Lorn Leitman, CPA and Attorney sentenced to 17 1/2 years in Federal Prison for a Ponzi Scheme!

July 14, 2011

Lorn Leitman, attorney and CPA, of Miami, Florida, to 210 months’ incarceration for his role in a 10-year Ponzi scheme. In an unusual decision, the court departed upward from a sentencing guideline range of 121-151 months, commenting, “this case is exceptional.”

A federal grand jury charged the defendant with violating the mail fraud statute for defrauding elderly victims and retirees, among others, through the operation of a Ponzi scheme which sought investments in either phantom residential mortgages or a separate venture burdening U.S. military personnel with predatory and usurious loans. The defendant pled guilty to one count of mail fraud on April 6, 2011 and faced a maximum possible sentence of imprisonment for 20 years. Several victims appeared in court to address the impact of the fraud. As one victim explained, losses from the Ponzi scheme forced the end of his retirement and his return to work. He commented, “my dreams are dead.”

The court explained that the decision to sentence above the guidelines resulted from the defendant’s conduct preying upon his closest friends, fellow servicemen, the elderly and retirees, and noted that the defendant breached codes of conduct applicable to members of the Florida Bar and certified public accountants. In addition to the enhanced sentence, the court ordered the defendant to pay $3,308,435.03 in restitution to victims.

OBSERVATION:

From personal and past experience in dealing with fraud and now fraud prevention, the most likely target of those scammed are folks who are close to the perpetrator.  Reality is, in this case, the time in prison will leave Leitman a changed man and the chance of seeing any restitution is slim.

If you were a victim of this crime, please take a moment and share how you were lured into Leitman’s trap.  Your comments may help others recognize and avoid a similar fate.

YOUR COMMENTS ARE WELCOME!


Lawyer – Ted Russell Schwartz Murray – Guilty! White Collar Crime Speaker Chuck Gallagher Comments

October 26, 2008

As the time of decision grew near, the only thing that Ted Russell Schwartz Murray could likely have wished for is another storm.

The trial which began on Sept. 8, 2008, was interrupted by Hurricane Ike, and concluded with the return of the guilty verdicts yesterday.  A Houston federal jury has convicted Ted Russell Schwartz Murray, a lawyer licensed in Texas and Florida, of conspiracy to commit mail fraud and securities fraud in connection with the operation of Money Mortgage Corporation of America, a subsidiary of Premiere Holdings, LP, a real estate investment program.  Murray was also convicted Murray of making a False Statement on Tax Returns for the years 1999 and 2000.

Murray and co-defendants David Isaac Lapin and Jeffrey Carl Wigginton, Sr. were all charged by indictment in August, 2006. Lapin and Wigginton pleaded guilty in August 2008 to the conspiracy to commit mail fraud and securities fraud for their roles in the scheme and are pending sentencing in Nov. 2008.  Murray was charged separately in a second indictment with the tax offenses.

Every choice has a consequence.  As a business ethics and white collar crime speaker I have seen over and over the consequences of greed motivated actions.  For a fraud to exist three things exit: (1) need; (2) opportunity and (3) rationalization.  The verdict was guilty.  The question is what was the motivation of Murray and his co-conspirators.

According to the US Attorney’s news release:

During trial, the United States presented its evidence proving that between 1996 and 2001, Murray, 57, conspired to commit mail fraud and securities fraud in the promotion and marketing of the Premiere 72 or “P72″ mortgage investment program. Murray testified at trial and denied he had made false representations to investors when the program was promoted with promises of (1) 12% interest; (2) 1st liens on real estate; (3) 72 hour liquidity; and (4) 70% loan to value ratio. However, the evidence proved that so-called interest payments were actually set aside from a portion of the investor’s principle and returned to them as interest; many loans were not secured by 1st liens on real estate; and many loans were not based on a 70% loan to value ratio. Lapin, a co-conspirator in the scheme, testified that he and his co-defendants failed to disclose to investors the fact that loans on certain projects were actually in default at the time the funds of new investors were placed in these loans. An expert witness, qualified in forensic accounting, testified that the Premiere 72 program was conducted like a Ponzi scheme, where the money from new investors is used to pay earlier investors.

Mortgage Crisis – no wonder.  With practically free money and a country that seemed to believe that real estate had no ceiling, the opportunity was right the perpetration of such a fraud.  Likewise, in the current economic climate with fear leading the way, others will rise to fill the void.

