Tuesday, May 24, 2011

Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)

I have blogged previously on various aspects of the Daugerdas trial. See here. The jury has just spoken. Guilty. I link below to some of the early articles from the web. The pundits will speak and this is just a preliminary and limited report.  For more information, see the articles linked below.

Update 5/25/11 9:50 AM:
From the USAO SD NY Press Release (setting aside the puffing):

DAUGERDAS, 60, of Wilmette, Illinois; GUERIN, 50, of Elmhurst, Illinois; and FIELD, 53, of Naples, Florida were each convicted of conspiring to defraud the IRS and to evade taxes, and of corruptly endeavoring to obstruct and impede the internal revenue laws. The defendants were also convicted on multiple counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud. DAUGERDAS also was convicted of tax evasion based on his use of fraudulent tax shelters to eliminate or reduce his personal income tax liabilities between 1999 and 2001. PARSE 49, of Elmhurst, Illinois, was found guilty of mail fraud and obstructing internal revenue laws.

On the conspiracy charge, each defendant faces a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and restitution. On the mail fraud charge, each defendant faces a maximum penalty of 20 years in prison. Each count of tax evasion carries a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and costs of prosecution. Each defendant also faces a maximum penalty of 3 years in prison; 1 year supervised release; and a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS on the charge of corruptly endeavoring to obstruct and impede internal revenue laws.
Acquitted:  Raymond Craig Brubaker, an investment banker with Deutsche Bank.

Some of the history from a Tax Notes article today (Shamik Trivedi, Daugerdas, Others Found Guilty of Tax Shelter Charges, 2011 TNT 101-1 (5/25/11)):

The jury's decision brings an end to a saga that lasted more than 17 years and resulted in countless hours spent on litigation and investigations, lost tax revenue of nearly $7.3 billion, and the shuttering of the once-prominent firm of Jenkens & Gilchrist.

The DOJ began investigating the firm and its employees for its tax shelter activities as early as 2006. On March 29, 2007, it announced that as part of a deferred prosecution agreement, the firm would admit to developing and marketing fraudulent tax shelters, as well as issuing fraudulent opinion letters. That same day, the firm agreed to pay a $76 million promoter penalty and announced that it would stop offering legal services. The firm settled a class action lawsuit in February 2005 with more than 1,000 tax shelter clients for $85 million.

The government alleged in its June 2009 indictment that Daugerdas, the former head of the firm's Chicago office, conspired with two partners in that office, Erwin Mayer and Guerin, along with Field, BDO tax partner Robert Greisman, and investment bankers Brubaker and Parse, by designing, marketing, and implementing fraudulent tax shelters from 1994 to 2004. Among the various schemes in which the defendants were engaged were short sales, short options strategy (SOS) swaps, and "HOMER" transactions

The tax shelters created by the defendants lacked economic substance and genuine business purpose, the indictment alleged, describing them as "turnkey tax elimination products." The shelters were used not only by the defendants' wealthy clients but also by the defendants themselves to "evade their own taxes on income received largely through the sale of the fraudulent tax shelters," the indictment said.

Greisman pleaded guilty to his role in the scheme soon after the indictment, and Mayer followed suit in October 2010, saying he was "filled with shame and remorse for what [he] did." They are both cooperating with the government, and neither has been sentenced.

JAT Comment:  I just note that, in my earlier blogs, I focused on the prosecutors' use in this type of criminal tax prosecution of derivative liability theories to bootstrap inappropriate support for the prosecution.  These theories were accomplice liability, causer liability and Pinkerton conspiracy liability. Judge Pauley, rightly I think, rejected that use and focused the jury on the real case -- the defendants' liability as direct principals for the crime of tax evasion. In the earlier trials (Larson and Coplan), the judges threw out those derivative liability "theories" to the jury as being a hodge-podge of ways to find the defendants in those cases guilty. Of course, we don't know what would have happened in those cases had the juries been properly instructed. But we can all feel more comfortable with the integrity of the verdict in the Daugerdas case because Judge Pauley did not allow those provisions to obscure the jury's task. That does not mean that the jury got it right in Daugerdas, but since we as a legal system imagine that a jury is more likely to get it right with better instructions, we can feel better about this verdict.

One other issue that just hit my consciousness is the convictions for tax obstruction (7212) and for conspiracy to defraud (Klein conspiracy).  I just wonder whether those are redundant convictions for the same conduct.  I know in the past that DOJ Tax has characterized the tax obstruction as being a type of one person conspiracy.  Here, the jury found a conspiracy, so tax obstruction could be duplicative for the same conduct unless, perhaps, there were some actions that the individuals did that were not within the scope of the defraud conspiracy.

Bloomberg article.
New York Times (Associated Press) Article.
For other links, see the Tax Prof Blog entry here.


  1. I think there is a problem with your link "here"

  2. Peter, thanks for the comment. I have tried the link and it seems to work. The link is to all blogs that have the word Daugerdas. That means it picks up the current blog as well as past blogs. Scroll down to see past blogs.

    I appreciate your interest in the blog.

    Jack Townsend


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