ATTORNEY SENTENCED FOR ARRANGING OVER $7 BILLION TAX FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 

Wednesday, June 25, 2014

Former Jenkens & Gilchrist Attorney Sentenced to 15 Years in Prison for Orchestrating Multibillion Dollar Criminal Tax Fraud Scheme

Paul M. Daugerdas Personally Received More Than $95 Million in Fees from Tax Shelter Scheme That Generated Over $7 Billion in Fraudulent Tax Deductions
Deputy Assistant Attorney General Ronald A. Cimino for the Tax Division of the Department of Justice and U.S. Attorney Preet Bharara for the Southern District of New York announced that Paul M. Daugerdas, 63, a tax attorney and certified public accountant, was sentenced today in Manhattan federal court to serve 15 years in prison for orchestrating a massive fraudulent tax shelter scheme in which he and his co-conspirators designed, marketed and implemented fraudulent tax shelters used by wealthy individuals to evade over $1.6 billion in taxes owed to the Internal Revenue Service (IRS).  The 20-year scheme, which Daugerdas hatched while working at the Arthur Andersen accounting firm and then continued while a partner at two law firms – Altheimer & Gray and then Jenkens & Gilchrist (J&G) – generated over $7 billion in fraudulent tax losses and yielded approximately $95 million in fees to Daugerdas personally.  In October 2013, Daugerdas was convicted following a seven-week jury trial, presided over by U.S. District Judge William H. Pauley III, who also imposed today’s sentence.

“Paul Daugerdas used his legal and accounting expertise to cheat the system and unlawfully deprive the government of over $1.6 billion of tax revenue,” said U.S. Attorney Bharara.  “With today’s sentence, Daugerdas’s giant tax fraud scheme has reached its just conclusion under the law, with a sentence of 15 years in prison.”

“Dishonest professionals who market tax fraud schemes to their clients need to sit up and take note of today’s sentence,” said Deputy Assistant Attorney General Cimino.  “The Justice Department and IRS are committed to holding responsible those who would misuse their skills and expertise to help others to evade their lawful tax obligations.”

According to the evidence at trial and other documents filed in the case:

From 1994 through 2004, Daugerdas, who is a lawyer, a certified public accountant, and the former head of the Chicago office of J&G and its tax practice, participated in a scheme to defraud the IRS by designing, marketing, implementing and defending fraudulent tax shelters.

As part of the scheme, Daugerdas and others plotted to defraud the IRS by, among other things, corruptly endeavoring to prevent the IRS from: detecting their clients’ use of these shelters; understanding how the transactions operated to produce the tax results reported by the clients; learning that, rather than serving as legitimate investment transactions, the tax shelters lacked economic substance in that they were designed and marketed as cookie-cutter products intended exclusively to eliminate or reduce large tax liabilities; learning that the clients were not seeking profit-making investment opportunities, but were instead seeking huge tax benefits; and learning that, from the outset, all of the clients intended to complete a pre-planned series of steps that had been designed to lead to the specific tax benefits they sought.  Daugerdas and others created and assisted in creating transactional documents and other materials that falsely and fraudulently described their clients’ motivations for entering into the tax shelters and for taking various steps in order to yield the tax benefits.

As part of the scheme, Daugerdas and his co-conspirators also fraudulently backdated some of the tax shelter transactions.  In particular, Daugerdas and his co-defendants learned that certain tax shelter transactions had been implemented incorrectly during the year of the transactions in that they failed to produce the amount or type of tax losses requested by the clients.  Rather than reporting those tax shelter results as they occurred – as required by the Internal Revenue Code – Daugerdas and others engaged in corrupt “correcting” transactions after the close of the pertinent tax years, and then backdated the tax shelter documents to make it appear that the amount and type of tax losses sought by the clients had in fact been generated during the pertinent tax years.  Daugerdas also authored fraudulent tax opinion letters that falsely described when certain aspects of the transactions had actually occurred.  As a result of the fraudulent backdating, Daugerdas and others caused tax shelter clients to file tax returns that falsely and fraudulently claimed tens of millions of dollars of tax losses to which the clients were not entitled.

As a result of the scheme, Daugerdas and his co-conspirators made millions of dollars in fees and bonuses.  Daugerdas himself made $95 million in profits but used tax shelters to reduce the taxes he paid to less than $8,000; without the shelters, he would have owed over $32 million in taxes.

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Daugerdas, of Wilmette, Illinois, was convicted of conspiring to defraud the IRS, to evade taxes, and to commit mail and wire fraud, and of corruptly endeavoring to obstruct and impede the internal revenue laws.  He was also convicted of four counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud.

In addition to the prison term, Judge Pauley ordered Daugerdas to forfeit $164,737,500 in proceeds of the offenses, which included certain assets that had been seized and frozen at the time Daugerdas was indicted.  The forfeited proceeds include a lakefront home on Lake Geneva in Wisconsin, and over $20 million in various securities and financial accounts.  Judge Pauley also ordered Daugerdas to pay $371,006,397 in restitution to the IRS.  At sentencing, Judge Pauley said that Daugerdas “was at the apex of tax shelter racketeers who tapped into the greed of the super wealthy who did not want to pay taxes.”

