District Court Case on Brady Obligations and Uncertain Legal Duty (5/30/14)

The name of this case initially attracted me.  United States v. Townsend, 2014 U.S. Dist. LEXIS 70656 (ED WA 2014), here.  It  turns out the defendant is no relation to me.  But the case proved to have some interesting facets.  The first is just an interesting recitation of the Government's Brady obligations.  The second is a more interesting application of the James holding that uncertain legal obligation cannot form the basis for a criminal prosecution.

The defendant was indicted under Section 7202, here, for failing to withhold and pay over on employee's compensation.

Now the issues I report in this blog:

1.  Brady

Brady v. Maryland held "that the suppression by the prosecution of evidence favorable to an accused upon request violates due process where the evidence is material either to guilt or to punishment, irrespective of the good faith or bad faith of the prosecution." 373 U.S. at 87. In United States v. Bagley, 473 U.S. 667 (1985), the Supreme Court disavowed any difference between exculpatory and impeachment evidence for Brady purposes. Despite the Government's argument to the contrary, Bagley also held that regardless of request, favorable evidence is material, and constitutional error results from its suppression by the government, "if there is a reasonable probability that, had the evidence been disclosed to the defense, the result of the proceeding would have been different." 473 U.S. at 682 (it abandoned the distinction between the "specific-request" and "general — or no-request" situations). 

The Ninth Circuit summarized the obligation of the prosecutor concerning Brady material under Kyles v. Whitley, 514 U.S. 419 (1995): 

Moreover, as we have previously held: 

actual awareness (or lack thereof) of exculpatory evidence in the government's hands, ... is not determinative of the prosecution's disclosure obligations. Rather, the prosecution has a duty to learn of any exculpatory evidence known to others acting on the government's behalf. Because the prosecution is in a unique position to obtain information known to other agents of the government, it may not be excused from disclosing what it does not know but could have learned. 

United States v. Price, 566 F.3d 900, 909 (9th Cir. 2009) (citing Carriger v. Stewart, 132 F.3d 463, 479-80 (9th Cir. 1997) (en banc)). The Government correctly notes that Brady is not a discovery rule, but then incorrectly claims the materiality test of Rule 16 and Brady are interchangeable. ECF No. 46 at 5-9. They are not. Rule 16(a)(1)(E)(i) only requires demonstration that the "item is material to preparing the defense" not that it's materiality rise to the level of a reversible Constitutional violation for the failure to disclose it.

I don't know that any of this is new or bold, but it is useful refresher of the Brady obligation.

2.  The Uncertain Legal Duty Issue

Accountant Sentenced For Tax Crimes; Conduct Included FBAR violations (5/30/14)

The United States Attorney's office has announced the sentencing of "Dennis Duban, a Los Angeles-based accountant and tax return preparer."  The press release is here.  He was sentenced to 24 months in prison pursuant to his plea for one count of conspiracy to defraud (Klein conspiracy) and for one count of aiding and assisting (Section 7206(2)).  The sentencing minutes record is here.

The gravamen of Duban's conduct is that he assisted the persons related to the automobile dealership in running nondeductible personal expenses through the corporation.  He also was involved in offshore accounts and entities for one of the principals and for himself personally.  The release says (bold facing supplied by JAT).

- Prior to the sale of the Hacienda property, Duban and others assisted the same co-defendant in creating a nominee Cook Islands trust and opening a bank account at Wegelin Bank in Switzerland in the name “Southpac Trustee International, Inc., as Trustee of the Vista Pacifica Trust.” Proceeds of the Hacienda sale, over $14 million, were sent to the Wegelin account. Duban and a New York-based firm served as investment managers for the account. Duban and the co-defendant did not timely report the co-defendant’s beneficial interest in the Swiss account on Schedule B of a Form 1040 individual income tax return or by filing a Report of Foreign Bank Account (“FBAR”).` 

- Duban had an interest in other foreign bank accounts that he failed to properly report to the government. For at least 2006 and 2007, Duban failed to report his interest in at least one New Zealand account, held in the name of Lookout Point Limited, on Schedule B of his individual income tax returns or by filing an FBAR.

Others involved perviously pled guilty.  The news release says:

Three of Duban’s codefendants, Alan Pflueger, Randall Kurata, and Julie Kam previously pleaded guilty. Alan Pflueger pleaded guilty to willfully filing his own false 2005 Form 1040. In his plea agreement he admitted that from 2003 through 2005, personal expenses were paid for on his behalf by Pflueger, Inc., and Pacific Auto Distributors, LLC, another entity he owned, and his personal tax returns did not report these personal expenses as income. Randall Kurata, CFO of Pflueger, Inc., pleaded guilty to willfully filing a false 2003 Form 1120, U.S. Corporation Income Tax Return, for Pflueger, Inc., which improperly deducted as business expenses significant personal expenses of Alan Pflueger. Julie Kam, Alan Pflueger’s executive assistant, pleaded guilty to willfully filing her own 2004 Form 1040, which did not report personal expenses paid to her through Pacific Auto Distributors. Judge Kobayashi sentenced Alan Pflueger to 15 months’ imprisonment, while Randall Kurata and Julie Kam were both sentenced to terms of probation.

I previously reported on the acquittal of a related defendant:  Acquittal in Pflueger Involving Offshore Accounts (Federal Tax Crimes Blog 3/20/13), here.

I think this is an atypical case because I think it arose from investigations unrelated to the offshore account initiative.

BNP Paribas Rumor Mill (5/30/14)

Devlin Barrett, David Enrich and Christopher Matthews, Justice Dept. Seeks More Than $10 Billion Penalty From BNP Paribas (WSJ 5/30/14), here.  This is subscription only.

Reuters passes the WSJ Report:  U.S. seeks $10 billion penalty from BNP over sanctions probe: WSJ (Reuters 5/30/14), here.

(Reuters) - The U.S. Justice Department is pushing BNP Paribas SA to pay more than $10 billion to resolve a criminal probe into allegations that the French bank evaded U.S. sanctions against Iran and other countries for years, the Wall Street Journal reported on Thursday, citing people familiar with the matter. 

Sources told Reuters earlier this month that U.S. authorities were seeking more than $5 billion from the French bank. 

The Journal said the final settlement amount could be less than $10 billion. Still, the multibillion dollar figure would put the fine among the largest penalties imposed on a bank and is far higher than what BNP has provisioned for. 

* * * * 

The $10 billion settlement figure would represent a "hit" of around 5 percent to the bank's tangible book value, Citigroup analysts said in a research note. 

It would also reduce BNP Paribas' common equity tier 1 capital ratio to around 9.5 percent, a hit of around 10 percent on the bank's reported tier 1 capital ratio for the first quarter of 2014, Citigroup analysts said. 

* * * * 

Prosecutors have also pushed the bank to plead guilty to criminal charges as part of a resolution, sources have previously said.

The gravamen of the U.S. angst, as reported, is not U.S. taxpayer offshore accounts used for U.S. tax noncompliance.  However, I believe that the U.S. does have a bone to pick there.  BNP Paribas is among the 14 who could not resolve its problems for such accounts in the U.S. DOJ initiative.  I would expect that BNP Paribas will look to resolve all of this at the same time.

Zwerner Jury Verdict -- FBAR Willfulness for 3 Years (5/29/14)

Yesterday, the jury returned a verdict, here, in the Zwerner case.  (For all posts on Zwerner, see here.)  Readers will recall that, in that case, the IRS, acting for the Treasury Department, assessed a 4 year willful FBAR penalty at the maximum 50% of the amount in the account on the respective June 30 dates of violations.

The verdict asks:

1. Has the United States established by a preponderance of the evidence that Carl Zwerner's failure to timely file FBAR forms for the following years was willful?

The jury returned a verdict of yes to that question for 2004, 2005 and 2006, but no for 2007.

The verdict then asked:

2. Has the United States established by a preponderance of the evidence that the IRS's calculation of the assessed penalties for any of the years was equal to 50% or less of the balance of the account in question as of June 30 of the following year?

The jury answered yes for each of the years 2004-2006.  The year 2007 was not in issue because of the no answer to question 1.

The verdict then asked:

3.  Has Carl Zwerner established by a preponderance of the evidence that he qualified for the 2009 Offshore Voluntary Disclosure Program?

The jury answered no to this question.

The judge in the case was Cecilia Altonaga, here.

I poked through the docket entries, here, and some of the recent filings this morning.  I will formulate some additional comments later, but do offer one at the end of this blog.

There is a good discussion of this development on by taxlitigator.com.  See Zwerner: Jury Determines 150% FBAR Penalty Applies – Excessive Fines Clause to the Rescue?? (Tax Controversy (Civil and Criminal) Report 4/29/14), here.

I will close with one thought that I have not fully researched yet.  It seems to me that the structure of the statute, 31 USC 5321(a)(5), here, is to provide maximum penalties for nonwillful of $10,000 (perhaps per account) and for willful of the greater of $100,000 or 50% on the key date (June 30, as interpreted).  Each of these maximums could apply per year.  The point is that, as the statute is written, the penalty is not required to be at the maximum.  The jury was not asked to review the IRS's assertion of the maximum willful penalty.  Is the IRS's decision to assert the maximum not reviewable?  That just seems odd to me.

