Archive for the ‘Department of Justice’ Category

Tidal Wave of Attorneys and Tax Crimes

January 18th, 2012 No comments

The curriculum vitae for attorney Leslie W. Jacobs:

  • Former President of the Ohio State Bar Association
  • Former Senior Antitrust Partner at Thompson Hine
  • Harvard Law School

Impressive. His legacy? Anything but. Yesterday, Leslie Jacobs was sentenced to one year and one day in federal prison for making and subscribing false personal income tax returns.

On his 2004 through 2007 personal income tax returns, Jacobs falsely inflated business expenses he incurred while serving as a partner in the Cleveland law firm of Thompson Hine, LLP. As stated in the Department of Justice press release:

Among the deductions that Jacobs improperly took were business expenses for which he was reimbursed by the firm; memberships at clubs, including the Chagrin Valley Hunt Club, the Castalia Trout Club, the Union Club and the Harvard Club, that he knew were not deductible; several meals and entertainment charges at the clubs that were personal in nature, including their son’s wedding rehearsal dinner at the Hunt Club, the florist charge at the club and a Valentine’s Day party at the club, according to court documents.

This story is a disappointing head scratcher. To put all the hard work and accomplishments at risk for what, a lesser tax liability? Can an attorney get so caught up in advising others how to act within the bounds of the law that he recklessly forgets to do the same for himself? Sadly, yes.

It’s a problem within the profession. Last week, former Sullivan and Cromwell partner John O’Brien was sentenced to two years and four months in prison for failing to pay taxes on over $10 million in partnership income earned between 2003 and 2008.

We’re talking about egregious white collar offenses committed by men who presumably charged several hundred dollars an hour for their legal advice. Sickening.

Categories: Department of Justice, Ohio, Tax Fraud Tags:

Take It, Then Tax It

December 26th, 2011 No comments

Today I write about a recent case out of North Carolina involving U.S. Department of Justice seizure of a taxpayer’s video poker machines at his place of business. Although we hear about similar seizures fairly often, this particular case included a very interesting tax issue.

In 2006, the DOJ executed a seizure warrant at Harrison Amusement Park because the taxpayer, Robert Harrison, was allegedly operating an illegal gambling business there. Showing a little compassion, the DOJ did not take all of the taxpayer’s assets. They left pool tables and jukeboxes. Sometime in 2007, the taxpayer liquidated those assets for $450,000, and then deposited the funds into his personal bank account.

A day after making the deposit, the taxpayer purchased shares in the amount of $450,000 out of a money market fund account. Problem was, the taxpayer’s money market account had been previously frozen pursuant to a seizure warrant. Shortly thereafter, the feds seized the $450,000 and prevented Mr. Harrison from exchanging, transferring, or redeeming the money until court order directed otherwise.

Had the taxpayer simply kept the $450,000 in his personal bank account, it would not have fallen within the scope of the seizure warrants. Alternatively, he could have bought a car or purchased real estate with the funds, as the taxpayer even acknowledged. Whoops.

Authorities brought forfeiture proceedings against Mr. Harrison, alleging violation of several federal statutes, including 18 U.S.C. § 1955 (illegal gambling businesses), as bases for seizure and forfeiture of the taxpayer’s properties.

In 2008, the taxpayer entered into a settlement agreement, and forfeited to the federal government all $450,000 that was frozen, less $10,000 exempt from forfeiture. He also received three years probation.

Now to the interesting part. After the taxpayer filed his 2007 North Carolina individual income tax return reflecting no taxable income, the N.C. Department of Revenue challenged the return, asserting that the taxpayer owed tax on the $450,000 he received upon liquidating his company’s assets.

Wait, he owes tax on funds that were seized? That was the Department’s position. And the Department’s legal specialist, who reviewed the ALJ’s decision in favor of the taxpayer, agreed.

Because the taxpayer did not renounce his ownership, dominion, or control over the $450,000 in 2007, the income was taxable. Had the taxpayer renounced or rescinded his interest in the funds, said the Department, he would not have been able to enter into the 2008 settlement agreement.

The logic makes sense. While the result seems unfair, the taxpayer may obtain some relief by claiming a deduction in his 2008 tax year for the amount forfeited to the federal government. Well, maybe not.

In the Fourth Circuit, said the Department, “no deduction may be allowed for the forfeiture of gambling assets due to the frustration of public policy that would ensue.” Put another way, there’s no tax benefit in connection with operating illicit gambling activity. Does that principle extend to a deduction for gambling losses? My reading says no.

