Free Sur-Reply - District Court of Federal Claims - federal

Case 1:06-cv-00245-EJD

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS
Nos. 06-245T, 06-246T, and 06-247T (Consolidated)

MURF AM FARMS, LLC, §
By and Through Wendell H. Murphy, Jr., §
a Partner Other Than Tax Matters Partner, §

PSM FARMS, LLC, §
By and Through Stratton K. Murphy, §
a Partner Other Than Tax Matters Partner, §
§

§

MURPHY PORK PARTNERS, LLC §
By and Through Wendell H. Murphy, Jr. §
a Partner Other Than Tax Matters Partner, §

v. §

Plaintiffs, §
§
§ §

§

UNITED STATES OF AMERICA, §

Defendant. §

APPENDIX

#

Description
Declaration of Andrew J. Krieger.

Pages
001-012

Exhibit A

-Vi-

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORAO

CAROS E. SALand
TIA ZAOLINI SALA,

)

Plantiffs,
v.

) ) 05-cv-00636-LTB-KLM )
)

)
)

UNTED STATES OF AMERlCA,
Defendant.

) )
)

DECLARTION OF ANDREW 1. KRGER
I, Andrw J. Kneger, pursuat to 28 U.S.C. § 1746, declare and stte as follows:
i. I have personal knowledge of

the representations made in ths declaration.

2. I was the trader responsible for implementing Mr. Sala's tax shelter transaction.

Sometime in i 999 or 2000 I was introduced to the idea for the shelter by Michael Schwarz.
3. I was deposed in the above-captioned case on October 26 and 27, 2006 and again

on April 17, 2007.
4. In 2007, I was first contacted by the United States Attorney's Offce for the

Southern District of

New York ("USAO"). I leaed that the USAO was conductig an

investigation into certin ta shelter transactions relating to a pending criminal case involving

Ernest & Young ta shelters.
5. I thereafter met with the USAO, and provided certain information under a proffer

agreement providing that my statements could not be used agaist me. I informed the USAO

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about my involvement in the ta shelter at issue in the pending cr cae. I also inonned

the USAO that some of my teony in Mr. Sala's cas wa false, mileadng and incomplete.

6. Somete before the tral in ths mattr, I leared tht my depsition tesony
wa to be offred by one or both of

the paes. I knew th pars of my depostion testony

wer fase, misleaing and incomplete. I therefore authorized my counel, Jay Fischer of
Fischer Portr Thoma & Reinfeld P.C., to advise the pares th some of

my testiony was

inconsistnt With what I knew to be th tre facts regarding the motivations behid the shelter
traction at issue in Mr. Sala's cas. I wa contiuing to review my testiony for other

specific inconsistencies. My counel so advised the pares by letter dated Febru 27. 2008, a

tre and accurte copy of which i$ anexed hereto as Exhibit A. I was not willing to be re-

interviewed by the paries or provide sworn testimony in ths case at that time because my
trth sttements would have incrinated me.
7. Subsequently, I authorize my counsel to advise counsel for the parties in Mr.
fuer specific inconsistencies and possible inconsistencies. My counsel did so

Sala's cas of

by a letter dated Marh 12,2008, a tre and accurate copy of

which is anexed hereto as Exhbit

B. At that time I was stil reviewing the testimony. I stil was not willing to be re-interewed or
to provide sworn testimony in ths mattr.

8. On May 21, 2008, I executed a non-prosecution cooperation agreement with the

Governent. Among other thngs, the agrment reuires me to provide trthl information
and testimony about my activities involving ta shelters, and it provides that ifI do so, I will not
be prosecuted for those activities or for the false testimony I gave in this matter. I am required to

2

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fuly coopere with the USAO, the Tax Division of

the United States Deparent of Justice and

the Internl Revenue Serce.
9. I was advied by my counel tht until I entered into ths agement, I should not

prvide sworn testiony on any of my ta shelter actvity, includig Mr. Sala's trsation. Had

I been caled to testify pnor to the execution of ths agrent, I would have followed my .

counsel's intrction, assert my Fif Amendment right, an ref to testify. Furer, in the
weeks pnor to and dùrg Mr. Sala's tral, which I understad began on Mach 10, 2008 and
concluded on March i 9, 2008, I was out of the countr with no immediate plans to re. I have

ben residing in Dubai continuously since Augu 2007.
10.. As pa of

the Saa trtion, I engaged in several call-spread an put-spread

option stctus in October 2000, which were used to generate the tax basis for Mr. Saa an the

other paricipants, including myself. I will collectively refer to these as the "ta trade."

