Back in 2009, the Department of Justice indicted Jeff Greenstein and Charles Wilk, the former CEO and attorney for Quellos Group, LLC. The DOJ accused the pair of masterminding a tax scheme that turned capital gains into, well, dust.
The scheme included a phony investment fund on the Isle of Man. Investors with large gains could offset these gains with capital losses from the phony fund…for a price, of course. The scheme apparently allowed television producer Haim Saban (best known for bringing the Power Rangers to the United States) to avoid a large capital gain. The fund supposedly held over $9 billion in stock; however, it actually didn’t exist.
The DOJ noted that the individuals caught up in the scheme did not know it was fraudulent, and those individuals have voluntarily paid $240 million in back taxes. However, the DOJ believed that Mr. Greenstein and Mr. Wilk knew quite well of the phony nature of the fund. Also, the DOJ noted that a large portion of Quellos was legitimate (that portion was sold to BlackRock, Inc. in 2007).
And it appears that the DOJ was correct. The two pleaded guilty last week to tax fraud and will face at least two years and possibly as many as six when sentenced in January. They also agreed to pay $7 million in fines and $400,000 for the cost of prosecuting them.
There was one other item that the two men agreed to. They will each be addressing their graduate school giving a presentation on business ethics. Hopefully, this will not be a “how to” but will instead be a what not to do. Given that the head of criminal division of the US Attorney’s Office in Seattle plans on attending, I suspect that will be the case.
In the end, though, this case goes back to a recurring theme in this blog over the last several years. If it sounds too good to be true, it probably is. If someone tempts you with a foreign tax shelter or foreign investment fund, be very, very careful.