In connection with this scheme, David Parse, a former broker at Deutsche Bank, was convicted of various tax fraud charges in May 2011 after an 11-week jury trial, and was sentenced in March 2013 to serve 46 months in prison.  Donna Guerin, a former lawyer at J&G’s Chicago tax practice, pleaded guilty in September 2012 to various tax fraud charges related to her role in the scheme.  She was sentenced in March 2013 to serve eight years in prison.

Former J&G partner Erwin Mayer, former BDO Seidman vice chairman and board member Charles W. Bee Jr., former BDO principal and former member of BDO Seidman’s TSG and Tax Opinion Committee Michael Kerekes, former BDO Seidman vice chairman and TSG member Adrian Dicker, BDO Seidman partner Robert Greisman, and BDO Seidman partner Mark Bloom have all previously been convicted in connection with this scheme.

This case is being prosecuted by the U.S. Attorney’s Office for the Southern District of New York’s Complex Frauds and Cybercrime Unit.  Assistant U.S. Attorneys Stanley J. Okula Jr. and Niketh Velamoor for the Southern District of New York and Assistant Chief Nanette L. Davis of the Tax Division are in charge of the prosecution.

CFTC CHARGES ACCOUNTING FIRM WITH IMPROPERLY AUDITING REGISTERED FUTURES COMMISSION MERCHANT

FROM: COMMODITY FUTURES TRADING COMMISSION

April 18, 2013

CFTC Charges Accounting Firm Tunney & Associates, P.C. and Its Sole Owner Michael Tunney with Failing to Properly Audit a Registered Futures Commission Merchant

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a Complaint against Tunney & Associates, P.C. (Tunney & Associates), an accounting firm with offices in Hammond, Indiana and Orland Park, Illinois, and Michael Tunney (Tunney), its sole owner and a certified public accountant (CPA) licensed in Illinois and Indiana, alleging violations of the CFTC’s Regulations related to conducting audits for The Linn Group, Inc. (TLG), a registered Futures Commission Merchant (FCM).

According to the Complaint, filed in the U.S. District Court for the Northern District of Illinois, Tunney & Associates served as TLG’s independent auditor and conducted TLG’s required year-end audits for 2007 through 2011. The Complaint alleges, however, that neither Tunney & Associates nor Tunney had any experience auditing FCMs or any entity that holds customer segregated accounts, and neither was qualified to conduct an FCM audit, and that Tunney had no understanding of the applicable Commodity Exchange Act or CFTC regulatory provisions prior to accepting any of the audit engagements. The Complaint states that Tunney & Associates and Tunney improperly relied on a non-employee, non-CPA, to perform all of the work on TLG’s 2007 through 2010 audits, and that Tunney conducted TLG’s 2011 audit on his own, despite the fact that he was not qualified to conduct an FCM audit.

The Complaint also alleges, among other things, that Tunney & Associates’ audits did not comport with Generally Accepted Auditing Standards (GAAS) or CFTC Regulations. For example, there was no planning for the auditing of TLG, and the audits failed to include appropriate tests of TLG’s accounting system, internal accounting controls, and procedures for safeguarding customer and firm assets.

TLG has entered into a settlement with the CFTC in connection with its failure to properly handle, monitor, and report customer funds it maintained as required by the Commodity Exchange Act (Act) and Regulations, and for supervision failures. As part of the settlement, TLG agreed to a $400,000 civil monetary penalty and retention of a consultant to review and improve TLG’s procedures as necessary to comply with the Act and Regulations TLG terminated the services of Tunney & Associates prior to entering into a settlement with the CFTC.

David Meister, the CFTC’s Director of Enforcement, stated, "Auditors are gatekeepers who perform a key role in a system designed to promote market integrity and protect market participants. An accountant who assumes the role of independent auditor for a CFTC registrant must be capable of satisfying his professional obligations. The audit function is meant to do more than earn the auditor a paycheck."

In the litigation, the CFTC seeks disgorgement of all benefits Tunney & Associates and Tunney received as a result of their conduct, civil monetary penalties, and permanent injunctions against further violations of the Commodity Exchange Act and Regulations, as charged.

The CFTC appreciates the assistance of the Division of Swap Dealer and Intermediary Oversight. The CFTC also appreciates the assistance of the National Futures Association.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Passman, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

CERTIFIED PUBLIC ACCOUNTANT SENTENCED TO PRISON FOR ROLE IN HALF-BILLION DOLLAR FRAUD SCHEME

FROM: U.S. DEPARTMENT OF JUSTICE

Friday, November 30, 2012
New Jersey Man Sentenced to 54 Months in Prison for Half-Billion Dollar Fraud Scheme with Thousands of Victims Worldwide

A certified public accountant (CPA) and purported outside auditor for Provident Capital Indemnity Ltd. (PCI) was sentenced today in Richmond, Va., to 54 months in prison for his role in an approximately half-billion-dollar fraud scheme that affected more than 3,500 victims throughout the United States and abroad, announced U.S. Attorney for the Eastern District of Virginia Neil H. MacBride and Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division.

