FORMER INVESTMENT FIRM CEO AND TWO ATTORNEYS INDICTED IN OFFSHORE TAX FRAUD AND KICKBACK SCHEME
Men Allegedly Used Phony Stock Sales Scheme to Help Investors Avoid Income Taxes on more than $1 Billion
Two individuals, the former Chief Executive Officer of Quellos Group L.L.C. (“Quellos”) and an attorney and principal of the investment firm, are named in an 18 count indictment charging Conspiracy to Defraud the Internal Revenue Service, Tax Evasion, Counseling False Tax Filings, Wire Fraud and Conspiracy to Launder Monetary Instruments. A third attorney who served as a personal advisor to a client of the firm is also charged with Conspiracy to Launder Monetary Instruments. Quellos founder and former CEO JEFFREY I. GREENSTEIN, 47, of Mercer Island, Washington, and attorney CHARLES H. WILK, 51, of Seattle, a tax attorney and principal in the firm, have been summoned for arraignment in U.S. District Court in Seattle on June 18, 2009, at 2:30 pm. The third defendant, Los Angeles attorney MATTHEW G. KRANE, 55, is currently detained at the Federal Detention Center in Los Angeles awaiting trial on passport fraud charges brought by the Central District of California.
“The vast majority of American taxpayers work honestly and diligently to calculate and pay their income taxes. Our tax system, at its core, is an honor system where everyone, including our wealthiest citizens, must pay their fair share,” said U.S. Attorney Jeffrey C. Sullivan. “This case demonstrates our commitment to prosecute those who seek multi-million dollar fees marketing a tax shelter scheme based on lies and deceit.”
“Taxpayers cannot enter into financial arrangements that create false losses in investment programs for the purpose of decreasing their tax liability,” said Eileen Mayer, Chief, IRS Criminal Investigation. “A top priority for the IRS is the investigation and prosecution of income tax evasion by high net worth individuals, both domestic and offshore.”
According to the grand jury indictment returned today, beginning in June 1999 and continuing through August 2006, GREENSTEIN and WILK designed, implemented and defended before the IRS a fraudulent tax avoidance scheme known as POINT (Portfolio Optimized INvestment Transaction). POINT purportedly permitted wealthy taxpayers who anticipated large capital gains to offset those gains by mixing those gains with losses derived from the sale of depreciated stock. POINT clients were told that a certain offshore investment fund owned billions of dollars worth of stock in well-known, publicly traded U.S. technology companies that had depreciated in value. The offshore investment fund purportedly formed various offshore and onshore partnership entities and contributed portions of its portfolio of stock into these entities. Because of certain provisions in the tax code, the POINT clients were advised that if they purchased one of these partnerships from the offshore fund, they could inherit the unrealized losses in the stocks and use them to shelter the gains from sales of other assets, and greatly reduce the clients’ tax liability.
In return for participating in the shelter, the clients were generally instructed to pay fees to Quellos and others totaling approximately three percent of the total amount of “loss” the client sought, which, even with additional transactional costs, was far below the 20% capital gains tax the clients were facing. What GREENSTEIN and WILK did not tell clients, or the attorneys who evaluated the proposals, was 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. At the direction of GREENSTEIN and WILK, offshore shell entities with no assets or ongoing business were appropriated to engage in sham paper transactions to fabricate the appearance that an offshore entity possessed billions of dollars worth of stock, in order to defraud the clients and ultimately the IRS into believing that these stocks existed. In 2000 and 2001, clients paid some $86 million in fees to Quellos and others, in an attempt to shelter more than $1.4 billion in capital gains, and avoid $400 million in federal taxes.
The indictment alleges that GREENSTEIN and WILK drafted and disseminated fraudulent materials touting the tax shelter strategy. GREENSTEIN and WILK knew that numerous representations in the documents were false, and knew that investors would rely on those documents if the tax shelters were questioned by the IRS. GREENSTEIN and WILK also gave false information to legitimate tax attorneys who provided opinions that the strategy was legal.
Additionally, GREENSTEIN and WILK allegedly provided kickbacks to attorney MATTHEW G. KRANE in exchange for his assistance in enrolling a wealthy client in the tax shelter scheme. The client had more than $1 billion in capital gains in 2001, and GREENSTEIN and WILK promised KRANE a cut of the fees. The client was never informed of the kickback arrangement. Between March 2001, and October 2001, the men drafted false fee agreements that made it appear that the wealthy client was paying $46 million to Quellos to participate in the tax shelter strategy. In fact, $36 million of that fee was actually diverted by WILK and GREENSTEIN to an offshore account controlled by KRANE.
The indictment details that five different clients claimed more than $1.3 billion in fraudulent capital losses on their tax returns, allowing them to avoid more than $400 million in taxes. After the IRS started examining these capital losses, GREENSTEIN and WILK continued to provide fraudulent and misleading information to those trying to respond to the IRS audits. GREENSTEIN even testified before the U.S. Senate providing false information about the tax shelter scheme.
As part of the indictment, the government seeks $36 million in forfeiture from KRANE representing the money he laundered through the scheme. The taxpayers who purchased the POINT tax shelter scheme subsequently paid all taxes owed.
The Tax Conspiracy offense and the each of the evasion offenses are punishable by up to 5 years of imprisonment. Each counseling of false return offense is punishable by up to 3 years imprisonment. The wire fraud offenses and the conspiracy to launder monetary instruments offense are each punishable by up to 20 years of imprisonment.
The charges contained in the indictment are only allegations. A person is presumed innocent unless and until he or she is proven guilty beyond a reasonable doubt in a court of law.
The case is being investigated by the Internal Revenue Service Criminal Investigation (IRS-CI).
The case is being prosecuted by First Assistant United States Attorney Mark Bartlett and Assistant United States Attorney Katheryn Kim Frierson.
For additional information please contact Emily Langlie, Public Affairs Officer for the United States Attorney’s Office, at (206) 553-4110 or Emily.Langlie@USDOJ.Gov.