White Collar Crime Prof Blog

11th Circuit Reversal on Rehearing

Probably the rarest of decisions is a reversal on a rehearing. But this week, the Eleventh Circuit Court of Appeals did just that in the case of United States v. Kottwitz.  In the original decision (see here), the court had concluded that the refusal to give the jury an instruction about reliance on an accountant's advice was error as to Counts Three, Four, and Five.  In this rehearing, the court extended this decision to Count One - a conspiracy count.  The court stated,  "[e]ven though no evidence directly showed that Defendants’ accountant was involved in initially entering/hiding transactions on the corporate books (for example, the personal-expense transactions), Defendants introduced enough circumstantial evidence to warrant an instruction that -- at some pertinent point -- Defendants may have relied on the accountant’s advice."

Representing the defendant in this case was Jerry Froelich, Jim Jenkins, and Bruce Maloy of Atlanta, Georgia and the lawfirm of Bernhoftlaw was co-counsel and lead on the Kottwitz appeal for a lead defendant in the case.  See Robert G. Bernhoft's Petition for Panel Rehearing -Download 1_09-09-10_PetitionPanelRehearing

(esp)

NACDL's 6th Annual Defending the White Collar Case Seminar – “Evasion, Avoidance, or What? Ethically Navigating the Modern Tax Fraud Case Post-UBS,” Friday, October 1, 2010

Guest Blogger: Joseph D. Mancano, Pietragallo Gordon Alfano Bosick & Raspanti, LLP (Philadelphia, PA)

Panelists: Peter D. Hardy and Kathryn Keneally

Peter Hardy of Post & Schell and Kathryn Keneally of Fullbright & Jaworski presented on government enforcement initiatives and the voluntary disclosure program regarding Americans with off-shore bank accounts.  The DOJ and IRS initiative began in 2007 at when Igor Linikov pled guilty to tax evasion in connection with a $350 million undisclosed bank account at UBS in Switzerland.  He paid $52 million to the IRS, received probation and cooperated with the government.  Later, the person who serviced Linikov at UBS pled guilty, cooperated and received nearly four years in jail.

UBS entered into a deferred prosecution agreement with the government, paid $700 million in penalties and disclosed the names of 250 account holders of foreign accounts to the government. Since then, the U.S. and Swiss governments have entered into an agreement whereby Swiss financial institutions have agreed to turn over information to the U.S. regarding Americans who hold accounts in Swiss institutions.  As a result, the government is now prosecuting UBS account holders, although the cases have so far been few (only ten indicted), and the sentences have been relatively short.

Most practitioners may be unaware of the FBAR form that must be filed by a person who holds a foreign bank account containing greater than $10,000. Under Title 31 of the U.S. Code, a willful failure to file the form is a felony carrying a maximum sentence of five years.  The civil penalty for failing to file is also severe.  That penalty is 50% on the total assets in the account per year.  Besides the FBAR, IRS Form 1040 requires a taxpayer to disclose foreign bank accounts.  Failure to disclose the account on the Form 1040 is interpreted by the IRS as a false return, a felony.

To encourage voluntary compliance, and in recognition that people fall out of the system for various reasons, the IRS instituted the “Off-shore Voluntary Disclosure Initiative.”  Under this Program, the IRS guarantees a one-time penalty of 20% of the highest balance in the foreign account for the prior six years.  Those in the Program would, of course, have to file the FBAR and amend their tax returns to pick up the unreported income. Under this Program, 14,700 people came forward, which overwhelmed the system.  After an extension, the Program ended on October 15, 2009.  Thus, the IRS guarantee of the 20% penalty ended.

Although the Off-shore Program ended, the general IRS Voluntary Compliance Program regarding tax offenses still remains in effect. There are, however, some changes to this program implemented in connection with off-shore accounts. One such change is that the IRS developed an institutional position against so-called “quiet disclosure,” i.e., disclosing the omission by simply filing an amended return. 

