Saturday, October 31, 2009

Second UBS Client, Chernick, Sentenced (11/31/09)

The press reports today proclaim the sentencing of Jeff Chernick on October 30. (See, e.g., the associated press article here.) The sentence is 3 months of incarceration (no good time credit), 6 months of home confinement, and no fine. The Government had requested 9 months incarceration for the alleged substantial cooperation Chernick had given, but probably signaled the judge that some home confinement may be OK. The Government's 9 months request was 50% of the low end of the Sentencing Guidelines calculated range. The 3 incarceration and 6 months home confinement gives the Government its request of 9 months, but, as I have said before, if you must be incarcerated, home confinement is the way to go.

The sentencing judge, Judge Cohn, was unmoved by a request for probation, reasoning that a sentencing that amounts to a "slap on the wrist" is "negative publicity," which "informs the public that you can cheat on your income taxes and get away with probation."

Chernick paid back taxes and a $4.5 million penalty. In the plea agreement he had agreed to a 50% FBAR penalty, which on the reported $8 + million foreign accounts would account for most of the reported penalty.

Chernick also prostrated himself (figuratively) before the court with the appropriate mea culpa and contrition.

Chernick had accounts at UBS and NZB Neue Zürcher Bank (sometimes NZB Neue Zuercher Bank).

Chernick had attempted a voluntary disclosure (even before the special initiative was announced and found that the Government already had him in its sight.

JAT editorial comment: I am not sure I see a material difference between Rubinstein (1 year home confinement) and Chernick (3 months incarceration and 6 months home confinement).

Questions to readers: Do you see a material difference between persons who cheat through foreign accounts and persons who cheat the old fashion, historically more visible way who do not get such lenient sentencing (the ordinary cheats who are routinely sentenced to significant jail time, even post-Booker)? What is the explanation(s) for the leniency for cheating through foreign accounts? (In this regard, I assume that, at least in the gut, there may be some difference between (i) a foreign account tax cheat who funds the foreign account with U.S. tax paid money or money not subject to U.S. tax and (ii) a foreign account tax cheat who funds the foreign account with money that was subject to U.S. tax but U.S. tax was not reported and paid (e.g., funds that went to the foreign account without U.S. reporting or by claiming improper deductions).)


  1. Are you sure about that Chernick attempted a Voluntary Disclosure? The press reports I read indicated he was talked out of doing it by his attorney, so he contemplated it but that's about it.

    If in fact, he did file a voluntary disclosure, even if it was untimely, shouldn't this have been factored in somehow in terms of either the charges or sentencing?

    If there was no benefit from his attempted, but untimely voluntary disclosure, what is the incentive for anyone after the October 15th date to do one, if they get the same criminal charges as someone who never even bothered to try?

  2. Anonymous

    Thanks for correcting me on the voluntary disclosure issue. The report from bloomberg is:

    Voluntary Disclosure

    Media coverage of the Justice Department’s probe of UBS was intensifying in July 2008, when Chernick told the attorney and the executive that he wanted to make a voluntary disclosure to the IRS of his offshore accounts, according to court papers.

    The attorney persuaded Chernick “not to take any action with respect to his undeclared Swiss bank accounts, including his accounts at UBS” because of the executive’s connection to a high-ranking government official who could provide the names of UBS clients that would be given to U.S. authorities.

    The unidentified executive said that while the names of two other clients would be disclosed, Chernick’s would not, according to court papers.

    The executive, who formerly worked at UBS, paid $45,000 to the government official for the information, according to the papers. Chernick used $45,000 from his UBS account to reimburse the executive, according to the papers. It isn’t clear whether the Swiss government later handed over Chernick’s name to the U.S.

  3. Anonymous,

    On the issue of what a U.S. person with one or mroe foreign financial accounts does after October 15, the reports are that the regular voluntary disclosure is available. See my prior blog on this issue:

    The regular voluntary disclosure should solve the criminal problem, provided the IRS has not yet focused on the taxpayer. The question then is the penalties. As I noted in the prior blog, the range of concern seems to be between 20% and 50%. I don't know whether the IRS is going to announce what the penalties are for post-10/15 voluntary disclosures, but I suspect that there will be some percentage or range that will guide CI.

    Jack Townsend

  4. I think there is a material difference between someone who diverts earned income from the US overseas versus someone who does not, but still has a filing requirement. The Roberto Cittadiin case (the Boeing exec) would seem to be an example of what you're talking about - someone who inherited something that never came to the US. Their is clearly a difference in the level of 1) willfullness, and 2) the relative egregiousness of the overt acts. But the Cittadini plea deal does not seem to show any recognition of this.

  5. I have 2 observations:
    1) Jack was correct and "Anonymous" is wrong according to court documents.
    2) The DOJ seems to be actively prosecuting good faith, but untimely voluntary disclosures which contradicts the spirit of numerous public statements by the IRS Commissioner.

    Specifically, Chernick's Defendant Sentencing Memorandum clearly states on pg. 3 of 17 the he began the Voluntary Disclosure process on February 5th, prior to the DOJ having his name. Now his paperwork was not submitted to the IRS on February 24th, which is actually pretty fast, but the point is that he made a good faith attempt at a Voluntary Disclosure. Actually this highlights a subtle point - that there are two might be two types of untimely voluntary disclosures - those begun before the government had a subject's name and those begun after they had a subject's name. While both might be good faith, clearly someone who began the process before the government had his name has a much stronger good faith defense. Yet not only is there no recognition of that in the charges that Chernick faced, but he faced the same charges as Rubinstein who presumably did not do this.

    After this startling discovery, I am wondering how many of the other early pleas involved people who made good faith, but untimely voluntary disclosures. It terms out Moran submitted a Voluntary Disclosure on March 17th, and presumably began much earlier. Cittadi also submitted a Voluntary Disclosure in early March 2009 (Defendant's Sentencing Memorandum, pg. 6 line 8).

    Jack, I think this is worth of an entirely new post because it means that despite the IRS Commissioner's public statements that people who came in to "get right" would not be prosecuted, the DOJ is prosecuting them using their own Voluntary Disclosures. While the letter of the law is on the side of the DOJ and they have the right to prosecute even timely Voluntary Disclosures, their actions clearly violate the spirit of the IRS Commissioner's words, and maybe even the letter of his words.

    While the DOJ's actions will no doubt hold up in court since the law is on their side, I am surprised no one in the press has picked up on what the DOJ is doing and how potentially damaging it is to the credibility of the Voluntary Disclosure Program at a time when it is just starting to have a revival.


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.