11. At the time of my depsition, I purosely avoided all discussions of ta matters

and pursely downplayed the ta motives behind the ta trades or the "investment progra." In
fact I was aware that the primar motivation for entering into these tax tres and the
"investment progr" was to generate tax savings. As a result, certn portions of

my deposition

were intentionally false, misleading, and incomplete.

12. Ifnow called to tesfy in Mr. Sala's case, my trthful testimony wolUd be
substantially different from my depsition testimony in several areas. Some examples of

trthl

testimony are sumarzed briefly below with citations to examples of contr testimony in the
deposition:

3

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a The priar purose of the ta trades was to generate ta losses for the
parcipants and not to generte positive economic retu. (Dep. Testimony 505:6-15). The ta
benefits we not "incidenta" to the ta trades, the intial "test perod" the remag tres in
2000 or the remader of the "investent progr." But for the ne to generte ta losses for

the pacipants, I would not have executed the ta trades. Regaress of market conditions, I
was required to liquidate the positions by the predeteed strcte of

the traction. (Dep.

.t

Testiony 429:3-21); I believed tht had I tesfied trthlly at my deposition as to these facts,

my testony might have undermed Mr. Sala's ta ca.
b. Based upon my conversations with Michael Schwa I understoo that I wa

reuired to p~chase roughy equal amounts of long and short options to generate ta losses for
the traction paricipants, including Mr. Sala. The amount of long option premimns I was

instrcted to purchae as par of the ta trdes intentionaly approximted the tax losses sougt
by the paricipants. (Dep. Testimony 161 :12-14 and 165:8-166:23). The face amounts of

the

long options were significat and I would not have entered into trades with these face amounts
but for the need to purchase options with such large premiwns.

c. Indeed, because the face amounts were so signficant, the normal tranction
costs that Refco would have charged would have made the tres cost prohibitive. Therefore, I

arged for my company, Beckenh Trading Compay (BTC). and not Refco, to assume the
risk of the trades and to do so without chaging any fees. These trades would not have ben

economically feasible if we had to incur Refco tranaction costs. In addition, had BTC charged
execution fees, it would have been significantly harder to ensue a profit at year end.

4
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d. Given the size of the premium relative to the amount of capita in the account I
could not have sepaed the long and short

options.

e. A thrt or even a niety-day tet period in 2000 wa not a reistic test of my

tradin program. Rather, the tenn "tes period" was coined by Mr. Schwar for the benefit of
the IRS and in an attempt to disguse th rel purose of

the ta tres: (Dep. Tesony 428:20-

23). The primar purose was .not to ease people gently into foreign exchange tradng. (Dep.
Testimony 246:20-247:3).

f. The tranactions th gave rise to the ta losses, includig the stctue impose

on the paricipants and the use of an S corporation and a general parership, were not designed
to 'assist in the creation of a profit or for any purose other than the creation of tax losses. (Dep.

Testimony 453:9-20 and 513:9-515:17). Instead, everhing that occurred in 2000 consisted of
predetermined steps required by Mr. Schwartz, aU for the purse of generating tax basis and a
ta loss for the paricipants.

g. Mr. Schwar explained to me that the trading acounts were required to be
liquidated at yea end to generate the tax losses and that the transaction was strcturd to achieve
this end. There was no sound tring or business reason to liquidate the trades by year end under
my trding strategy and absent the requirement that these be liquidated to generate a ta loss in
2000, the positions would not have been prematuely unwound. (Dep. Testimony 263:1-4 and
515:7-516:22).

h. I was a parcipant in the same tax shelter trasaction that Mr. Sala parcipated
in. (Dep. Testimony 261: i -9). My primary motivation in paricipating in the shelter was to
generate a tax loss in 2000, which I claimed.