But that also raises the question of what standard the trier -- here the jury -- would apply in determining whether something less than the maximum penalty should apply and, if so, what the lesser penalty should be.  There are of course mitigation guidelines in the IRM, but the IRM is not the law even under relaxed notions of Chevron deference.

I will just have to think more about this.

The DOJ Tax Press Release [link to come later] is [cut and paste]:

FBAR Plea for U.S. Wegelin Depositor (5/28/14)

The USAO SNDY announced, here, a plea for Viktor Kordash for

willfully failing to file Reports of Foreign Bank and Financial Accounts (“FBARs”) with the IRS regarding a secret Swiss bank account that he maintained and controlled at Wegelin & Co. (“Wegelin”), a Swiss bank formerly headquartered in St. Gallen, Switzerland, which separately pled guilty in January 2013 to assisting U.S. taxpayers in maintaining undeclared accounts.

The conduct is described as follows:

In the early 1980s, KORDASH opened an account at Wegelin. At that time, KORDASH was living in Russia and was a Russian citizen. In 1984, however, KORDASH emigrated to the United States, and in 1986, KORDASH applied for and was granted citizenship in the United States. After emigrating to the United States, and after becoming a United States citizen, KORDASH continued to maintain his account at Wegelin, and failed to declare it to the IRS, up until approximately November 2010. KORDASH used the undeclared account as an operating and investment account for his antique reproductions business, which he operated out of New York, New York. 

During the time period that KORDASH maintained his undeclared account at Wegelin, capital gains and losses were generated in the account from KORDASH’s investments in foreign securities. Between 2007 and 2010, the high value of KORDASH’s undeclared account was over $1.5 million. Further, between at least April 2008 and June 2010, KORDASH received a series of cash distributions from the undeclared account from Wegelin’s correspondent account in Stamford, Connecticut, which totaled over $168,000. In November 2010, KORDASH closed the undeclared account and transferred the balance to his wife. The balance of the undeclared account at the time of its closure and transfer was nearly $1 million. 

For each of the calendar years from at least 1986 through 2010, Kordash was required to, but failed to, file an FBAR with the IRS disclosing his signatory or other authority over his undeclared account at Wegelin. He was required to identify the financial institution with which his account was held, the type of account, the account number, and the maximum value of the account during the calendar year for which the FBAR was being filed. He willfully failed to do so.

DOJ Tax AAG Kathy Keneally is Leaving DOJ Tax (5/27/14)

The DOJ Press release is here.

Kathy has been a dedicated public servant.  Some of her accomplishments are set forth in the press release, but I am also sure that she has touched and benefited the Tax Division in many other ways, large and small.

Readers of this blog will recognize Kathy, during her AAG tenure, as the public face of DOJ Tax in various initiatives, including most prominently the offshore account initiatives.

My best wishes to Kathy.

The press release indicates that she will return to her home in New York.  I expect that she will return to private practice and serve clients with the same professionalism she exhibited in private practice and as AAG.

Thoughts on What Swiss and Other Offshore Banks Whose Business Model of Secrecy Is No Longer Viable (5/27/14; 6/10/14)

I just picked up this interesting opinion piece:  Peter Gumbel, Secrecy’s out, so here’s what Swiss banks can still offer (Reuters Opinion 6/22/14), here.

The opinion piece starts as follows:

If Swiss banks were to cast off their usual discretion and make a marketing pitch these days, it might start off something like this: 

Dear Potential Client, 

While we would be delighted to open an account and manage your money for you, once you’ve complied with our anti-money laundering provisions, please be advised that we will no longer be able to help you avoid taxes back home, and in fact may soon start providing account details to your national tax authorities. Moreover, if you are American, please stay away. We’ve been so beaten up by the Justice Department that we’d rather not take your money at all.

I could quibble about several parts of this opening, but focus on only one.  The last sentence:  "We’ve been so beaten up by the Justice Department that we’d rather not take your money at all."

I have heard the variations of this refrain that, because of the U.S. allegedly short-sighted offshore account initiatives, including punishing the Swiss banks, a material number of Swiss and othoer offshore banks have stopped or will soon stop servicing U.S. citizens.  I can't speak to anecdotal instances where U.S. citizens may have heard or thought they heard that refrain from offshore banks.  It is hard to deal with anecdotes unless there is enough data to draw conclusions about the universe of offshore banks.

I do know that banks and other profit-seeking organizations seek, well, profit.  Banks do that by receiving deposits and exploiting those deposits while they hold them.  Banks do not turn away deposits unless the costs exceed the profit they can make.  Going forward, the critical mass of offshore banks will be FATCA compliant and compliant with similar initiatives by other countries, whether or not they take additional U.S. deposits.  So, will they stop taking U.S. deposits when the costs are really sunk costs and not materially different than required for other deposits?

Is Section 7202 an Aggravated Felony for Immigration Purposes? (5/25/14)

Section 7202, here, criminalizes the following conduct:

Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony [balance omitted]

Like evasion, section 7202 is a 5-year felony offense.  It is the most serious offense chargeable specifically for payroll tax fraud so common in the business world.  Much of that fraud could possibly be charged as a conspiracy or tax evasion or, possibly, tax obstruction under Section 7212(a).  But Section 7202 is the targeted serious tax crime for this particular conduct.

I would have thought that it is a "no brainer" that this serious conduct involves fraud or deceit and thus would be an aggravated felony, just as tax evasion is.  But, apparently, I am wrong.

In Corral-Trevizo v. Holder, 2014 U.S. App. LEXIS 9007 (5th Cir. 2014), here, the opinion in its entirety is (absent captions) (JAT has supplied the bold-facing):

Jesus Roberto Corral-Trevizo (Corral), a native and citizen of Mexico, petitions for review of a decision of Board of Immigration Appeals (BIA) dismissing his appeal of a decision by an immigration judge (IJ) ordering him removed under 8 U.S.C. § 1227(a)(2)(A)(iii) for having been convicted of an aggravated felony. The BIA affirmed the IJ's decision only to the extent that it found that Corral's prior offense under 26 U.S.C. § 7202 categorically met the definition of an aggravated felony under Clause (i) of 8 U.S.C. § 1101(a)(43)(M). It did not address the IJ's determination that the offense met the definition under Clause (ii). 

The parties concur, and a plain reading of the statute reveals, that there is at least one way to commit a § 7202 offense that does not involve fraud or deceit. Thus, Corral's conviction is not categorically an aggravated felony. See Larin-Ulloa v. Gonzales, 462 F.3d 456, 464-67 (5th Cir. 2006). The Government urges that under the modified categorical approach, however, it is clear that Corral pleaded guilty to an offense necessarily involving fraud or deceit because the information charged Corral with "willfully fail[ing] to truthfully account for and pay" the taxes that were due. Corral's plea agreement included a factual basis, however, indicating that Corral agreed only that he failed to pay the taxes, a failure which did not necessarily require fraud or deceit. Corral's admission to failing to pay the tax was sufficient for a conviction under § 7202. See United States v. Gilbert, 266 F.3d 1180, 1184-85 (9th Cir. 2001); United States v. Evangelista, 122 F.3d 112, 120-22 (2d Cir. 1997). Thus, although the information was charged in the conjunctive, it is not clear that Corral was necessarily admitting that his offense involved fraud or deceit. See United States v. Morales-Martinez, 496 F.3d 356, 358-59 (5th Cir. 2007); cf. Descamps v. United States, 133 S. Ct. 2276, 2288 (2013) ("[W]hatever [defendant] says, or fails to say, about superfluous facts cannot license a later sentencing court to impose extra punishment."). Because the documents approved for review under the modified categorical approach "are insufficient to establish that [Corral] was necessarily convicted of an aggravated felony," i.e. one involving fraud or deceit, the petitioner must prevail. Larin-Ulloa, 462 F.3d at 464 (emphasis added). 

Corral's § 7202 offense was not categorically an aggravated felony under Clause (i) of 8 U.S.C. § 1101(a)(43)(M). We do not reach the question whether the offense meets the definition of an aggravated felony under Clause (ii) because the BIA did not address it. 

We GRANT Corral's petition for review, VACATE the BIA's decision, and REMAND the case for further proceedings.

Any thoughts from readers?  Did Corral just win this skirmish and will eventually lose the war?

Also, I did try to pull the briefs from Pacer, but could not do it.  I presume that they are filed under seal for some reason.

Attempts to Commit Tax Crimes (5/23/14)

I deal today with a little discussed feature of criminal procedure.  Federal Rules of Criminal Procedure Rule 31, here, provides:

(c) Lesser Offense or Attempt. A defendant may be found guilty of any of the following: 

(1) an offense necessarily included in the offense charged; 

(2) an attempt to commit the offense charged; or 

(3) an attempt to commit an offense necessarily included in the offense charged, if the attempt is an offense in its own right.

It is well established law that a defendant may be convicted of a lesser included offense in lieu of the offense charged.  I focus on subsection (2) -- conviction of an attempt to commit the offense charged.