Jorge Luis Castillo, 57, a resident of New Jersey, was sentenced today by U.S. District Judge John A. Gibney in the Eastern District of Virginia. In addition to his prison term, Castillo was sentenced to three years of supervised release and ordered to pay $43,582,699 in forfeiture.

Castillo pleaded guilty on Nov. 21, 2011, to one count of conspiring to commit mail and wire fraud. Castillo was a PCI employee prior to becoming PCI’s "outside auditor."

"As a licensed accountant, Mr. Castillo used his expertise to create fraudulent financial statements out of whole cloth," said U.S. Attorney MacBride. "Many elderly investors relied on Mr. Castillo’s credibility as an outside auditor before entrusting their life savings in this fraud scheme. Accountants and auditors are the gatekeepers of our financial system and are entrusted with the critical role of protecting the public from fraud. Today’s sentence will hopefully send a strong message to those in the accounting profession that they will be held responsible when they break that trust by facilitating or participating in fraud."

"Jorge Luis Castillo will spend 54 months in prison for trading on his qualifications as a CPA to facilitate a massive fraud scheme that harmed investors throughout the United States and abroad," said Assistant Attorney General Breuer. "Mr. Castillo’s prison sentence demonstrates the Justice Department’s commitment to holding accountable any fraudster who preys on innocent, unsuspecting investors."

According to court records, PCI was an insurance and reinsurance company registered in the Commonwealth of Dominica and doing business in Costa Rica. PCI sold financial guarantee bonds to companies selling life settlements, or securities backed by life settlements, to investors. PCI marketed these bonds to its clients as a way to alleviate the risk of insured beneficiaries living beyond their life expectancy. PCI’s clients, in turn, typically explained to their investors that the financial guarantee bonds ensured that the investors would receive their expected return on investment irrespective of whether the insured on the underlying life settlement lived beyond his or her life expectancy.

Castillo admitted that he conspired with Minor Vargas Calvo, 61, the president and majority owner of PCI, to prepare audited financial statements that falsely claimed that PCI had entered into reinsurance contracts with major reinsurance companies. These claims, which were supported by a letter from Castillo stating that he conducted an audit of PCI’s financial records, were used to assure PCI’s clients that the reinsurance companies were backstopping the majority of the risk that PCI had insured through its financial guarantee bonds.

Castillo further admitted that he never performed an audit of PCI’s financial statements and that, in fact, he personally created the statements he claimed to be independently auditing. He also admitted that he and others at PCI knew that the company never actually entered into reinsurance contracts with any major companies. Castillo also admitted that he and other conspirators provided the false financial statements and fraudulent independent auditors’ report to Dun & Bradstreet (D&B), which D&B relied on in compiling its commercial reports on PCI and issuing its 5A rating of PCI’s financial strength.

From 2004 through 2010, PCI sold at least $485 million of bonds to life settlement investment companies located in various countries, including the United States, the Netherlands, Germany, Canada and elsewhere. PCI’s clients, in turn, sold investment offerings backed by PCI’s bonds to thousands of investors around the world. Purchasers of PCI’s bonds were allegedly required to make up-front payments of six to 11 percent of the underlying settlement as "premium" payments to PCI before the company would issue the bonds. Court records state that Castillo received approximately $84,000 from his work as the purported outside auditor of PCI from 2004 through 2010.

Vargas, a citizen and resident of Costa Rica, was convicted on April 30, 2012, of one count of conspiracy to commit mail and wire fraud, three counts of mail fraud, three counts of wire fraud and three counts of money laundering. On Oct. 23, 2012, he was sentenced to 60 years in prison. PCI pleaded guilty on April 18, 2012, to conspiring to commit mail and wire fraud, and was sentenced on Sept. 6, 2012, to one year of probation.

This investigation is being conducted by the U.S. Postal Inspection Service, Internal Revenue Service – Criminal Investigation, and FBI, with assistance from the Virginia State Corporation Commission, the Texas State Securities Board and the New Jersey Bureau of Securities. This case is being prosecuted by Assistant U.S. Attorneys Michael S. Dry and Jessica Aber Brumberg of the Eastern District of Virginia and Assistant Chief Albert B. Stieglitz Jr. of the Justice Department Criminal Division’s Fraud Section.

The U.S. Securities and Exchange Commission (SEC) conducted a parallel investigation and in January 2011 filed a parallel civil enforcement action against PCI, Vargas and Castillo. The department thanks the SEC for its assistance in this matter.

The investigation has been coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases in the nation and in Virginia specifically. The task force is an investigative arm of the President’s Financial Fraud Enforcement Task Force, an interagency national task force.

President Obama established the Financial Fraud Enforcement Task Force (FFETF) in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants