Second Circuit Opinion on Derivative Liability (8/20/11)

I write today on a fascinating recent decision from the Second Circuit in a nontax case. United States v. Ferguson, ___ F. 3d ___, 2011 U.S. App. LEXIS 15811 (2d Cir. 2011). The opinion is here.  The opening paragraph introduces the case as follows:

This criminal appeal arose from a "finite reinsurance" transaction between American International Group, Inc. ("AIG") and General Reinsurance Corporation ("Gen Re"). That transaction (the "Loss Portfolio Transfer," or "LPT") reallocated risk in a way that shored up AIG's flagging loss reserves, which were feared to be dragging down its stock price. Finite reinsurance transactions, which entail some (usually low) risk, are acceptable accounting measures in the insurance industry, and have their uses; but in this instance it is charged that the transaction entailed no risk at all, and was a fraud. The defendants, four executives of Gen Re and one of AIG, appeal from judgments entered in 2008 and 2009 by the United States District Court for the District of Connecticut (Droney, J.), convicting them of conspiracy, mail fraud, securities fraud, and false statements made to the Securities and Exchange Commission ("SEC"). They were sentenced principally to prison terms ranging from one to four years, and are free on bail pending this appeal.

I write principally because of the Court's discussion of the theories of vicarious liability. I have previously discussed those theories in various blogs can be viewed by clicking on the key words that I assign to this page. (I am also currently returning soon to my draft article on this subject which I hope to wrap up soon and will post to a blog at some time.)
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Further Comments on the Briefing in the Larson, Pfaff and Ruble Cert Petitions (6/21/11)

I have just received the Government's Brief in Opposition to Certiorari in the Larson and Pfaff cases (Sup. Ct. Dkt No. 10-1049) and Brief in Opposition to Certiorar in the Ruble Case (Sup. Ct. Dkt No. 10-1061). I have previously blogged on the Petitions for Certiorai in those cases in the following blog entries: Petitions for Cert in US v. Pfaff, Ruble & Larson and The Conduct Too Remote Is Not Evasion Argument in the Larson & Pfaff Petition for Certiorari . I have just a few points that I wish to make on the documents documents I just received:

1. The issue that I think is worthy of certiorari is whether the economic substance doctrine draws a sufficiently knowable criminal line. (I have previously blogged on facets of this issue here.)  The problem, in my mind, is that the Supreme Court itself has botched the analysis and approved civilly transactions that lack economic substance relative to the taxpayer's participation in the shelters / arrangements. Charles Kingson, are respected observer in this area, has said pungently:
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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.

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Even More on Principals, Accomplices, Causers and Pinkerton Conspirators - the Daugerdas Case (5/10/11)

I have previously written on derivative criminal liability for the enablers in the tax shelter game (lawyers, CPAs, financial wizards). See here. I have just today read the transcript for the instruction conference on 5/5/11 in the Daugerdas criminal case.  Daugerdas involved the same basic pattern as the Larson and Coplan cases (previously discussed here and here). That pattern is the prosecution of the enablers but not the taxpayers (or taxpayer advisors), with even a concession that for purposes of the submission to the jury the taxpayers are not guilty of the crime of evasion. In these cases, the prosecutors trot out several redundant or just not applicable theories of liability as if they were different than criminal liability for the underlying criminal offense of tax evasion.  They are not.

Judge Pauley, the trial judge in Daugerdas, gets it. My bullet point summary of the charging conference is: (i) the prosecutors may have abandoned 2(a) accomplice liability, (ii) Judge Pauley wants to conflate 2(b) causer liability directly into the substantive offense, and (iii) Judge Pauley is not enamored with Pinkerton liability. Judge Pauley defaults to the real issue -- either these defendants are guilty as direct principals of tax evasion or they are not guilty of tax evasion at all (regardless of what theory is used).
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Of Principals, Accomplices, Causers and Pinkerton Conspirators

I have drafted an article on concepts of criminal liability in the federal system. The crime I address is tax evasion. Tax evasion has three elements -- tax due and owing, an affirmative act, and willfulness of the actor. The actor liable for this crime is usually the taxpayer but others may also be liable even when the taxpayer is innocent (or at least not guilty). The setting for discussion is the promotion of tax shelters such as involved in the spate of Son-of-Boss shelters in the late 1990s and early 2000s. The Government finds these shelters offensive and has prosecuted multiple promoters related to KPMG, E & Y, BDO Seidman and Jenkens & Gilchrist in the promotion of such SOB shelters. My theses are:

