Friday, October 23, 2020

Private Equity Guru Smith Got a Hell of a Deal (10/23/20)

Today, the Wall Street Journal published what, I understand, is called an “explainer” about the Brockman indictment and the Smith nonprosecution agreement (“NPA”).  See Laura Saunders The IRS Reels in a Whale of an Offshore Tax Cheat—and Goes for Another (WSJ 10/23/20), here.  I previously wrote on these events.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20), here.  

The WSJ article provides a good bullet point high-level summary of the events.  I write today to provide some nuance to a sound bite quote that I gave for the article.  The quote, at the end, is:  "Jack Townsend, a lawyer who publishes the Federal Tax Crimes blog, says, 'He got a hell of a deal, considering what he did.'"

My statement was based only on the publicly disclosed facts in the NPA and the Statement of Facts (Exhibit A) with the NPA, which are here and here, respectively.  Those publicly disclosed facts may not tell the whole story as to why Smith achieved an NPA rather than some other disposition (I discuss some possible other dispositions below.)  

Just on those facts, Smith’s deal is exceptionally good for him.  He committed years of tax evasion, then attempted to do a Streamlined disclosure (after being rejected from OVDP) where he had to certify nonwillfulness and submit amended returns and delinquent or amended FBARs which he did and which were false.  That pattern, particularly, the second step Streamlined disclosure was just incredibly stupid.  If he had done only the OVDP and been accepted into OVDP, he likely would have avoided prosecution if his OVDP submissions and cooperation were truthful and complete.  Two caveats on that, however: (i) OVDP did not “guarantee” nonprosecution but, as a practical matter it would if the disclosure and cooperation were good (I am not aware of any prosecution of an OVDP participant whose cooperation was truthful and complete); and (ii) his behavior on the subsequent Streamlined suggest at least that his amended return and delinquent or amended FBAR submissions in the posited counterfactual OVDP if it had gotten that far likely would not have been truthful and thus would not have resulted in the key relief generally offered by OVDP – nonprosecution.

What I address today is why, given the facts in the NPA and Statement of Facts, DOJ would have given Smith an NPA for such egregious behavior (by which I don’t mean just the dollars involved, but more importantly his overall behavior to cheat and avoid getting caught with continued lies).

The Statement of Facts and the NPA do not really address that issue, except that in the press release his cooperation was emphasized.  I presume that the cooperation is not only the cooperation in exposing his own criminal conduct but more importantly in indicting and prosecuting Brockman.  So, this raises some speculations / questions.

1. Did Smith get an NPA because the Government did not have the necessary proof to convict Smith and the NPA was the best the Government could do, particularly if it helped nail a bigger fish?  In other words, the facts in the Statement of Facts could have been provable only after Smith’s cooperation after his lawyers negotiated the commitment for an NPA.  Hence, rather than indicting Smith with a weak case, the Government might have been motivated to grant the NPA in order to get his cooperation against Brockman as well as obtain the monetary benefits accorded by the NPA.  That’s a matter of what each party’s hand was as they negotiated Smith’s disposition.  I just don’t know that.

2. Did Smith get an NPA because his testimony would be critical to the Brockman prosecution?  In other words, if the Government stood a substantial chance of either not getting an indictment against Brockman (not likely) or suffering a not guilty verdict against Brockman without the Smith testimony, that could be a reason to give Smith a substantial benefit.  Substantial benefits for such testimony can take several forms.  Often for one with as egregious conduct as Smith committed, the benefit of cooperation would take the form of a guilty plea to a one or two felony crimes (perhaps tax perjury, § 7206(1), a three-year felony or tax evasion, § 7201, a five-year felony.  (Whatever the plea, it would be accompanied by payment of tax, penalties and interest and FBAR civil willful penalties.)  If one count, then Smith’s incarceration would be max of 3 or 5 years, respectively, and, with substantial cooperation, the Government could agree to recommend substantial reduction, perhaps no incarceration and minimum probation.  (Readers will remember that Ty Warner whose conduct, in my judgment, was not nearly as egregious as Smith’s pled to one count of tax evasion and got no incarceration, although over the objection of the Government; the point though is that he had to plead to one criminal felony count; of course, Warner did not have a bigger fish to deliver up.)

3. Could Smith have turned on Brockman by identifying Brockman before the Government was onto Brockman?  If that were the case, that might explain why the Government was so warm and fuzzy with Smith.  (And, amazingly, had Smith done that Smith might not only have saved his own skin, he might even be entitled to a substantial whistleblower reward on collected proceeds from Brockman; keep in mind that, so far as the known facts, Smith was not a material participant in Brockman’s crimes.)

I could go on asking questions and speculating as to answers.  I would hope that, given the unusual known facts, at some time in the future DOJ will give a fuller reckoning of its decision-making process on NPAs.  In the meantime, however, I wonder whether the Smith deal might be interpreted -- correctly or incorrectly -- as an indication that DOJ is receptive now to such sweetheart deals where I don't think it has been in the past.  But, to get back to my quote from the WSJ, on the facts I know from the NPA and the Statement of Facts, Smith got a hell  of a deal for really, really corrupt behavior.

One side comment:

I want to go back to the Streamlined submission which required a nonwillful certification.  The Statement of Facts establishes that the certification was willfully false and the returns and FBARs submitted with the Streamlined submission were false.  In the event Smith had lawyers on the Streamlined submission, one would hope that they did not know the facts, meaning that Smith lied to the lawyers.  I have previously written about lying to the lawyers who then submit false documents to the IRS: Second Circuit Affirms Application of Crime-Fraud Exception to the Attorney-Client Privilege (10/10/15; 5/24/16),  here; and Update on the Zukerman Indictment - Potential Waivable Conflicts of Interest of Advocate as Witness (5/28/16; 6/21/16), here,

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