So let's take a look at the money, the root of the evil alleged in the indictment.
The indictment alleges (¶ 60) the following "approximate aggregate amounts" of payments to them (or at their direction) related to tax shelters during the tax years 1998 through 2002 (the years Daugerdas was with J&G):
PAUL DAUGERDAS $ 95,700,000
ERWIN MAYER $ 28,700,000
DONNA GUERIN $ 17,500,000
DENIS FIELD $ 24,600,000
ROBERT GREISMAN $ 4,200,000
CRAIG BRUBAKER $ 3,300,000
DAVID PARSE $ 6,000,000
Other individuals were in the feeding chain, but they were minor relative to the indicted defendants. One cosmetic intermediary third party did earn in excess of $1,000,000 but he was not indicted and for this purpose is relatively minor.
The Institutions (Business Entities)
The indictment alleges (¶ 59) that the institutions who joined with these defendants to market and implement these shelters while Daugerdas, Mayer and Guerin were with J&G earned gross revenue as follows:
Jenkins & Gilchrist ("J&G") $230 million
BDO Seidman ("BDO") $ 44 million
Bank A (Deutsche Bank) $ 99 million
Bank B (Bank One) $ 5.2 million
These institutions were in it for the money. Let's pick off the easiest. J&G. J&G had gross revenue of $230 million. Gross is not net. So, assuming that, from J&G gross, the entire compensation to Daugerdas, Guerin and Field is deducted (as directly or indirectly coming from J&G) [I do caution, however, that some of the $95.7 million which the Government alleges Daugerdas made may have been paid by persons other than J&G, such as Tax Shelter Investor A, but I assume here it was paid by J&G to try to work toward a minimum net share of the loot that J&G's shareholders got], we then have $88,100,000 left to apply against related expenses and pay as profits to the shareholders of J&G. J&G had some expenses and may have paid some referral fees that would have reduced the net to J&G (and its partners other than Daugerdas, Mayer and Guerin). But, I think it fair to assume that for doing nothing more than lending its name to Daugerdas and crew's tax shelter marketing, J&G was left with substantial net. It sold its name and reputation for handsome net revenue presumably shared in by all shareholders (but certainly shared in, probably disproportionately by J&G management approving the relationship) and turned a blind eye to its source. (That bargain with the devil was a bad one; J&G has since entered a nonprosecution agreement with the Government requiring a payment of $76 million penalty for the Daugerdas tax shelter activity, J&G and its malpractice insurers have paid untold millions to taxpayers allegedly aggrieved by the allegedly fraudulent shelters, and J&G has dissolved as a result. But, I suppose, if the measure of the bargain is the money (that is, after all what J&G wanted), it was good while it lasted.)
For further reading on the J&G bargain with the devil, I think the following from the indictment is enlightening:
80. In or about mid-1998, defendant PAUL DAUGERDAS, and four other A&G lawyers, including defendants ERWIN MAYER and DONNA GUERIN (the "DAUGERDAS Group"), approached representatives of J&G's Dallas office and commenced discussions aimed at having the DAUGERDAS Group join J&G and operate a newly-formed J&G office in Chicago. During the course of the negotiations with J&G, DAUGERDAS provided certain data and information to J&G projecting that his revenues for 1998 would be in the range of $4-8 million. Also during the course of the negotiations with J&G, DAUGERDAS demanded that, as a condition of his employment contract, he be paid (i) a significant percentage of the fee income collected as part of his tax shelter practice, and (ii) not as a salaried employee of J&G, as the other J&G shareholders were paid, but, instead, through PMD Chartered, his S corporation.I guess the implication is that, had Daugerdas told J&G the truth, J&G might have insisted that J&G get more of the loot for selling its name. And, even if J&G was outmaneuvered in the 1998 negotiations, J&G was quite willing to continue the arrangement even when it became aware of the real deal. The money was just too damn good.