Today, there is a great deal of uncertainty regarding the treatment of undisclosed off-shore accounts by DOJ and the IRS for people who missed the “Off-shore Voluntary Disclosure Program” deadline. Moreover, UBS is not the only foreign bank disclosing the names of account holders to the IRS.  News reports have revealed that HSBC and many others are doing the same. Now, white collar practitioners have to present clients with a choice of loss of their freedom versus the loss of the assets in their foreign accounts.  Such decisions will become more frequent as DOJ and the IRS ramp-up prosecutions. 

(jdm)

11th Circuit Reverses on Failure to Give Good Faith Reliance Instruction

The Eleventh Circuit Court of Appeals reversed several convictions in the case of United States v. Kottwitz for failure to give a "requested special instruction to the jury on their good faith reliance on their accountant's advice."

The court stated: "A trial court is not free to determine the existence of the defendant’s theory of defense as a matter of law; it is established by the defendant’s presentation of an evidentiary and legal foundation and, once established, the defendant is entitled to jury instructions on that defense theory." (citations omitted) 

The court also stated: "The defendant bears an "extremely low" threshold to justify the good faith reliance instruction and does not need to prove good faith."

 Finally the court said: "The instruction is appropriate even where the evidence might lead the jury to conclusions that would not benefit the defendant because refusing the charge withdraws the point from the jury’s consideration and a jury should be given the opportunity to resolve all questions of fact."

See also Carl Lietz & Paul Kish, Federal Criminal Lawyer Blog, Kottwitz: Eleventh Circuit Holds Trial Court Should Have Given Good Faith Defense Jury Instruction

(esp) 

Commentary on Snipes Decision

As noted here, the 11th Circuit affirmed the lower court's decision in the Snipes case. The unanimous decision authored by Circuit Judge Marcus did not find error in the sentencing, jury instructions, or venue issues raised by Snipes. Snipes had been found guilty after a trial by jury of three misdemeanor offenses and had been acquitted of conspiracy and false claim charges.  He also was acquitted on failure to file charges premised on the years 2002, 2003, and 2004.  The district court sentenced Snipes to 36 months, which was "comprised of three one-year terms for the failure-to-file convictions, to be served consecutively," followed by additional terms.

Noteworthy in this decision is the court's discussion on the change of venue issue. Snipes's attorneys challenged venue "alleging that the government had chosen Ocala County, Florida, for trial for racially discriminatory reasons."   Of particular interest is that the district court granted Snipe's request for a jury instruction on venue and "instructed the jury that the government must prove venue -- the district of Snipe's legal residence -- by a preponderance of the evidence, and that the jury must acquit Snipes if the government had not met its burden."  But Snipes was not given the pretrial hearing he wanted on the venue issue and he argued on appeal that "a pretrial hearing was necessary because a defendant cannot be forced to cede his Fifth Amendment right against self-incrimination in order to enforce his right to testify about venue at trial."  This argument has worked for some defendants with respect to the Fourth Amendment. The Eleventh Circuit held that Snipe's "Sixth Amendment rights were not impaired in this case."  The court stated:

"Snipes had a constitutional right to have venue decided by the jury.  It did just that.  Both parties presented evidence on venue at trial in great detail.  Moreover, the district court fully instructed the jury that venue is an element of the offense and that Snipes must be acquitted if the government failed to establish venue by a preponderance of the evidence." 

This could well be an issue that progresses to a higher court. If one is arguing improper venue and saying that the venue was selected for "racially discriminatory reasons," should the jury in that locale decide the issue of venue?  Can the accused be placed in the situation of choosing between presenting evidence contrary to the venue and having to forgo rights against self-incrimination?  (see background here)  Venue motion timing issues may cloud this being the case for determination of these questions. But it is interesting to note that the decision includes no mention of the makeup of the venire or jury.  

In addition to all the questions raised by this decision, the case may well be examined because of new evidence. (see here)  Stay tuned.  

(esp)

11th Circuit to Snipes - You Lose

The Eleventh Circuit issued an opinion in the Wesley Snipes case (background here and here) denying defendant's arguments with respect to sentencing, jury instructions, and venue. Snipes had been convicted of three misdemeanor counts of willful failure to file federal income tax returns for three years in violation of 26 U.S.C. s 7203. Commentary forthcoming.