While admitting that the above material facts were not disclosed to investors, Murray blamed his partners claiming Lapin had failed to live up to his fiduciary duties and both Lapin and Wigginton failed to disclose to investors that Premiere Holdings charged fees ranging from 15 -25% from investor funds. Murray denied any responsibility to disclose any material facts to investors.

With sentencing following in March 2009 the failure to accept personal accountability will no doubt play a role in the length of sentence.

Over 500 people invested in the fraudulent mortgage investment program promoted by Murray and his co-conspirators.  During the five year period the scheme operated, Premier Holdings, LP, Murray and his co-conspirators generated more than $200 million in gross receipts. Premier Holdings, LP, filed for bankruptcy in Oct. 2001 at which time the company had more than $160 million of investor funds tied up in the fraudulent scheme.  Murray filed for personal bankruptcy a short time thereafter.

The jury found Murray guilty of all 20 counts submitted to the jury arising from the scheme to defraud investors including the conspiracy charge, 14 counts of mail fraud, and four counts of securities fraud. The conspiracy conviction and each of the convictions for mail fraud carry a maximum statutory penalty of five years imprisonment. The securities fraud counts of conviction each carry a maximum penalty  of  10 years imprisonment.  Each count also carries a maximum fine of $250,000.

In addition to the scheme to defraud, Murray was also charged and convicted in a separate case with two counts of making a false statement on his tax returns based upon evidence which proved that Murray disguised personal expenses as business expenses and deducted a portion of those expenses on his tax returns, including a $29,000 Rolex watch, payments to casinos, a series of payments totaling over $5 million for return of principal to investors, payments for a $1 million ownership interest in the building where Premiere held its offices at 11451 Katy Freeway, and gifts to family members.  Murray faces a maximum of three years imprisonment and a $250,000 fine on each of two counts of conviction.

Considering where we are today – economically – I would not be surprised to see that the sentence would err on the heavy side.  For those who read this – if you know Murray perhaps you could give some clue as to what motivated his behavior.  Obviously, Murray was educated and hence would know the difference between right and wrong, between ethical behavior and unethical behavior.

Comments are welcome


Fake IRS Employee – Morgan Mayfaire a/k/a Elizabeth Valdo – Charged with Prepare Fraudulent Tax Returns

May 1, 2008

So it’s tax season, the time when all are required to file tax returns. You look for someone who can provide the service correctly. You want someone with experience, someone who knows the law. Hum… I guess a n IRS employee would do?

As it turns out, Morgan Mayfaire, a/k/a/ Elizabeth Valido, age 49, of Davie, Florida, was charged with thirty-five counts of making false and fraudulent statements and eight counts impersonating an employee of the United States. Great! Wonder how the folks who had her fill out their returns feel?

If convicted, Morgan Mayfaire faces a maximum term of imprisonment of 3 years and a $100,000 fine on each of the charges of fraud and false statements, and a maximum term of imprisonment of 3 years and a $250,000 fine on each of the charges of impersonating an employee of the United States.

According to the Indictment, Morgan Mayfaire prepared fraudulent tax returns at her residence in Davie, Florida for several clients. The clients paid Mayfaire a tax return preparation fee of 10% of the refund claimed on their federal tax returns. Mayfaire prepared tax returns and amended tax returns on Forms 1040 and 1040X in which she reported false medical expenses, taxes, charitable contributions, and employee business expenses. The false expenses and deductions listed on the returns resulted in approximately $472,904 in tax refunds to her clients.

NOTICE: If you hire a return preparer who charges based on the refund received…watch out. By any ethical standard you can think of – this is wrong and a clear indication that some sort of fraud is likely.

Moreover, according to the charges, Mayfaire falsely represented to her clients that she was an IRS employee, and, as such, knew ways to increase taxpayer deductions on tax returns that others were unfamiliar with. These false representations induced clients to hire her to prepare their tax returns.

While an indictment is not an indication of guilt, I have found as someone who speaks and writes about white collar crime, that most indictments result in a guilty verdict. As evidenced in the Wesley Snipes sentencing hearing, if convicted, this woman will go to jail.

YOUR COMMENTS ARE WELCOME!

Meanwhile, white collar crime speaker, Chuck Gallagher, signing off…


Cruise Scam Travel Agents – Carol Ribaudo and Sonja Ritz – Sentenced to Federal Prison! No Vacation for Them!

March 27, 2008

White collar crime comes in many forms, but this scam is just blatant and destined to produce negative consequences.

CAROL RIBAUDO, 52, and SONJA RITZ, 28, both of Clearwater, Florida were sentenced to 57 months and 37 months respectively in federal prison for their role in a scheme to sell booking to passengers for a fraudulent cruise.

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According to the US Attorney’s news release: between July 2003 and January of 2004, Ribaudo and Ritz operated Elite Business Services, a travel-related business located in McKinney, Texas. At trial in August 2007, prosecutors presented the testimony of 30 witnesses and introduced almost 200 exhibits establishing that Ribaudo and Ritz made a series of false representations to prospective passengers indicating that they would be booked on a charter cruise scheduled to occur in February 2004 and accepted payments from these prospective passengers, despite the fact that Ribaudo and Ritz had neither contracted with any cruise line for passage nor had they provided payments to any cruise line.

Now, spending time in federal prison is no vacation. So let me get this straight – these two run a scam for less than 12 months and end up spending between 3 and almost 5 years of their life in prison. You’ve gotta wonder if they would say it was worth it today? The answer would have to be – NO!

Every choice has a consequence. As a white collar crime and business ethics speaker, I speak from first hand experience about the truth about consequences. Reality is – no one escapes the consequences of their choices. While Ribaudo and Ritz avoided the consequences for a time – they did not avoid the consequences all together. Prison is no fun and will prove to be a dramatic change from their prior activities. You do reap what you sow.

If anyone reading has any background on Ribaudo or Ritz or were scammed by them – feel free to comment as I study the behaviors and backgrounds of those convicted of white collar crime.

White Collar Crime Speaker – Chuck Gallagher – signing off…


Child Sexual Predator – CBS Technician Sentenced to 10 Years in Prison!

March 4, 2008

As a teen ethics speaker, I have found that over time, more and more presentations are centered on sexual predators, the internet and how to protect our youth from folks who mean them harm.

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On October 25, 2007, a Ft. Pierce Grand Jury returned an Indictment charging Daniel J. Barron with persuading, inducing, enticing or coercing a person under 18 to engage in sexual activity. Barron, a CBS freelance technician, was in Ft. Lauderdale, Florida covering a Miami Dolphins football game. On September 29, 2007, Barron entered an America Online chat room and began to correspond with an undercover police officer posing as the father of an eleven year old girl. During internet communications, Barron repeatedly expressed his desire to engage in sexual activity with the child. Barron made plans to meet the father and his fictitious 11 year old daughter. Barron later traveled to the meeting location in order to engage in sexual activity with the child.

According to local10.com news: The affidavit alleges that Barron said hello and wrote, “So do you and the kids all enjoy some adventure?” When the detective identified himself as an adult with an 11-year-old daughter, Barron allegedly responded, “Very, very cool. Not a cop.”

According to the affidavit, Barron asked if the undercover detective and his fictitious daughter would visit him. When the detective said he wasn’t interested in fantasy chat, Barron allegedly responded, “I am very serious. You and the dau come down here.”

Every choice has a consequence. On March 3, 2008 Daniel J. Barron was sentenced to 10 years in federal prison followed by 15 years of supervised released. At age 56, Barron will find the final years of his life marred by life in prison.

Sexual predators come from all walks of life and are all ages. One of the major issues that parents face is lack of knowledge of the playing field for sexual predators today.

Questions for Parents:

  1. Do you know what sites your children visit?
  2. Are you familiar with MySpace – Facebook and how social networking works?
  3. Would you know what to look for if your child was viewing inappropriate sites?

Church Fraud – Joann Bollinger Sentenced to Prison for $800,000 Fraud. What was She Thinking?

March 4, 2008

On a late Friday afternoon in February, a gavel fell and Joann Bolliger was sentenced to federal prison and ordered to repay $800,000. Can you for a moment image what she was thinking as she heard the gavel drop?

History: In late December 2007 Bolliger pled guilty to conspiring to defraud St. Maurice Catholic Church by counterfeiting their checks. Bolliger, who worked as a bookkeeper at St. Maurice Catholic Church, conspired with another church employee to forge and alter payroll and other checks belonging to the church and then negotiated over $800,000 in checks for their personal enrichment.

Lisa Mazurkevitch, another church employee charged in the case, pleaded guilty in March 2006. She was sentenced that same year to six months of house arrest, five years of probation and ordered to pay $40,151 in restitution.

Reality: Every choice has a consequence. One cannot assume that any fraud committed will go unnoticed or that there will be no consequences. I speak from experience, as (although I am not proud of my past) I have spent time in federal prison for white collar crime. For a time, I believed that I was able to perpetrate a fraud that would go undetected. Such a believe is an illusion. You do reap what you sow.

In this case, Bolliger will soon report to federal prison. She will find that, while this experience will be humbling, different, and less than pleasant – it will be a growth opportunity for her should she choose to use it.

As a business ethics and white collar crime speaker, I know that a conviction and prison sentence does not limit one’s ability to rise above poor choices and make more effective positive choices. Hopefully, Bolliger will see the error of her ways and make use of this time to have a positive impact on the lives of others in the future.


Mortgage Fraud Alive and Well! Justin Barker Sentenced – 7 Years and $2.3 Million in Restitution

February 26, 2008

Mortgage Fraud – this time from Jacksonville, Florida. Seems that Justin Barker, age 31 and Robert Hulbert, age 45, both pled guilty to conspiracy to commit wire and bank fraud. Barker just received his sentence – 7 years in federal prison – $2.3 million in restitution and $4.4 million in forfeited property jointly and severally owned with other conspirators.

Seven years and likely bankruptcy. So what does Barker has to show for his fraudulent activities? A convicted felony record? By it’s end 20% of his life in prison? Both?

The scheme operated in 2005 and 2006. Barker negotiated the purchase of residential real estate properties, either on behalf of himself personally, on behalf of an entity he controlled, or on behalf of a third-party buyer. Barker, the entity, or the buyer entered into a purchase and sale agreement with the seller of the property. Barker then retained a licensed real estate appraiser to appraise the property at a significantly inflated price. The appraiser would appraise the property at the price that Barker requested, using inappropriate comparable properties and other fraudulent methods to obtain the price requested. At the closing on the property, Barker or an entity controlled by him would receive the difference between the loan amount, which was based on the inflated appraisal, and the actual purchase price, usually described with terms such as “assignment fee” or “payoff of second mortgage” that did not exist. This difference was the proceeds of the fraud.

During the course of the scheme, fraudulent loans totaling about $17.7 million were obtained on more than 40 properties. These loans would not have been approved but for the fraud. Barker received approximately $4.4 million in gross proceeds from the fraudulent transactions. To recover some of these illicit proceeds, the government seized from Barker a 2004 Bentley Continental, a 2007 Cadillac Escalade, a 2002 BMW 745Li, a 2005 Chaparral 330 Signature 36’ boat, a 1997 19’ Wellcraft boat, a 2006 Yamaha motorcycle, a 2001 Yamaha motorcycle, a 2-carat loose diamond, a 1-carat diamond necklace, a .5-carat diamond necklace, diamond stud earrings, and two Movado watches.eds of the fraud.

Every choice has a consequence! As a white collar crime and ethics speaker, Barker is a prime example of choices gone bad – very bad! There is a statement that is true – you will reap what you sow. While these next comments I am not proud of, but having spent time in federal prison for poor choices, I know first hand the answer to the question – was it worth it? The answer – a resounding – NO!

Barker will find that federal prison is no fun. Some call it “club fed” – let me say…it is fed – there is no club to it. Working every day for 12 cents per hour cleaning toilets and urinals is nothing that anyone would do at the “club.” My guess – Barker will have time to figure out a lot about himself. Perhaps, like me, when he emerges he will have a different perspective and can use his new found wisdom to benefit others.

More Mortgage Fraud reports to come…

Your comments are welcome!


White Collar Crime – Week In Review From South Carolina to California to Florida – Comments by Ethics Speaker Chuck Gallagher

February 3, 2008

After reviewing the verdict in the Wesley Snipes case – both guilty and innocent – it makes sense to consider what else is taking place on the white collar crime front.

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South Carolina: Christina J. Williams, age 32, of Conway, South Carolina, was sentenced in federal court for aggravated identity theft and credit card fraud.

Williams worked as the office manager in a doctor’s office in Surfside Beach, South Carolina. From August 2003 to July 2004, Williams made unauthorized charges using the doctor’s personal and business credit cards, and used his personal information to secure a card for herself. Williams also embezzled money from the doctor’s office and had her name added to his cellular phone account. Investigators determined that Williams stole more than
$104,000.00 during the course of the scheme.

Rhode Island: Cory Johnson, the former president of Mixitforme, a company that sold electronic devices over the Internet and by telephone, pleaded guilty today to fraud and money laundering. Johnson admitted that he defrauded a credit card processing firm out of about $2.2 million worth of customer orders that Mixitforme failed to fulfill.

Between November 2005 and March 2006, NOVA processed millions of dollars worth of credit card transactions on behalf of Mixitforme for orders the company received over the Internet and by telephone. In March 2006, Mixitforme ceased operations, and hundreds of customers subsequently complained to NOVA that their credit card accounts had been charged for orders to Mixitforme but the merchandise had not been delivered.