The taxpayer may appeal the Final Agency Decision in the Superior Court, but I don’t believe he has a leg to stand on here.

Case: Harrison v. N.C. Dep’t of Revenue, 09 REV 05218 (Sept. 27, 2011)

The Abyss of Ruination

December 19th, 2011 No comments

Back in September, I wrote about Maryland criminal defense attorney Stanley Needleman. Needleman had pleaded guilty to income tax evasion and structuring financial transactions.

Last week, he faced sentencing. The Baltimore City Paper reports Needleman will spend one year in federal prison. He also agreed to pay back taxes totaling over $660,000.

Needleman represented drug dealers, including Jose Morales. Back in 2008, Morales had been released on a $30,000 cash bond. Apparently, Needleman supplied Morales the money. No, a lawyer cannot provide financial assistance to a client. In an effort to pay Needleman back, Morales was caught shortly thereafter attempting to charter a jet to fly to Baltimore with several kilos of cocaine.

At his sentencing hearing, Needleman pleaded for mercy:

If I had the power to leap back­wards and freeze frame the hands of time, I would. Since April of this year, I am an emo­tional and intel­lec­tual zombie.

Being a lawyer invig­o­rated my very being as a human being. Now as you look at me, I dwell in the abyss of ruination.

No matter how impassioned with regret, one engaging in criminal activity with clients will not be overlooked by a federal judge. Needleman’s abyss will only seem more bottomless when he begins to serve the time.

Categories: Department of Justice, Tax Fraud Tags:

Clickjacking the IRS

November 9th, 2011 No comments

If you enter the search term “IRS” on, the first result, unsurprisingly, is the homepage of the Internal Revenue Service. And, you would click on that first result to be brought to the homepage.

I didn’t write the immediately preceding sentence to insult your intelligence. I wrote it because some users, in fact, have not been brought to the IRS homepage, but to somewhere else.

Wired is reporting that seven men have been charged in New York with operating a “clickjacking” scheme in a sixty-two page indictment unsealed today. The indictment states the men infected computers in over 100 countries with malware known as DNSChanger. DNSChanger altered DNS settings on a user’s system, redirecting the system’s browser to a DNS server controlled by the defendants. Then, that DNS server directed the browsers to another web site.

Why infect systems to redirect? For money, of course. Allegedly, the men set up advertising businesses which would receive a commission each time a user visited certain web sites. For example, users of infected systems that clicked on the link to the Internal Revenue Service web site were actually brought to a site for H&R Block. Each time a user visited the H&R Block site, the men were paid. The indictment alleges the men generated $14 million through the scheme.

Trend Micro’s Malware Blog claims we’re witnessing the “biggest cybercriminal takedown in history.” Apparently, over 500,000 machines in the United States were infected, at least 100 of which belong to the National Aeronautics and Space Administration (NASA).

The men face 27 charges, including wire fraud and other computer-related crimes. Six of the seven men have been taken into custody.

In a similar vein, taxgirl tells us about an apparently new IRS e-mail phishing scam. Remember, the IRS *never* asks for taxpayer identification information via e-mail. If you receive such an e-mail, forward it to and then immediately delete it.

Full Tilt Poker Ponzi Scheme?

September 21st, 2011 3 comments

Yesterday, the news of the Department of Justice amending its complaint against the Poker Companies to add three individual defendants made national headlines. Read the official press release from the U.S. Attorney’s Office here, and the amended complaint here. Preet Bharara, the U.S. Attorney for the Southern District of New York, asserts that Full Tilt Poker was “a global Ponzi scheme.”

The new allegations add much fuel to the already massive fire that has been burning Full Tilt Poker since Black Friday. Players still haven’t received any of their frozen monies back. It has not appeared as unlikely to happen as it does now. Authorities claim that Full Tilt was $330 million short in funds owed to players in March.

I’ve written before about possible tax consequences for U.S players who don’t receive their funds back. With the Ponzi scheme allegations surfacing, additional tax consequences may arise. In light of the Madoff investment scandal, the IRS created rules for taxpayers who experienced Ponzi scheme losses.

Whether or not players with Full Tilt balances qualify for Ponzi scheme losses is not immediately clear. Russ Fox agrees. Indeed, Full Tilt may not have been engaged in a Ponzi Scheme. Remember, we’re talking about allegations. So, let’s not jump to conclusions. I’ll be sure to revisit these issues when we learn more facts.

