The former chief executive of the investment company Quellos, along with two attorneys, have been indicted in a tax fraud and kickback scheme.

Quellos founder Jeffrey Greenstein, 47, and tax attorney Charles Wilk, 51, were charged in an 18-count indictment with conspiracy to defraud the IRS, tax evasion, counseling false tax filings, wire fraud, and conspiracy to launder monetary instruments. Another attorney, Matthew Krane, 55, was charged with conspiracy to launder monetary instruments, and is currently in a federal detention center in Los Angeles awaiting trial on passport fraud charges.

Prosecutors claim that between June 1999 and August 2006, Greenstein and Wilk devised and promoted a fraudulent tax shelter scheme known as a Portfolio Optimized Investment Transaction. POINT purportedly permitted wealthy taxpayers who anticipated large capital gains to offset those gains by mixing them with losses derived from the sale of depreciated stock.

Clients were told that an offshore investment fund owned billions of dollars worth of stock in well-known, publicly traded U.S. technology companies that had depreciated in value. The fund had purportedly formed various offshore and onshore partnership entities and contributed portions of its portfolio of stock into these entities. Because of certain provisions in the Tax Code, the POINT clients were advised that if they purchased one of these partnerships from the offshore fund, they could inherit the unrealized losses in the stocks and use them to shelter the gains from the sales of other assets, greatly reducing the clients’ tax liability.

In return for participating in the shelter, clients were generally instructed to pay fees to Quellos and others totaling approximately 3 percent of the total amount of “loss” the client sought. Even with the additional transactional costs, the 3 percent was far below the 20 percent capital gains tax the clients were facing.

However, POINT was apparently predicated on a sham. There was no offshore investment fund, and no shares of stock were actually purchased by any offshore investment fund. Instead, offshore shell entities with no assets or ongoing business were appropriated to engage in sham paper transactions to fabricate the appearance that an offshore entity possessed billions of dollars worth of stock, in order to defraud the clients and the IRS into believing that the stock existed. In 2000 and 2001, clients paid about $86 million in fees to Quellos and others, in an attempt to shelter more than $1.4 billion in capital gains, and avoid $400 million in federal taxes.

Quellos was later acquired in October 2007 by the private equity giant BlackRock.

Greenstein and Wilk allegedly drafted and disseminated materials touting the fraudulent tax shelter strategy, and gave false information to legitimate tax attorneys who provided opinions that the strategy was legal.

In addition, Greenstein and Wilk allegedly provided kickbacks to Krane in exchange for his help in enlisting a wealthy client in the tax shelter scheme. The client had more than $1 billion in capital gains in 2001, and prosecutors contend that Greenstein and Wilk promised Krane a cut of the fees. The client was never informed of the kickback arrangement. Between March and October 2001, the men allegedly drafted false fee agreements that made it appear the wealthy client was paying $46 million to Quellos to participate in the tax shelter strategy. In fact, $36 million of that fee was actually diverted by Wilk and Greenstein to an offshore account controlled by Krane.

After the IRS started examining the capital losses, Greenstein and Wilk continued to provide fraudulent and misleading information to those trying to respond to the IRS audits. Greenstein even testified before the U.S. Senate providing false information about the tax shelter scheme.

As part of the indictment, the government seeks $36 million in forfeiture from Krane representing the money he laundered through the scheme. The taxpayers who purchased the POINT tax shelter scheme subsequently paid all the taxes they owed.

The tax conspiracy offense and each of the evasion offenses are punishable by up to five years of imprisonment. Each counseling of false return offense is punishable by up to three years imprisonment. The wire fraud offenses and the conspiracy to launder monetary instruments offense are each punishable by up to 20 years in prison.

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