In United States v. Johnson, 2014 U.S. App. LEXIS 8834 (4th Cir. 2014), here, the defendant was "convicted by a jury of four counts of violating the Internal Revenue Code ("IRC"); one count of corruptly obstructing or impeding, or endeavoring to obstruct or impede, the due administration of the IRC, in violation of 26 U.S.C. § 7212(a), and three counts of willfully failing to file income tax returns, in violation of 26 U.S.C. § 7203."  On appeal, one of his claims was that the trial court had improperly constructively amended the § 7212(a) charge.  Section 7212(a), here, is tax obstruction.  The statute, here, is:

§ 7212 - Attempts to interfere with administration of internal revenue laws
(a) Corrupt or forcible interference
Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both. The term “threats of force”, as used in this subsection, means threats of bodily harm to the officer or employee of the United States or to a member of his family.

As recounted by the Court of Appeals, § 7212(a) "criminalizes both successful and unsuccessful attempts to impede the IRS."  In this case, the § 7212(a) Count, Count One, was titled "Corrupt Endeavor To Obstruct, Impede, and Impair the Due Administration Of the Internal Revenue Code" but the text of Count One charged that the defendant "did corruptly obstruct and impede the due administration of the Internal Revenue Code."  [Actually, there was a typo, but I include what the correct text should have been.]  So, focusing only on the text of the charge and not the title (like a caption which usually is not controlling), the defendant was charged with a completed act of obstruction.  The court nevertheless:

instructed the jury on the meaning of the word "endeavor," defining it as "any effort or any act or attempt to effectuate an arrangement or to try to do something, the natural and probable consequences of which is to obstruct or impede the due administration of the Internal Revenue laws." 

The defendant complained that this broadened the scope of the charge actually made.

Willful Blindness / Conscious Avoidance Again (5/23/14)

I have addressed on this blog the concept of willful blindness, a concept that goes by several names, including conscious avoidance.  The concept is that a jury may consider a defendant's willful or conscious effort to avoid knowing key facts or law that, if known, would give the defendant the level of mens rea required as an element of the crime.  That level for most tax crimes is willfulness -- the intent to violate a known legal duty.  For other crimes, the element may be knowingly (or some variation), which is often interpreted as a less strict standard than tax crimes willfulness, but still requires knowing mens rea on the defendant's part.  What if the defendant makes a deliberate or willful or intentional or conscious attempt not to achieve the required level of knowledge?

The crisp question is whether, if a jury finds such a willful attempt,

(i) can it convict on that basis alone without specifically finding the intent level required by the statute;
(ii) or it must consider that willful attempt in the context of the other factors to find that, in fact, the defendant had the required level of intent.  

Case (i) would be a substitute for the jury finding the level of intent required by the statute, permitting the jury to find guilt upon finding willful blindness without finding the existence of the statutorily required mental knowledge beyond a reasonable doubt; case (ii) would still require the jury to find the level of mental knowledge required by the statute beyond a reasonable doubt, permitting the jury only to infer that knowledge beyond a reasonable doubt from willful blindness and all the other facts.  These are important distinctions.

I have argued in past blogs that I believe case (ii) is the right answer.  I don't think the cases are clear and, in fact, tend to muddle the issue.

In a recent nontax case out of the Third Circuit, the Court's analysis muddles the issue. United States v. Tai, ___ F.3d ___, 2014 U.S. App. LEXIS 8129 (3d Cir. April 30, 2014), here.

In Tai, the defendant was convicted for mail fraud and wire fraud in connections with false claims relateld to a Fen-Phen settlement.  Tai was a board certified cardiologist who read echocardiagrams and submitted reports for some persons making claims.  The Government prosecuted him.

Mail fraud requires that, through the mail, the defendant "devise[] or intend[ed] to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations or promises." 18 USC 1341, here.  Wire fraud is similarly worded for conduct through the wires.  18 USC 1341, here.  There is thus the requirement that the defendant act knowingly.

The Court addressed the defendant's appellate claim that the willful blindness instruction was improper because it shifted some burden onto the defendant to prove his innocence.  The discussion can be read as just addressing that burden shifting issue and perhaps was not meant to address the issue I raise above.  But on the issue I raise, whether dicta or not, it seems to flip flop.

Credit Suisse Criminal Venue in EDVA; More on Venue in Tax Cases (5/23/14)

There is a good article in NYT's DealBook on how the Credit Suisse criminal investigation and prosecution ended up in the United States District Court for the Eastern District of Virginia ("EDVA"). Ben Protess, From Virginia, Chasing Down Credit Suisse (NYT DealBook 5/23/14), here.

This is a good write up on how the USA EDVA snared the Credit Suisse investigtion and brought it across the goal line.  Why EDVA?  That is a good question.  The article offers insight into the answer to the question.

Federal prosecutors have a lot of power over where to locate prosecutions.  The word for placing the prosecution of a federal crime is venue.  Venue has constitutional dimensions.  I offer at the end of this blog, a cut and paste of some portions of my Federal Tax Crimes book discussing venue.  Suffice it to say for now that, for tax prosecutions alleging a conspiracy (either offense or defraud), the conspiracy will often directly or indirectly touch a lot of federal districts that could thereby serve as sufficient nexus for venue for the prosecution.

The big tax shelter prosecutions of the mid-to-late 2000s were brought in SDNY.  A lot of people with their substantial presence outside SDNY and less than strong connections with SDNY in terms of the crimes alleged were herded into the prosecution in SDNY simply because some conduct of the alleged conspiracies occurred in SDNY.

Readers will recall that much of the visible criminal prosecution activity regarding Swiss banks and Swiss bank enablers has been in SDNY.  The Wegelin actions were in SDNY.  And, I understand that USAO SDNY is conducting some other Swiss bank criminal investigations.

So, it appears at this time, for the Swiss banks, SDNY and EDVA are the centers of activity.

Here is the cut and paste (footnotes omitted):

Credit Suisse Update - The Aftermath for Credit Suisse #1 (5/21/14)

I offer links to and excerpts from a few articles:

Mary Jacoby, Credit Suisse Guilty Plea - What's the Big Deal? (Main Justice 5/20/14), here.

The article provides a brief summary of the background and the event of the guilty plea.  The author concludes after noting the DOJ's concerted effort that, other than paying the monetary amounts and the loss to reputation, there would be no ill effects to Credit Suisse:

But isn't the treat of being obliterated supposed to have been the very incentive for big banks and other companies not to commit crimes? 

Now that we have a new precedent for preserving big banks' rights to operate despite criminal charges, I'm having a hard time understanding what's change.

Jenny Anderson, Credit Suisse Investors Shrug Off Tax Plea (NYT DealBook 5/20/14), here.

The article starts:

A day after Credit Suisse pleaded guilty to tax evasion in the United States, the Swiss bank says that it is able to conduct its business as normal despite its criminal conviction. Swiss officials and investors seemed to welcome the fact that the resolution allows the bank to put the matter behind it.

Katharina Bart, Karen Freifeld, and Aruna Viswanatha, Credit Suisse guilty plea has little immediate impact as shares rise (Reuters 5/20/14), here.

While we expect that this event has been well-flagged and the impact likely to be muted, there is always the small risk of unintended consequences," Citigroup analysts Kinner Lakhani and Nicholas Herman wrote in a note to investors. 

* * * * 

To appease investors, the bank will begin paying out roughly half its profits to shareholders once it hits a key capital ratio. It will also reduce assets, sell real estate and take other actions to help to meet the 10 percent capital ratio, which it expects to achieve by year-end. 

"We see the size of the fine as affordable given the high ROE (return on equity) of Credit Suisse's businesses," Nomura analyst Jon Peace said. Peace, who rates the stock as a "buy," said the payout guidance gave the bank a yield premium compared to the sector.

JAT Comment:  Just a cost of doing business?

Added 5/21/14 5:25pm:

Peter Eavis, In Credit Suisse Settlement, a Question of Justice (NYT Dealbook 5/21/14), here.  Excerpts:

I won't excerpt this.  I recommend that readers of this blog read the whole article.

Impact of Credit Suisse Guilty Plea on Resolution of Other Swiss Bank U.S. Tax Issues (5/21/14)

A Swiss web report has a good discussion of comments from various parts of the Swiss bank community regarding the effect of the Credit Suisse guilty plea.  Credit Suisse Deal Seen Paving Way for Swiss Banks to Settle (swissinfo.ch 5/210/14), here.  Excerpts that caught my attention are:

The Department of Justice reached the [Credit Suisse] deal after years investigating more than a dozen Swiss firms, including Julius Baer Group Ltd., the nation’s third-largest wealth manager. Many of the companies are close to settlements, said Andreas Brun, an analyst with Zuercher Kantonalbank in Zurich. 

“I expect resolutions in the next couple of weeks,” he said. 

* * * * 

'Speedy Resolution’ 

Julius Baer, which had 264 billion francs ($296 billion) of client assets worldwide at the end of April, may achieve a better deal than Credit Suisse as it has no business operations in the U.S.
“I can now see Julius Baer settling rapidly as well,” said Alevizos Alevizakos, a London-based analyst with Mediobanca SpA. In this bank’s case, four analysts polled by Bloomberg News estimated fines ranging from 400 million francs to 2 billion francs. 

Julius Baer dropped 0.8 percent to 39.4 francs as of 3:21 p.m. in Zurich today, extending the stock’s decline this year to 9 percent. 

“Removing the overhang of these tax disputes will be beneficial for any Category 1 bank,” Alevizakos said, using a Justice Department term for Swiss banks under investigation before it opened a voluntary disclosure program. “A speedy resolution in the coming weeks or months would be marginally positive for Julius Baer.” 