Not So Safe

September 2nd, 2011 2 comments

We all know why people keep a safe in their homes. We also all know that a safe doesn’t completely protect one’s valuables from damage, destruction, or theft. Criminal defense attorney Stanley Needleman not only lost valuables stored in his safe, but also will very likely lose something invaluable: His freedom.

Yesterday, Mr. Needleman pleaded guilty in federal court to income tax evasion and structuring financial transactions, and consented to disbarment. Needleman practiced law in Maryland.

Needleman implemented the following billing structure with his clients: He required a one-time, up front “engagement fee” for representation. The fee was not tailored to the amount of work involved.

The “engagement fee” is not the same as a “retainer fee.” The difference is that the funds from the latter are typically applied to invoices as services are provided. If, at the conclusion of the matter, a balance of the retainer fee remains, the client may obtain a refund. The engagement fee, at least in the case of Mr. Needleman, however, was a nonrefundable payment up front.

Clearly, Needleman was required to report as income his “engagement fee” upon receipt. The problem: He often didn’t.

According to authorities, Needleman vastly underreported his income earned from engagement fees, and took steps to conceal the income. Instead of living a lavish lifestyle with his underreported income, he stored large amounts of the cash in a safe in his basement. In addition, over several years, he made various bank deposits in amounts slightly less than $10,000 in order to avoid the bank from issuing Currency Transaction Reports. That is known as “structuring,” and is against the law.

Ultimately, he broke the law (by structuring cash transactions) in an attempt to avoid getting caught for breaking another law (income tax evasion). That’s quite the lose-lose situation for a criminal defense attorney. Actually, it’s lose-lose-lose in this case, as he can no longer practice law.

Needleman faces up to five years of imprisonment for income tax evasion, and up to ten years for structuring financial transactions. His sentencing is scheduled for December 15.

(Hat Tip: The Blog of LegalTimes)

Categories: Department of Justice, Tax Fraud Tags:

It’s a (Dysfunctional) Family Affair

August 29th, 2011 No comments

Today I tell the story of Thomas Parenteau of Hilliard, Ohio. Earlier today, he was sentenced to 22 years in prison for conspiring to commit tax fraud and money laundering, to obstruct justice, and to tamper with witnesses.

His co-conspirators? His wife, his accountant, and his mistress. All four are now serving time.

Mr. Parenteau was in the business of selling luxury homes. Of course, one can conduct such a business with clean hands. Unfortunately, Parenteau’s hands were so dirty that he used those closest to him as rags to share his filthy conduct.

Together, the four falsely inflated the purchase prices of the homes Parenteau built and sold, and gave kickbacks to the buyers after their purchases.

Parenteau, together with his accountant, prepared false income tax returns for the mistress, who received more than $850,000 in fraudulent tax refunds. To where did the refunds go? Back to Parenteau, of course. I’ll venture to guess he spent some of that money on his two children. The mother? His mistress, obviously.

A significant portion of the illicitly obtained funds were used to make premium payments towards several life insurance policies on the life of Parenteau’s father. The court ordered Parenteau to forfeit nearly $15 million, which includes the policies.

Something tells me this family won’t have quite as much fun together behind bars as they did while breaking the law. But families always stick together through both the good and the bad, right? Just ask any parenteau.

Categories: Department of Justice, Tax Fraud Tags:

Robbie’s Lottery Robbed by DOJ

August 24th, 2011 No comments

The Department of Justice continues to expend resources relating to offshore gambling. Reported by the Wall Street Journal, this time the DOJ is involved with an alleged illegal gambling operation in the Dutch Caribbean.

Yesterday, a federal judge issued a restraining order against three UBS accounts in Miami that resulted in freezing over $28 million apparently tied to Robertico Alejandro dos Santos, who Curacao authorities are investigating for tax fraud, forgery, and money laundering.

Allegedly, dos Santos has sold millions of dollars in forged lottery tickets out of his popular gambling lottery business, “Robbie’s Lottery.” If true, he has essentially been stealing from his customers’ pockets. This time, “Robbie’s Lottery” gets a taste of its own medicine, with the DOJ robbing dos Santos of his $28 million.

The federal government’s interest here seems at least in part similar to that of the recently indicted offshore online poker companies: Cracking down on money laundering in the United States. A key difference is that in this matter, the Curacao public prosecutor’s office reached out to the DOJ for assistance. The DOJ’s pursuit of the offshore online gambling sites, however, was initiated by federal authorities, as far as we know.

