The US Attorney for the Southern District of New York, Michael Garcia, announced today the guilty plea of Douglas Steger, a Chicago businessman who headed American Financial Capital Corporation (a company that raised money for hedge funds) and got in way over his head in a tax shelter promotion scheme with a law firm (the now essentially defunct Jenkens & Gilchrist and its notorious Chicago tax threesome headed by Paul Daugerdas, the one who sold Henry Camferdam on the COBRA deal to "invent" $70 million in losses to offset his gains from sale of his computer company), a domestic bank (presumably the former BankOne (now part of Chase) located in Chicago and inventor of HOMER and other tax shelter schemes, as well as an adroit manipulator of the mark-to-market accounting rules in its favor), and a foreign bank (presumably Deutsche Bank, which made significant fees from tax shelter accommodations). These shelters have been making the news for years now, with a few actors such as Jenkens & Gilchrist in center stage in quite a few of them. See this May 28, 2006 posting on ataxingmatter, What's New in Tax Shelters for a good overview of the sordid shelter promotion business.
Steger pleaded guilty in Manhattan today to conspiracy to commit tax fraud and to filing a fraudulent tax return. (See links at bottom for the settlement, information and press release.) The first charge has a maximum of 5 years in prison and the second a maximum of 3 years, and both have fines of two times the gross gains or losses from the crime, as well as costs of prosecution. Steger has agreed to cooperate with the Department of Justice--bad news for the 36 "high net worth clients" that used the "hedge fund monetization of economic remainder " or HOMER tax shelter in 2001 to generate artificial losses. The banks had a good payday back then--the shelter was promoted for fees of 6% of the tax loss generated.
What's particularly interesting about these shelter promoters--a testimony, I guess, to their naked avarice--is their willingness to risk not only their livelihoods and professional integrity but that of their colleagues. These guys did things like file bogus third party referral invoices (one of Steger's was for more than $900,000) and used the very shelters they were promoting to clients themselves to offset the bogus income! Ultimately, being associated with these promoters was not good for one's professional career: Jenkins & Gilchrist had more than 600 lawyers when this scandal broke and the resulting $75 million charge caused its downfall (on top of its losses in connection with the savings and loan debacle that John McCain and the rest of the Keating Five got involved in). You can read more about J&G's downfall in Katie Fairbanks, How Jenkens & Gilchrist Lost Its Way, Dallas Morning News, April 1, 2007. And of course, it looks like here, as in the credit crunch problem, the great big investment banks that cater to the wealthy and powerful are front and center in promoting criminal tax fraud. For more on Bank One and its "innovative strategies group" that designed the HOMER strategy (and others), you can read Terence O'Hara, Tax Shelter Cases Shed Light on Banks' Role, Washington Post, Aug. 31, 2005.
Of course, perhaps worth even more of our attention is that fact that so many "high net worth clients" with millions of dollars of assets are so greedy that they are unwilling to pay the puny capital gains preferential rate on their incomes but would rather engage in what should be obviously illegal tax fraud (creating noneconomic losses to claim as offsets to their real income). That's another reason that it is necessary to have adequate tax rules to capture appropriate taxes from the wealthy elite--the same rate on capital gains that is charged on ordinary salary income; an estate tax that has some heft (not the $7 million exemption (per couple, plus other goodies) that the Congress is considering making permanent); and "payroll" taxation of million dollar salaries that is the same as that of $35,000 salaries (today, all salary received above about $90,000 is exempt from the payroll taxes that support Social Security and Medicare).
Information on Steger's case is available in
- plea agreement Download steger_plea_agreement.061608.pdf ,
- information Download steger_information_signed.071008.pdf , and
- SDNY Attorneys Office press release Download steger_plea_pr.SDNY.071008.pdf .
Recent Comments