The Kepke (Brockman and Smith Lawyer Enabler) Prosecution - Developments (10/27/22)

Regular readers know that I have posted several times on the criminal prosecution of Carlos E. Kepke, a Houston attorney who was allegedly the enabler for two alleged massive tax evasion (and related crime) tax schemes involving offshore trusts. Readers will recall that Brockman died before his criminal case went to trial, and Smith achieved an NPA requiring him to testify in the Kepke prosecution. By order dated 10/20/22 (CL here), Judge Donato addressed certain pending motions. The ones that I thought might be interesting to readers are: 

For Dkt. No. 61, defendant’s disclosures for expert witness Rodney Read did not adequately state the bases and reasons for his proposed opinion testimony under Fed. R. Crim. P. 16(b)(1)(C). See Dkt. Nos. 61-1, 61-2, 61-3. In lieu of excluding  Read as a witness, and with the government’s agreement, defendant will have an opportunity to disclose by October 28, 2022, the bases and reasons for each of the following opinions:

 • Foreign asset protection trusts and foreign non-grantor trusts are valid and legal trust entities.

• It is not uncommon to establish a trust in a foreign jurisdiction that has a lower income tax rate than the United States in contemplation of potential United States income tax reduction or deferral.

• There are no legal prohibitions against appointing a beneficiary as the trust protector, which may include the power to remove and replace the trustee of a foreign trust. This arrangement does not necessarily affect the non-grantor status of the foreign trust.

• Foreign and domestic trustees alike owe a fiduciary responsibility to beneficiaries to ensure trust assets are being used exclusively for the benefit of a trust’s beneficiaries and acting within the restrictions and limitations set forth in the trust documents.

Aegis Convictions Affirmed Installment #3 - the Cheek Defense (9/30/12)

This is installment #3 of the discussion of United States v. Vallone, et al., 698 F.3d 416 (7th Cir. 2012), here.  Vallone affirmed the convictions of the promoters of a widely marketed fraudulent trust scheme.

As is typical in tax crimes cases, a key defense in Vallone is that the defendants did not subjectively know that they were violating a legal duty and therefore did not meet the element of willfulness as defined in a series of Supreme Court cases culminating in Cheek v. United States, 498 U.S. 192 (1991).  Ultimately, a finding of willfulness absent a confession from a defendant requires that the jury infer beyond a reasonable doubt from the facts and ambiance of the proof at trial that the defendant had the requisite intent to commit the crime.  In may tax crimes cases, willfulness is the only seriously disputed element of the crime.  For example, tax evasion (Section 7201) has three elements -- willfulness, a tax due and owing and an affirmative act in furtherance of the evasion.  Often, the Government can prove the latter two, so although all elements are submitted to the jury, the real dispute is over  willfulness.  The same is true or the other tax crimes which all require willfulness or something equivalent to willfulness.

In Vallone, the trial judge held that the defendants could not put on evidence that the schemes were legal.  That issue had been litigated several times in the Seventh Circuit and other courts and, besides, the trial judge determines the law.  The trial judge said in precluding that type of evidence:

You cannot argue to the jury that Aegis was a lawful plan and therefore because it was or is lawful that somehow the defendants are not guilty in this case. You certainly can require the government to prove that each defendant may be convicted of tax offenses only if he knows that the code requires him to pay. That's the government's burden here, they must show that the actions were willful, that they were done with knowledge, and the government concedes that. But you will not be permitted to reargue the lawfulness of the Aegis plan itself.

The defendants claimed that this decision of the trial judge precluding evidence that the schemes were legal undermined their Cheek defense.   The Court of Appeals rejected the argument: