Deutsche Bank Settles Liability for Enabling Bullshit Tax Shelter -- A Midco Variation (1/5/17)

I previously reported on one of Deutsche Bank's bullshit tax shelter adventures.  Deutsche Bank's Amazing Magnificent Adventure -- Again -- into the Land of Bullshit Tax Shelters (Federal Tax Crimes Blog 10/3/15), here.  That blog reported on Judge Kaplan's rejection of DB's motion to dismiss the case filed by the Government with respect to the bullshit tax shelter -- a variation on the Midco shelter theme.  The case has now been resolved.  See Settlement and Dismissal Order here.  The key facts, which DB admits in the settlement document, are covered in the prior blog, so I won't repeat them here.  Suffice it to say that DB admits that it participated knowingly in a scheme to avoid payment of taxes.

The settlement requires DB to pay $95 million.  The settlement does not state how that figure was derived.  I could speculate but I suspect there would be a high chance that my speculation would be misfocused.

The agreement says that the following claims of the U.S. are not released:

a.  Any claim for conduct other than the Covered Conduct.

b.  "Any criminal liability."

c.  A broad swath of potential liability in a paragraph that I am not sure I understand the full scope of (so I quote that paragraph, ¶ 5.c.):

Except as expressly stated in this Stipulation, any administrative liability (other than (i) the collection, assessment, or adjustment of any income tax,  including any interest thereon and any penalties for failure to report or failure to pay such income tax, arising from the Covered Conduct and (ii) BMY's unpaid tax liability, including any interest thereon and any penalties for failure to report or failure to pay such income tax, resulting from the sale of the Bristol-Myers shares), including the suspension and debarment rights of any federal agency;

The settlement further states (¶ 7):

7. Deutsche Bank waives and will not assert any defenses it may have to any criminal prosecution or administrative action relating to the Covered Conduct that may be based in whole or in part on a contention that, under the Double Jeopardy Clause in the Fifth Amendment of the United States Constitution, or  under the Excessive Fines Clause in the Eighth Amendment of the United States Constitution, this Stipulation bars a remedy sought in such criminal prosecution or administrative action.

JAT Comments:

Deutsche Bank's Amazing Magnificent Adventure -- Again -- into the Land of Bullshit Tax Shelters (10/3/15)

In United States v. Deutsche Bank, 2015 U.S. Dist. LEXIS 134367 (SD NY 2015), here, Judge Kaplan of SDNY denies Deutsche Bank's motion to dismiss the United States' suit against Deutsche Bank and others arising from what appears to be a bullshit tax shelter gambit from 2000.  Judge Kaplan introduces the context as follows:

The United States brings this action on state law fraudulent conveyance and unjust enrichment theories to recover over $190 million in unpaid tax, penalties and interest allegedly owed by Deutsche Bank A.G. and affiliates (collectively, "DB"). Broadly speaking, it claims that DB in 2000 conducted a series of transactions with the purpose and effect of leaving a special purpose vehicle owing tends of millions of dollars of federal taxes that it was unable to pay while DB profited as a result of the non-payment of the taxes. DB moves to dismiss the complaint on the theory that it is barred by the New York statute of limitations, fails to state a legally sufficient claim, and fails to allege fraud with the particularity required by Fed. R. Civ. P. 9(b). In the alternative, it seeks to limit the government's recovery.

Just for background, this general introduction is reminiscent of the wave of Midco transactions that proliferated in the 1990s and early 2000s.  In those transactions, one or more shareholders in a corporation having substantial built-in gain in assets would have shares that were worth only the value the corporate assets less all liabilities, including the tax on the expected tax on the built-in gain.  Some buyer would buy the stock from the selling shareholders, paying them more than that value.  The buyer could pay more because, supposedly, it had some way to eliminate or mitigate the gain, thus avoiding the corporate level tax.  In effect, to the extent of the excess price paid the selling shareholders, the buyer and the selling shareholders would share the tax benefit of eliminating or mitigating the tax.  The problem in the abusive transactions was that the elimination or mitigation of the tax did not work (often because the buyer sought to eliminate the gain with bullshit tax shelters or some other similar bullshit mechanism).  The IRS and the citizens of the U.S. were left holding the bag with, so the schemers hoped and, in many cases, I am sure, prayed, nowhere to collect the tax. The Midco transactions were structured variously, often with an attempt to obscure the skulldugggery, but that was the essence.

Judge Kaplan makes short shrift of Deutsche Bank's attempt to avoid justice in this case.  But, I would like in the balance of this blog entry to deal with the Midco-like quality of the transactions based on the allegations in the U.S. complaint, here,  Here is the Introduction from the complaint.

Deutsche Bank Swiss Unit Joined DOJ Program as Category 2 Bank (10/10/14)

John Letzing and EYK Henning, Deutsche Bank to Aid U.S. Justice Department in Swiss Tax Evasion Probe (WSJ Markets 10/9/14), here.  Excerpts:

Deutsche Bank AG’s Swiss unit has entered a U.S. Justice Department self-reporting program for banks that believe they may have helped Americans evade taxes, according to people familiar with the matter. 

