Monday, August 20, 2012

Judge Apportions Restitution in a Massive Tax Shelter Case (8/20/12)

In United States v. Kerekes, 2012 U.S. Dist. LEXIS 115280 (SDNY 2012), here, Judge Baer of SDNY imposed restitution against one of the individual defendants in the massive BDO Seidman tax shelter case, but apportioned the restitution so that the defendant, who pled to a conspiracy count for the large conspiracy, is liable for only a portion of the tax loss.

Here are the points I believe are key.

1.  The defendant pled to the overarching conspiracy count, a Klein conspiracy count under 18 USC 371, here, and to one count of tax evasion, 26 USC 7201, here.

2.  The defendant was sentenced to "one-year sentence, six months incarceration, and six months home confinement, a $50,000 fine and a $200 special assessment."

3.  Although the Mandatory Victims Restitution Act ("MVRA"), 18 USC 3663A, here, does not apply to the tax crimes established in Title 26, it does apply to conspiracy under Title 18.  Hence, Kerekes was subject to mandatory restitution.

4.  The amount of restitution is normally the loss to the victim.  For Klein conspiracies, the victim is the United States via the IRS.  According to the judge's calculations (after removing some of the claims made by the prosecutors) "the total loss is $61,922,963.96 ($29,547,426.96 attributable to taxes owed and approximately $32,375,537.00 in interest)."  In making this calculation, the judge found that calculating the restitution did not require certainty and would permit reasonable estimates (which he made).

5.  That there might be other sources from which the victim (the IRS) might collect the loss is immaterial.  Thus, that the IRS might collect from the taxpayer or other co-conspirators paying restitution is irrelevant.  In any event, in the aggregate, the IRS Is entitled to collect only once.  In this case, of course, the taxes and interest thereon (as well as possible penalties) were owed by the taxpayers.  The IRS's ability to collect those taxes might be limited by the statute of limitations (although as I have previously noted, one consequence of the Allen holding, if correct (I think it is not correct) is that those statutes of limitaiton might still be open).    In addition, the court noted that the record included a letter from Kerekes alleging that BDO Seidman had agreed to pay the United States $50 million as a result of the conspiracy involved; there was no allegation as to the portion of this that was in restitution of the losses in question.

6.  In addition to mitigating restitution if the loss is paid by others, the law also permits a court discretion to apportion the liability so that a defendant -- Kerekes in this case -- is not ordered to pay restitution on a joint and several basis for the entire amount.  See, 18 USC. § 3664(h), here.  The judge exercised this discretion to order restitution for Kerekes only in the amount of his gross compensation.  I think it is worth providing here his analysis (one footnote omitted):
Kerekes' final argument opines that in the event that restitution is ordered, the Court ought to apportion the amount attributable to Kerekes pursuant to 18 U.S.C. § 3664(h) ("If the court finds that more than 1 defendant has contributed to the loss of a victim, the court may make each defendant liable for payment of the full amount of restitution or may apportion liability among the defendants to reflect the level of contribution to the victim's loss and economic circumstances of each defendant."). 
The Second Circuit has suggested that joint and several liability may be inappropriate where, as here, there are multiple defendants spread across multiple judges (albeit in the same jurisdiction). See United States v. Aumais, 656 F. 3d 147,156 (2d Cir. 2011) (questioning whether "joint and several liability may be imposed only when a single district judge is dealing with multiple defendants in a single case (or indictment);... it would seem that the law does not contemplate apportionment of liability among defendants in different cases, before different judges, in different jurisdictions around the country"). The Aumais court's concern, double recovery by the victim, was addressed by the district court in United States v. Hagerman. No. 10 Cr. 0462, 2011 WL 6096505, at *17 (N.D.N.Y. Nov. 30, 2011) (imposing joint and several liability but directing the government to monitor restitution collection to ensure that the plaintiff did not double recover). 
I conclude that it is appropriate to exercise my discretion and apportion liability individually, at least with respect to this Defendant and, as noted, I do so based primarily on his relatively modest role in this conspiracy. See 18 U.S.C. § 3664(h). Of the methods suggested by the Government and Kerekes to apportion his responsibility, the fairest approach is to hold Kerekes responsible for the amount of his bonus. n7 Kerekes' total bonus came to approximately $2 million. Mazzella Decl. 3/15/2012 ¶ 4. n8 While Kerekes asserts that given his minor role and limited resources, I ought to provide an even smaller percent of the total restitution amount, Def. Mem. 6/1/2012, at 13,1 decline that invitation. Indeed, the fact is that Kerekes was in a better position than his co-conspirators to have stopped this fraud earlier when he testified under oath in depositions conducted during an audit of one of the taxpayers. Rather than help the Government, "he lied to the IRS ... as part of the ongoing effort to defraud the IRS." Gov't Mem. 5/18/2012, at 6; see also Plea Tr. 2/13/2009, at 24:4-5. Only his cupidity stood in the way of offering help to the IRS and bringing this gigantic fraud to a halt. Taking all the relevant factors into consideration, an individual payment of restitution is the amount of $2 million is imposed. United States v. Certified Envtl Servs., Inc., 800 F.Supp.2d 390, 397-98 (N.D.N.Y. 2011) (apportioning liability among various individuals by ordering  them to pay a percentage of the total restitution amount in light of different amounts of culpability); see also Salas-Fernandez, 620 F.3d at 49 (upholding apportionment of equal amounts to responsible parties because "the court is not required to use any particular formula for apportionment or, indeed, to apportion the loss at all"). It will be the Government's responsibility to track any payments made to the IRS ultimately recovered from other co-conspirators and to ensure that there is no double recovery.
   n7 Although Kerekes objects that the bonuses were not based solely on the tax shelter work, Def. Mem. 6/1/2012, at 14, I merely used this as a proxy for his involvement in the fraud. Despite ample opportunity, Kerekes also offered no calculation of what portion of his bonus was attributable to tax shelter work.
   n8 The Government included Denis Field ($21,500,000), Charles Bee ($15,000,000), Adrian Dicker ($7,500,000), Robert Greisman ($2,800,000), Paul Daugerdas ($80,000,000) and Donna Guerin ($17,500,000) in this calculation. I conclude that Kerekes' argument that the Government was obligated to include Erwin Mayer is without merit because Mayer did not promote tax shelters with BDO.  See Gov't Mem. 5/18/2012, at 7. 
By my calculation, after the removal of the five taxpayers for whom the Government has provided no tax returns and conducted no interviews and reducing the tax rate for all taxpayers to 20 percent across the board, the total loss is $61,922,963.96 ($29,547,426.96 attributable to taxes owed and approximately $32,375,537.00 in interest). Deducting the $8,345,436.00 recovered in the forfeiture from Deutsche Bank leaves a restitution amount of approximately $53,577,527.96, of which Kerekes' restitution amount is set at $2 million.
8.  The Government is required to keep track of the payments toward the loss and insure that it only collects once.  No indication is given as to how any overpayments are apportioned.  For example, assume that over time the Government collects restitution from the victims (say from Kerekes of $2,000,000 and say $30,000,000 from BDO), but then collects the tax and interest (plus penalties) in full from the taxpayers.  Who gets the overpayment?

1 comment:

  1. Interesting and informative update. Thanks.


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