each count is subject to a maximum fine of the greatest of $250,000 or twice the gross gain or loss derived from the offense. Sentencing is scheduled for September 10, 2009.
David L. Smith, the alleged mastermind behind the scheme who was charged with conspiracy along with the remaining defendants, failed to appear before a federal judge last year. Investigators traced him to British Columbia, Canada, where he is believed to be living; his daughters are said to be attending private school there. He is allegedly working with Vancouver law firms to increase his vast wealth; he is charged with personally failing to report almost $20 million in income. Reportedly, the U.S. Marshal’s office was preparing a warrant for extradition but Smith has not yet been brought to New York. The US Department of Justice has not offered further comment.
You can read the indictment from 2007 here as a pdf.
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?).
Jay Gordon, the former chair of the tax practice at Greenberg Traurig, has pleaded guilty to two counts of obstructing the due administration of the internal revenue laws, and conspiracy to defraud the IRS and to violate the tax laws. Gordon revealed his “misconduct” to Greenberg in 2004 and resigned from the bar two years later.
Gordon participated in a series of transactions meant to shelter wealthy clients from paying taxes. He referred various clients to a tax shelter boutique firm that paid him over a million dollars in referral fees. Initially, those fees were not disclosed to the clients (bad), his law firm (very bad), or to the IRS (very, very bad).
Over the next several years, Gordon continued to refer additional clients to the tax shelter boutique firm, as well as to “a bank” which was participating in the transaction (hmm… Could it be Chase?). At some point, Gordon got wise (sort of) and reported some of the fees paid to a company created by Gordon called “Albert Edward LLC,” to the IRS. However, Gordon offset those fees in some years by claiming fraudulent losses attributable to tax shelter transactions. In other years, he claimed thousands of dollars of false deductions on his individual tax returns.
As to those tax shelters? It’s the same tired story that we’re seeing with respect to KPMG and other indictments and allegations. Gordon issued opinion letters about these shelters to “protect” his clients even thought he knew that they would not survive scrutiny under the circumstances. To bolster those opinion letters, Gordon and his co-conspirator basically made up facts (the US Attorney General says he “developed a series of false representations”) in an effort to assist clients in the event of an audit.
Gordon will be sentenced on June 19, 2009. He faces a maximum sentence of three years in prison on the tax obstruction charge and five years in prison on the conspiracy charge; and a maximum fine on each count of the greatest of $250,000 or twice the gross gain or gross loss from the offense. He may also be required to make restitution.
Greenberg, for its part, has said: We asked Gordon to leave the firm more than four years ago and reported him to the appropriate disciplinary committee. We cooperated fully with the federal investigation of Gordon.
Their statement kind of has that “I can’t believe I dated that guy in high school” feel, doesn’t it.
So, why a plea from Gordon? Why now? It’s all about timing. Last month, the federal government made public its investigation of John Ohle, another tax lawyer accused of marketing and selling illegal tax shelters. Ohle is thought to have worked with Bank One (now Chase), Jenkens Gilchrist, and Deutsche Bank to assist wealthy clients in evading hundreds of millions of dollars in tax. Gordon is now cooperating with the authorities in the prosecution of Ohle. The hope is clearly that his participation will lead to a lighter sentence come June.