There’s no reason to believe the DOJ will stop pursuing individuals committing bank fraud and money laundering in the U.S. while running their operations offshore, gambling-related or not. Whether or not the underlying operation violates U.S. laws, the DOJ has a strong interest in the moving of funds related to those operations that does break the law.

Money for Nothing

August 9th, 2011 5 comments

As much as we attorneys don’t like to acknowledge it, let’s face it: Some of us are crooked. Perhaps none are more crooked than Thomas Frey of Edison, NJ.

Frey had attempted to collect legal fees from various individuals, including two police officers, to handle an IRS investigation. What Frey didn’t tell them, however, was that he fabricated the entire matter. Last week, a federal grand jury indicted Mr. Frey with multiple charges. He’s now facing up to 140 years in prison if convicted on all counts. The Department of Justice press release is here, and the indictment is here.

Frey’s co-conspirator communicated to the victims that IRS agents approached him at a property owned by one of the victims as part of a criminal investigation. To corroborate the story, Frey showed to the victims business cards of the IRS agents, claiming he received them during the questioning. According to the indictment, Frey had obtained these cards while representing another client in an unrelated tax matter many years prior.

Frey set up the plot, and sought to score. He told the victims (again, who were police officers) that if they each paid him $10,000, he could utilize a “special relationship” with one of the IRS agents in order to have the criminal investigation converted to a mere desk audit. Frey also represented that a family member of his is an IRS employee who would enable Frey to obtain a more favorable outcome. Under the direction of law enforcement, one of the victims provided to Frey the $10,000 in a tape recorded meeting.

Frey’s alleged conduct is unethical on so many levels. First, fabricating a story to obtain funds for legal services is obviously grounds for immediate and permanent disbarment. Second, if the story were true, he’d be conspiring with a government employee to reach a more favorable outcome for his clients.

When I read a story like Mr. Frey’s, I find myself dumbfounded. Mr. Frey dedicated at least three years of his life to obtain a legal education, and earned the right to practice law after passing the New Jersey bar exam. He’d been practicing law since 1989.

Why risk throwing away all of the hard work for roughly fifty grand? There had to be another way out of whatever mess Mr. Frey got himself involved in. Whatever valuable experience and sound judgment Mr. Frey had accumulated over the years, if any, it certainly wasn’t on display here.

To my attorney readers, please don’t try this at home. To those who seek to hire an attorney, be careful whom you choose.

Congratulations! Your Lottery Winnings Don’t Exist

August 3rd, 2011 No comments

Imagine a new e-mail landing in your inbox. The sender is someone who works for the “Tourism Malaysia Lottery Program,” and claims that you, the e-mail recipient, have just won a $1 million prize from the program. In order to redeem this prize, you are first required to deposit $500 to open a bank account in Malaysia in order to facilitate the transfer of funds.

I’m fairly certain that both you and I would immediately proceed to click the “Delete” button, well-knowing that we would never see a dime. In a complaint recently filed by the U.S. Department of Justice, we learn the story of two individuals who deposited not only the initial required amount but also several hundred thousand dollars in order to redeem their alleged prize. Unfortunately, our instincts were accurate.

To perpetrate the scams, the culprits had each of their victims comply with several requests made beginning in late 2007 through early 2010. The e-mails claimed that in order to retrieve their prizes, certain fees and taxes must first be paid by wire transfer to overseas banks. One victim was under the belief that his money was being used to pay the IRS.

Please take note: I cannot immediately conjure up any circumstances by which a taxpayer situated in the U.S. would satisfy any U.S. income tax obligation by wire transfer to an overseas account. Further, as far as I know, one does not satisfy an income tax liability on lottery winnings by paying the liability out-of-pocket before receiving the winnings. If anything, the lottery payer may be required to withhold a portion of the winnings for remittance to the IRS; alternatively, there may be no withholding and the taxpayer is solely responsible for paying the tax liability directly to the IRS.

As a result of these scams, one victim is now out-of-pocket $428,758, and another $868,438. You’d think that someone who makes a transfer or two of a few thousand dollars would realize something is amiss after not receiving anything. These two victims, however, kept sending more. Approximately 111 wires were sent to 56 accounts among three countries.

The complaint asks for a forfeiture of more than $1.2 million held in various accounts. Similar to poker players with frozen funds on online gambling sites, an individual can file a legal claim for an interest in the funds. Apparently, no such claims have been filed.

(Hat tip: The Blog of LegalTimes)

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