* * * *

Credit Suisse Pleads to One Count of Conspiracy to Aiding and Assisting (5/19/14; 5/20/14)

The key documents are:

• Criminal Information, here.
• Plea Agreement, here.
• Statement of Facts, here.

FROM THE CRIMINAL INFORMATION (THE ACTUAL CHARGING DOCUMENT):

Title of Case:  United States v. Credit Suisse AG (ED VA Alexandria Div.  No. 1:14-CR-1:14CR2188)  (I am not sure the docket number is correct, but will confirm and correct latler if necessary).

Defendant:  Credit Suisse AG.  Two subsidiaries are included in the definition of Credit Suisse AG.  The two subsidiaries are Credit Suisse Fides and Clariden Leu Ltd.

Charge:  One count of conspiracy under 18 USC 371.  The charge is an offense conspiracy to violate Section 7206(2), aiding and assisting  Section 7206 is here.  The charge is not the defraud / Klein obstruction conspiracy.

Factual allegations in the Information:  "For decades prior to an through in or about 2009, the exact dates being unknown to the United States Attorney, in the Eastern Distrist of Virginia and elsewhere" the defendants committed the crime.

There are bare bones allegations of "manner and means" and "overt acts."  Only two clients' situations are alleged as overt acts, but presumably they are not unrepresentative of thousands of other clients over the years.

I should note that Dana Boente, the United States Attorney, formerly served in the DOJ Tax Division both as trial attorney and Principal Deputy Assistant Attorney General.

The DOJ Tax attorney signing the information is Mark F. Daly who has played a prominent role in DOJ Tax's actions in the offshore bank account initiative.

FROM THE PLEA AGREEMENT (SELECTED EXCERPT):

2. Factual Basis for the Plea 

The defendant will plead guilty because the defendant is in fact guilty of the charged offense. The defendant admits the facts set forth in the Statement of Facts filed with this plea agreement and agrees that those facts establish guilt of the offense charged beyond a reasonable doubt. The Statement of Facts, which is hereby incorporated into this plea agreement, constitutes a stipulation of facts for purposes of Section I B 1.2(a) of the Sentencing Guidelines. 

* * * * 

5. Restitution 

Defendant agrees that restitution is mandatory pursuant to 18 U.S.C. §3663A. Defendant agrees to the entry of a Restitution Order for the full amount of the victim's losses. Pursuant to 18 U.S.C. § 3663A(c)(2), the defendant agrees that an offense listed in§ 3663A(c)(l) gave rise to this plea agreement and as such, victims of the conduct described in the charging instrument, statement of facts or any related or similar conduct shall be entitled to restitution. The Government is currently aware that the fo llowing victim has suffered the following losses:

Law Professors Amicus Brief Questioning Guidelines Emphasis on Financial Loss (5/19/14)

Prominent law  professors have filed an amicus brief in a case arguing that the Sentencing Guidelines place too much emphasis on the quantum of financial loss in white collar crimes.  I picked this up from Ellen Podgor, White Collar Sentencing is Not All About Loss (White Collar Crime Prof Blog 5/15/14), here.  The amicus brief is here.  Readers of this blog will recall that tax crimes are just a genre of financial crimes, with tax crimes sentencing being most heavily influenced by the "tax loss."

The following is a cut and paste of the description of the well-known Amici:

4. Amici include:  

a. Prof. Stephen A. Saltzburg. He served as the Attorney General’s ex officio representative on the United States Sentencing Commission in 1989-1990 and is the Chair of the American Bar Association Criminal Justice Section Task Force on the Reform of Federal Sentencing for Economic Crimes.  

b. Gregory R. Miller. He is a former U.S. Attorney for the Northern District of Florida and has served as an assistant U.S. Attorney for both the Middle District of Florida and the Northern District of Florida. He also served as a Judge Advocate in the United States Marine Corps. He has taught numerous workshops and seminars on subjects relating to criminal litigation, and he currently manages the Tallahassee office of Beggs & Lane, RLLP. 

c. Prof. Douglas A. Berman. He teaches at the Ohio State University Moritz College of Law. He is the co-author of a casebook, Sentencing Law and Policy: Cases, Statutes and Guidelines (Aspen 3d ed.), has served as the managing editor of the Federal Sentencing Reporter for more than a decade, and is the sole creator and author of the widely-read and widely-cited blog, Sentencing Law and Policy.  

d. Prof. Jeffrey L. Fisher. He teaches at Stanford Law School, has written and taught federal sentencing law, and has handled United States Supreme Court cases dealing with federal sentencing issues.  

e. Prof. Kate Stith. She served as an Assistant U.S. Attorney in the Southern District of New York, teaches courses at Yale Law School on Sentencing and White Collar Crime, and has written extensively on and testified concerning the federal sentencing guidelines. She is a member of the ABA Task Force that Professor Saltzburg chairs.  

f. Prof. Bruce A. Green. He served as an Assistant U.S. Attorney in the Southern District of New York, teaches at Fordham University Law School and writes in the area of criminal law, and is past Chair of the ABA Criminal Justice Section.  

g. Neal R. Sonnett. He is a former Assistant United States Attorney and Chief of the Criminal Division for the Southern District of Florida. He is a past President of the National Association of Criminal Defense Lawyers and the American Judicature Society, a past Chair of the ABA Criminal Justice Section, and a member of the ABA Criminal Justice Section Task Force on the Reform of Federal Sentencing for Economic Crimes.  

h. Prof. Steven Wisotsky: He teaches separate courses in criminal law, criminal procedure and white collar crimes at Nova Southeastern University Law Center. He has chaired the Appellate Practice Section of the Florida Justice Association and has served as co-chair of the ABA Criminal Justice Section Appellate and Habeas Committee. He is the author of a treatise on appellate practice, PROFESSIONAL JUDGMENT ON APPEAL: BRINGING AND OPPOSING APPEALS (Carolina Academic Press, 2d ed. 2009).

The Ongoing Credit Suisse Saga - What is Appropriate Punishment for Crimes Committed by Big Entities? (5/19/14)

I write today on articles about the alleged upcoming deal where Credit Suisse and BNA Paribas will plead guilty to some federal crime or crimes.  The first is an exceptional article in the New York times.  Floyd Norris, Convicted of Felonies, Banks Are Allowed to Stay in Business (NYT 5/15/14), here.

Mr. Norris asks:  "Is there really a difference between criminal convictions of banks and civil settlements that yield equally large fines?"

He explores whether big banks and organizations are "too big to jail," noting the obvious that you cannot incarcerate a lifeless, breathless entity.  Some interesting excerpts

But if companies cannot be sent to Leavenworth [the notorious -- at least renowned -- federal penitentiary], they can face the death penalty. Some think that is what happened more than a decade ago to Arthur Andersen, which was the fifth-largest accounting firm in the country before it was accused of criminal conduct in connection with the Enron scandal. It is possible, even likely, that Andersen would have failed without criminal charges, so deep was the damage to its reputation, but the precedent has been cited by some large companies that succeeded in avoiding criminal charges.

Readers of this blog will know that a similar dynamic played out in the KPMG bullshit tax shelter saga, where KPMG took a DPA that helped assure that it survived.

Perhaps the most interesting part of the prolonged and leak-filled dance leading up to the expected criminal charges has been the effort to assure that the banks will stay in business after they plead guilty.

The article discusses mechanisms to avoid adverse ongoing effects.  In particular, he focuses on SEC waivers of laws that would otherwise limit activity.  Those waivers appear to be routine for larger entities and get little public attention.

Taxpayer in Bullshit Tax Shelter Fails to Pass the Cost to an Enabler (5/18/14)

I have posted before about rich taxpayers trying to avoid / evade payment of tax by "investing" in bullshit tax shelters.  (Investing is a euphemism for creating a façade in the guise of an investment without risk and reward to cheat on tax.)  The play all along was to create a smokescreen in which the taxpayer hoped to win the audit lottery.  The enablers in those shelters -- often big accounting and law firms and foreign banks -- were paid handsomely to generate the smoke.

In those cases where the IRS discovered the shenanigans, it audited if it thought the statute of limitations was still open and assessed tax accordingly.  The taxpayer lost the lottery.  As is human nature, the taxpayers wanted a scapegoat to ease the consequences of their own misconduct.  So, the only scapegoat around to sue was the enablers, many of whom had very deep pockets.  I have written occasionally about those suits before, for the courts in some cases did not appear sympathetic to making one skulldugger pay another skulldugger.  See e.g., The Role and Culpability of the Taxpayers Participating in Bullshit Tax Shelters (Federal Tax Crimes Blog 5/4/14), here, and Taxpayer Playing the Bullshit Tax Shelter Game Tries to Shift Blame to the Enablers (Federal Tax Crimes Blog 1/16/14), here.

I report today on another attempt by the taxpayer to shift his own blame to an enabler.  In GG Capital v. Deutsche Bank, 2014 U.S. Dist. LEXIS 59540 (CD CA 4/28/14), here, the court dismissed the claims for being untimely under civil cause of action statute of limitations.  Most claims in U.S. law have a statute of limitations.  Sometimes the statute of limitations "tolls" until the taxpayer has either discovered or had reason to discover the conduct underlying the claim.  This is known as the discovery rule.  The court applied that rule to pour the defendant out.

