Daugerdas Gets 15 Year Sentence (6/25/14)

Paul M. Daugerdas, previously convicted of tax crimes, was sentenced to 15 years.  See the DOJ press release here:  Key excerpts from the press release:

Deputy Assistant Attorney General Ronald A. Cimino for the Tax Division of the Department of Justice and U.S. Attorney Preet Bharara for the Southern District of New York announced that Paul M. Daugerdas, 63, a tax attorney and certified public accountant, was sentenced today in Manhattan federal court to serve 15 years in prison for orchestrating a massive fraudulent tax shelter scheme in which he and his co-conspirators designed, marketed and implemented fraudulent tax shelters used by wealthy individuals to evade over $1.6 billion in taxes owed to the Internal Revenue Service (IRS).  The 20-year scheme, which Daugerdas hatched while working at the Arthur Andersen accounting firm and then continued while a partner at two law firms – Altheimer & Gray and then Jenkens & Gilchrist (J&G) – generated over $7 billion in fraudulent tax losses and yielded approximately $95 million in fees to Daugerdas personally.  

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According to the evidence at trial and other documents filed in the case: 

 From 1994 through 2004, Daugerdas, who is a lawyer, a certified public accountant, and the former head of the Chicago office of J&G and its tax practice, participated in a scheme to defraud the IRS by designing, marketing, implementing and defending fraudulent tax shelters. 

 As part of the scheme, Daugerdas and others plotted to defraud the IRS by, among other things, corruptly endeavoring to prevent the IRS from: detecting their clients’ use of these shelters; understanding how the transactions operated to produce the tax results reported by the clients; learning that, rather than serving as legitimate investment transactions, the tax shelters lacked economic substance in that they were designed and marketed as cookie-cutter products intended exclusively to eliminate or reduce large tax liabilities; learning that the clients were not seeking profit-making investment opportunities, but were instead seeking huge tax benefits; and learning that, from the outset, all of the clients intended to complete a pre-planned series of steps that had been designed to lead to the specific tax benefits they sought.  Daugerdas and others created and assisted in creating transactional documents and other materials that falsely and fraudulently described their clients’ motivations for entering into the tax shelters and for taking various steps in order to yield the tax benefits. 

 As part of the scheme, Daugerdas and his co-conspirators also fraudulently backdated some of the tax shelter transactions.  In particular, Daugerdas and his co-defendants learned that certain tax shelter transactions had been implemented incorrectly during the year of the transactions in that they failed to produce the amount or type of tax losses requested by the clients.  Rather than reporting those tax shelter results as they occurred – as required by the Internal Revenue Code – Daugerdas and others engaged in corrupt “correcting” transactions after the close of the pertinent tax years, and then backdated the tax shelter documents to make it appear that the amount and type of tax losses sought by the clients had in fact been generated during the pertinent tax years.  Daugerdas also authored fraudulent tax opinion letters that falsely described when certain aspects of the transactions had actually occurred.  As a result of the fraudulent backdating, Daugerdas and others caused tax shelter clients to file tax returns that falsely and fraudulently claimed tens of millions of dollars of tax losses to which the clients were not entitled.

 As a result of the scheme, Daugerdas and his co-conspirators made millions of dollars in fees and bonuses.  Daugerdas himself made $95 million in profits but used tax shelters to reduce the taxes he paid to less than $8,000; without the shelters, he would have owed over $32 million in taxes.  

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 Daugerdas, of Wilmette, Illinois, was convicted of conspiring to defraud the IRS, to evade taxes, and to commit mail and wire fraud, and of corruptly endeavoring to obstruct and impede the internal revenue laws.  He was also convicted of four counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud. 

 In addition to the prison term, Judge Pauley ordered Daugerdas to forfeit $164,737,500 in proceeds of the offenses, which included certain assets that had been seized and frozen at the time Daugerdas was indicted.  The forfeited proceeds include a lakefront home on Lake Geneva in Wisconsin, and over $20 million in various securities and financial accounts.  Judge Pauley also ordered Daugerdas to pay $371,006,397 in restitution to the IRS.  At sentencing, Judge Pauley said that Daugerdas “was at the apex of tax shelter racketeers who tapped into the greed of the super wealthy who did not want to pay taxes.”

 There are some interesting features of the sentencing memoranda submitted by the parties.  If I have time to delve into those issues, I will report on them in later blogs.

It looks like I won't have time to get deeply into the weeds on what is apparently the key issue raised by Daugerdas in the sentencing memoranda.  As best I understand it, on a quick review, based on interviews of two jurors -- interviews authorized by the court -- counsel determined that the jury actually convicted Daugerdas on a limited number of instances and in fact did not convict on the Government's economic substance claims.  Therefore, Daugerdas urged that, in setting the sentence under 18 USC 3553, the Judge should take the more  limited scope into consideration and not sentence based on a theory not accepted by the jury.  Of course, the law is clear that sentencing can consider acquitted conduct to set the sentence within the maximums permitted by the counts of conviction.  The argument, as presented, is more subtle than that.  Judge Pauley apparently did not accept the argument. The sentence will almost certainly be appealed, and therefore we can expect the Second Circuit to speak on the issue.

For those wanting to get more into the weeds on this issue, a good resource is Andrew Velarde,  Daugerdas Sentenced to 15 Years in Prison for Tax Fraud, 2014 TNT 123-1 (6/26/14), which has a more detailed summary and links to the sentencing memoranda.

I have subsequently posted a blog entry on two Government sentencing spreadsheets from the Daugerdas case.  Sentencing Tales Told in Spreadsheets (6/28/14), here.

With the permission of Tax Analysts, I offer readers the following article:  David Cay Johnston, Daugerdas's Crimes Go Beyond Fraudulent Deductions, 2014 TNT 121-1 (6/24/14), here, which I offer here by link with the permission of Tax Analysts.  The article was written prior to sentencing and principally relies on the Government's sentencing submissions which pick apart Daugerdas's submissions for more lenient sentencing.  And, based on the 15 year sentence imposed, Judge Pauley apparently gave more credibility to the Government's submissions than Daugerdas's

Those with access to Tax Analysts publications might want also to check out:  David Cay Johnston, Paul Daugerdas, John Dillinger, and Justice, 2009 TNT 118-11 (6/23/09).