United States Attorney Jenny A. Durkan
Western District of Washington
FORMER QUELLOS EXECUTIVES SENTENCED IN OFFSHORE TAX SHELTER SCAM INVOLVING MORE THAN $9.6 BILLION IN PHONY STOCK SALES
Men Fabricated Losses as a Tool to Help Wealthy Avoid Taxes
The former Chief Executive Officer of Quellos Group L.L.C. (“Quellos”) and its head of the private clients group, both principals of the investment firm, were sentenced in U.S. District Court in Seattle to 50 months in prison and two years of supervised release for Conspiracy to Defraud the United States, and aiding and assisting with the filing of a false tax return. Quellos founder and former CEO JEFFREY I. GREENSTEIN, 48, of Mercer Island, Washington, and former Quellos tax attorney CHARLES H. WILK, 52, of Seattle, pleaded guilty in September 2010. Today both men paid the IRS $7 Million in penalties related to their personal gain realized from the design, promotion and implementation of the fraudulent tax shelter, which they called POINT. The estimated tax loss from the scheme is $240 million. Those losses have since been repaid by the taxpayers. Addressing Greenstein, U.S. District Judge Ricardo Martinez said, “You conspired with others to steal from every other taxpayer who voluntarily pays their taxes . . . . You stole from the very society that allowed you the opportunity to achieve wealth and status beyond most peoples’ wildest dreams.”
“This scheme was pure fraud aimed at cheating critical government programs of $240 million in taxes. These dollars aren’t just numbers -- this fraud affects real people with real needs,” said U.S. Attorney Jenny A. Durkan. “That amount of tax money would pay for many small business loans to create jobs, it would pay for enrollment of 31,579 disadvantaged children in Headstart, or it would pay for a month of hot breakfasts for more than a million hungry schoolchildren. It is fortunate that through the hard work of IRS investigators, these tax dollars have been repaid.”
“Today the individuals responsible for developing and selling a fraudulent tax shelter scheme have been held accountable for their actions. Their tax strategies were no more than a web of lies and false representations,” said Victor S.O. Song, Chief, IRS Criminal Investigation. “As the tax filing season gets underway, honest taxpayers can be assured that the IRS, in partnership with the Department of Justice, will investigate and prosecute those who promote such bogus schemes. Also, it is worth noting that none of the investors benefitted from this fraudulent scheme because the IRS collected the correct tax from those who invested in it.”
Noting the GREENSTEIN and WILK’s “clear disdain for the law... in pure pursuit of profit,” prosecutors recommended a six year prison term. “Reasonable people do not need a masters degree in law to know and understand that it is wrong to completely fabricate losses to offset your gains. There is no difference between what the Defendants did in this case from someone simply sitting down and making up numbers on their tax returns, except that in this case, Defendants sought to make up numbers on numerous tax returns for very wealthy individuals.... Defendants committed blatant fraud and they wanted to implement this fraud on a wide spread scale, making a mockery of the entire tax system,” prosecutors wrote in their sentencing memo.
Beginning in 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.
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.
Both men have also paid the government for the cost of their prosecution: $296,873.
The case was investigated by the Internal Revenue Service Criminal Investigation (IRS-CI).
The case is being prosecuted by Assistant United States Attorneys Robert Westinghouse, Katheryn Kim Frierson, Mike Dion and Jerrod Patterson.