Free Affidavit - District Court of Federal Claims - federal

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fix tax purposes -that his tax basis in the partnership was equal to the cost of the long option
(which had been calculated intentionally to equal the income the client wished to eliminate), rather than the net amount actually paid by the client to participate in the transaction (5% of the price of the long option). The conspirators claimed that the low-value asset contributed by the client to the partnership would take on that high tax basis when the partnership terminated, so that when the S-Corporation sold the low-value asset at fair market value only days later, a huge artificial loss - equal to almost twenty times the client's initial cash contribution - was created

for the client.
29.

Thc defendants and their co-conspirators were aware that if the IRS were

to discover all the facts surrounding the design, marketing and implementation of COBRA, and that the COBRA clients were primarily or exclusively motivated by a desire to eliminate huge tax liabilities, the IRS would aggressively challenge the claimed tax benefits. Accordingly, among oxher steps they took to prevent the IRS from learning those facts, the conspirators: 1) falsely and mislcadingly represented the COBRA clients' motivations for entering into the transaction, and for taking the various steps necessary to create the huge artificial losses; 2) encouraged COBRA clients to engage in activities designed to disguise and conceal their tax motivations for entering into the transaction; 3) falsely represented to the IRS the likelihood that clients could earn a profit from COBRA; 4) directed the destruction of documents which would reveal the true facts surrounding the design, marketing and implementation of COBRA; 5) caused and approved the issuance of false and fraudulent opinion letters; and 6 ) misled the IRS during audits of the COBRA transaction.

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30.

Among the ways in which the conspirators sought to conceal the fact that

C:OBRA was tax-motivated, and was designed and implemented as apre-planned series of steps, were the following: a) Defendant ROBERT COPLAN directed that client engagement

1t:ttcrs make no reference to tax losses, or to the fact that fees were calculated as a percentage of tlie tax losses the clients sought to generate. b) Defendant ROBERT COPLAN directed that Powerpoint

presentations which laid out all the steps of the COBRA transaction not be left with clients. c)
In addition to having clients contribute 5% of the desired loss

a-mount to the transaction, the defendants directed clients to contribute an additional 2%of the desired loss anlount to the COBRA partnerships, and recommended using that additional cash to engage in trading activity. The sole purpose of that trading activity was to deceive the LRS into believing that the COBRA partnerships had bccn formed to conduct investment activities, and not merely to generate tax losses. The defendants' intent to deceive the IRS in this regard was

reflected in a series of emails sent by defendant ROBERT COPLAN to various PFC members
whose clients had initiated COBRA transactions, as well as to defendants RICHARD SHAPLRO, hlARTW NISSENBAUM and BRlAN VAUGHN. COPLAN explained in the first email, "l:T]he more trading activity the better [because] the trading activity is important to the maintenance of a business purpose for the partnership." In a later email he advised, 'Trades should occur weekly in the partnership, with weekly turnover of positions at or near 100% . . . . The tax position will be aided if there is at least some type of trading activity[.]" d) Defendant ROBERT COPLAN sent an email to PFC professionals,

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with a copy to defendants RlCHARD SHAPIRO, MARTIN NISSENBAUM and BRIAN VAUGHN, suggesting that their COBRA clients download foreign currency trading information fiom a website, and explaining that such material could be useful "as file material to evidence irivestigation into currency trading." e) After the COBRA partnerships terminated in late 1999, and after

the artificial losses had been generated, the defendants recommended that clients maintain the
2% cash in their S-Corporations, and continue to engage in trading activities. This step was

designed to deceive the R S into believing that the S-Corporations bad been created for some actual business purpose, instead of simply to achieve COBRA'S tax benefits. In an email to PFC professionals in January 2000, defendant ROBERT COPLAN stated that he, together with defcndants MARTIN NISSENBAUM and RICHARD SHAPIRO, were "providing guidance a!; to what is recommended to strengthen the client's tax position[.]" COPLAN continued:

"It is preferable to leave the S Corp in place through the end of the year 2000 to
enhance the substance of the transaction - i.e., so that the entire structure is not closed down within hvo months. . . . As for activity in the account we believe 'The more the better' [because] the tax position will be strengthened by significant trading activity. . . ." With respect to the S-Corporation, COPLAN explained to another PFC member, "The longer it runs, the better it looks firom a business standpoint as to why the thing was formed." After the lRS began auditing COBRA clients, defendant ROBERT COPLAN sent an ernail to PFC professionals throughout the country, directing that they destroy COBRA documents. The email was titled "Important - Purge OfAll Key COBRA Documents," arid it instructed that recipients "immediately delete and dispose of' COBRA documents such as Powerpoint slides and work plans.

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31.

