The Kepke (Brockman and Smith Lawyer Enabler) Prosecution - Developments (10/27/22)

Regular readers know that I have posted several times on the criminal prosecution of Carlos E. Kepke, a Houston attorney who was allegedly the enabler for two alleged massive tax evasion (and related crime) tax schemes involving offshore trusts. Readers will recall that Brockman died before his criminal case went to trial, and Smith achieved an NPA requiring him to testify in the Kepke prosecution. By order dated 10/20/22 (CL here), Judge Donato addressed certain pending motions. The ones that I thought might be interesting to readers are: 

For Dkt. No. 61, defendant’s disclosures for expert witness Rodney Read did not adequately state the bases and reasons for his proposed opinion testimony under Fed. R. Crim. P. 16(b)(1)(C). See Dkt. Nos. 61-1, 61-2, 61-3. In lieu of excluding  Read as a witness, and with the government’s agreement, defendant will have an opportunity to disclose by October 28, 2022, the bases and reasons for each of the following opinions:

 • Foreign asset protection trusts and foreign non-grantor trusts are valid and legal trust entities.

• It is not uncommon to establish a trust in a foreign jurisdiction that has a lower income tax rate than the United States in contemplation of potential United States income tax reduction or deferral.

• There are no legal prohibitions against appointing a beneficiary as the trust protector, which may include the power to remove and replace the trustee of a foreign trust. This arrangement does not necessarily affect the non-grantor status of the foreign trust.

• Foreign and domestic trustees alike owe a fiduciary responsibility to beneficiaries to ensure trust assets are being used exclusively for the benefit of a trust’s beneficiaries and acting within the restrictions and limitations set forth in the trust documents.

• It is not uncommon for the beneficiary of a foreign trust to request that a trustee take certain actions or execute certain transactions, including investments or purchases. Generally, it is up to the trustee to review these requests and decide whether to accept or reject them.

• It is not uncommon that when an attorney identifies a trustee that is reliable and responsive, that the attorney continues to utilize the same trustee for other clients.

• When United States tax advantages and asset protection are the goals of the foreign trust, it is not uncommon for the foreign trust to own one or more offshore corporations whereby shares of stock in the offshore corporations are held as assets of the trust.

• It is not uncommon for a foreign trust to purchase an asset from a beneficiary, which then becomes an asset of the trust. The sale does not necessarily cause the beneficiary to become a grantor of the foreign trust.

Read’s proposed testimony will be limited to these opinions, so long as their bases and reasons are adequately stated pursuant to this order. Any opinion that is not adequately supported will be excluded at trial.

For Dkt. No. 63, the motion is denied. The parties are advised that experts will not be permitted to give legal conclusions on an ultimate issue of law, or instruct the jury on the law.

For Dkt. No. 90, the government may introduce evidence related to Robert Brockman solely for context and background. The government may not use evidence of Brockman’s foreign trust structure or other circumstances to establish willfulness on defendant’s part. Fed. R. Evid. 403.

Finally, addressing the IRS sting operation where Kepke allegedly made damaging statements at least indicating knowledge or intent: 

For Dkt. No. 66, the government will provide defendant with a specific statement of the undercover evidence that it expects to introduce at trial by October 28, 2022. As a guiding principle, the Court will likely limit admission of the undercover evidence to statements and  communications by defendant relevant to his knowledge or intent that offshore structures and trusts were designed to evade federal income taxes. Fed. R. Evid. 403, 404(b). For Dkt. No. 81, the government is directed to produce by October 28, 2022, the documents summarized in the August 12, 2022, letter, Dkt. No. 80-3. For any redactions or withheld documents, the government is directed to provide by October 28, 2022, a log describing the reasons for withholding the information, in the manner of a privilege log.

JAT Comments:

1. There is one other development in the Kepke prosecution that I should note, although as yet do not have enough information as to how meaningful it may be.  This item showed up on the docket entries a couple of days ago:

Date Filed	#	Docket Text
10/21/2022	101	ORDER. The parties are directed to file under seal by October 24, 2022, the letter with respect to defendant Kepke's legal fees. Counsel for Kepke is directed to file under seal by October 24, 2022, a declaration stating whether Kepke obtained independent legal advice about the fees arrangement, and if so, who provided the advice and when. Signed by Judge James Donato on 10/21/2022. (This is a text-only entry generated by the court. There is no document associated with this entry.) (jdlc1, COURT STAFF) (Filed on 10/21/2022) (Entered: 10/21/2022)

All I know is what I read in this entry.  I can make some inferences (perhaps speculations) based on my practice and writings in the tax crimes area. Someone is paying (or has agreed to pay) Kepke’s legal fees. I don’t know who would have a dog in the hunt on Kepke’s prosecution. Perhaps Brockman (by agreement sometime before his death)? I would think not Smith because Smith would be incredibly stupid to do that or continue it after his DPA (but then Smith did some pretty stupid things). Perhaps some other Kepke client who is paying for continuing secrecy protection. I would appreciate hearing from any reader with any further insight on this development. I will not publish the insight without the express advance permission of the person offering it.