The particular bullshit tax shelter was one apparently hawked by David Greenberg, although his precise role is not made totally clear in the case.  For purposes of the case, the Court seems to treat Greenberg as the representative of the taxpayer vis-a-vis the transactions in issue.  By way of background, Greenberg was among the crowd of 19 defendants in the first big tax shelter prosecution related to KPMG, United States v. Stein (SDNY), in 2005.  The common core of the prosecution was bullshit tax shelters hawked by KPMG and certain related enablers.  Greenberg, associated with KPMG during some of the relevant period, was among the defendants because of, in part, some "off the books" -- at least off KPMG's books and allegedly unknown to KPMG -- shelters.  The shelter in GG Capital may have been one of that he hawked or sponsored independently.

The shelter was the digital options shelter which paired long and short options to eliminate, practically, any risk because of their offsetting nature (if the long fell in value, the short would rise and vice-versa), so that with the possibility of risk practically eliminated, the possibility of gain was likewise eliminated, at least practically.  (This is an economic variation of the mantra, no pain, no gain.)  This variation of the SOB shelter was, in other contexts, called the Short Option Strategy or SOS.

The shelter taxpayer "bought" required financial transactions in exceedingly large amounts, the amount of which were offset by the leveraged nature of the offsetting positions, permitting the taxpayers to enter the transactions with very little down and, as noted, very little, if any, risk to anyone -- the taxpayers or the financial institution sitting on the offsetting positions for the taxpayer.

According to the taxpayer's allegations, when hawking their role in the deal to the taxpayer, Deutsche Bank represented that the financial transactions (options) were appropriately based on the Black-Scholes formula, with the probability of hitting a "sweet spot" was between 0.051 and 0.091, depending on the option pairing.  For that alleged represented sweet spot opportunity, taxpayer paid the enablers really big bucks, further impairing the possibility that the long-shot sweet spot could return their costs, much less produce a cash-on-cash profit justifying the costs.  Without a taxpayer profit motive for the transactions, the taxpayer could not claim the alleged tax benefits.  So, the taxpayer alleged that he had the profit motive based on what Deutsche Bank represented.  But, the taxpayer alleges, Deutsche Bank's representations were lies and that he did not have reason to know they were lies until later, within the discovery period for the statute of limitations.

Booker Variances are More Common in Tax Crimes. Why? And Do They Disproportionately Benefit the Rich? (5/16/14)

Readers of this blog should be familiar with the name Ty Warner.  He is the billionaire who cheated on his U.S. taxes big time (the financially big can cheat big) and, in addition, willfully failed to file the FBARs.  He pled guilty to a reduced set of charges.  He was sentenced to no incarceration.  The Government is appealing the lenient sentence as an abuse of sentencing discretion by the sentencing judge.  See When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case (Federal Tax Crimes Blog 5/12/14), here.

Forbes tax columnist, Janet Novack, has discussed the Warner sentencing in the context of the larger sentencing subset of tax crimes generally.  Janet Novack, Federal Judges Are Cutting Rich Tax Cheats Big Sentencing Breaks (Forbes 5/14/14), here.  As she presents the larger discussion, tax crimes generally get more lenient sentences -- in the jargon of the defense industry, a downward variance from the Sentencing Guidelines.  That phenomenon has occurred since Booker, although one could see its tendencies in the pre-Booker regime with departures in tax cases.  When there is a persistent variance as presented by Ms. Novack, one has to question whether the Guidelines are serving their purpose in the case of tax offenses.  And, even within the set of Guidelines-lenient sentence in tax cases, there may even be more leniency for the rich tax cheat than for the poor one.

The Guidelines were developed based on extensive studies of what judges were doing in real cases, subject to some adjustment for the societal gravity of the offenses.  Adjustments are made from time to time.  For tax offenses, the sentence is based principally on the amount of tax that was the object of the offense.  The Guidelines speak strongly that the sentence generally should go up with the amount of the tax evaded.  So, if the Guidelines are the key, Ty Warner should have received a significant incarceration period.  But he did not.

I urge readers to read and indeed study Ms. Novack's blog entry.  It is good background.  It prominently cites a new paper to be  published in the Villanova Law Review by Scott Schumacher, with whom (along with others) I co-author a case book on Tax Crimes, here.

The article says:

Schumacher says that given how much deference sentencing judges are now given, “I would not be surprised if Warner’s sentence is affirmed.”

However, as the article says, although reversals of a judge's sentencing discretion generally are rare and in tax cases even rarer, as the article notes, some courts will impose limits.  The article cites United States v. Engle, 592 F.3d 495 (4th Cir. 2010), here, discussed in one of my prior blogs, Fourth Circuit Cites S.G. Tax Sentencing Policy in Reversing Sentencing Variance (Federal Tax Crimes Blog 1/16/10), here, where the Court said:

Reduced to its essence, the district court’s approach means that rich tax-evaders will avoid prison, but poor tax-evader will almost certainly go to jail. Such an approach, where prison or probation depends on the defendant’s economic status, is impermissible.

So the open question is whether the Seventh Circuit will take a similar approach in Warner.

And, even the larger question, why do sentencing judges treat tax offenses less seriously than other offenses, which in turn causes then to exercise the Booker variance discretion more often in tax cases?

And, the further question must be asked by slicing the tax sentencing population a different way than rich and poor.  Slice it between offshore account tax crimes and other tax crimes.  Offshore account crimes seem to draw materially lighter sentences than other tax crimes.  Why?  Perhaps there is a correlation there.  Offshore tax offenders as a set seem to be richer than offenders of other tax crimes.

The Credit Suisse Costs for U.S. Tax Misbehavior is Said to Be $2.5 Billion (with a B) (5/15/14)

The Credit Suisse matter is getting more buzz.  The ante has been upped to $2.5 billion, but that includes a big chuck for the New York and perhaps other regulators, and about $1.7 billion for DOJ in its tax probe.  Devlin Barrett, Credit Suisse to pay about $2.5 billion, end tax probe (WSJ Market Watch 5/15/14), here.

And, the DOJ is said to be pushing for a guilty plea to some significant criminal charge.

Now a billion $ is a lot of money -- but it used to be more in purchasing power.  In the 1960s, the consummate politician, Senator Everett Dirksen (R), is reputed to have said:  "A billion here, a billion there, pretty soon, you're talking real money." (Whether or not he actually said it is reputedly uncertain; see Wikipedia, here.)

Another Dirksen quote is:  "I am a man of fixed and unbending principles, the first of which is to be flexible at all times."  See Wikiquotes here. Dirksen, the Senate leader for the Republicans, could work with Democrats and get things done.

Another Bullshit Shelter Bites the Dust Even with Variations (5/14/14)

I write today on the defeat of another bullshit tax shelter of the Son-of-Boss ("SOB") variety.  The Markell Company, Inc. v. Commissioner, T.C. Memo. 2014-86, here, decided yesterday.  If it were just another ho-hum SOB, it would be worth noting only in passing.  But, it has a twist -- both the twist and the outcome is projected in the opening two short paragraphs:

This case began when the Commissioner found the remains of a corporation on an Indian reservation in an extremely remote corner of Utah. The tribe claimed not to know how the corporation's stock had ended up in its hands. And there was little or no money or valuable property left inside the corporate shell. 

All signs pointed to the corporation's manager, a sophisticated East Coast moneyman, as the key person of interest. And his method was a series of complex transactions that bore a striking resemblance to Son-of-BOSS deals already examined many times before by this Court -- but with a corporate-partner twist.

The last sentence of the first paragraph resonates with the equally bullshit intermediary transactions.  One of the strategies in shelters is to push tax consequences to an empty shell of a company, so that the IRS is left without anyone to collect tax clearly due.

The Son-of-Boss transactions in their pure bullshit form seemed to promise to the gullible or complicit that the taxable income disappearing from the taxpayer's tax ledger would just go away.  But, every one I know that gave a hard and knowledgeable look knew that, even if the imagined scheme worked to push the income from the original taxpayer (always a doubtful proposition), some taxpayer down the line would be liable for the tax.  Enter the intermediary gambit to make sure that taxpayer down the line had no assets to pay the tax because the taxpayer and the promoters would have sucked all the value out of the company.  Thus, this intermediary was designed to deal with an inherent and blatant flaw in the SOB transactions.  (Of course, SOB transactions had flaws in them before reaching this stage, but the intermediary was a fine artistic touch to put on the bullshit.)

The Merits

Are Swiss Insurers Next (5/13/15)

Reuters has this report:  Foreign Insurers’ Role in U.S. Tax Evasion Under Scrutiny (Insurance Journal 5/12/14), here.

Products hawked by insurance companies can be made to function like banking or financial accounts, even when dressed in the guise of insurance.  Accordingly, such products may be FBAR reportable and, because of the differences in tax treatment of insurance as compared with banking or financial accounts, may be used for U.S. tax evasion.  Moreover, like bullshit tax shelters, they can appear in a blizzard of paper and words that makes it difficult to understanding exactly how it functions.

The Reuters report above indicates that the swisspartners indictment discussed recently (Swiss Non-Bank Enabler Enters NPA and Cooperates to Identify U.S. Persons (Federal Tax Crimes Blog 5/9/14), here) has insurance companies that played some role.  Excerpts are:

Court papers and a Justice Department news release say that insurance company subsidiaries of Swisspartners based in the Cayman Islands and Liechtenstein were also parties to the non-prosecution agreement with U.S. authorities, suggesting U.S. investigators may also be looking at the role of foreign insurance companies in helping Americans to evade taxes. 

