The Daugerdas Indictment - Part #1 - the Players (6/11/09)

OK, I've finally gotten around to discussing the Daugerdas indictment. I will have several installments, so I start by making the raw material available -- the indictment itself. A pdf of the indictment can be downloaded from the Tax Prof Blog here. I have OCRd the indictment into a PDF (making it easier for searching) here, although I caution that the OCRing may not be perfect. Other convenient links are: (i) the USAO SDNY press release here; (ii) Taxing Matters Blog (with some moralizing) here; (iii) a Bloomberg article here.

I don't have a final outline of the installments, but here is a tentative outline is.

#1 The Players
#2 Follow the Money
#3 The Shelters - the Technical Superstructure
#4 The Shelters - Economic Substance - the Lie
#5 The Really Ugly

Let me caution my readers that, outside the indictment and a few articles I have read, I have no knowledge of the facts underlying this indictment. My comments will be based principally on the indictment itself, filtered through my 4+ year experience living with this genre of indictment as lawyer for one of the individuals in the KPMG indictment.

Now, lets look at the Players. A scheme as pervasive as alleged in the indictment has lots and lots of players and enablers -- (i) rich taxpayers seeking too-good-to-be-true tax shelter and willing to pay handsomely for the opportunity to play the tax lottery with, they thought, no risk of a penalty because they "relied" upon the enablers (the taxpayers were the sine qua non; without them and the money they were willing to pay the enablers, these schemes would not get off the ground); and (ii) a bevy of enablers, including (a) lawyers blessing the shelters with their more-likely-than-not opinions, (b) those lawyers' law firms who enabled those lawyers; (c) accounting firm personnel (some CPAs and some lawyers) also willing to render some form of advice or otherwise perform necessary functions in the sales and implementation process; (d) the accounting firms that enabled those accounting firm personnel; (e) financial firm personnel who implemented investment strategies designed to implement the structure and at least give the appearance of profit potential; and (f) the financial firms enabling those financial firm personnel.

THE INDICTED

Here is the list of the indicted players (there were more players; this is just a list of those indicted). This comes from the USAO SDNY press release here, although I add some comments of my own in brackets introduced by JAT:

• PAUL M. DAUGERDAS, 58, of Wilmette, Illinois, a lawyer, was the former head of J&G's Chicago office and its tax practice. DAUGERDAS is a certified public accountant who previously served as a tax partner at Arthur Andersen LLP and head of the tax department at the Chicago law firm Altheimer & Gray ("A&G"). [JAT: Daugerdas was the ring-leader among the enablers, hence he gets top billing on the indictment; I suspect the case will be forever referred to as the Daugerdas tax shelter case or some variation of that description. The indictment alleges that, in addition to designing, marketing and implementing tax shelters to others, Daugerdas used the tax shelters to shelter his own income. Daugerdas, of course, brought down the firm of Jenkens & Gilchrist ("J&G") which incident to its demise reached a nonprosecution agreement with the Government for these shelters and paid (or at least became liable for) millions to the shelter investors and the Government.]

• ERWIN MAYER, 45, of Winnetka, Illinois, a lawyer, was a shareholder at J&G's Chicago office in its tax practice. MAYER is an accountant who previously served as a tax partner in A&G's Chicago office.

• DONNA GUERIN, 48, of Elmhurst, Illinois, a lawyer, was a shareholder at J&G's Chicago office in its tax practice. GUERIN is a certified public accountant who previously served as a tax partner in A&G's Chicago office.

• DENIS FIELD, 51, of Naples, Florida, is the former Chief Executive Officer and Chairman of the Board of BDO Seidman, former head of its national tax practice, and one of three heads of BDO's "Tax Solutions Group," which handled all aspects of BDO's tax shelter practice. FIELD is a certified public accountant and an attorney, with an LLM in taxation.

• ROBERT GREISMAN, 48, of Deerfield, Illinois, was a tax partner in BDO's Chicago office and a member of BDO's Tax Solutions Group. GREISMAN is a certified public accountant and an attorney.

• RAYMOND CRAIG BRUBAKER, 53, of Plano, Texas, is a former investment representative at Bank A's Dallas office. BRUBAKER, who is a certified public accountant and an attorney, previously served as a tax partner in Arthur Andersen's Dallas office.

• DAVID PARSE, 47, of Elmhurst, Illinois, is a former investment representative at Bank A's Chicago office. PARSE is a certified public accountant.

OTHERS NAMED IN THE INDICTMENT

I now list all of the other individuals or firms mentioned in the indictment with a brief explanation of their alleged roles. I am listing in alphabetical order, with individuals listed in alphabetical order of their last names. Some of these are identified cryptically - e.g., Bank A or Individual A. Where I can, I identify these persons.