. 5

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I declare under penalty of perjur tht the foregoing is tre and correct.

Executed May~ 2008 in "lfAi..J C.lí-t-\

ANREW~~ER

lL .'

, New Jersey.

6
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Feb27,20

VI ELECTNIC MAL

.Da D. Halle Esq. tIla.OO
Clne & Hallet
Wstrlnt Plce One, Suit 803

. . Da N. Ge. Es. .

1011 Wesrn Avenue .
Seatte, WA 98104

R8: Saa Y. Unit St Case No. 058-TBAC
Gentemen:
. As yo kn. we repre An Kreger whe deposit W8sbiken in the

..

da." per8Il.Qov Uni St Depart of Ju~ti Tax Olv/&on . CI Tril Sen, Wes Reion
PO Box 683 . Ben Franklin Stion

Washingt, DC 2004

above mar. We wish to ad you that subseqen to th deposit, Mr. Krier was
questne exnsivy by the Uni St Att who Is Invesgatng thé Emst and

Young tax shelter matr. We ha leamed re that the tral of the abve maer Is , scheduled to begin on or about March 11th. .
Having had soe ti to coder questns raise in the Sa/a. desin. it appers Mr. Kreg pred Infrmalon. to the Uni St govemment that may be

Incosl8nt wi Infrmtin proed In the depitns. For ~mp. it is now Mr.
drien. This. of course. does no chang any of Mr. Krs tBstny as to what Mr.

,-

Kneger's view, base. upo his re and realuatin of th clrncG, th the progrms in which Mr. Sala was involve we eslly ta drien as opp to pro

Sals told Mr. Krieger resrding his (Ssls's) motva nor does It afct any testny
provied In the depoitn as to the

lack of any knowede on Mr. Krieger's part as to the

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,i

.I
ASCHER PoRTR & THOMA, P.C.
DaR81 D. HaUel Es. Jon M. Coil, Es.
Februry 27, 2008 Page 2

1
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uhlmat utIlzon by Sa of any gains an lose in th prepara of any ta rems.

of Mr: Krs depit speif areas In which thre 8re mari incosi and molfns in Mr.
We ar In the pr of maki a mo detle re

and subent Infnnat pr by Mr. Krr an, to the mdntthther ar otr
Krr's depitn temoy, we shall ad you at th eallest possile dat.
i
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, JDF:/1

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..
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FISCHER PORTER THOMAS & REINFELD, P.C.
,Jy D, FIHER

ARUR L PO, JR. AU C. 1lMA.'
oJEI ù. RENFU t
DOAl H. LARSEN ..

AiTRM~ AT LAw
440 SVL.VAN AVENUE, SUIT I 30

2150 W£

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EtlOLEOD CUFF. N.J 0763Z-2700
TEHOIIE: (20 I) l5eø-SQSQ

NEWYO I' 10107-'oolS ~CNE. 12121 1S4S-io21
185 NO MAIN sr. NEW cn. NY 100__110
lEa-E: 18461 70S00SO I

ST., SUI lelQ

TEOPER; II I 21 545102

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2C1l BOS PO RO.

AEH. iiLE. FO. PE
BA .I. EA.

HO P. DAVIS

S~OER'5 E-M ADORIt:

Jlchll(jllw.co
Mar 12, 2008

LA, NY 1083&3Q41 "lOH lS 1 41 833-7815 FACMIl Cl14) e~3-7ee

70 SL.Mf1 AVE

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FACILE: IQ73) 227-5440

PINE El. No 07OS&Q737

N.Y BA ONLY N..i. BAA a-LV
a N.Y.. N.J. & C.C. BARS . N..i. 5. PA. BAS . N.Y. 5. C.T. BAR

PLE REPOD TO

DlL. CUF. NJ OFCE

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VIA ELECTRONIC MAIL

dhalletttâc-hlaw.com
Darrell D. Hallett, Esq. Chicoine & Hallett Waterfront Place One, Suite 803

david.n.iieiertâusdoi.aov
David N. Geier, Esq. United Stated Department of Justce Tax Division Civil Trial Secion, Western Region

1011 Western Avenue
Seatte, WA 98104

Washington, DC 2000

Re: ANREW KRGER
Gentlemen:

Peter Tilem of Counel to our fi ha reviewed the Anew Kreger deposition in the Sala case and has put together a lit of areas that are inconsistent with staents th were made
by I(neger to the.

