More on the Quellos Individuals Indictment - It is About the Lie (6/8/09)

I have now had the opportunity to review the Quellos indictment in more detail. It is all about the lie that, if the allegations are proved, a jury will understand. A jury almost certainly would not understand -- or need to understand -- the complex tax rules which might have applied if the key factual underpinning were true. The jury will understand the lie. And, the gravamen of the instructions to the jury will be that, if the jury finds that prosecutors prove the lie they allege, the defendants should be found guilty.

Let's look at the counts and the lie. At the risk of oversimplication, I simplify and thus omit much of the detail.

The Conspiracy Count (Count One).

The conspiracy alleged against the Quellos defendants (Greenstein & Wilk) is the defraud or Klein conspiracy under 18 U.S.C. § 371. The key allegations are:

a. The investment transactions purportedly underlying the shelter did not occur as they were described in the offering documents provided to taxpayers and their independent attorneys. Specifically, as represented in the documents, real transactions involving actual loss stocks provided by third parties were supposed to be a central feature of the deal, but obtaining such stocks was cost prohibitive (perhaps because they were Quellos profit deflating). Hence, these defendants and others just made it those key transactions. Representative of the claim is the following: "Therefore, JEFFREY I. GREENSTEIN and CHARLES H. WILK caused the creation of a fictional 'offshore investment fund' with a fictional portfolio of stocks that had been obtained through a series of sham paper transactions in which no stocks and no money ever exchanged hands." Key buzz words describing the transactions include "non-existent," "sham portfolio," and "a virtual share transaction." These allegations, if proved, are the lie. All of the many documents related to the transactions were constructed on this essential lie.

b. By their lie, these defendants' actions impaired and defeated, etc., the IRS function in ascertaining and collecting taxes. Various of their actions impaired and impeded, and also "caused" the taxpayers to file tax returns claiming "false and fraudulent capital losses."

c. The lie was not only told for IRS consumption but also to influence the advice rendered by independent lawyers for the taxpayers whose positive advice was necessary to encourage the taxpayers to participate in the shelter. The lie once told was repeated. ("Oh what a tangled web we weave, When first we practise to deceive! Sir Walter Scott, Marmion, Canto vi. Stanza 17.) The lie was repeated to the IRS. The lie was also repeated to a congressional committee.

d. A key allegation is that these Quellos defendants (Greenstein & Wilk) kicked back $36 million to a supposedly independent attorney (Krane) for one tax shelter participant with over $1 billion in gain seeking shelter. (This allegation ("the Krane Kickback") is the basis for the money laundering conspiracy count.)

Tax Evasion.

Counts 2-9 allege tax evasion under 26 U.S.C. § 7201 and 18 U.S.C. § 2 with respect to certain returns filed by certain shelter participants. This count is summary, but incorporates the allegations in the conspiracy count which are about the lie.

Aiding and Assisting - False Documents.

Counts 10-14 alleges aiding and assisting in the submission of false documents under § 7206(2). The false documents are the false partnership tax returns (Forms 1065) filed in the implementation of the scheme. This count is summary, but incorporates the allegations in the conspiracy count which are about the lie.

Wire Fraud.

Counts 15-17 allege wire fraud under 18 U.S.C. §§ 1342 and 2. The allegation is that the fax and emails were used to disseminate the lie to the taxpayers, lawyers and the IRS (including those provided during audits). Only three instances of such wire fraud are alleged, but with a scheme this large I would suspect that there are more unalleged instances that may be used at trial as part of the overall tapestry of proof.

Money Laundering Conspiracy.

Count 18 alleges a money laundering conspiracy under 18 U.S.C. § 1956(h). The SUA in this case relates to the Krane Kickback and asserts "Deprivation of Honest Services Wire Fraud, in violation of Title 18, United States Code, Sections 1343 and 1346." The count flowers up the allegation, but the crux of it is that Krane owed a duty of loyalty to the client that he illegally compromised by accepting an under-the-table kickback. All of the defendants participated in various acts of wire fraud to implement the conduct amounting to a "deprivation of Honest Services Wire Fraud." JAT Comments: It is interesting that, given the egregiousness of the pattern of conduct alleged in the earlier counts, that the Government did not bootstrap the other acts of wire fraud into SUA for a money laundering or conspiracy to commit money laundering counts. Perhaps given concerns about the interface of lesser crimes (such as tax crimes) and greater crimes (money laundering) that I have discussed here, the prosecutors decided to use only the most egregious wire fraud conduct to ratchet up to a money laundering count. Note that the indictment does not assert an underlying count for the honest services wire fraud (the SUA) or of money laundering itself. The honest services crime is a matter of some controversy and will be considered by the Supreme Court in the context in the Conrad Black case (discussed here on the WSJ Law Blog). And, I am not sure that this allegation is necessarily dependent upon the big alleged lie -- relating to the underlying shelter transaction. The honest services count might even apply if there had been no lie with respect to the underlying tax shelter or even if it had worked (although the federales might not have had any interest in pursuing an independent honest services count if the shelter had worked), for the gravamen of the claim is that the kickback alone rendered the lawyer incapable of rendering honest services.