• Accounting Firm A - a national accounting firm with an office in Chicago mentioned in paragraphs. The firm prepared tax returns related to the shelters. The suggestion is that the firm or some of its personnel prepared returns reporting the fraudulent shelter transactions, in some cases doing so after the taxpayer's regular accountants refused to prepare or sign returns claiming the purported tax shelter benefits. The firm was a referral source to Daugerdas and crew and may have received "referral fees," directly or indirectly, from J&G or the indicted J&G personnel.

• Altheimer & Gray ("A&G") -- This is the Chicago law firm that Daugerdas joined after he left Arthur Andersen LLP (see below) and before he joined Jenkens & Gilchrist. Daugerdas and his crew promoted tax shelters with A&G. Daugerdas appears to have been the principal beneficiary of the profits of the tax shelter promotions while with A&G but I infer the other partners of A&G appear to have receive some of the profits.

• Arthur Andersen LLP ("AA") -- readers surely know that AA was the big accounting firm that went down for financial statement and related obstruction escapades with respect to its Enron engagement. AA was not directly involved in the shelters alleged in this indictment, but Daugerdas and some others involved came from AA which, as the Enron episode establishes, was subject to economic pressure that made it vulnerable to bending to client wishes for favorable financial reporting. Responding to similar economic pressure -- perhaps more properly characterized as greed -- individuals within AA's tax section developed aggressive and abusive income tax shelters and hawked those tax shelters to Enron and others. (I don't mean to suggest that this behavior was consistent with AA's culture and general practice and, in fact, do not believe that it was; I only suggest that some within AA did this.) While at AA, Daugerdas "designed, marketed and implemented" one of the types of shelter involved in the indictment (the so-called Short Sale tax shelter). (See Indictment paragraph ¶ 26.) Daugerdas moved his aggressive schemes and mindset from AA to A&G and then to J&G. So, AA's key role is in the run up to the principal events charged in the indictment.

• Bank A - Bank A is Deutsche Bank. Bank A implemented some of the financial transactions that were key to the cosmetics of the shelters. Indicted defendants Brubaker and Parse were associated with Bank A or its related party, Investment Banking Firm A. Deutsche Bank was significantly involved in at least the major shelter -- BLIPS -- involved in the KPMG case. The expectation for some years has been that DB will reach some type of agreement with the Government (perhaps a nonprosecution or deferred prosecution agreement) that will require DB to pay a lot of money to the Government.

• Bank B - Bank B is Bank One. Bank B was involved with the so-called HOMER tax shelter. Ohle (see below) worked for Bank B.

• BDO Outside Law Firm A - a major international law firm, with offices in New York and Washington, although the indictment does not cast aspersions on this law firm's actions.

• BDO Seidman ("BDO") - BDO is mentioned all over the indictment. According to the indictment, its personnel at the highest levels were involved in the Daugerdas tax shelter machine. The indictment alleges that "BDO entered into an alliance with J&G, pursuant to which BDO assisted in the design, marketing, and implementation of certain J &G tax shelters to BDO's clients and potential clients, acted as a referral source for clients to purchase certain J&G tax shelters, and prepared certain of the income tax returns reporting the tax benefits of the tax shelters." The money was good for BDO and its partners involved in the shelters. Some of the BDO partners or principals have already pled guilty.

• Charles W. Bee - Former BDO Seidman Vice Chairman and board member. He pleaded guilty on June 3, 2009, to related charges of conspiracy to defraud the IRS, tax evasion, and perjury.

• Adrian Dicker - Former Vice Chairman of BDO Seidman and TSG member. He pleaded guilty on March 17, 2009, to related conspiracy and tax evasion charges.

• Individual A - a co-conspirator not named as a defendant herein, a childhood friend of John Ohle, enlisted by Ohle to appear as an unrelated third-party "buyer" of certain assets in one of the tax shelters (the HOMER shelter).

• Individual B - at Accounting Firm A, to whom J&G referred tax shelter clients for return preparation.

• Investment Banking Firm A - a firm that was acquired sometime in the relevant years by Bank A. Sometimes in the indictment, this firm is included under the term Bank A.

• Jenkens & Gilchrist ("J&G") - J&G is the law firm of Jenkens & Gilchrist, in which Daugerdas became a partner in 1998. As noted above in the Daugerdas discussion, J&G went down as a result of its connection with Daugerdas' activity. I will perhaps have a subsequent blog on Jenkens & Gilchrist as Daugerdas' enabler; suffice it to say now that its demise was well deserved even though a lot of good, blameless people in the firm were seriously hurt; it was a systemic and major failure of J&G leadership that itself was nothing more than greed (plenty of greed to go around in this tragedy).

