Sunday, July 4, 2010

Another Instance of Government Misconduct in a Tax Case

In United States v. Struckman, ___ F.3d ___ (9th Cir. 2010), the Ninth Circuit, as did the District Court, found that the Government committed egregious misconduct in its zeal to prosecute and convict an abusive tax shelter promoter. The Ninth Circuit’s opening provides a succinct summary of the claimed abuse, saying that the Government charged and apparently proved (Struckman was convicted) the following:

From 1996 to 2002, Global Prosperity offered, for a fee and through middlemen called "Qualified Retailers," an audiotape/CD series and seminars. These products advocated the use of illegal means to avoid paying income tax, including "voluntary withdrawal" from the United States' jurisdiction and the placement of assets in purported foreign or common law trusts without relinquishing control of them. The indictment alleged that Struckman purchased bogus trusts and fraudulently established bank accounts to receive profit distributions from Global Prosperity's more than $ 40 million in gross receipts, and that Global Prosperity and Struckman never reported these distributions to the Internal Revenue Service ("IRS") as income.
The IRS began investigating Struckman for this conduct. In the investigation, the IRS came up with all sorts of information about Struckman, but the sources and means of some of the key information were irregular to say the least. When, in the pretrial skirmishing in the criminal case, the court permitted Struckman to inquire into key Government sources, those sources became highly suspect and, in explanation, the prosecutors and IRS investigators were evasive to say the least. The prosecutors thus were “economical with the truth.” (The quote is from the infamous KPMG tax shelter criminal case, U.S. v. Stein (on which I have written extensively in this blog), where the prosecutors made the mistake of being “economical with the truth.”) The district court thus excluded the evidence in question but declined to dismiss. Struckman, of course, preferred dismissal. But sometimes the exclusion of evidence will result in the Government dropping the case or, alternatively, being unable to prove its case at trial. In this case, neither occurred, and, to his chagrin, Struckman was convicted.

But, before the prosecution even could gear up, the Government had to deal with the fact that, sensing danger, Struckman had absented himself from the United States to Panama where he hoped to avoid the danger that would befall from his indictment. The Government was not pleased. Government agents began a series of intrigues to extricate Struckman from his safe haven. Through a series of maneuvers, including lies to the Panamanian immigration authorities who undertook maneuvers which had the effect (if not the intent) of denying Struckman the Panamanian equivalent of habeas corpus, the Panamanian authorities deported him, without the U.S. having to request formally his extradition under the U.S. Panama treaty. In the pretrial skirmishing after his return to the U.S., Struckman complained that the Government’s skulduggery was an end run around the extradition process that was required in the case and that, in any event, the skulduggery, including the lies, was so reprehensible that the indictment should be dismissed. The trial court declined to dismiss.

In its resolution of the issues, the Ninth Circuit addressed first the Government’s maneuvering to get Struckman back into the United States from his preferred place of residence, Panama. The law, of course, has been for a long time that, almost regardless of how egregious the conduct in getting a defendant back into the United States for trial (kidnaping may even work), the courts will not dismiss unless (a) the extradition treaty in question forecloses other means for getting the defendant back or (b) the Government’s conduct was shocking or egregious. The Ninth Circuit found that neither of those conditions were present. Struckman was not extradited under the treaty; he was deported. And the treaty did not provide the exclusive means to remove a person to the United States. And, although the Government’s conduct (particularly the lies), may be bad behavior, it was not so shocking and outrageous that it was sanctionable by dismissal of the indictment. Nor, finally, did the conduct implicate the supervisory powers of the court to assure fair and proper justice.

Then, turning to the strange circumstances in the investigation, the Ninth Circuit too was concerned but affirmed the district court’s decision exclude the evidence rather than dismiss the case. Essentially, the court found that that was a trial judge’s call to make in the unique circumstances of the case and Struckman had made no showing of error that was not harmless.

