Matthew Krane, a tax attorney involved in the Quellos matter, has been sentenced. (I have previously blogged about Krane here and Quellos here.) Specifically, I discussed the bizarre facts of the Krane prosecution here. Krane has been sentenced to 36 months and must (i) return $17.9 million in fees to a wealthy former client and (ii) pay $23.1 million in back taxes. The relatively light sentence was "reward" for Krane's cooperation.
Hat tip to Tax Prof Blog
See also Kelly Phillips Erb, Show Biz Lawyer Finally Sentenced in Massive Fraud Case, TaxGirl Forbes Blog (6/11/11)
Showing posts with label Quellos. Show all posts
Showing posts with label Quellos. Show all posts
Tuesday, June 14, 2011
Saturday, January 29, 2011
Quellos Principals Sentenced
Yesterday, the United States Attorney's Office for WD WA announced here the sentencing off Jeffrey Greenstein, for CEO of Quellos Group, LLC, and Charles Wilk, head of Quellos' private client group (he was also a tax attorney). They each received 50 months in prison. (I have previously blogged on Quellos here).
Greenstein and Wilk were convicted of crimes involving transactions that never occurred and structures that were never implemented. From the press release:
Greenstein and Wilk were convicted of crimes involving transactions that never occurred and structures that were never implemented. From the press release:
Greenstein and Wilk did not tell clients, or the attorneys who evaluated the proposals, that the POINT transaction was predicated on a sham. They knew but did not disclose that there was no offshore investment fund, and that no shares of stock were actually purchased and possessed by any offshore investment fund. They knew that the purported offshore investment fund was merely a shell entity with nominee administrators and no assets or employees.Read more »
Sunday, October 31, 2010
Ninth Circuit Applies Perlman Rule for Collateral Appeal of Order Rejecting Attorney-Client Privilege for Former Attorneys of NonIndicted Party
In United States v. Krane, ___ F.3d ___ (9th Cir. 2010), the Ninth Circuit upheld the continuing viability of the Perlman rule permitting collateral appeals of rejection of the attorney-client privilege in certain circumstances. Krane arose from a tax shelter prosecution of individuals who conducted their tax shelter activity through Quellos Group LLC. We have previously blogged about this indictment here and here, but suffice it to say now that they were the genre of shelters that led to other prominent prosecutions (e.g., KPMG related individuals and the Daugerdas related individuals). In Krane, the district court allowed the Government to issue a pretrial subpoena for the records of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), a prominent national law firm that had previously represented Quellos, which was not indicted. Quellos advised Skadden that it was asserting the attorney-client privilege. Skadden asserted the privilege. The Government moved to compel. Quellos intervened to sustain the privilege. The trial court rejected the assertion of privilege and ordered Skadden to comply. Quellos appealed the order and the district court stayed compliance with the subpoena pending appeal. The defendants pled guilty. The Government insisted that it needed compliance with the subpoena in order to prepare for sentencing and issued an identical trial subpoena for the sentencing hearing. "Thereafter, Quellos filed a "Notice of Further Proceedings and Suggestion of Mootness" before this court [the Ninth Circuit], which the government opposed." In a footnote, the court noted: "Despite having served the second subpoena on Skadden, the government has yet to file a motion with the district court seeking issuance of a pre-sentencing subpoena duces tecum."
The appeal presented two issues. The first was whether the compulsory order to Skadden Arps was appealable. The second was, if appealable, the pleas of the defendants mooted the need for the subpoenas. The answers to both questions was yes, so the appeal was dismissed, vacated and remanded with instructions.
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The appeal presented two issues. The first was whether the compulsory order to Skadden Arps was appealable. The second was, if appealable, the pleas of the defendants mooted the need for the subpoenas. The answers to both questions was yes, so the appeal was dismissed, vacated and remanded with instructions.
Read more »
Saturday, December 12, 2009
Bizarre Plea in Quellos - Plea Not Surprising but Facts Are Bizarre
Matthew Krane, a tax attorney, who took a large, very large kickback on a large, very large client investment in an allegedly abusive / criminal Quellos tax shelter has pled guilty. The announcement from USAO EDWA is here and a Law.com article with more of the background than in the USAO announcement is here. I do not have a copy of the plea agreement so some information provided in this blog is incomplete and may be updated when and if I get the plea agreement.
I previously blogged the larger indictment of Krane and two others involved with Quellos here.
The gravamen of the claim against Krane, a tax attorney is that he received a kickback, perhaps shared with the two other defendants, of some 35 million + on the sale of the shelter designed to shield over $1 billion in gain realized by one of his clients. Quellos and its principals designed the shelter. Krane did not advise his client of the kickback.
