One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20)

I write today about two related developments involving the tax misdeeds of private equity moguls that readers will have probably already read about in the popular news:  (i) Robert T. Brockman the biggest mogul and alleged tax cheat of the two was indicted in the Northern District of California (the indictment is here and the Court Listener Docket Entries is here), with an alleged criminal amount of $2 billion (revised at 5:00pm - I understand this is the omitted income amount rather than the bottom line tax loss); and (ii) Robert F. Smith, the smaller mogul (but still a large one) and now admitted tax cheat, reached a nonprosecution agreement (“NPA”) wherein he agreed to pay $139 million in tax and penalties (presumably with interest thereon as appropriate (the US Attorney’s press release on the NPA is here, the NPA and an Exhibit are linked on the press release)).

So, what’s this commotion all about?  I have not studied the indictment in detail, but here are key points (some with my inferences) that I derive from either the press release and two articles (Kadhim Shubber  & Miles Kruppa, Billionaire Robert Brockman charged in $2bn tax evasion case (Financial Times 10/15/20), here; and Jaclyn Peiser, A Texas billionaire evaded $2 billion in taxes, feds say. Now he’s charged in the ‘largest-ever’ tax fraud case (WAPO 10/16/20), here)

• This is said to be the largest tax fraud case ever.  The criminal cases against the Son-of-Boss professional enablers involved, in the aggregate more dollars, but I assume the this is the largest single taxpayer (as opposed to enabler of multiple taxpayers) case.
• Smith is not named in the indictment except by pseudonym which is typical for uncharged co-conspirators.  Smith has agreed to cooperate to achieve his NPA.  (The NPA is linked in the press release linked above.)  In addition to cooperation against Brockman and perhaps others, Smith agreed to pay about $139 million in tax and penalties.  Smith achieved some positive notoriety in 2019 by agreeing to “pay off all the student loans for the graduating class of Morehouse College, an all-male, historically Black college in Atlanta.  (WAPO article.)  I discuss aspects of the NPA below in my comments.  (I wonder whether Smith's generosity at the time was motivated in significant part to contribute in some way to achieving an NPA.)
• The pattern alleged for Brockman’s offshore evasion is just a variation of a theme that we have seen in offshore tax evasion but ramped up with many intrigues outlined in the indictment.
• The charges also included allegations that between 2008 and 2010, Brockman lied to investors and allegedly bilked them out of nearly $68 million. (WAPO article.)
• Smith attempted a voluntary disclosure in 2014 but apparently was already on the IRS radar screen and was rejected.  He probably attempt to do a voluntary disclosure because one or more of the offshore banks had turned information over to DOJ Tax or the IRS.
• The US attorney said Mr Smith had used a Houston lawyer to direct his offshore nominees.  The Houston lawyer is not named.

The counts charged against Brockman are from the attachment to the indictment (some of these have multiple counts):

• 18 U.S.C. § 371 – Conspiracy (Offense and Defraud)
  5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
• 26 U.S.C. § 7201 – Tax Evasion
  5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment, costs of prosecution;
• 31 U.S.C. §§ 5314 & 5322(b) –FBAR Violations
  10 yrs prison, $500k fine, 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1343 – Wire Fraud Affecting a Financial Institution;
  30 yrs prison, $1M fine, 5 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(1)(B)(i) – Concealment Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(1)(A)(ii) – Tax Evasion Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(2)(B)(i) – International Concealment Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1512(b)(2)(B) – Evidence Tampering;
  20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1512(c)(1) – Destruction of Evidence;
  20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;

Even without considering the multiple counts the concept of stacking will tell readers that the maximum sentence if conviction on all counts is around 130 years. (revised 10/17/20 11:40am: my actual calculations of all counts shows 800 years maximum incarceration). Of course, the Sentencing Guidelines and Booker variance (if appropriate) will produce a much smaller actual sentence.  My rough and ready calculation of the offense level considering only $2 billion tax loss and acceptance of responsibility (although he has not accepted yet) shows a sentencing range of 168-210 months with good time credit of 21.6-27 months.  revised at 5pm: this is true even if $2 billion was the omitted income amount because it would almost certainly produce at tax loss of $550 million, the top of the table and even if the tax loss were less, the Guidelines calculation would not be reduced much).  

(Added 9:30pm):  The following is a summary of key facts (selective) from the Smith NPA Exhibit A, Statement of Facts:  Foreign Bank notified Smith of intent to participate in the Swiss Bank Program that would require outing Smith.  Smith filed preclearance request for OVDP.  The preclearance request was denied.  Smith filed a false FBAR omitting accounts and filed income tax return omitting income and including false Form 8275.  Smith attempted Streamline disclosure, filing false FBARs and false income tax returns.  (Although not stated in the Statement of Facts, the Streamlined filing would have required that Smith represent that his conduct was not willful, a representation that based on other admission would have been false.)  These actions were willful.