NOVA refunded customers a total of $3,178,347 in charges for unfulfilled orders. NOVA was able to recoup $954,460 from a bank, but was left with a net loss of $2,223,887.

Johnson, 29, of Morrisville, Pennsylvania, pleaded guilty to one count of conspiracy to commit wire fraud and one count of money laundering. He is free on bond pending sentencing, which Judge Smith scheduled for June 20. The maximum prison sentences are: conspiracy — five years, and money laundering — ten years. Each offense also carries a maximum fine of $250,000.

Pennsylvania: William D. Edgar, a resident of Verona, Pennsylvania, has been sentenced in federal court in Pittsburgh, Pennsylvania to 37 months of incarceration and five years supervised release on his conviction of Conspiracy, Bank Fraud, and Wire Fraud.

Edgar, who was a mortgage broker licensed by the Pennsylvania Department of Banking, operated a mortgage brokerage business known as America’s Mortgage Outlet in Monroeville, Pennsylvania. Between May 2001, and October 2003, Edgar participated with loan officers at America’s Mortgage Outlet in a scheme to defraud banks and private lenders by making false representations in more than seventy mortgage loan applications submitted on behalf of his customers.

Two types of fraudulent schemes were used. One form was to falsely represent to the lenders that mortgage loan applications presented to the lenders were for refinance loans, when in actuality the applications were for purchase loans. The refinance scheme deceived the lenders into approving and funding loans on terms and conditions they would not have otherwise approved or funded.

Another form of the scheme was to accurately represent loans as purchase loans, but to falsely inflate the sale prices and values of real properties being purchased in order to cause the lenders to approve larger loans than they would have otherwise approved. This scheme deceived lenders into financing down payments and other cash disbursements from mortgage loan proceeds. In total, more than $3,000,000 worth of loans were issued in connection with this scheme.

California: BARRY HOLLAND, age 60, of Carmichael, entered a guilty plea to accepting unlawful bribes while serving as Superintendent for the City of Sacramento’s Water Distribution Branch. HOLLAND pled guilty to a one count information charging him with bribery in connection with a municipality that receives federal funds.

From at least 1999 through 2005, one Sheldon M. had an oral agreement with the Water Distribution Branch under which he would retrieve used meters from the Water Distribution Branch, transport the same to a recycler, and sell the same for profit. Sheldon M. would then keep a portion of the meter sale proceeds for himself as a fee and would maintain a separate portion of the meter sale proceeds in a “slush fund” which he later would disburse to certain employees of the Water Distribution Branch, including HOLLAND, or utilize to make purchases for the benefit of the Water Distribution Branch. Between October, 1999 and November, 2005, defendant HOLLAND accepted approximately 16 checks and cash totaling approximately $10,371 as rewards from Sheldon M. for allowing Sheldon M. to sell the water meters. HOLLAND also accepted various machinery (then retained by the Water Distribution Branch), including two air motors with a combined value of approximately $7,200, and a tapping machine with an approximate value of $8,000 to $9,000 from Sheldon M., also as rewards from Sheldon M. for allowing Sheldon M. to sell the water meters.

Florida: It was announced that owners of nine separate Miami-based health care corporations have been sentenced to prison terms within the past two weeks. Collectively, the nine defendants filed fraudulent claims with Medicare for $56,599,832 worth of unnecessary durable medical equipment (DME) and infusion therapy.

The nine defendants sentenced in Miami are: (1) Luis Soto, 41, sentenced to 87 months in prison; (2) Noel Rodriguez, 50, sentenced to 51 months in prison; (3) Rosabel Gonzalez, 32, sentenced to 30 months in prison; (4) Christian Vasquez, 22, sentenced to 41 months in prison; (5) Maria De La Serna, 55, sentenced to 19 months in prison; (6) Ariel Betancourt, 35, sentenced to 24 months in prison; (7) Jose Prieto, 58, sentenced to 41 months in prison; (8) Armando Jorge Herrera, 27, sentenced to 36 months in prison; and (9) Reinaldo Lopez, 40, sentenced to 46 months in prison.

Comments: First, as a business ethics speaker (www.chuckgallagher.com) I often speak to groups about the Truth About Consequences. My workshops on white collar crime and fraud are well attended as it appears that anyone can get caught up in criminal activity – and I speak from experience – the consequences can be devastating.