Opinion - Download 11Op071610

(esp)

Tax, Tax, Tax

As April 15th was approaching, an increasing number of tax related cases were being prosecuted. Here are just a few recent DOJ Press Releases:

Former Hope, Idaho Resident Indicted on Tax Charges

Justice Department Sues to Stop Birmingham-Area Tax Return Preparers

U.S. Sues Missouri Lawyer to Halt Alleged Tax-Fraud Schemes

Phoenix Men Charged in Money Laundering and Tax Fraud Scheme

Idaho Businessman Pleads Guilty to Failure to Pay Employment Taxes

Ponzi Scheme Operator Pleads Guilty to Tax Charges

Justice Department Highlights Tax Enforcement Results

Will this deter future criminality?

(esp)

Oral Argument in Wesley Snipes Case

Previously granted oral argument (see here), lawyers for Wesley Snipes appeared in the 11th Circuit this past week to argue the case. A report of the argument sounded like it was a "hot" bench with questions regarding the venue and some about the "good faith" jury instructions. See also Greg Bluestein (AP), Wesley Snipes appeals 3 tax convictions in Georgia.

(esp)

Reactions to UBS Settlement and Possible Future Prosecutions

Some folks are voicing an opinion on the UBS settlement and what may result from it.  Check out the following:

• Reuters, Reactions to UBS tax deal
• Tax.com, Law Professors Express Concern over UBS Settlement 
• TaxProfBlog, Tax Profs Criticize UBS Settlement 

Three American U. Law Profs (Nancy S. Abramowitz, Andrew Pike, and Robin Westbrook) state in the second paragraph of their letter:

We have also watched with interest the IRS' efforts to promote voluntary disclosure by US taxpayers prior to IRS' commencement of examination. With the lure of amnesty in the form of no criminal action and reduced civil penalties, the IRS hopes taxpayers will come forward "voluntarily." This general concept is equally laudable. However, the IRS' promise to keep open the September 23 amnesty deadline for taxpayers who come forward even after they receive notice from UBS that their names are about to be revealed is the point at which we depart company with IRS policy.

They state later in their letter:

Our law school operates a low income taxpayer clinic. In the last few years, we have seen an increase in the assertion of penalties against the poorest, least sophisticated taxpayers with virtually negligible room for negotiation by the IRS. It would seem that a blanket program of offering reduced penalties and no criminal action to wealthy, sophisticated tax dodgers who come forward on the eve of their names being turned over to the IRS and with prior knowledge of the forthcoming disclosure, is suggestive of something less than even handed tax administration.

For background on the UBS Settlement see here, here, and here.

(esp)

Indicting the Gatekeepers - Post UBS

DOJ Press Release,Swiss Banking Executive and Swiss Lawyer Charged with Conspiring to Defraud the United States -Defendants Aided Wealthy Americans Conceal Assets in Secret Swiss Bank Accounts

"According to the indictment, [these individuals] helped wealthy American clients conceal their assets by establishing sham and nominee offshore entities to hide their U.S. clients' assets and income while allowing these clients to still control the assets and make investment decisions."

Other interesting posts on UBS-

Sharona Coutts, ProPublica, UBS and the Taxpayers’ Hidden Billions

WebCPA Staff, Former UBS Banker Sentenced to 40 Months

(esp)

USB Agreement & US-Swiss Agreement

UBS entered into a deferred prosecution with DOJ (see here).  The agreement included that UBS would provide the U.S. government "with the identities of, and account information for, certain United States customers of UBS’s cross-border business." The process initially moved slowly. Eileen C. Mayer, Chief of IRS-Criminal Investigation, called one prosecution "the tip of the iceberg." (see here).  An issue that needed to be resolved involved an agreement between the US and Swiss government.  That agreement has been reached.  This is a copy of the US-Swiss Agreement - Download US-Swiss Agreement Declararaions Signed.  The Bank's Agreement with DOJ is here - Download Bank_agreement

(esp)(w/ hat tips to Tiffany M. Joslyn of NACDL and Peter Hardy of Post & Schell).