The non-prosecution agreement (NPA) was entered into between the U.S. Attorney’s Office, on the one hand, and swisspartners Investment Network AG and the following three wholly-owned subsidiaries on the other: swisspartners Wealth Management AG, a   Zurich-based company that establishes and manages entities such as foundations and trusts; swisspartners Insurance Co. SPC Ltd., a Cayman Islands-based life insurance carrier that offers life insurance and annuity products; and swisspartners Versicherung AG, a Liechtenstein-based insurance carrier that offers a variety of insurance and annuity products. 

When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case (5/12/14)

The Government has filed its opening brief in the Ty Warner appeal.  The brief is here. Briefly, Ty Warner was, at least in quantity, the biggest offshore account abuser both from a tax evaded perspective and a wealth perspective.  I assume that most readers already know something about the saga of Ty Warner's offshore bank account adventures.  For Federal Tax Crime Blogs on Ty Warner, see here.  Suffice it to say that he got probation despite very ugly sentencing factors under the Guidelines and even under 18 USC 3553, here.

The legal background, highly summarized, is that the district court is required to calculate and respectfully consider the Sentencing Guidelines.  Nevertheless, the district court sentences under 18 USC 3553.  Applying 3553, the district court can vary from the Sentencing Guidelines calculations.  It is not the wild west with each sentencing judge's gut reactions and predilection controlling the result, as existed in sentencing prior to the Guidelines, but it has certainly moved in that direction since Booker, so long as the sentencing judge articulates some basis that would permit a court to say that the sentencing judge did not abuse his discretion.

I did not see anything unexpected or startling in the brief.  Just taking the facts and working them in a professional manner. The Government basically argues that the district judge was too lenient and, indeed, so lenient that he exceeded the Booker discretion.

Keep in mind that the brief is just one litigant's side of the story.  Mr. Warner has yet to be heard in support of the sentencing.  He too has exceptional lawyers.  So the case will be well briefed.  I will post the subsequent briefs as I get them.

I offer some excerpts I think either helpful to readers or just interesting to me (omitting footnotes and distracting record references):

ISSUE PRESENTED FOR REVIEW 

Over the course of over a decade, defendant hid more than $100 million in secret Swiss bank accounts, refused to report at least $24 million of income to the Internal Revenue Service, and evaded at least $5.5 million in taxes. Defendant was sentenced to a term of probation, 500 hours of community service, and a fine of $100,000. Was this a reasonable sentence? 

STATEMENT OF THE CASE 

A. Defendant’s Tax Evasion 

* * * * 

At the time of sentencing, defendant’s self-reported net worth was approximately $1.7 billion dollars. 

* * * * 

Defendant has not disclosed, and the government is not aware of, the amount of funds defendant used to open this UBS AG account, although defendant admitted in his plea agreement that the account was worth approximately $93 million six years after he opened it, in December 2002. Nor has defendant disclosed the source of these initial funds or whether he paid taxes on them. The books and records of defendant’s company show the funds were not transferred from the company, nor did they come from defendant’s personal domestic bank accounts.  

[After transferring his funds from UBS to Zuercher Kantonalbank] He placed his funds at Zuercher Kantonalbank in the name of a nominee Liechtenstein entity, the “Molani Foundation,” instead of holding the funds in his own name. Defendant’s actions further concealed his name from the Zuercher Kantonalbank account because it appeared in the bank records that the Molani Foundation was the true owner of the account.  

Another UBS Related Offshore Account Conviction (5/9/14; 5/12/14)

The caption on a new DOJ press release, here:  Florida Doctor Sentenced for Federal Tax Crimes, with a subcaption:  Doctor Maintained Multiple Offshore Bank Accounts at UBS and Other Foreign Banks That Concealed More Than $60 Million in Income and Assets.

Key excerpts:

Dr. Patricia Lynn Hough, of Englewood, Florida, was sentenced today to serve two years in prison and three years supervised release by U.S. District Court Judge John Steele in Fort Myers, Florida, for conspiring to defraud the Internal Revenue Service (IRS) by concealing millions of dollars in assets and income in offshore bank accounts at UBS and other foreign banks, and for filing false individual income tax returns which failed to report the existence of those foreign accounts or the income earned in those accounts, the Justice Department and the IRS announced.   Hough was also ordered to pay $15,518,382 in restitution and $42,732.27 for the costs of prosecution .  Hough was convicted by a jury on Oct. 24, 2013. 

 According to court documents and court proceedings, Hough owned two Caribbean-based medical schools, Saba University School of Medicine located in Saba, Netherlands Antilles, and Medical University of the Americas located in Nevis, West Indies.  Hough conspired to defraud the IRS with her husband, Dr. David Fredrick, who is awaiting trial.   They carried out the conspiracy by creating and using nominee entities, including a foundation, and by using undeclared accounts in their names and the names of nominee entities at UBS and other foreign banks to conceal assets and income from the IRS.   Both schools and the associated real estate were sold on April 3, 2007, for more than $35 million, all of which was deposited into undeclared accounts in the names of the nominee entities.   The majority of the proceeds from the sale were not reported to the IRS on their tax returns and no tax was paid.   In total, between 2003 and 2008, Hough and Fredrick failed to pay more than $15 million in taxes.

The evidence at trial further proved that Hough and Fredrick used emails, telephone calls and in-person meetings to instruct Swiss bankers and asset managers to make investments and transfer funds from their undeclared accounts at UBS.  The evidence also established that Hough and Fredrick caused funds from the undeclared accounts in the names of the medical schools to be transferred to undeclared accounts in their individual names or in the names of nominee entities.   Hough and her husband then used the funds in their undeclared accounts to purchase an airplane, two homes in North Carolina and a condominium in Sarasota, Florida.     

 Hough was also convicted of three counts of filing false tax returns for 2005, 2007 and 2008.   The evidence at trial showed that Hough filed false tax returns that substantially understated her total income because she failed to report substantial interest and investment income and because she failed to report her half of the proceeds from the sale of the medical schools in 2007.   In addition, Hough failed to report that she had an interest in, or signature or other authority over, bank, securities or other financial accounts located in foreign countries.  

JAT Comments:

1. I have no time to comment now, other than say that the very recent sentencings have involved significant incarceration time.  But as one practitioner noted at a recent meeting, Ms. Hough's sentencing was well below the Sentencing Guidelines range, which even the low point was likely over double what her sentence was.  I haven't seen the calculations, but my rough and ready calculations suggest a range with a low-end exceeding 100 months.  She received only 24 months.  Hence, Dr. Hough benefited substantially from a Booker variance.  As with Ty Warner (Beanie Baby fame), I speculate that that reflects well on the lawyers.

2. The tax loss is addressed in 1 sentencing order.  United States v. Hough, 2014 U.S. Dist.LEXIS 63660 (MD FL 5/8/14).  As readers know, the tax loss is the principal factor in calculating the offense level which sets the Guidelines Range.  Hence, the first order of business in the order is to address the parties' claims on tax loss.  Here are key excepts:

The government asserts that the tax loss for the years 2003 through 2008 is $7,771,972 for Hough and $7,746,410 for Fredrick, for a total of $15,518,382. Defendant asserts that the total tax loss for these years is $0.\ 

* * * * 

Where the criminal activity is jointly undertaken, the district court may consider "all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity, that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense." U.S.S.G. § 1B1.3(a)(1)(B). Since the offenses in this case involved the filing of tax returns in which gross income was underreported, the tax loss is equal to 28% of the unreported gross income "unless a more accurate determination of the tax loss can be made." U.S.S.G. § 2T1.1(c)(1)(A).

Dr. Hough and her husband ran their offshore operations through entities, Saba Foundation and Medical University of the Americas.  The Government sought to ignore the entities and attribute the income to Dr. Hough and her husband as Schedule C income for tax loss purposes.  Defendant argued that the entities must be respected.  The Court found that the entities met the minimum / minimal requirements of Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).  However, the Court then determined that the entities' attributes made them for tax purposes entities other than corporations.  Under the U.S. rules, such entities are treated as partnerships rather than corporations and the income flows through.  The Government won this argument.

3. In the order, the Court also rejected Dr. Hough's claim that, because her husband had the more active role, she should be given a downward role adjustment, reasoning:

While Fredrick clearly had a more active role in many of the activities in the conspiracy, Hough's role cannot be properly described as either minimal or minor. She was an active participant in the conduct which led to her convictions, including the conspiracy, and could reasonably foresee the conduct of co-defendant Fredrick. Additionally, the tax loss attributable to Fredrick's individual returns had no impact on the base offense level, since defendant's tax loss exceeded $7 million by itself but the combined tax loss was less than $20 million. U.S.S.G. § 2T41. Tax Table (K), (L). Defendant's request for a minimal or minor role adjustment is denied.

4.  I posted on her conviction here:  Another UBS U.S. Depositor Convicted (10/25/13), here.

Swiss Non-Bank Enabler Enters NPA and Cooperates to Identify U.S. Persons (5/9/14)

This press release from DOJ:  Swiss Asset Management Firm and Related Companies Agree to Resolve Criminal Tax Investigation, here.