The Florida issue clearly is one of pure greed and seemingly opportunity. Time after time people (especially in dealing with the government) think that the customer – US Government – is too big and would never catch their “slick” illegal scheme. And, more times than not – they do and the consequences are less than pleasant. Prison terms no matter their length are unpleasant.

In California we see an example of someone being found guilty for participating in a scheme. I would be that this person would have felt that it must be O.K., someone else is making the choice – he was just a recipient. Wrong! Illegal is illegal.

Pennsylvania, Rhode Island and South Carolina – well that was just fraud pure and simple. Most of the time when a fraud is committed there are three components: (1) Need; (2) Opportunity and (3) Rationalization. While I don’t know how the three came together in there cases…you can bet they did.

But, this week has past – Snipes has been found innocent and guilty – and we face another week. Perhaps, it would help if people understood two simple facts:

Every choice has a consequence! and You reap what you sow!

Your thoughts and comments are welcome!

 


MacLafferty Convicted – Sentenced For Failure to File Tax Returns! Evidence of What’s to Come for Wesley Snipes?

February 3, 2008

Robert M. MacLafferty, age 46, of Portland, Tennessee was sentenced January 29th to serve 5 months in prison, followed by 3 years of supervised release. His sentence also included the requirement to pay restitution to the IRS of $37 plus thousand.

According to the US Attorney’s news release:

MacLafferty pled guilty on October 12, 2007, to five counts of income tax evasion. During his plea hearing, MacLafferty admitted that he earned income which required him to file federal income tax returns for years 1996 through 2003, however, he failed to file such a return in each of those years. MacLafferty also admitted that he had adjusted gross income totaling $227,993 from 2000 to 2003. During this period of time, MacLafferty provided false documents to his employer claiming he was not a citizen of the United States and therefore not liable to pay federal income taxes. MacLafferty also admitted that after the Internal Revenue Service filed a federal tax lien against his residence in Sumner County, he quitclaimed his interest in this property and another property to his wife.

Similarities? Let’s see – Snipes claimed that he was not a citizen of the US and not liable to pay federal income taxes. Likewise, Snipes filed to file tax returns for a number of years during which he had approximately $37 million in earnings.

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Possible Outcome! Snipes, due to “star power” avoids prison and makes right with the IRS and federal government. Or, Snipes gets a “hand slap” prison sentence like MacLafferty and is told to pay up for his misdeeds.

Since it will take time to see what the outcome is…want to weigh in with your thoughts.

Prison (light sentence) or freedom – which will the judge order?

Business ethics speaker, Chuck Gallagher, off for now…


Wesley Snipes and the 861 Tax Avoidance Argument – White Collar Crime Speaker Chuck Gallagher Comments!

February 3, 2008

Just this morning I received this comment to one of my blogs:

“Don’t quit your day job and become an attorney because it looks like you really don’t know much about law.”

While I am not an attorney – never have been – the comment caused me to pause. I have been a CPA – Tax Partner in a CPA firm – and so I know a bit about tax law. However, I have focused on Wesley Snipes choices and the consequences that could have and did follow that I haven’t taken time to focus on his position, his prosecution and the outcome. So in the comments that follow I’ll try to break it down into manageable bits for those who want to know the thoughts behind Wesley’s actions.

First, let me say – so there is no miscommunication – I am not a CPA today. I lost my license years ago for making wrong choices. In fact, I was convicted for tax fraud and spent time in federal prison. Hence, not only was I trained formally (including a Masters with emphasis in tax), but I received a Ph.D. (s0 to speak) from the school of hard knocks – learning first hand the effect of choices and the consequences that can follow. So – I speak from training and experience.

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The Background: Wesley Snipes, for all I know, has been a law abiding citizen filing and paying his taxes like most normal folks for years. He has been successful and most would assume that he will continue to be – earning money from his services as an actor.

Somewhere back in the late ’90’s Snipes (unfortunately for him) came across two folks – Eddie Ray Kahn and Douglas Rosile – both of whom were promoters of an obscure position that a section of the tax code – Section 861 – somehow provided the ability for a US Citizen to avoid paying taxes on income earned within the US. Kahn has been described as a Veteran Tax Protester.

In August 2004 the following experts were part of a news release related to the tax protest activities of Eddie Ray Kahn and Douglas Rosile:

Eileen J. O’Connor, Assistant Attorney General for the Justice Department’s Tax Division, announced today that a federal court in Ocala, Florida has ordered four people and their businesses to stop preparing, selling, or marketing fraudulent tax schemes. The permanent injunction applies to Eddie and Kathleen (“Kookie”) Kahn of Sorrento, Florida; David Stephen Lokietz of Mt. Dora, Florida; Bryan Malatesta, a certified public accountant in Cleburne, Texas; and Eddie Kahn’s Mt. Dora, Florida businesses-American Rights Litigators (ARL), Guiding Light of God Ministries (GLGM), and Eddie Kahn and Associates.