* * * * 

Deutsche Bank’s Swiss business has around 13,000 clients in total, though the number of U.S. clients is insignificant, a person familiar with the matter said.  

* * * * 

The Justice Department’s self-reporting program for Swiss banks represents the culmination of a years-long U.S. legal crackdown. The first non-prosecution agreements for banks participating in the program could be announced as soon as the end of this year, according to attorneys and experts. 

Some banks in the self-reporting program have found the process to be trying, people familiar with the matter said. 

For instance, banks must try to get current and former clients to waive their right to privacy under Swiss law, so that they can identify those clients to U.S. authorities as having disclosed their accounts. Amounts voluntarily disclosed by these clients can be subtracted from a bank’s penalty, according to the program’s rules. 

The savings could be substantial. Some banks in the program could see hundreds of millions of dollars shaved from their total penalties, according to people familiar with the matter. But many disgruntled clients have been unwilling to provide the necessary paperwork, these people say.

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.

Prosecuting the Banks: Does the U.S. Prefer Foreign Banks to U.S. Banks? (1/4/14)

There have been some commenters on this blog who complain about the Government's mistreatment of Swiss banks, all the while American banks are not prosecuted.

Today's news reports that JP Morgan Chase -- a very big and powerful U.S. bank -- has agreed to a deferred prosecution agreement and penalties of $1.7 billion with more to come from a civil case by regulators.  Ben Protess and Jessica Silver-Greenberg, JPMorgan Settles With Federal Authorities in Madoff Case (NYT DealBook 1/7/14), here.

The circumstances are not the same, of course, because the conduct which led to this agreement involved U.S. players, including JP Morgan Chase, and the conduct or nonconduct occurred in the U.S.  But it does establish some key points:

1.  The mighty banks in the U.S. are at risk.  The DealBook article also notes

In November, JPMorgan paid a record $13 billion to the Justice Department and other authorities over its sale of questionable mortgage securities in the lead-up to the financial crisis.

2.  JP Morgan takes the hit in these cases because, at a minimum, it did not smell the rat that was waived before its nose.

In addition, in the fraudulent tax shelter boom times in the late, for some reason it was the foreign banks who were the prominent enablers of the fraudulent / bullshit shelters.  Some of those foreign banks were similarly prosecuted.  See Another Chapter Closes in the Tax Shelter Wars - Deutsche Bank Admits Crimes and Takes $553,633,153 Hit (Federal Tax Crimes Blog 11/22/10), here, and HVB Cops Plea in KPMG Tax Shelter Fraud (Tax Prof Blog 2/15/06), here.  See also Dutch Bank Funded U.S. Tax Shelters: Rabobank Supplied Cash for Structures Under Investigation (WSJ 5/2/13), here.  (I think the supplied cash is a bit of an overstatement; usually they supplied bookkeeping entries only.)

Why is it that foreign banks -- not just Swiss banks -- imagine that they are entitled to enable U.S. tax evasion with impunity?  Why do they complain when they are called on the carpet for doing so?

I think it is for the same reason that JP Morgan has seen its brand tarnished for the same reason.  Why ask questions when you are making money.  See What Motivates the White Collar Criminal? (Federal Tax Crimes Blog 1/7/14), here.

Investigative Journalists Report on the Maze of Offshore Accounts as Global Problem (4/4/13)

Earlier today, a reader pointed me to a report that had gained currently overseas but apparently not in the U.S.  The link is an investigative journalism report by the International Consortium of Investigative Journalists titled Secrecy for Sale: Inside the Global Offshore Money Maze, here.  I just noticed that the New York Times and, presumably, other news organizations will pick up the story.  The New York Times story is Rick Gladstone, Vast Hidden Wealth Revealed in Leaked Records (NYT 4/4/13), here.

Excerpts from the NYT Article :

An enormous leak of confidential financial records has revealed the identities of thousands of wealthy depositors — including European officials and corporate executives, Asian dictators and their children, and even American doctors and dentists — who have stashed immense amounts of money in offshore tax havens. 

The leak of records, mainly from the British Virgin Islands, the Cook Islands and Singapore, covers 2.5 million files that disclose proprietary information about more than 120,000 offshore companies and trusts and nearly 130,000 individuals and agents, including the wealthiest people in more than 170 countries. 

* * * * 

The International Consortium of Investigative Journalists, a network of reporters that obtained the secret records, collaborated with The Guardian, Asahi Shimbun, Le Monde, The Washington Post and more than 40 other news organizations to untangle and report their contents. 

The project, titled “Secrecy for Sale,” appeared to have the potential to create political shock waves, particularly in Europe, where an economic malaise caused by the euro zone debt crisis has created enormous popular resentment toward austerity policies and widened the gap between rich and poor. The project said some of the world’s top banks in Europe, including UBS and Deutsche Bank, had “aggressively worked to provide their customers with secrecy-cloaked companies in the British Virgin Islands and other offshore hideaways.”