I like Judge Berzon’s concurrence which agreed with the affirmance of the conviction but would have remanded for the district judge to inquire further into the prosecutors’ behavior. The following gives the flavor of Judge Berzon’s indignation with the prosecutors:

So where are we left? With no showing in the record of prejudice to the defendant and continuing defiance by the government of an order of the district court to produce "Ted"'s identity, after the government prosecutors, knowingly or not, repeatedly provided false information to the court and then defied requests to provide sworn-to information about "Ted"'s identity. We still don't know who or what "Ted" is. Struckman's posit was and is that an illegal wiretap must have been involved, and the evidence from Struckman's daughter and former wife registers a similar concern. As far as I can tell, the government has not specifically denied any such activity. Nor has the government in this appeal contested the district court's finding that "Ted"'s full identity remains unknown. So the district court's finding that the government has still not told the whole story stands. Given that, and given the history in this case of government disavowals of previous assurances regarding the sources of information, the truth of the matter is left up in the air, whether that truth is that there was an illegal wiretap or that there were one or more other informants. And all of this occurred after the district court, relying on Roviaro v. United States, 353 U.S. 53, 59-62 (1957), concluded that Struckman had made a minimal threshold showing that the identity of "Ted" could be relevant to Struckman's defense of governmental misconduct which, if proven, could have led to dismissal at that juncture. That finding of the degree of potential prejudice necessary to require revelation of the sources of information has not been contested by the government on this appeal either.

To me, this is an intolerable situation, severely challenging the integrity of the courts and the appearance of justice, and so requires further inquiry on remand before we may lay this case to rest. The district court tailored its remedy for the government's behavior based on the constitutional violation under Brady v. Maryland, 373 U.S. 83, 87 (1963), that could otherwise have resulted at trial, treating this case as a traditional Brady claim in which the information withheld by the government is actually discovered. But the separate governmental misconduct that occurred in court and has continued to occur--the government's continuing defiance of the trial court's discovery orders--has never been remedied, either by insistence on pain of contempt that the government reveal its additional sources after it was determined that it had not done so or otherwise.

I would, therefore, remand for the district court to order the government to reveal the full source of the information attributed to "Ted," in light of the district court's now-final finding that Moritz was not the sole source. 1 Only when this information is available can the district court, and we, accurately determine whether a further remedy, in addition to the suppression order, is appropriate. Should the government refuse to disclose the true source of information attributed to "Ted" on remand, I would instruct the district court to consider separately the appropriate remedy for the ongoing affront to the judiciary. I explain briefly below why I would proceed in this way.
One of the ironies related to the case is that the Government touts the conviction as one of its premier efforts in fighting offshore evasion.  The Associate Attorney General of the United States thus said in testimony before the United States Senate Committee on Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations in the Hearing Entitled "Tax Haven Banks and U.s. Tax Compliance":

The Department has successfully prosecuted a number of taxpayers as well as tax professionals and institutions who assist them in using offshore accounts and entities to evade U.S. taxation. Recent prosecutions include:

David Alan Struckman, co-founder of the Institute of Global Prosperity, an organization that promoted offshore "wealth-building" seminars, was convicted of tax evasion and conspiracy to defraud the United States. The bogus wealth-building methods marketed to clients included placing assets in purported foreign "common law" trusts to evade detection by the IRS. Struckman concealed more than $45 million earned from the sale of these products through the use of bogus trusts, nominee entities, and related offshore bank accounts in the Turks and Caicos and Eastern Europe. Struckman is currently in prison awaiting sentencing. The IRS and Tax Division continue to pursue enforcement activity against individuals who engaged in the scheme.
(This statement is reproduced at 2008 TNT 139-37 (7/17/08).  It seems strange indeed that our DOJ would take great pride in this conviction.  Maybe it was necessary and maybe the U.S. can systemically tolerate a tainted conviction, but I am not sure DOJ should be promoting the case as an example of our Government at its best.

1 comment:

  1. What precisely do you think the "misconduct" was? If a remedy was provided at district court and sustained on appeal, what's the real beef? Causing a fugitive defendant to be expelled from a foreign country is done all the time and presents no issue. The other is also hardly "egregious" misconduct. It may warrant what the concurrence suggests, but certainly does not really taint the trial because of the court's ruling below.

    I do strongly agree that the DOJ should not be boasting about any conviction affirmed or not, when allegations of government wrongdoing were made and appear colorable. Of course, most of the CI press releases are rote stupidity banging their chests (a la we got Capone) rather than focusing on how the defendant is in the process of pissing away his/her freedom and finances.


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