The guts of this news is as follows:
1. As to Krane, the plea is to "Tax Evasion and False Statement in a Passport Application." The announcement says: "KRANE will serve up to five years in prison for his two convictions." (As an aside, it is unclear why Krane will serve only up to 5 years; given the amounts the tax evasion plea generates a Guideline sentence of; I have not seen the calculation that would make the Passport conviction moot in terms of sentencing.)
2. As to the remaining defendants (Wilk and Greenstein), Krane will assist the Government in making its case. May not be a pretty picture for them. The trial is tentatively scheduled for September 2010.
I previously blogged the larger indictment of Krane and two others involved with Quellos here.
The gravamen of the claim against Krane, a tax attorney is that he received a kickback, perhaps shared with the two other defendants, of some 35 million + on the sale of the shelter designed to shield over $1 billion in gain realized by one of his clients. Quellos and its principals designed the shelter. Krane did not advise his client of the kickback.
The guts of this news is as follows:
1. As to Krane, the plea is to "Tax Evasion and False Statement in a Passport Application." The announcement says: "KRANE will serve up to five years in prison for his two convictions." (As an aside, it is unclear why Krane will serve only up to 5 years; given the amounts the tax evasion plea generates a Guideline sentence of; I have not seen the calculation that would make the Passport conviction moot in terms of sentencing.)
2. As to the remaining defendants (Wilk and Greenstein), Krane will assist the Government in making its case. May not be a pretty picture for them. The trial is tentatively scheduled for September 2010.
Monday, June 8, 2009
More on the Quellos Individuals Indictment - It is About the Lie
I have now had the opportunity to review the Quellos indictment in more detail. It is all about the lie that, if the allegations are proved, a jury will understand. A jury almost certainly would not understand -- or need to understand -- the complex tax rules which might have applied if the key factual underpinning were true. The jury will understand the lie. And, the gravamen of the instructions to the jury will be that, if the jury finds that prosecutors prove the lie they allege, the defendants should be found guilty.
Let's look at the counts and the lie. At the risk of oversimplication, I simplify and thus omit much of the detail.
Read more »
Let's look at the counts and the lie. At the risk of oversimplication, I simplify and thus omit much of the detail.
Read more »
Saturday, June 6, 2009
New Tax Shelter Enabler Indictments - More About the Lie
On June 4, 2009, the Federal District Court in Seattle unsealed a previously sealed indictment of certain Quellos-related individuals. A Wall Street Law Blog article is here, and the indictment is here. Quellos was a bona fide investment company that got in the tax shelter business. The indictment contains the same pattern as the KPMG related indictment -- (1) conspiracy as the ubiquitous Count One and 8 Counts of Tax Evasion. But the indictment and goes beyond that pattern to add 3 counts of wire fraud and one count of money laundering conspiracy. Wire fraud and money laundering conspiracy often accompany traditional tax crimes (including the general defraud conspiracy), but are not often charged together in the same indictment. See Tax Division Directive No. 128. And, such piling on of charges addresses a concern that Congress recently stated in FERA (see the prior discussion here)).
I focus in this blog not on the charging decisions (how many crimes can a creative prosecutor imagine and charge), but rather upon the basic pattern of conduct that is reported to be behind the indictment. I have previously discussed here the common feature -- the lie -- of tax shelter crimes. See prior blogs here and here. If tax shelter crimes are really about the lie, who is the target of the lie? It is not a lie unless it is told to someone who might rely upon the lie. Let's take the quintessential lie that the Government claims in tax shelters -- that the taxpayer has a business or profit motive independent of the tax benefits. The lie is intended for IRS consumption to distract the IRS from the truth -- no profit motive and no right to the tax benefits claimed. In all events, it is imagined, the lie might avoid penalty relief if all else fails. The lie is also intended for persons in the tax shelter chain who might not know the truth otherwise and relies upon the lie as truth as a condition to their participation in the chain.
The WSJ Law Blog today asks the question of whether attorneys for the taxpayers entering Quellos shelters were also the intended targets of such lies in order to give them the comfort they needed to, in turn, give the taxpayers whatever comfort they needed. In other words, in the simple example posited above, the lie about the intended business or profit motive might be required for the taxpayers' lawyers to bless the deal. That is the focus of the WSJ Law Blog discussion.