“People who sell tax scams are cheating their customers as well as law abiding taxpayers,” said Assistant Attorney General O’Connor. “The IRS and Justice Department are working vigorously to protect the public and the U.S. Treasury from tax scams.”

The United States District Court for the Middle District of Florida entered the permanent injunction on August 12 after these defendants failed to respond to the Justice Department’s complaint. The court found that the defendants sold counterfeit checks, set up sham corporations (known as “corporations sole”) to help customers hide income and assets, and helped customers obstruct IRS investigations and collections by filing frivolous complaints against IRS employees. The order bars the defendants from selling these or any other fraudulent tax schemes and from representing customers before the IRS. The injunction also requires the defendants to send their customers a copy of the injunction and to refund to their customers all membership fees and other payments received for selling fraudulent tax schemes and services since 1996.

The court separately ordered that Eddie Kahn and Bryan Malatesta, who previously had been found in civil contempt of court for failing to obey the court’s preliminary injunction, be incarcerated until they turn over documents, including their customer list, to the Justice Department. To that end, the court directed the Clerk of the Court to issue bench warrants for the arrest and detention of Kahn and Malatesta until each complies with the previously entered injunction.

Now, let me first state – just because the government took this position does not mean that they were wrong. However, there is a clear difference between professionals (Tax Attorneys and CPA’s) who understand the law, the complexities of the law and the application of the law for tax avoidance purposes and those who can’t seem to find the legal boundary. The government’s position is that those named above have gone too far and crossed the legal line from tax avoidance into tax fraud.

Eddie Ray Kahn reminds me of Jim Jones – except that Kahn’s followers drink the “koolaid” of avoiding paying taxes or participating in the system. The “koolaid” in this case won’t kill them, but the consequences can be legally and financially devastating.

The 861 Argument: Tax avoidance promoters, like Eddie Ray Kahn, promote that tsections 861 through 865 of the Code permits an individual to take the position that either the individual or the individual’s U.S. based income is not subject to federal income tax. The arguments rely on sections 861 through 865 of the Code and the regulations (in particular, Treasury Regulation § 1.861-8) to argue that taxes are only imposed on income derived from certain foreign-based activities.

Kahn and others rely on this as a foundation for their positions that one does not have to pay taxes on US earned income. Likewise, there are other similar arguments that the IRS is not properly sanctioned and that there is no constitutional authority to tax citizens, etc. (the list goes on and on). Most of the folks sucked in by Kahn have elected not to pay taxes and not to file – claiming that there is not authority to compel such activity.

Snipes Actions: First, Snipes is just a well known figure who is a pawn at play here. Kahn sucked him in and in order to get Kahn (which the government did) they used the notoriety of Snipes to draw attention the the consequences than can follow choices like what Snipes made.

Snipes (now well documented) did the following:

  • After being indicted in 2006, actor Wesley Snipes sent a document to the Internal Revenue Service declaring he was a “nonresident alien” of the United States, refuting his Social Security number and warning that continued prosecution could lead to professional consequences for federal employees. Now honestly how dumb was that? It was clear that Snipes had, by this time, been drinking a lot of Kahn’s “koolaid.”
  • IRS Frivolous Return Program senior technical advisor Shauna Henline read excerpts of the document at his trial of the 600-page declaration signed by Snipes and sent Dec. 4, 2006, Snipes said he had “no ill intent or malice” and didn’t want to evade any lawful requirement to pay taxes. But he went on to say the government had “no lawful authority to impose any kind of criminal sanctions.” Snipes claimed (and that’s what saved his butt) that he just wanted the IRS to prove to him that he did have to file and pay taxes. Kahn, and others, promoted that one should not file or pay until the IRS satisfied their questions. They used that as a defense. In other words, don’t file or pay, rather push their issues or agenda with the IRS assuming that they would not get an answer and hence avoid the requirement to pay.
  • Snipes declared he had no taxable U.S. income, making the IRS Form 1040 “absolutely the wrong form for me to file.” He also claimed taxes withheld were “stolen funds.” Here’s where the 861 argument comes into play. Their position is that income earned in the US is not taxable therefore, since his income from acting was earned in the US – he obviously didn’t need to file a tax return.