1. In the setting addressed in the article (promoters prosecuted with guilty or innocent taxpayers), the conduct required to make the promoter defendants principals in the crime of tax evasion is the same conduct that would make them derivatively liable as accomplices and causers and perhaps, depending on the facts, as Pinkerton conspirators as well. Stated alternatively, the conduct required to make them principals directly in the commission of the crime is the same conduct that would make them derivatively liable, and vice-versa. If they are not direct principals in the commission of the crime, they are not liable under any derivative theory, and vice-versa.
2. If the first thesis is valid, then instructing the jury as to the derivative theories of criminal liability for the crime of tax evasion is not helpful.
3. Indeed, instructing the jury on these alternative theories -- particularly if they are presented as something different from principal liability -- risks jury confusion and erosion of confidence in the system.

Before sending the article out for consideration of publication, I would greatly appreciate the critique of any reader having the time and interest to read the article. For a copy of the draft article, readers can email me at jack@tjtaxlaw.com.

Imposing FBAR Civil Penalties on Foreign Financial Institutions

An anonymous poster alerted me to Lynnley Browning's article, Overseas Banks Could Face Novel Penalty From U.S. (New York Times 4/12/11). The poster suggested that I do a blog on the topic of the article -- whether the U.S. could assert the FBAR penalties against the foreign financial institutions ("FFI") in addition to or in lieu, perhaps, of the U.S. taxpayer having foreign financial accounts. I address that issue today, but caution readers that my answer is based on only limited research -- the statute and some additional research in the types of criminal liability that enablers can draw in the context of tax evasion. I plan to have an article on the latter issue in the near future, but that research informs the discussion I present here.

First, I start with the statute. The penalties are found in 31 USC 5321(a)(5)(A) which provides:

(5) Foreign financial agency transaction violation.
(A) Penalty authorized. The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314 [31 USCS § 5314].

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Lesser Included Offense to Rescue a Conviction After Confusion of Liability as Aider and Abetter or Causer

I have recently had several blogs arising from the Larson and Pfaff petition relating to the concepts of aider and abetter liability and causer liability under 18 USC §§ 002(a) and (b), respectively.  (To review those, click on the labels below.) Contemporaneously, in the Tax Fraud and Money Laundering class that Larry Campagna and I teach at the University of Houston Law School, we recently covered the lesser included offense concept.  So, I  present today one case where these concepts came together.  I think it nicely illustrates the lesser included offence concept in a nontraditional setting where it is used to save a conviction after the prosecution blurred the roles of the two types of liability under 18 USC § 2.

In United States v. Motley, 940 F.2d 1079, 1082 (7th Cir. 1991), the defendant, an income tax preparer who prepared false returns, had been charged and convicted under 18 U.S.C. §§ 287 and 2(a). The court held that the defendant was not guilty of aiding and abetting under subsection § 2(a) under which he was tried because the Government failed to prove the taxpayers committed the underlying crime. The Seventh Circuit refused to allow the Government to switch on appeal to subsection § 2(b), causer liability, which does not have the element of requiring that there be one or more other persons guilty of the underlying crime. But, the Seventh Circuit saved the day for the Government by holding the defendant liable for the lesser included offense of § 7206(2) which did not have the element requiring that another person (here the taxpayers) be guilty of the crime. The Court reasoned after giving the taxpayer his accomplice victory:
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More on 18 USC § 2(b) Liability from the Larson / Pfaff / Ruble Case

In yesterday's blog titled "The Conduct Too Remote Is Not Evasion Argument in the Larson & Pfaff Petition for Certiorari," I discussed the application of 18 USC § 2(b) to make an actor guilty as a principal of a crime committed by another who may be entirely innocent in contrast to 18 USC § 2(a) which requires another criminal actor who the defendant aids and abets. The relevant portion of the § 2(b) is:

(b) Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.

In the indictment, the Government relied upon both direct liability for their conduct under 7201 and upon 18 USC § 2. The instructions make clear that the Government was relying upon 2(b) (although it also relied on 2(a) as I shall note in a later blog). I provide the instructions below and, after doing that, will provide some further discussion of 2(b) liability from a case differentiating the 2(a) and 2(b) concepts.
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