But in the simple example I posit, what lie is being told? It is true that in these deals, the promoters require the taxpayer to make the independent business or profit motive representation. But who is making the representation? It is the taxpayer. The taxpayer has the relationship with his own counsel -- i.e., the taxpayer's lawyer is not in bed with the tax shelter promoters but truly an independent lawyer representing only one person, the taxpayer. The taxpayer's lawyer is supposed to understand the overall structure including any of its components relevant to the taxpayer's representation as to independent business or profit motive. If the taxpayer believes the representation and his lawyer believes that, properly counseled by that lawyer, the taxpayer believes the representation, there should be no criminal conduct on behalf of either the taxpayer or the lawyer. Of course, even if the taxpayer's lawyer believes that the taxpayer believes the representation and nevertheless, based on the lawyer'sw independent review of the structure, believes that the taxpayer is misguided as to the belief, the lawyer's job is to counsel the client that the facts do not support the belief, however sincerely held, and the taxpayer should reconsider. But, if the taxpayer persists in his belief after proper counseling, however misguided that belief may be, it is not the taxpayer's lawyer's job to call his client a lier. It is, after all, a subjective belief, and there is no litmus test of a subjective belief. (Of course, the lawyer will surely advise the taxpayer that the risk is that, if the belief is not credible, the lawyer and the taxpayer take the risk that no one -- specifically the IRS, a prosecutor or a juror -- will believe that the taxpayer really believed he had an independent business or profit motive or that the lawyer really believed that the taxpayer had that belief, and the Government may convict the taxpayer and the lawyer for hiding behind the known lie to particpate.)
As noted in the article, the taxpayers and their lawyers in the Quellos shelters have not been indicted, although they are pseudonymically identified in the indictment. In apparent explanation for why the taxpayers and their lawyers have not been indicted, a prosecutor is quoted as saying:
And, to close the loop, if it is the lie that is really involved, people of reasonable intelligence and experience should be able to recognize the lie. If that is true, the taxpayers and their advisors (both lawyers and financial advisors) should have recognized the lie and the Government should be able to prove it. Yet the quote above from the Quellos prosecutor indicates that the Government knows it cannot prove the lie -- the taxpayer's own representation -- that was the central feature of all the Government imagines is bad about these shelters.
The underlying problem, I think, is that no one really knew the precise paramaters of the business or profit motive requirement. Did it mean a certain threshold probability over covering the all-in costs and have some profit potential beyond that? Does one who "invests" in a lottery ticket have a profit motive? Does the profit motive play in the deal have to relate directly to the tax play that produces the shelter? (For example, in some of the shelters, the investment aspect was really separate from the tax play, often based on Helmer, producing the shelter.) So different taxpayers even being counseled by competent lawyers and advisers might indeed reach a conclusion that, while not acceptable to the prosecutors, really was their conclusion based on the independent advice they received from their highly competent lawyers and, in some cases, independent financial advisors.
I hope that readers will also see in this level of confusion / uncertainty about the law's commands issues related to the certainty required in the law to set the legal duty (a la James/Critzer/Garber/Dahlstrom/Pirro), as well as issues of Cheek willfulness.
I focus in this blog not on the charging decisions (how many crimes can a creative prosecutor imagine and charge), but rather upon the basic pattern of conduct that is reported to be behind the indictment. I have previously discussed here the common feature -- the lie -- of tax shelter crimes. See prior blogs here and here. If tax shelter crimes are really about the lie, who is the target of the lie? It is not a lie unless it is told to someone who might rely upon the lie. Let's take the quintessential lie that the Government claims in tax shelters -- that the taxpayer has a business or profit motive independent of the tax benefits. The lie is intended for IRS consumption to distract the IRS from the truth -- no profit motive and no right to the tax benefits claimed. In all events, it is imagined, the lie might avoid penalty relief if all else fails. The lie is also intended for persons in the tax shelter chain who might not know the truth otherwise and relies upon the lie as truth as a condition to their participation in the chain.
The WSJ Law Blog today asks the question of whether attorneys for the taxpayers entering Quellos shelters were also the intended targets of such lies in order to give them the comfort they needed to, in turn, give the taxpayers whatever comfort they needed. In other words, in the simple example posited above, the lie about the intended business or profit motive might be required for the taxpayers' lawyers to bless the deal. That is the focus of the WSJ Law Blog discussion.
But in the simple example I posit, what lie is being told? It is true that in these deals, the promoters require the taxpayer to make the independent business or profit motive representation. But who is making the representation? It is the taxpayer. The taxpayer has the relationship with his own counsel -- i.e., the taxpayer's lawyer is not in bed with the tax shelter promoters but truly an independent lawyer representing only one person, the taxpayer. The taxpayer's lawyer is supposed to understand the overall structure including any of its components relevant to the taxpayer's representation as to independent business or profit motive. If the taxpayer believes the representation and his lawyer believes that, properly counseled by that lawyer, the taxpayer believes the representation, there should be no criminal conduct on behalf of either the taxpayer or the lawyer. Of course, even if the taxpayer's lawyer believes that the taxpayer believes the representation and nevertheless, based on the lawyer'sw independent review of the structure, believes that the taxpayer is misguided as to the belief, the lawyer's job is to counsel the client that the facts do not support the belief, however sincerely held, and the taxpayer should reconsider. But, if the taxpayer persists in his belief after proper counseling, however misguided that belief may be, it is not the taxpayer's lawyer's job to call his client a lier. It is, after all, a subjective belief, and there is no litmus test of a subjective belief. (Of course, the lawyer will surely advise the taxpayer that the risk is that, if the belief is not credible, the lawyer and the taxpayer take the risk that no one -- specifically the IRS, a prosecutor or a juror -- will believe that the taxpayer really believed he had an independent business or profit motive or that the lawyer really believed that the taxpayer had that belief, and the Government may convict the taxpayer and the lawyer for hiding behind the known lie to particpate.)
As noted in the article, the taxpayers and their lawyers in the Quellos shelters have not been indicted, although they are pseudonymically identified in the indictment. In apparent explanation for why the taxpayers and their lawyers have not been indicted, a prosecutor is quoted as saying:
“It would be impossible to show that any of the taxpayers had knowledge that this was a criminal scheme,” said Mark Bartlett, an assistant U.S. attorney in Seattle. “What the evidence has shown is the lies that were told to the IRS were also told to the taxpayer, and also told to attorneys for the taxpayers.”I am not familiar with the Quellos deals. Some do have the same acronyms of shelters I am familiar with, but my experience has been that they are variations of a common theme that I observed in other cases, particularly the KPMG indictments. In the KPMG indictments, the Government charged the promoters, but did not charge the taxpayers or their lawyers. In the particular shelters in which my client participated, the taxpayers were represented by highly competent lawyers who understood the deal and, so far as I know, were told no lies. On the business or profit motive issue, the promotoers may have made some generic general conclusions that the investment aspect of the deal was designed to permit a highly speculative profit after covering the all-in costs of the deal if some event, albeit unlikely, occurred. But the taxpayers and their attorneys and, in some cases, their financial advisors, were given the specifics of the trading strategy behind the generic general conclusions and thus were able to make their own assessments. The Government did believe that any representation of a business or profit motive could not be credibly made, but as I noted in an earlier blog I don't think the Government proved that, in fact, all of the taxpayers did not have the subjective belief, even if that belief was not justified. So, where was the lie, unless the promoters knew that the taxpayers were subjectively lieing, in which case their attorneys probably knew also or certainly should have known that their clients were lieing. In other words, the promoters could and did not make the representation that the Government claims is false; only the taxpayers could do that. Of course, if the promoters lied to the taxpayers about the potential for risks and rewards in the underlying investment program (e.g., in the case of BLIPS, if the promoters had assured the taxpayer that the chance of the Argentinan peg breaking being 50% rather than minor), that could be a problem for the promoters, but so far as I am aware in the KPMG deals there were no such lies told by the promoters. All of the taxpayers and their advisors (lawyers and financial advisors) knew the risks and the potential for reward and on that basis made their own independent determination of whether that permitted the taxpayers to represent that they had an independent business or profit motive.
And, to close the loop, if it is the lie that is really involved, people of reasonable intelligence and experience should be able to recognize the lie. If that is true, the taxpayers and their advisors (both lawyers and financial advisors) should have recognized the lie and the Government should be able to prove it. Yet the quote above from the Quellos prosecutor indicates that the Government knows it cannot prove the lie -- the taxpayer's own representation -- that was the central feature of all the Government imagines is bad about these shelters.
The underlying problem, I think, is that no one really knew the precise paramaters of the business or profit motive requirement. Did it mean a certain threshold probability over covering the all-in costs and have some profit potential beyond that? Does one who "invests" in a lottery ticket have a profit motive? Does the profit motive play in the deal have to relate directly to the tax play that produces the shelter? (For example, in some of the shelters, the investment aspect was really separate from the tax play, often based on Helmer, producing the shelter.) So different taxpayers even being counseled by competent lawyers and advisers might indeed reach a conclusion that, while not acceptable to the prosecutors, really was their conclusion based on the independent advice they received from their highly competent lawyers and, in some cases, independent financial advisors.
I hope that readers will also see in this level of confusion / uncertainty about the law's commands issues related to the certainty required in the law to set the legal duty (a la James/Critzer/Garber/Dahlstrom/Pirro), as well as issues of Cheek willfulness.
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