United States Attorney's Offce. Below ar excets fr the depositions tht

he believes are incousstet. The UIited States Atorney's offce ba rnviimed ths list and agee that the sttements in ths list ar inconsistent but have their own adtion whch ar highighted
below.

Page 427 J ~ines 3-15
THE WISS: I recall tht
the investors were testin th water
and that they wanted to watch the trdigi

have a chace to get to experence the sttegy for a few month. And, at wlúch point, they would

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FISCHER PORTFl THOMAS & REINFELD, P.C.

March 12, 2008
Page 2

then either have the option to go in

voluntly in the longer te program
which would be five yes or they would they automacaly be reed to, if

went thugh th enti te peod and .
we showed substan or renable

proñts; is wh I underd.

Page 428, Lines 20.23
TH WIS: With

regards

to the progr itscl achev the ta
loss was completly irelevant. Our
. purose was to mae money.

Page 429, Lines 14-21
QueStion: 'In your mi at the time th the

program was implemented; to what extent, if any, wa achievig a tax loss, a goal that you had

with resect to the operaon oflle progr?
Answer: It wasn't
Queson: What was the goal?

Anwer: The goal is sily to generte good
rets because we wanted to maage money.

Paiio 453. Lines 9-20

Queson: Whý! Aner: Because everng that Mr. Sala
stated, as well as my own view for my own
investment. was that ths was an investment program that was designed an gead to make money.

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.. t
FISCHER PORTER THOMAS èS REINFELD, P.C.

Mah 12, 2008
Page 3

I ha bee tradg
prfessionally for a lon tie an bistoncally,

we made money over time. And thatI underoo .
there might be incidenta ta bents, but they

were exacy tht; they were incidenta and not
the pri reaon for inves.

Page 505. Lies 7-15
Question: Lokig at your pmpose with

reec to those traction, and ifit's dient with respect to differt tractions,
pleae tell me on Exbit-ll. what

was the

purse of entering into those trsaction.

Aner: The purose was to eam profits.
In addition to the foregoing. member of the Uiuted States Attmo/ s Ofce wanted us to
include the below listig. When they reviewed the trcrit they reviewed it to deteI.e

whether Andrew Krieger's tesony today would be diert frm how be tefied in the Sala

depsition. We did not review the deposition using thei tes but only using the test of whether he actuly stte someth in his meetigs with the Unte State Attrney's Offce that was
Inoonsstent with hi testimony in the Sala deposition. Other th the :f lie in the followig

listg. we do not necessarly agre tht the other items wamt consdeaton; however we
mclude them in the interest of completeness.
Page i 65 Lie 4 through i 66 line 23.

Page 161 lies 3-14 .
Page 246

lie 20 through 247 line 13

Page 261 Line 2-9
Page 263

Lie 2-4

Page 456 Lie 4 thugh 457 Line 5

Page 5 1 3 Line 8 thugh 5 l4 Line 17 Page 515 Line 7 thrugh 516 Line 22
You should note the following important caveats:
1. Neither we nor the United States Attorey's Offce have had an opportty to

thoroughy review the trcnpt with Mr. Krieger because of the fact that he lives fa .
away.

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., . ..
FISCHER PORTER THOMA & REINFELD. P.C.

Marh 12, 2008
Page 4

2. Th bece of

the urgeny of the Sala tral we ar not in a position to pren an

exhusve lis of innsstecies but have done our bes to iden the Iinsencies

~ven the tie condeons an th fat that our clien redes fa away.
3. That we hae only discused some of 4. That if given imty his testiony may dier

the tesony with our clent but not al.
in other ar.

Please contact me if you have ÍUy additiona qution about ths.

~
cc: Deborah LandIs, Deborah.Landis~usdoi.aov

VertnyyO~
Jay D. Fischer

Andrew Krieger
JDFllc

012