Gay Collars - Perhaps An Investigation Is Needed

Watching a part of NBC's Today Show of the interview with Richard Hatch (Survivor) (for background see here) and then hearing that he is arrested shortly thereafter, certainly has a chilling effect.  Hatch, on house arrest, did an interview with the media.  Listening to Hatch, the media, and his attorney, it sounds like permissions had been granted to do this interview (see here) but I have no information to confirm whether it was or was not. And why shouldn't an interview be allowed - after all even those in prison should be entitled to some First Amendment rights.  Is this related to prison security? And if so, does it make a difference that he is no longer in prison? Or was this one of the conditions of this house arrest? And if he violated one of the conditions of his house arrest, why would he chance this now?

Shortly after the interview, the media reports that he was taken from his home back to prison. What is problematic here is that during the interview he not only proclaims his innocence but also claims that anti-gay bias drove this prosecution.  

This latter claim needs to be investigated, and an investigation that occurs apart from DOJ individuals associated with the past administration. When someone is on the back end of their prison time (doing house arrest), the last thing they would want to do is jeopardize their ability to return to society. Someone needs to look at whether different treatment is being given to gay collars.

See Today MSNBC.com, ‘Survivor’ Richard Hatch is back behind bars -Mere hours after TODAY interview, reality show star taken into custody; see also Matt Caputo, Daily News, 'Survivor's' Richard Hatch arrested after Today Show with Matt Lauer; says anti-gay bias drove feds

(esp) 

"The Tip of the Iceberg" - A Plea in the UBS Swiss Accounts

UBS entered into a deferred prosecution agreement with the government (see here).  The agreement included that UBS would provide the U.S. government "with the identities of, and account information for, certain United States customers of UBS’s cross-border business." Things initially moved slowly as an agreement needed to be reached regarding the release of information in light of privacy laws (see here). But with these two steps apparently settled according to press reports, it is not surprising to see an individual reaching a plea agreement with the government for failure to disclose UBS Swiss bank accounts to the IRS. A DOJ Press Release reports that this individual "admitted that he failed to pay at least $200,000 in federal income taxes and that he now owes the government interest and penalties."

One has to wonder if the government action of proceeding against individuals with Swiss accounts that were not properly reported to the IRS, will assist the US economy. Eileen C. Mayer, Chief of IRS-Criminal Investigation, called this prosecution "the tip of the iceberg."

(esp)

Wesley Snipes Gets Oral Argument in the 11th Circuit

Actor Wesley Snipes has been granted oral argument in the 11th Circuit Court of Appeals. Snipes was convicted of misdemeanor tax counts and found not guilty of other conspiracy and tax fraud counts following a jury trial (see here). The oral argument is scheduled for November 2009.  Last year (September - September reporting period) less than 16% of  all Eleventh Circuit criminal appeals were disposed of on the merits following oral argument (1258 total criminal cases, 1059 terminated after submission on the briefs, and 199 terminated after oral argument see here).  Representing Snipes are Philadelphia area Attorney Peter Goldberger, former president of the National Association of Criminal Defense Lawyers Carmen Hernandez, Daniel Meachum (of Atlanta), and Linda Moreno (of Tampa). For a discussion of one of the issues likely to be raised on appeal, see here. 

(esp) 

Race Car Driver Not Guilty of Tax Evasion

Discussed here are recent DOJ press releases related to tax charges and pleas - all immediately prior to the April 15th tax deadline. But the government was fortunate that this result occurred after the 15th -  Helio Castroneves was found not guilty of all six counts of tax evasion at his recent trial. See AP, Castroneves not guilty of tax evasion;Jay Weaver & David Ovalle, Miami Herald, Helio Castroneves found not guilty in tax-evasion trial

The government can use tax charges filed near the 15th to stimulate compliance with the law. It can serve as a general deterrence to future criminality. Having a "not guilty" of tax related offenses near this same time, certainly would not be beneficial to the government.  But Castroneves' jury result of "not guilty" was immediately after the 15th.

The jury did not reach a verdict on the conspiracy charge against Castroneves, but the conspiracy charge was premised on the tax evasion charge so it presents difficult issues for the prosecution if they do decide to try again. The conspiracy count was worded "to defraud the United States for the purpose of impeding, impairing, obstructing, and deteating the lawful government functions of the Internal Revenue Service of the United States Department of Treasury in the ascertainment, computation, assessment, and collection of United States income taxes." (See Indictment)  Hopefully prosecutors will not spend tax money trying to convince a jury that the inchoate crime of conspiracy does not require a completed act. Section 371 does require an overt act and the rejection of the substantive offenses sends a loud message to the government here.

(esp)

April 15th - Tax Day Is Approaching

One can easily tell that tax day is getting near by just looking at the DOJ Press Releases.  Although tax prosecutions occur year round, one can't help but notice the many appearing around April 15th.  In a way this publicity is good, because what better way to achieve general deterrence then publicizing the ramifications of not filing a tax return, or filing an improper one. Although some of these are indictments, and the individuals are of course presumed innocent until convicted, if they are, here are some of the latest press releases -

DOJ Press Release, Louisiana Tax Defier Convicted on Federal Tax Charges -Defendant Had Filed Millions of Dollars in Fictitious Liens to Harass Law Enforcement

DOJ Press Release, Federal Court Blocks Chicago Tax Preparation Firm from Claiming Improper Tax Credits -Tax Preparer Allegedly Claimed Fraudulent Fuel Tax Credits for Customers

DOJ Press Release, Bronx Return Tax Preparer Indicted for Aiding in Preparation of False Tax Returns

DOJ Press Release, Disbarred Maryland Attorney Pleads Guilty to Preparing False Tax Returns

And of course, one also finds DOJ issuing this week the highlights of the 2008 year, which includes mention and reference to the  UBS deferred prosecution agreement.

(esp)

Snipes Holds Onto Bail - Just Barely

Defendant Wesley Snipes made a Motion for Limited Travel for Work Obligations.  He sought permission to travel outside the United States for work on two films (Gallowwalker and Game of Death). The government objected to this post trial bail "on the grounds that Defendant Snipes traveled to Dubair, United Arab Emirates, in late November 2008 without obtaining prior permission from the Court."  The court acknowledged that Snipes had violated his conditions of release for several reasons including "failing to notify his Pretrial Services Officer when his trip to Bangkok was canceled." But as the court noted, "[w]hile it does appear that on two occasions Defendant Snipes exceeded his travel conditions as set forth in his terms and conditions of release and the Court's July 2, 2008 Order, it is also true as pointed out in Defendant Snipes' moving papers that he has never failed to appear at the many proceedings in this case where his presence was required." In the end, the court granted the motion but did place restrictions on Snipes.

Snipes was represented by Carmen Hernandez, Linda Moreno, Dan Meachum and Peter Goldberger.

Court's Order -  Download 520_OrdGrantTrav 033109

(esp)

Major Criminal Tax Fraud Trial Results In Complete Defense Victory

This past week a U.S. Virgin Island (USVI) federal jury returned not guilty verdicts on all twenty-six counts in a major federal criminal tax fraud trial. The government alleged that three individuals created and promoted Kapok, a USVI limited partnership, in order to unlawfully obtain tax benefits from a USVI economic development program.  The program provided a 90 percent federal income tax credit for eligible companies and individuals. Also charged were a St. Louis area auto dealer and several companies affiliated with the defendants. The government alleged a loss of more than $75 million in federal income taxes from Kapok's participating partners.

Blair G. Brown, a partner in Washington, DC's Zuckerman Spaeder, led the defense of one of the individual's accused, with assistance from associate Lani Cossette. "This case should never have been a criminal prosecution," said Mr. Brown. "The legal standards for USVI residency and qualifying income under the economic development program were vague. All of the defendants did their best in relying on the guidance of experts. The jury also correctly understood that the defendants and similar partnerships brought substantial economic benefits to the USVI."

"The defense was a real team effort that melded the strengths of all defense counsel. Sticking together and pounding our themes-vague standards, reliance, disclosure, and benefits to the USVI-were essential," added Mr. Brown. The defense presented only two witnesses, and none of the defendants testified.

