Wylys Ordered to Disgorge Hundreds of Millions of Tax Benefits With Interest (9/27/14)

Judge Shira Scheindlin, of SDNY, has ordered (see here) the Wyly brothers to pay 187.7 million plus interest over a long period in disgorgement of taxes on certain offshore trading activity.  See Joseph Axe and Nate Raymond, U.S. SEC wins hundreds of millions in Wyly fraud case (Reuters 9/25/14), here.  (For a previous post on this suit, see Wyly Brothers' Use and Tax Abuse of Offshore Banks and Entities (Federal Tax Crimes Blog 8/5/14), here; and SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (Federal Tax Crimes Blog 6/16/13), here.)

The suit was brought by the SEC (rather than by or on behalf of the IRS) under securities statutes authorizing disgorgement.  I post first a very brief summary of the Conclusions and then a cut and paste of the Conclusions.

JAT SUMMARY OF KEY POINTS:

1.  Ordering disgorgement does not violate the IRC's command that the Secretary assess and collect tax.

2.  This action for disgorgement, although measured by unpaid tax, is not an action to collect the tax; it is an action for disgorgement, "a discretionary and equitable remedy aimed at preventing unjust enrichment."

3.  The disgorgement equitably should be applied against any tax liabilities the IRS asserts.  Here a key quotes:

While it would be equitable to credit the amount disgorged in this SEC enforcement action towards any tax liability assessed in the future arising out of the same conduct, treating such amount as an offset does not transform the disgorged amount into a tax. 

* * * * 

As I mentioned earlier, any amounts disgorged in this case should be credited towards any subsequent tax liability determined in an IRS civil proceeding as a matter of equity. n205
   n205 In the event there is a judicial determination that contravenes the legal conclusions of this Opinion and Order — that is, if another court determines that the IOM Trusts are in fact, tax-exempt non-grantor trusts, defendants may pursue all available remedies in this Court, including a motion to vacate the final judgment under Rule 60(b) of the Federal Rules of Civil Procedure. But no such motion will be considered if the IRS, in exercising its discretion, chooses not to proceed with an administrative or civil action against the Wylys."

4.  The tax issues are not too difficult to resolve in a disgorgement case.

5.  The Court then determines the tax issues.  They are far too difficult to summarize here, but the details are included in the lengthy quote below.  But essentially the offshore structures were treated as grantor trusts with the tax consequences being visited contemporaneously on the Wylys.

More on Credit Suisse and the Larger SEC Issue for Some Swiss Banks (3/7/14)

I previously blogged on the Credit Suisse SEC fine.  Credit Suisse Take a Hit on U.S. Tax Evasion Business (Federal Tax Crimes Blog 2/21/14), here.  The Wall Street Journal has a good more recent article: Joel Schedman, Broker Dealer Rules Have Teeth Against Swiss Banks (WSJ World 3/6/14), here.  Some f the opening excerpts to get your interest:

Despite stories of unmarked elevators and secret wire transfers, the most damaging charge against Credit Suisse Group AG has been comparatively mundane: as it courted Americans for offshore accounts, the bank failed to register its bankers with the Securities and Exchange Commission. 

Credit Suisse Group AG bankers courted American tax evaders, between 2002 and 2008, schooling them in how to do an end-run around the Internal Revenue Service and hide behind Swiss secrecy rules, according to a 181-page report from the Senate’s Permanent Subcommittee on Investigations. Beyond just offering American clients undeclared Swiss accounts, Credit Suisse bankers helped set up “shell entities” to “mask their U.S. ownership.” The bankers also offered helpful tips in hiding financial activity, like keeping transactions below a certain dollar amount to avoid triggering greater scrutiny, according to the report. 

Credit Suisse acknowledges the “misconduct, centered on a small group of Swiss-based private bankers, previously occurred at our bank,” according to the bank’s statement submitted to the subcommittee. Bank officials “deeply regret these employees’ actions.” Since 2008, after the allegations came to light, Credit Suisse, “took proactive and decisive steps to ensure that only U.S. clients who established compliance with U.S. tax laws could remain at the Bank,” according to the statement. The bank says it shut down the unit responsible for in 2009. 

Despite the color of the alleged tax evasion, the most painful charge against the bank has been less sexy: As bankers recruited American clients, they failed to register with the SEC. Credit Suisse agreed to pay the SEC $196 million over those charges last month, in a case that bore a striking resemblance to the allegations against another Swiss bank, UBS AG. “It’s Deja Vu all over again,” said John C. Coffee, a professor at Columbia Law School.

Credit Suisse Take a Hit on U.S. Tax Evasion Business (2/21/14)

See Credit Suisse to Pay $197 Million in SEC U.S. Client Case (Bloomberg 2/21/14), here.  Excerpts:

Credit Suisse Group AG (CS) agreed to pay $197 million to regulators and admitted servicing thousands of U.S. clients without approval, leaving unsettled a criminal probe of whether it helped Americans evade taxes. 

Credit Suisse, the second-biggest Swiss bank, never registered a cross-border securities business that served 8,500 client accounts between 2002 and 2008 and collected $82 million in fees, according to a settlement today with the U.S. Securities and Exchange Commission. The accounts were valued at about $5.6 billion in 2008. 

* * * * 

Credit Suisse’s advisory and brokerage services began as early as 2002 and involved more than 107 trips to the U.S. by relationship managers. The bank was aware of the registration requirement, though the procedures it had to prevent violations weren’t properly implemented and monitored, according to the SEC. 

Credit Suisse was slow to implement rules that would have forced its bankers to follow local laws, according to the SEC. 

After some bankers were arrested in Brazil in 2006, including the head of private banking in the country, Credit Suisse started a project it called “Cross-Border+.” The head of the bank’s Switzerland-based group that handled American accounts complained that the proposed rules were too strict. 

‘No Air Left’ 

“People have no air left to breathe,” he complained to his boss in 2007, according to the SEC. “The latest changes will make this business impossible.” 

When Credit Suisse’s auditors looked into the handling of U.S. accounts in 2006, some bankers altered reports to take out references to American trips that broke securities laws, the SEC said. The auditors dropped some preliminary findings of cross-border issues from their final report. 

Credit Suisse didn’t begin taking steps to end the business until October 2008, after probes into similar conduct by UBS had been publicized, the SEC said. The majority of U.S. client accounts were closed or transferred by 2010 though the bank still held an average total of about $34 million in American client accounts by mid-2013, according to the SEC.