I cut and paste virtually the entire press release because it is so important.  I do bold-face certain parts of the press release that I think readers should pay particular attention to:

* * * swisspartners Investment Network AG, a Swiss-based asset management firm, and three of its wholly-owned subsidiaries (collectively, the Swisspartners Group), entered into a non-prosecution agreement (NPA) with the U.S. Attorney’s Office for the Southern District of New York and agreed to pay $4.4 million to the United States.

  The NPA was entered into based on, among other things, the Swisspartners Group’s remedial measures, voluntary self-reporting and extraordinary cooperation, including its voluntary production of approximately 110 client files for non-compliant U.S.-taxpayer clients, and provides that the Swisspartners Group will not be criminally prosecuted for assisting U.S. taxpayer-clients in opening and maintaining undeclared foreign bank accounts from in or about 2001 through in or about 2011.   The NPA requires the Swisspartners Group to forfeit $3.5 million to the United States, representing certain fees that it earned by assisting its U.S. taxpayer-clients in opening and maintaining these undeclared accounts, and to pay $900,000 in restitution to the IRS, representing the approximate amount of unpaid taxes arising from the tax evasion by the Swisspartners Group’s U.S. taxpayer-clients.   The NPA applies only to the four specific entities that are party to it and does not apply to any other subsidiaries of swisspartners Investment Network AG or any individuals. 

“The extraordinary cooperation of Swisspartners has enabled us to identify U.S. tax cheats who have hidden behind phony offshore trusts and foundations,” said Deputy Attorney General Cole .   “In this and other cases around the world, we will continue to provide substantial credit for prompt and full cooperation.”
“As today’s announcement shows, we receive information about U.S. taxpayers with undisclosed accounts from many sources, some of which are not public,” said Assistant Attorney General Keneally.   “For many accountholders, the time to come forward voluntarily to avoid criminal prosecution has run out.” 

“This office will continue to work aggressively to hold accountable not only those U.S. taxpayers who evade their tax obligations by hiding money overseas, but also those abroad who make such tax evasion possible,” said U.S. Attorney Bharara.   “For its wrongdoing in assisting U.S. taxpayers to open and maintain undeclared accounts overseas, the Swisspartners Group is being made to pay $4.4 million in forfeiture and restitution.   Swisspartners avoided criminal charges as a direct result of its decision to self-report its misconduct at a time when it was not even under investigation and its extraordinary cooperation, including its decision to turn over voluntarily the files and identities of U.S. taxpayer clients it helped hide money from the IRS.   The case serves as a clear example of the benefits that can be obtained from early and complete cooperation with federal law enforcement." 

“I am very pleased that we have successfully concluded negotiations with the Swisspartners Group,” said IRS-CI Chief Weber .   “In making amends, the Swisspartners Group has turned over 110 account files relating to U.S. taxpayer-clients who maintained undeclared assets overseas.   This agreement marks yet another significant step forward in combating offshore tax evasion.   Anyone who is hiding money or assets offshore with the intent of committing tax evasion will be found and prosecuted.   It's not a matter of ‘if,’ it's a matter of ‘when." 

Another Foreign Account Sentencing (5/7/14)

DOJ Tax News Release:  Wyoming Businessman Sentenced to Prison for Using Concealed Caribbean Bank Account in Tax Evasion Scheme (5/7/14), here.  The defendant, Robert C. Sathre, had previously pleaded guilty to willfully evading payment of his 1995 and 1996 taxes.  Both he and his wife were originally indicted. See New Indictment Related to Offshore Accounts (Federal Tax Crimes Blog 6/15/13), here.

He was sentenced to 36 months, with $3,111,882 in restitution.

The following is an excerpt from the press release:

According to court documents and proceedings, Sathre sold a Minnesota business and received installment payments in 1995 and 1996 of more than $3 million.  Sathre concealed his income by filing a 1995 tax return in which he reported only $64,928 in total income.  Sathre then purchased land and set up another business, a gas station and convenience store in Sheridan, Wyoming, known as the Rock Stop. 

 According to court documents and proceedings, Sathre concealed assets by opening a foreign bank account in the Caribbean island of Nevis and by using purported trusts.  In a 10 month period spanning from 2005 through 2006, Sathre sent over $500,000 to the account in Nevis to keep the funds out of reach from the IRS.  When Sathre sold the Rock Stop in 2007, he wired over $1,250,000 from the sale proceeds to the trust account of a Wyoming law firm.  He later directed the law firm to wire $900,000 from the trust account to his account at the Bank of Nevis.  Sathre also provided a false declaration and false promissory note to the Bank of Nevis to conceal the source of this transfer and obtained a debit card linked to the foreign account to access funds locally.  In addition, Sathre provided the Bank of Sheridan with an IRS form on which he falsely claimed that he was neither a citizen nor a resident of the United States.

JAT Comment:  I just picked this up and have not reflected on it.  Moreover, I don't have immediate access to my spreadsheet.  However, based on my recollection and experience, this seems to be one of the more onerous offshore account sentences.  The cryptic information in the press release excerpted above indicates that a large amount of tax was evaded and some extra culpable steps were taken; in addition, there may have been significant relevant conduct.  (See my prior blog on the indictment above).  Still, maybe more will come out so that observers can fit this sentencing into the overall context of foreign account sentencings.)  I assume but do not know that his guilty plea resulted in the dismissal of the indictment against his wife.

Should Swiss Banks Committing U.S. Tax Crimes Pay for Their Conduct? (5/7/14)

The question I ask has several levels of consideration.  I address here only one of them -- an appropriate sharing of the costs of misconduct that might fairly, at some level, be considered criminal misconduct.

A number of U.S. persons with Swiss bank accounts after 2008 have been contacted by Swiss banks seek information and/or documents establishing U.S. tax compliance that the Swiss banks can use for penalty relief under the U.S. DOJ / Swiss Bank Initiative.  (The original initiative and a subsequent clarification are here and here.)  Basically, in summary, the Swiss banks joining the U.S. DOJ Swiss Bank Initiative as Category 2 banks will have a penalty equaling the following:

A penalty base
x (times) a percentage
equals
the penalty.

The penalty base refers to U.S. person accounts at the bank during the Applicable Period, defined as "the period between August 1, 2008, and either (a) the later of December 31, 2014, or the effective date of an FFI Agreement, or (b) the date of the Non-Prosecution Agreement or Non-Target Letter, if that date is earlier than December 31, 2014, inclusive."  In part here pertinent, U.S. person accounts otherwise includible can be excluded from the penalty base if the Swiss Bank can establish to the satisfaction of the DOJ that the account either that (i) the account was not an undeclared account, (ii) was disclosed by the Swiss Bank to the IRS, or was disclosed by the U.S. person to the IRS under the OVDI/P.  The letters from the Swiss Banks seek information and documents from the U.S. persons to meet the requirement of the third category, so that the Swiss Banks can avoid penalty for their misconduct.

These letters from the Swiss Banks come in various iterations.  Apparently, as best I can discern, DOJ has not given them the a list of the precise form of proof required.  Examples of the requests I have seen include: (i) request for the OVDI/P preclearance acceptance letter; (ii) the ultimate Form 906 itself; (iii) just a U.S. person certification of U.S. tax compliance.  I gather that each Swiss Bank, in consultation with its U.S. attorneys, are determining what is required and asking for it.

Often the letter requests are not straight-forward.  They do not simply advise the U.S. person that the Swiss Banks are trying to reduce their penalty exposure and would appreciate the U.S. person providing the proof the Swiss Banks feel they need.  Often the letters are shrouded in rhetoric about the Swiss banking system, how the U.S. persons should give the banks waivers of U.S. persons' secrecy rights under Swiss law to permit the inevitable disclosures to the IRS (whether waivers or given or not), and how the U.S. persons should waive all rights they have against the Swiss banks. I don't doubt that this extra verbiage is important to the Swiss Banks and that, even if not important, the Swiss Banks would appreciate U.S. persons waiving all rights they may have against the Swiss Banks.  But it is the height of hubris for Swiss Banks to seek such waivers and not be straight-forward in advising the U.S. persons that their real goal is seeking unilateral benefits from the U.S. person that the banks have no legal right to require.

Now, I focus not on the waiver of rights but on the request for affirmative documentation as to U.S. tax compliance so that the Swiss Banks can avoid penalties for their own misconduct.  Of course, U.S. persons are not required to give that documentation.

Credit Suisse Reports (5/6/14; 5/7/14)

Credit Suisse is reportedly in talks to pay well over $ 1 billion to resolve its woes with the U.S. DOJ regarding its offering of offshore accounts for U.S. tax evasion.  See Credit Suisse in Talks to Pay $1.6 Billion to Resolve US Tax Probe: Report (NDTV Profit, incorporating a Reuters report 5/6/14), here.  An excerpt:

Credit Suisse Group AG is in talks with the US Justice Department to pay as much as $1.6 billion to resolve an investigation into the bank's role in helping Americans evade US taxes, a person familiar with the matter said on Monday. 

The penalty could be roughly twice the amount paid by UBS AG, which settled similar charges in 2009 for $780 million and agreed to identify its customers. 

Prosecutors have also been pushing for Credit Suisse to plead guilty in connection with the probe, two people with knowledge of the talks said. 

The settlement talks are in progress, and the details are still being finalised. An agreement could come in the next few weeks, the sources said.

Some reading of the tea leaves regarding the negotiations are (Tom Schoenberg, David Voreacos and Elena Logutenkova, Credit Suisse Said Near U.S. Tax Deal for Over $1 Billion (Bloomberg 5/6/14), here):

Credit Suisse Group AG (CSGN) is close to resolving a U.S. tax-evasion probe with an agreement that might include a penalty of more than $1 billion, after creating a separate entity last year to house the businesses involved. 

The resolution of the investigation may also include a guilty plea, according to a person familiar with the talks who asked not to be identified because the matter is private. The new unit, CS International Advisors AG, was incorporated in December with a Swiss banking license. In February, Credit Suisse moved its U.S. cross-border business into the fully owned entity, according to records from the Commercial Register of the Canton of Zurich. 

The Justice Department, cracking down on foreign banks that help Americans cheat the Internal Revenue Service, may charge the unit instead of the whole firm, said Scott Michel, a tax lawyer at Caplin & Drysdale in Washington. Prosecutors, who must weigh economic consequences when taking action, have expressed concern about the potential fallout from charging big banks.
“It has the earmarks of a structural step that somebody has thought of to try to protect the bank as a whole in the event that a guilty plea is required,” Michel said. “I’ve had a couple of criminal tax cases over the years where the client created a corporate entity to enter a guilty plea.”

Addendum 5/6/14 1:15pm:  

See also Mark Hosenball and Aruna Viswanatha and Oliver Hirt, Credit Suisse in talks to pay $1.6 billion to resolve U.S. tax probe: source (Reuters 5/5/14), here.

The penalty would exceed the 895 million Swiss francs ($1 billion) that Credit Suisse has set aside to pay potential penalties to the United States. 

It's also much tougher than the settlement the Justice Department reached in 2009 with Credit Suisse's hometown rival UBS AG, which was also accused of helping Americans dodge taxes.
In that settlement, UBS paid $780 million to settle similar charges, roughly half the amount being discussed for Credit Suisse, even though the latter's offshore private banking business was much smaller than UBS's. 

Also, UBS was allowed to enter a deferred prosecution agreement and criminal charges were later dropped against the firm.

 The article also addresses how the anticipated resolution is factored into the CS market price and certain U.S. prosecution policy factors for entity misbehavior.

Addendum 5/7/14 8:15 am:

From Andrew Velarde, Credit Suisse Settlement Will Be Benchmark for Future Cases, 2014 TNT 88-2 (5/7/14):

Thierry Boitelle of Bonnard Lawson said that given the circumstances, confirmation of the penalty amounts would be good news for Credit Suisse and all category 1 Swiss banks. 

Under the DOJ's Swiss bank program, category 2 banks must agree to a penalty of 20 percent of the value of undisclosed accounts held by U.S. taxpayers. Boitelle cited Credit Suisse CEO Brady W. Dougan's admission to the Senate subcommittee that about $7 billion out of $10 billion to $12 billion of assets held at the bank by U.S. persons was undeclared, 20 percent of which would be $1.4 billion -- close to the $1.6 billion penalty the bank is reportedly facing. 

"So it would be as if [Credit Suisse] finds itself in the program under category 2 after all. That would certainly be a better than expected outcome for the bank," Boitelle said. 

* * * * 

Boitelle said that one big open question on the purported plea and settlement is the disclosure of the names of the account holders. 

"Apparently the Swiss Federal Council turned down [Credit Suisse's] request for a special emergency law allowing it to share a substantial number of names with the DOJ," Boitelle said. At the time of the UBS indictment, the council did issue an emergency decree to save UBS from prosecution, he said, adding, "According to Swiss media reports, the Federal Council doesn't want to do this again. So the million-dollar question to me is how [Credit Suisse] and the DOJ will deal with the request for the names of the account holders.

Third Circuit Court of Appeals Affirms Conviction Holding that the “Willful Blindness” Instruction was Proper (5/5/14)

This is a guest blog by Joseph DiRuzzo.  See the end of the blog for information on the author:

On April 30, 2014, the Philadelphia based U.S. Court of Appeals for the Third Circuit issued its precedential opinion in United States v. Tai, ___ F.3d ___, 2014 U.S. App. LEXIS 8129 (3d Cir. April 30, 2014), here. A copy of the Tai decision is available here.

Before filing an appeal with the Third Circuit, Tai was convicted for mail and wire fraud related to the “Fen-Phen Settlement Trust” which was created to compensate victims who underwent surgery for heart valve replacement or primary pulmonary hypertension (PPH) after taking Fen Phen. The trust was established by the U.S. District Court for the Eastern District of Pennsylvania to administer all claims and benefit payments to Fen Phen victims who registered as part of the Nationwide Class Action Settlement Agreement with American Home Products Corporation.

Individuals wishing to make claims were required to submit a physician’s report from a cardiologist and the Trust would review the documents to ensure that the claims were legitimate. Tai was one of the cardiologists hired to prepare reports in support of individuals claims.  Tai admitted that in about 10% of his cases, he drafted reports that he knew were incorrect.  When Tai’s reports were audited, a substantial number were not only clearly incorrect, but included measurements which were “inconsistent with a human adult heart.” Slip op. at 6.

Tai was charged with mail and wire fraud in violation of 18 U.S.C. sections 1341 and 1343; he was found guilty on all charges and sentenced to 6 years in prison.  Tai appealed his conviction arguing that, among other things, the jury instruction was “constitutionally infirm because it shifts the burden of proof to the defendant to disprove intent.”

As a threshold matter, because Tai did not raise his objection to the jury instruction at the trial level and thereby failed to preserve it, the Third Circuit employed a “plain error” test, which is a highly deferential standard of review. Under the “plain error” test, criminal defendants have the burden of establishing than any error was “plain” and he must show:  (1) an error; (2) that is plain; (3) that affects substantial rights; and (4) which seriously affects the fairness, integrity, or public reputation of judicial proceedings. Johnson v. United States, 520 U.S. 461, 466-67 (1997).

Regarding the instruction, the Third Circuit observed that a “willful blindness instruction is typically delivered in the context of explaining how the Government may sustain its burden to prove that a defendant acted knowingly in committing a charged offense.”  A jury instruction must track the applicable law, but District Court judges have substantial latitude in the actual wording of the jury instruction.  However, insofar as jury instructions related to the Fifth Amendment’s requirement that the Government prove its case beyond a reasonable doubt on each element of the offense, “a jury instruction violates due process if it fails to place squarely on the Government the full burden of proving beyond a reasonable doubt the required mental state for the offense.”  Slip op. at 10 citing Patterson v. New York, 432 U.S. 197, 204-07 (1977).

In other words, as Tai argued, shifting the burden of proof in a criminal case violates the Fifth Amendment and can often result in a conviction being overturned.  See Mullaney v. Wilbur, 421 U.S. 684, 703–04 (1975) (due process does not permit shifting the burden of proof to the defendant by the use of conclusive or burden-shifting presumptions); see also Boles Trucking v. United States, 77 F.3d 236, 241 (8th Cir. 1996)(discussing in a civil case that “it is reversible error to place the burden of proof on the wrong party or to place an unwarranted burden of proof on one party.” (internal quotations and citations omitted)). However, because the “willful blindness instruction then explicitly explained that ‘the Government may prove’ this element through evidence that established beyond a reasonable doubt that Tai ‘deliberately closed his eyes to what would otherwise have been obvious to him,’” (slip op. at 11), there was no impermissible burden shifting.  Ultimately, the Third Circuit concluded that the “instructions told the jury when willful blindness does or does not exist, but did not imply in any way that Tai must present evidence concerning his own beliefs or knowledge.” Accordingly, “there was no implicit or explicit shifting of the burden of proof to Tai.” Id.

The Tai case is instructive in criminal tax and Bank Secrecy Act cases to the extent that it addresses the willful blindness jury instructions which often arise in those cases.  Since the mens rea requirement requires that the Government prove that a criminal defendant had the culpable mental state, often the defense strategy will be along the lines of ignorance, negligence, incompetence, or lack of sophistication, but falling short of being criminal. In order to rebut this defense, the Government will typically attempt to introduce evidence that when a defendant “sticks his head in the sand” such deliberate acts – i.e., the willful blindness – cannot be used to escape criminal liability.  This essentially pits the criminal defendant’s subjective belief against the jury’s belief as to what was reasonable under the circumstances.

One other, special point is also worth mentioning. The Government may attempt to argue in “willful blindness” cases that the defendant’s actions were not objectively reasonable and hence the jury can conclude that the defendant intentionally intended to be willfully blind to the facts.  This subjective versus objective tension will often dictate the outcome of the case, but will almost always require a criminal defendant to take the stand in his defense to assert a Cheek defense. In Cheek v. United States, 498 U.S. 192 (1991), the Supreme Court established that a genuine, good faith belief that one is not violating the Federal tax law based on a misunderstanding caused by the complexity of the tax law is a valid defense to a charge of “willfulness,” even though the defendant’s belief is objectively irrational or unreasonable.

More often than not, willful blindness cases boil down to one question:  does the jury believe the defendant?

* * * * *

Guest blogger Joseph DiRuzzo is an attorney with the firm of Fuerst Ittleman David & Joseph, PL, in Miami, Florida.  His bio is here.