Also representing the same person as Brown were Clyde Kuehn from Belleville, Ill., and USVI local counsel Lee Rohn. Other defense counsel were William Lucco of Edwardsville, Ill.; Chuck Meadows and Josh Ungerman of Dallas; Robert Webster of Dallas; Robert Smith of Dallas; and Gordon Rhea of Mt. Pleasant, S.C.  The government was represented by Assistant U.S. Attorneys from the Southern District of Illinois, where the case was originally indicted before its transfer to the USVI, and the U.S. Department of Justice Tax Division.

(esp)

Will Tax Be A New "In" Crime & What Are the International Implications

The Washington Post article by David S. Hilzenrath titled, IRS, Justice Target Undisclosed Assets in Swiss Accounts raises the question of whether the veil will be further lifted over bank accounts held in Switzerland, and will there be prosecutions in the U.S. for individuals who placed funds abroad in efforts to evade U.S. taxation?  This remains to be seen, although Mr. Hilzenrath provides information on current happenings.

An interesting question can arise when DOJ tries to secure information that might result in a violation of foreign law if the information is provided to DOJ. In the past courts have been split on whether the production of documents should be permitted when there is a possible violation of the secrecy laws of another country. The Restatement (Third) of Foreign Relations Law of the United States section 442(1)(c) provides:

"In deciding whether to issue an order directing production of information located abroad, and in framing such an order, a court or agency in the United States should take into account the importance to the investigation or litigation of the documents or other information requested; the degree of specificity of the request; whether the information originated in the United States; the availability of alternative means of securing the information; and the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine important interests of the state where the information is located. (emphasis added).

One Fifth Amendment case DOJ is likely to cite to is United States v. Balsys, 524 U.S. 666 (1998).  There may also be questions as to whether operations in the U.S. make a difference. The Permanent Subcommittee on Investigations Report on Tax Haven Banks Hiding Billions From IRS can be found here. UBS continues to be in the news. (See previously from June 08, Linnley Browning, NYTimes, Wealthy Americans Under Scrutiny in UBS Case ). 

(esp)(w/ a hat tip to Mark Johnson)

Who Says White Collar Sentences Are Dropping Below the Guidelines?

Despite recent Supreme Court opinions that provide some flexibility when sentencing a convicted defendant, guideline sentences appear to be part of a culture that is not changing. A recent white collar case that demonstrates a court not departing below the guidelines, is the recent sentencing of T. Milton Street. A brother of former Philadelphia Mayor John F. Street, T. Milton Street received a sentence of 30 months for his convictions for tax charges. (see Emilie Lounsberry, Philadelphia Inquirer, T, Milton Street Sr. gets 30 months for dodging taxes) The trial was an unusual one, with the accused arguing the unconstitutionality of the tax code (see here).  The jury failed to convict the accused of the fraud charges brought by the government, and also did not convict of all the tax charges that had been brought. (see here).  In addition to the stiff tax sentence, the court failed to grant the accused bail pending his appeal. (see Michael Hinkelman, Philadelphia Inquirer, T. Milton Street Sentenced to 30 Months) This does not, however, preclude him from asking the appellate court for bail.

(esp)(w/ a hat tip to Peter Goldberger)

The Other Four in the Stein-KPMG Related Case

Defendants are not always successful in KPMG related cases before Judge Kaplan.  The four remaining defendants in the case found that out this past week when their claims of due process violations were denied.

The issue is a fascinating one, and one previously seen in cases such as Scrushy and Stringer - the sharing of information in a parallel proceeding. The court held that "[i]t is well-established that as a general rule, '[t]he prosecution may use evidence acquired in a civil action in a subsequent criminal proceeding unless the defendant demonstrates that such use would violate his constitutional rights or depart from the proper administration of criminal justice.'"

In denying the defense motion to dismiss the case, the court held that a reliance on other cases was "misplaced" in that in each of the cases cited by the defense, "the court emphasized that (1) there was no bona fide civil investigation, and (2) the defendant was deceived by the government during the civil investigation." With "no such allegations in this case" the court denied the defense motion to dismiss.

Memorandum and Order - Download 20080910_order_re_6103_tj252.pdf

(esp)