The former CEO of Quellos Group and the head of its private clients group were sentenced in a federal court on charges connected with the offshore tax shelters set up by the former investment firm.
The two former executives were sentenced Friday in U.S. District Court in Seattle to 50 months in prison and two years of supervised release for conspiracy to defraud the United States, and aiding and assisting with the filing of a false tax return. Quellos’s fund of funds business is now owned by the private equity firm BlackRock.
Quellos founder and former CEO Jeffrey I. Greenstein, 48, of Mercer Island, Wash., and former Quellos tax attorney Charles H. Wilk, 52, of Seattle, pleaded guilty last September (see Quellos Ex-Execs Plead Guilty to Tax Shelter Scam). On Friday, both men paid the IRS $7 million in penalties related to their personal gain realized from the design, promotion and implementation of the fraudulent tax shelter, which they called POINT.
The estimated tax loss from the scheme is $240 million. Those losses have since been repaid by the taxpayers. Both men have also paid the government $296,873 for the cost of their prosecution.
Addressing Greenstein, U.S. District Judge Ricardo Martinez said, “You conspired with others to steal from every other taxpayer who voluntarily pays their taxes ... . You stole from the very society that allowed you the opportunity to achieve wealth and status beyond most peoples’ wildest dreams.”
Noting Greenstein and Wilk’s “clear disdain for the law... in pure pursuit of profit,” prosecutors recommended a six-year prison term. “Reasonable people do not need a Master’s degree in law to know and understand that it is wrong to completely fabricate losses to offset your gains,” prosecutors wrote in their sentencing memo. “There is no difference between what the defendants did in this case from someone simply sitting down and making up numbers on their tax returns, except that in this case, defendants sought to make up numbers on numerous tax returns for very wealthy individuals ... . Defendants committed blatant fraud and they wanted to implement this fraud on a widespread scale, making a mockery of the entire tax system.”
Between 1999 and 2006, Greenstein and Wilk designed, implemented and defended before the IRS a fraudulent tax avoidance scheme known as POINT, short for Portfolio Optimized INvestment Transaction, according to prosecutors. POINT purportedly permitted wealthy taxpayers who anticipated large capital gains to offset those gains by mixing those gains with losses derived from the sale of depreciated stock.
POINT clients were told that a certain 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 offshore investment fund 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, 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 sales of other assets, and greatly reduce the clients’ tax liability.
Greenstein and Wilk did not tell clients, or the attorneys who evaluated the proposals, that the POINT transaction was predicated on a sham: There was no offshore investment fund, and no shares of stock were actually purchased and possessed by any offshore investment fund. They also knew that the purported offshore investment fund was merely a shell entity with nominee administrators and no assets or employees, according to prosecutors.
The case was investigated by the IRS’s Criminal Investigation Division.
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