Friday, July 15, 2022

Update Information from Kepke Prosecution (7/15/22)

I have posted before on the indictment of Carlos Kepke, a Houston tax attorney who, according to the allegations, assisted clients (including Brockman and Smith) set up offshore structures for tax evasion. See here. There is an excellent recent article on Kepke and various points in the trajectory (including sting operations) of his investigation Neil Weinberg & David Voreacos, The Sting That Snagged the Tax Lawyer to a Pair of Billionaires (BloombergLaw 7/12/22), here (subscription required). 

Much of the information in the article appears to be from the affidavit in support of the search warrant obtained for Kepke’s office/residence. That search warrant affidavit has been filed in Kepke’s criminal case. United States v. Kepke (N.D. Cal. No. 3:21-cr-00155). The docket entries and documents in the case are available on PACER (requires subscription and fee to download), but the docket entries and many documents are free on CourtListener. The CL docket entries are hereThe docket entry for the search warrant affidavit is 44, Attachment 3. The affidavit is here.

I found the affidavit to be great reading. I am particularly interested in the Kepke prosecution because I was formerly (1977-198) an associate in a law firm in Houston where Kepke was a partner. Kepke was doing the same type of stuff described in the affidavit then. I did not do anything with Kepke while with the firm except, on two occasions, to bring foreign tax questions to him because he was the firm’s foreign tax “expert.”  I found that on those occasions, his foreign tax advice was incorrect when I checked it further on my own. (On the most egregious occasion, Kepke who had a high billing rate (higher than his level of competence in my opinion based on two anecdotal instances) grossly inflated his claimed time spent by a multiple of 8 (Kepke always had huge monthly "billable" hours although not spending that much time at the firm); I convinced the billing partner to write off Kepke’s overstated claim of time (at exorbitant rate) spent giving me the incorrect advice.)  In any event, through some serendippity, I did review some documents from Kepke's practice regarding offshore strategies. He was doing then the same genre of structuring as described in the affidavits.

I won’t try to summarize all in the affidavit, but will just offer some items that I found particularly interesting that may be of interest to others:

Smith was identified through a bank disclosure in the DOJ Swiss Bank Program. Aff. 6-7, 13.)  DOJ Tax forwarded the Smith information to IRS CI, whereupon IRS CI recommended that the DOJ Tax authorize a grand jury investigation of Smith. (Aff. 7, ¶ 14). (Apparently there were Forms 211 filed for a whistleblower award with respect to Smith, but I don’t know the relationship of the Forms 211 information to the ultimate major recoveries from Smith.)  Kepke was implicated through the Smith investigation. 

Further, IRS CI investigated (including a sting operation) of Kepke in the late 1990s and got pretty damning information. (Aff. 10-14, ¶¶ 20-32.)  Included in the damning information was Kepke’s personal use of an offshore structure which appeared to be the type used for Brockman and Smith. Kepke had income-producing assets in the foreign structure. On his tax returns, Kepke reported no interest or capital gains from the foreign structure.

Using information from the civil examination preceding the 1990s referral to IRS CI, the IRS CI agent reviewed client invoices for 102 clients in 1995 and 1996 and identified 20 clients with returns compatible with offshore  structuring. (Aff. 14-15, ¶ 33.)

For some reason not apparent in the affidavit, after the 1999 IRS CI investigation, IRS CI did not refer Kepke to DOJ Tax for criminal prosecution.

In 1995, Kepke obtained a bankruptcy Title 11 discharge of $1.5 million in tax, penalties and interest. (Aff. 13. ¶27.)

In 2009, Two of Kepke’s clients, Roy and Ron Whitley, entered OVDP and gave information about Kepke. (Aff. 71-72, ¶¶ 151-153). It is not clear why IRS CI did not investigate Kepke at the time. (By contrast, I had a client that joined OVDP and, at least in due course, the lawyer enabling the tax evasion was prosecuted.)

In March 2014, Smith attempted to enter the OVDP. (Aff. 49-52  ¶¶ 103-106.) In April 2014, Smith was denied preclearance. Smith then attempted a Streamlined disclosure which certified his nonwillfulness, was incomplete as to substantial income, and said that he did not rely on a professional advisor regarding failure to timely report his income. (Editorial comment: Smith made some very stupid moves, but his Streamlined disclosure has to be one of the worst; I still don’t understand how he evaded/avoided prosecution.)

In 2017, IRS CI initiated a second sting operation. Aff. 15-33, ¶¶ 34-58. In that operation, Kepke made many damning admissions. One thing Kepke did to try to impress with his expertise and experience was to relate client information (although usually not identifying the clients except in one case a first nickname). I think that probably violated client confidentiality rules (both state and perhaps even § 7216), but I suspect that Kepke may not have been particularly concerned about that.

I have to stop here because I have spent all the time on this than I have available. Those interested can mine the Affidavit for further details.

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