LAWFUEL – MICHAEL J. GARCIA, United States Attorney for the
Southern District of New York, and PATRICIA HAYNES, Special
Agent-in-Charge of the New York Field Office of the Internal
Revenue Service (“IRS”), Criminal Investigation Division,
announced today the filing of a superseding Indictment adding two
new defendants and multiple additional charges in connection with
the tax shelter practice of Big-Four accounting firm Ernst &
Young (“E&Y”).
In May 2007, the Government filed an Indictment
alleging that four current and former E&Y partners, ROBERT
COPLAN, MARTIN NISSENBAUM, RICHARD SHAPIRO, and BRIAN VAUGHN
(“the E&Y defendants”), together with their co-conspirators,
concocted and marketed tax shelter transactions that were based
on false and fraudulent factual scenarios, and were designed to
be used by wealthy individuals to eliminate or defer their tax
liabilities on income generally in excess of $10 or $20 million.
As alleged in that Indictment, the conspirators understood that
if the IRS were to detect the use of these tax shelters, and
learn the true facts and circumstances surrounding the design,
marketing and implementation of the shelters, the IRS would
aggressively challenge the claimed tax benefits. In that event,
the IRS would seek to collect the unpaid taxes plus interest, and
might also seek to impose substantial penalties upon the clients.
Accordingly, the conspirators undertook to prevent the IRS from:
a) detecting their clients’ use of these shelters; b)
understanding how the transactions operated to produce the tax
results reported by the clients; c) learning that the shelters
were marketed as cookie-cutter products that would eliminate,
reduce or defer large tax liabilities; d) learning that the
clients were not seeking profit-making investment opportunities,
but were instead seeking huge tax benefits; and e) learning that,
from the outset, all the clients intended to complete a
pre-planned series of steps that had been designed by the
conspirators to lead to the specific tax benefits sought by the
clients.
Today’s superseding Indictment charges two additional
individuals — DAVID L. SMITH and CHARLES BOLTON — with
participating in the same conspiracy, and it charges all six
defendants with additional offenses. According to the
superseding Indictment:
In late 1998 or early 1999, SMITH introduced a
fraudulent tax shelter called “CDS” to the E&Y defendants, and
later that year, used his company — the Private Capital
Management Group (“PCMG”) — to implement CDS transactions for
wealthy clients identified by E&Y. Early in 2000, SMITH licensed
the CDS idea to BOLTON, and a group of companies owned by BOLTON
began to implement the same fraudulent shelter for additional
wealthy clients of E&Y.
In mid-2000, the E&Y defendants engaged BOLTON’s
assistance in implementing an additional fraudulent tax shelter
called “CDS Add-On.” The conspirators falsely portrayed the
“Add-On” transaction to the IRS as an “investment” entered into
by clients who were seeking to make profits through trading in
foreign currency options, when in reality, the transactions were
designed solely to generate tax savings, and the clients stood no
chance of making any profit after paying substantial fees to E&Y,
to the Bolton companies, and to the other participants in the
transactions.
BOLTON and the four E&Y defendants aided and abetted
tax evasion by three groups of E&Y clients who implemented the
Add-On transaction in 2000. They did this by assisting the
taxpayers in creating artificial tax losses totaling
approximately $70 million.
According to the new allegations, both SMITH and BOLTON
gave false and misleading testimony under oath when interviewed
by the IRS in connection with audits of various taxpayers who
implemented CDS.
Today’s Indictment also alleges that CHARLES BOLTON
himself utilized two CDS transactions to defer his own tax
liability on millions of dollars in fees collected from tax
shelter clients. In December 2001, in the space of seventeen
days, BOLTON used a CDS shelter to generate a tax deduction of
approximately $24.9 million, which he used to offset his tax
shelter fee income. Later, when audited by the IRS, BOLTON
denied that tax avoidance was a significant factor in his
decision to implement the shelter.
SMITH, who was involved in developing tax shelters for
years before founding PCMG, is also charged with evading his own
taxes on $18.4 million earned in 1998. He did this, in part, by
engaging in a sham sale of his company to an entity in the Cayman
Islands. According to the charges, SMITH controlled that
offshore entity, but when audited by the IRS, falsely denied any
interest in the entity. SMITH is also charged with filing a
false tax return on which he denied having any interest in a
foreign bank account.
Smith, 51, of San Francisco, California, and BOLTON,
45, of Memphis, Tennessee, are scheduled to appear on Friday,
February 22, 2008 at 9:30 a.m. for arraignment before United
States District Judge SIDNEY H. STEIN. The E&Y defendants are
also scheduled to be arraigned on the superseding Indictment at
this time.
Mr. GARCIA praised the investigative work of the IRS.
Mr. GARCIA added that the investigation is continuing.
Assistant United States Attorney DEBORAH E. LANDIS and
Special Assistant United States Attorney JOHN E. SULLIVAN are in
charge of the prosecution.
The charges contained in the Indictment are merely
accusations, and the defendants are presumed innocent unless and
until proven guilty.
08-43 ###