• Michael Kerekes - a principal of BDO Seidman and a former member of BDO's TSG and Tax Opinion Committee. He pleaded guilty on February 13, 2009, to related conspiracy and tax evasion charges.

• Lawyer A - a co-conspirator not named as a defendant in the indictment, was an associate lawyer in J&G's Chicago tax practice from June 1999 to November 2004 who worked primarily for defendants Daugerdas, Guerin and Mayer on the shelters involved in the indictment.

• John B. Ohle - an alleged co-conspirator not named as a defendant in the indictment. Ohle was indicted separately with respect to the Daugerdas shelter scheme (the Homer tax shelter). See USAO SDNY press release here.

• PMD Chartered - this is a Daugerdas entity through which some of Daugerdas' off the books income flowed and his personal tax shelters were used. See discussion of Shelter Promoter A.

• PMDI Investment Partners ("PMDI-Partners") - this is a partnership in which Daugerdas was 99% partner. He used the partnership for some of his own tax shelter transactions.

• PMDI Investments LLC ("PMDI-LLC") - this is a partnership owned or controlled by Daugerdas and used for some of his own tax shelter transactions. It is related to PMDI-Partners.

• Shelter Promoter A - A New York shelter promoter assisting Daugerdas by paying over substantial of Daugerdas fee income to two of Daugerdas' S Corporations - Treasurex and PMD Chartered which paid Daugerdas a small wage income each year. Apparently some or all of this income was "off the books" income not known to the law firm in which Daugerdas was a partner at the time and used for certain of his own shelter transactions.

• Treasurex - this is a Daugerdas entity through which some of the off the books income flowed and his personal tax shelters were used. See discussion of Shelter Promoter A.

Where are the Taxpayers?

As in the KPMG Indictment, some of the clients are named cryptically in the indictment but not indicted or identified as unindicted co-conspirators. The ones named in the Daugerdas indictment are named in two contexts:

1. As persons whose tax returns form the basis for the evasion counts. These persons are listed by last Initial, then by first initial):

Client G.B.
Client M.C.
Client S.D.
Client C.G.
Client W.H.
Client J.K.
Client L.M.
Client C.P.
Client B.R.
Client D.R.
Client G.R.
Client J.R.
Client K.R.
Client R.S.
Client S.S.
Client W.S.
Client M.T.

2. Named in the overt acts of the Conspiracy Count (Count One) as clients somehow involved with respect to the overt acts of the co-conspirators (although the clients are not named as co-conspirators):

Client N.D.
Client H.F.
Client W.H.
Client M.M.
Client C.P.
Client J.S.
Client C.T.
Client M.T. (This presumably is the same as
listed above).

3. Notwithstanding that clients are not identified as really bad guys in the indictment, Bloomberg here says that a spokewoman for USAO SDNY as saying "declined to comment on whether the wealthy investors would be prosecuted." However, readers of the blog here may recall this Quellos prosecutors comment:

“It would be impossible to show that any of the taxpayers had knowledge that this was a criminal scheme,” said Mark Bartlett, an assistant U.S. attorney in Seattle. “What the evidence has shown is the lies that were told to the IRS were also told to the taxpayer, and also told to attorneys for the taxpayers.”

Whether that phenomenon is at play in the Daugerdas indictment is not certain, but it may just be that those aggressive taxpayers playing the game with Daugerdas will escape criminal prosecution and get at least that minimum penalty protection that they thought they were buying on the front-end. (Most of them, I suspect, did not get full civil penalty protection that they thought they were buying, likely being subjected to the 20% accuracy related penalty rather than the 75% civil fraud penalty, so they got a little more than half a civil loaf.)

And, of course, the final question is whether, if the shelters were so obviously bad, what about the attorneys for the taxpayers. Even if the taxpayers were duped by the maze of tax arcana -- often willingly duped -- their lawyers should not have been.

And, if I can digress once more, there is no question that some of the taxpayers knew they were playing it fast and loose and simply hoped that, if anyone in the scenario went to jail, it would be the promoters and not the taxpayers. But, after all, the taxpayers -- at least those acting willfully as we might theorize some were after being properly counseled by their independent lawyers and chose to do it anyway -- were the ones who were robbing the bank. Having been caught many of them choose to sue the drivers they enlisted to help them rob the bank as if they were innocents taken advantage of by drivers. And, by rumor and hearsay, I hear that a number of them have been able to blast out large settlements from the promoters' firms. Amazing.