JAT Further Comments:

1.  Some of the news accounts seemed from my quick reading to indicate that the payment of such large amounts contributed to Smith's obtaining an NPA.  My experience is that a taxpayer's willingness to pay large amounts relative to the tax fraud involved will not achieve an NPA.  Many clients I have had when  a criminal tax investigation starts will ask, can I just pay and move on.  My standard line is that, if you are within DOJ Tax's prosecution priorities, payment will achieve no benefit; indeed at this point, the CI investigator and DOJ Tax prosecutor just wants to nail a conviction even if the tax, penalties and interest are never paid (that's hyperbole, but not  much).  (At sentencing, of course, payment may achieve some benefit, but that is not avoiding the investigation and indictment.)  

2. What can achieve an NPA benefit is material cooperation that the prosecutors need (or think they need) to investigate and indict other players who are "bigger fish" in the overall scheme (as was Brockman here).  For the DOJ Justice Manual Guidance on cooperation see Justice Manual 9-27.000 - PRINCIPLES OF FEDERAL PROSECUTION, here, and specifically the following sections:

• 9-27.410 Plea Agreements - Cooperation, here.
• 9-27.600 Entering into Non-prosecution Agreements in Return for Cooperation—Generally, here.
• 9-27.620 Entering into Non-prosecution Agreements in Return for Cooperation Considerations to be Weighed, here.
• 9-27.630 Entering into Non-prosecution Agreements in Return for Cooperation——Limiting the Scope of Commitment, here.

3.  Smith agrees to withdraw from joint defense agreements previously entered.  (NPA 3(c).)  

4. Smith agrees to imposition of the civil fraud penalty (NPA par. 3(h).)  It is not clear to me whether the quantified amount of taxes, penalties and interest includes the civil fraud penalty.  It is also not clear whether this closes out the IRS ability to determine more tax and penalty than the amount quantified in the NPA.

5. Smith agrees to pay FBAR penalties of $82,930,165. (NPA par. 2(i).) Although not stated explicitly, presumably this is the willful penalty.  And, somewhat confusingly, the paragraph concludes with “The amount of tax, penalty, and interest due pursuant to this sub-paragraph shall not be reduced by a carryback, deduction, loss, credit, or other tax benefit of any kind which is, or may become available.”  The provision probably should have been included under NPA par. 2(h), since FBAR penalties are not affected by carrybacks.

6. Smith agrees to commit “no crimes whatsoever.”  (NPA par. 2(j).)  Now that is one hell of an inclusive catch all agreement.  

7. Smith “agrees to the tolling of any applicable statute of limitations from August 13, 2020 until all the terms of this Agreement are fulfilled.”  (NPA par. 4(a).)  I assume that includes both civil and criminal statutes of limitations.

8. Smith agrees that “this Agreement, the Agreement and the associated Statement of Facts (Attachment A) and Closing Agreements with the IRS (Attachments D and E) shall be a matter of public record.”  (NPA par. 6.)

9.  The agreement provides:  "Other than the Department of Justice Tax Division, the United States Attorney's Office for the Northern District of California, and IRS-CI, this Agreement does not bind any other component of the Department of Justice or any other federal, state, or local law enforcement or regulatory authority.” (NPA par. 8.)

10. The tax-prominent attorneys for Smith on the NPA are Mark Matthews and Scott Michel.  Mark Filip of the Filip Memorandum is also an attorney for Smith.  The news reports are that Kathy Keneally, a prominent tax crimes attorney, is the attorney for Brockman.  Keneally is quoted as saying:  “Mr Brockman has pled not guilty, and we look forward to defending him against these charges.”  (WAPO Article.)

11.  (Added 9:30pm):  Being from Houston, I was particularly interested in the Houston lawyer who assisted Smith. The Houston lawyer is identified as Individual B in NPA Exhibit A, Statement of Facts.  In summary, Individual B did some very bad acts, creating offshore structures and disguising Smith's participation in those offshore structures.  Brockman (identified as Individual A) referred Smith to Individual B.  I don't know who the Houston lawyer is, but suspect that having practiced in Houston during this period, I likely know Individual B (whoever he or she is).  If anyone knows and is willing to share that information, please let me know.

12.  (Added 9:30 pm):  One question that came up earlier today is how this scheme (both Brockman and Smith) unraveled.  Of course, the Swiss bank was joining the DOJ Swiss Bank Program, but the timing seems to me to be a bit off (preclearance request in March 2014 and denied by June 2014 (Statement of Facts, pars. 22 and 23).  It is possible that there was a whistleblower, in which case the whistleblower might be in for a very substantial reward, particularly if the whistleblower gets to share in both Brockman and Smith's "collected proceeds."

13. This is a preliminary post to alert readers.  When I have done more study of the documents and gathered other information, I may do further postings on discrete aspects of the case that I think may be interesting to practitioners in the tax crimes and broader white collar crime area.  (In this regard, I have agreed to co-teach with Larry Campagna by videoconference the Tax Fraud and Money Laundering class at the University of Houston Law School in the Spring of 2021; Larry and I  co-taught the class until I left Houston in 2015, so it will be good to join up with Larry again and get the student experience again; but for present blog purposes, I think this case might be good for teaching.)