81. As a result of the discussions with defendant PAUL DAUGERDAS, J&G extended offers of employment to DAUGERDAS and other members of the DAUGERDAS Group. The offer to DAUGERDAS was made in the form of a December 22, 1998 letter addressed to DAUGERDAS and PMD Chartered, which provided that PMD Chartered would be paid the following amounts: a base salary of $480,000; a general bonus of $120,000; 50% of any tax shelter fee attributable to DAUGERDAS between $1,000,000 and $5,000,000; and 70% of any tax shelter fee collections attributable to DAUGERDAS above $5,000,000. Despite the fact that DAUGERDAS knew by on or about December 22, 1998, that DAUGERDAS's 1998 tax shelters sales would result in the collection of tax shelter fees in excess of $25,000,000, DAUGERDAS failed to tell management of J&G that his projected fee income was far in excess of the previously projected amounts. Instead, on or about December 27, 1998, DAUGERDAS signed the December 22, 1998 letter offer sent to him by J&G.
Finally, one of the obstructive acts alleged against Daugerdas is "directing that J&G and a New York-based tax shelter promoter ("Shelter Promoter A") pay over $90,000,000 of DAUGERDAS's fee income not directly to DAUGERDAS but instead to his S corporations - Treasurex and PMD Chartered," Daugerdas, in turn, sheltered his own income through those S corporations. The point is that Daugerdas was even unwilling to pay tax on his ill-gotten gains and got J&G to assist him in "sheltering" that gain.
How did those individuals and institutions make all these amounts? Well by producing shelter for taxpayers. How much tax shelter? Based on the allegations in the indictment (¶¶ 55-58), the aggregate "false and fraudulent" losses on the shelters involved in the indictment (there were other unnamed shelters) over the years from 1994-2002 was 7.320 billion -- that's right, billion. (The indictment appears to use interchangeably the adjectives "false," "fraudulent," and "false and fraudulent;" false and fraudulent may be redundant unless fraudulent encompasses both false and not false statements, documents, losses, etc.; henceforth in this blog, I shall just use the word fraudulent.) This 7.230 billion number relates to the four tax shelters alleged in the indictment (there were more). The breakdown is as follows:
Shelter - Fraudulent Loss (In billions) - Years
Short Sale - 2.600 - 1994-1994
SOS - 3.900 - 1998-2000
Swaps - 0.420 - 2001-2002
HOMER - 0.400 - 2001
Although some of the shelters were used to offset ordinary income, most were used to offset capital gain. Assuming just for rough purposes that there was an average capital rate of 20%, the minimum federal tax loss would be 1.464 billion.
The indictment does not allege tax evasion except for a sampling of the taxpayers involved. (See Counts 2-20, paragraphs 67-68). For those taxpayers, the amount of fraudulent tax loss claimed is $121,045,021, and the tax on that amount at a 20% assumed effective rate is $24,209,004.
Sentencing Based on the Money
Now, for you sentencing fans, I will throw out a real world issue driven by the overall tax loss for sentencing purposes of at least $1.464 billion. (The tax loss for sentencing purposes includes all relevant conduct -- i.e., the tax loss for the convicted conduct; the tax loss for related uncharged conduct, the tax loss for related conduct beyond the criminal statute of limitations, the tax loss for related acquitted conduct, the tax loss for state taxes arising from the conduct, etc.) You will see that even that minimal 1.464 billion number greatly exceeds the top sentencing tax loss of $400 million, so the base offense level is the maximum of 36 with upward adjustments for a Klein conspiracy +2, sophisticated means +2, aggravating role +4, and perhaps obstruction +2. Even without an obstruction bump (because it might be prohibitede since they are charged with obstruction), we get to a sentencing level of 44. The maximum level is 43 which draws a life sentence, provided, of course, there are sufficient counts of conviction to support that sentence. The Guidelines indicated sentence is not mandatory under the post-Booker regime, but given the amount involved and the other allegations of dastardly deeds, if proved, these defendants will face a very long sentence, perhaps in the range of the Skilling sentence of 24 years (which by the way was in the range of the Olis original sentence when the Guidelines were perceived as mandatory). [Caveat on my Guideline calculations, I used the 2004 edition; I do not address the ex post facto issue for the Guidelines, if ex post facto even has traction after Booker.]