Governments Position: As one can imagine, the IRS takes a different position. Treasury Regulations (some 29 pages) have been issued that define the meaning of Section 861. Click on the link if you want to mire up in the details. An excerpt defining income is shown below:

(a) Categories of Income.— Part I (section 861 and following), Subchapter N, Chapter 1 of the
Code, and the regulations thereunder determine the sources of income for purposes of the income
tax. These sections explicitly allocate certain important sources of income to the United States or to
areas outside the United States, as the case may be; and, with respect to the remaining income
(particularly that derived partly from sources within and partly from sources without the United
States), authorize the Secretary or his delegate to determine the income derived from sources within
the United States, either by rules of separate allocation or by processes or formulas of general
apportionment. The statute provides for the following three categories of income:

(1) Within the United States. The gross income from sources within the United States,
consisting of the items of gross income specified in section 861(a) plus the items of gross income
allocated or apportioned to such sources in accordance with section 863(a). See §§ 1.861-2 to
1.861-7, inclusive, and § 1.863-1. The taxable income from sources within the United States, in the
case of such income, shall be determined by deducting therefrom, in accordance with sections
861(b) and 863(a), the expenses, losses, and other deductions properly apportioned or allocated
thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be
allocated to some item or class of gross income. See §§ 1.861-8 and 1.863-1.

Likewise, not only has the government issued Treasury Regulations but Revenue Ruling 2004-30 was issued on March 22, 2004 related to frivolous tax returns and attempting to avoid taxes under section 861. The introduction of the Ruling states:

This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with tax schemes, that there is no authority in sections 861 through 865 of the Code that permits an individual to take the position that either the individual or the individual’s U.S. based income is not subject to federal income tax. The ruling also describes many of the possible civil and criminal penalties that apply to people who make frivolous section 861 arguments to evade tax.

Notice: If there is a Treasury Regulation that defines income and a Revenue Ruling that says don’t use this as a position to avoid taxes – one might assume that you would want COMPETENT tax advice – not advice from the likes of Eddie Ray Kahn and his “koolaid” crowd.

Conclusion: I have taken a keen interest in this trial, as I spent time in prison with others who were there for just the same reasons that Snipes took – taxes aren’t legal, income in the US isn’t subject to tax, etc. After prison, they decided that their minds were once again clear and they became law abiding citizens – avoiding the wrath of the IRS.

In Snipes case he had three things going for him: (1) he actually, to the jury, came across as a victim of Kahn’s ill advice – asking for information (albeit in a bizarre way), and acting not as a conspirator but just a misguided tax payer; (2) the race card was played early so it put the “all white jury” on notice that justice should be served. Had Snipes been convicted on all charges – it would have had racial overtones hence coloring the verdict (no pun is intended); and (3) Snipes had the benefit of star power. Notice that rarely do “stars” get the same treatment that plain folks seem to experience.

What’s next? The acquittal on the felony charge doesn’t relieve Snipes from his responsibility to pay taxes. The Internal Revenue Service can still sue him in civil court for back taxes for the years in which he didn’t file returns, from 1999 through at least 2004. The government says Snipes earned almost $38 million during that time.

Snipes is prepared to pay the taxes he owes for the years he didn’t file, Bernhoft, his attorney said.

“Mr. Snipes has always been committed to doing the right thing, and after this trial is over, he’ll make whatever amends are required. But this is a man of integrity.”

Prison for Snipes? Some how I doubt it – although I would be that the IRS would love to see some time served for Snipes convictions – even if it’s a short time like Martha Stewart. The message then would be clear.

The judge ordered a pre-sentencing investigation, which could take up to 75 days, but set no date for sentencing. He also reduced Snipes’ bond from $1 million to $250,000. Pending the sentencing hearing, Kahn will remain in custody, and Rosile will remain free on bond, the judge said.

Both Kahn and Rosile were convicted of tax fraud and will, no doubt, spend many years in federal prison.

The IRS will continue to aggressively pursue tax protesters, O’Neill said.

“We’re going to continue to go after those people, and I think you will see more indictments of tax protesters,” he said. “The IRS will go after all of those taxes.”

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As a professional speaker talking about business ethics and white collar crime (www.chuckgallagher.com) it is clear that this case will be talked about for years to come. One thing is for sure – a clear message was sent and when the smoke clears, I would bet that Snipes once again comes to his senses and files and pays his taxes. Hopefully, he won’t continue his protest – cause after this experience, he can’t claim that he just didn’t know.

NOW SNIPES KNOWS!