As part of the COBRA client's fees, the client received two "more-

likely-than-not" opinion letters, one from J&G, and the second from Law Firm B. The defendants and their co-conspirators knew that these opinion letters contained false and l7audulent statements, and omitted mate& facts. a) J&G's opinions were false and fraudulent for the following

reasons, among others: i) they stated that the clients had made factual representations to J&G concerning their reasons for entering into the transaction, when in reality, no such factual rc:presentations had been made to J&G; ii) they stated that the clients had contributed their foreign currency options to the COBRA partnerships for "substantial non-tax business reasons," w'hen in reality, there were no substantial non-tax business reasons for that step, and the clients took that step because the conspirators directed them to do so; and iii) they stated that the clients had contributed their partnership interests to the S Corporations for "substantial non-tax business rc:asons," when in reality, there were no substantial non-tax business reasons for that step, and the clients took that step because the conspirators directed them to do so. b) Law Firm B's opinions were false and fraudulent for the following

reasons, among others: i) they stated that the clients had contributed their foreign currency options to the COBRA partnerships for "substantial non-tax business reasons," when in reality, there were no "substantial non-tax business reasons" for that step, and the clients took that step b~:cause the conspirators directed them to do so; ii) they stated that the clients had contributed tkeir partnership interests to the S Corporations for "substantial non-tax business reasons," when in reality, there were no "substantial non-tax business reasons" for that step, and the clients took that step because the conspirators directed them to do so; and iii) they stated that "there existed

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no understanding, obligation or agreement" under which the clients committed to undertake the various steps in the COBRA transaction, when in reality, the COBRA clients had been told they could obtain the promised tax benefits only if all the stcps were completed, and therefore the clients intended to complete them. c) The J&G opinions purported to be based upon "all the facts and

circumstances necessary" for J&G to form its opinion, and Law Firm B's opinions purported to bc based upon all '"pertinent facts." However, the J&G opinions failed to disclose that J&G had

implemented the COBRA transaction on behalf of the clients, and that J&G had collected as its
fee a percentage of the loss amount generated. In addition, neither opinion disclosed the following material facts, among others: i) that most of the COBRA clients responded to a promotional pitch that emphasized COBRA'S tax benefits, and they entered into the transaction primarily or exclusively to obtain those tax benefits; ii) that the clients knew from the outset that a particular series of steps would be undertaken, for a given fee, leading ultimately to a specific tax result; iii) that COBRA was slmctured so that each client would probably lose his entire cash contribution plus fees, rather than make any profit; and iv)that the "more-likely-than-not" 01,inion letters had been offered to the clients as part of E&Y's promotion of the shelter.
32.

On or about January 5,2000, E&Y's management decided that

E&Y would no longer market COBRA to its clients. That decision was reached after subject
matter experts outside the VIPERISISG group expressed the view that COBRA would not survive scrutiny under applicable law. Among the objections raised by others within E&Y was that COBRA did not have a meaningful "business purpose."

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The Fraudulent CDS Add-On Shelters
33.

CDS Add-On, which involved adding a COBRA-like transaction onto a

CDS transaction, was marketed for a brief period in mid-2000. Approximately 61 wealthy ir~dividuals took part in a total of 37 Add-On transactions, which generated more than $24 million in fees for E&Y. In addition to the fees paid to E&Y and other participants in the transaction, clients paid $75,000 for a "more-likely-than-not" opinion letter &om Law Firm A. 34. The objective of CDS Add-On was for the client to defer indefinitely

the incomc tax liability on the capital gains generated in the second year of the CDS transaction.

Iri most cases, CDS Add-On consisted of two parts: 1) a two-year CDS transaction that would
rt:sult in capital gains to the CDS "trading partnership"; and 2) a COBRA-like strategy that would generate artificial losses for the "trading partnership," and thus offset those capital gains. However, unlike in COBRA, the losses generated using CDS Add-On did not permanently eliminate taxes, but instead resulted in a tax deferral for as long as the income to be sheltered remained in the hands of the partnership.

35.

The second part of the transaction (the COBRA-like structure) was

implemented by having each participating CDS "trading partnership" purchase one or more pairs oialmost completely off-setting digital foreign currency options. The participating partnerships would then contribute their option pairs to a new LLC ("the Add-On LLC"), thereby becoming members of the Add-On LLC. Before the end of the tax year in which the client wanted to st~elter their capital gains, the CDS partnership would withdraw from the Add-On LLC, and receive a capital asset which - as in COBRA - took on an artificially inflated tax basis. The CDS partnership would then sell the capital asset to trigger a loss equal to the final swap

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p.Iyment, or a larger loss if the client wanted to shelter additional income or gains from taxes. The client's taxes would be deferred until cash was removed from the "trading partnership," or until that partnership terminated.
36.

The idea for CDS Add-On arose in or about early May 2000, after a

similar idea was described to defendant BRIAN VAUGHN. VAUGHN passed the idea to

"M) defendant ROBERT COPLAN in an Instant Message ( I " ,stating, "Ifwe could integrate CDS
and the foreign currency trading program with the short option transaction, we could have a great transaction." COPLAN responded that he would consider VAUGHN'S proposal, and fowarded the I to defendants MARTIN NISSENBAUM and RICHARD SHAPIRO. M
37.

During the next several weeks, the defendants developed the Add-On

strategy, and obtained the participation of Company X, which was then acting as the CDS general p:trtner. The defendants were well aware that only a few months earlier, E&Y's management had decided that COBRA would no longer be marketed by E&Y, and that others within E&Y would o])pose the Add-On strategy unless it had a more meaningful business purpose than COBRA. In order to provide the Add-On strategy with such a "business purpose," and thus to obtain approval to market Add-On, the defendants created a false cover story: they claimed that the idea for the CDS partnerships to purchase the digital foreign currency options, and the idea to consolidate those options in the Add-On LLC, had come from an individual who was managing activity in the CDS partnership trading accounts, and that the purpose of those steps was "to diversify trading and enhance performance" in the trading accounts. They also claimed that the plan to take those steps was formulated by Company X before the defendants learned of it, and that the defendants merely recognized the favorable tax consequences that could be obtained. According

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to defendant ROBERT COPLAN, these events were simply a "fortuitous circumstance."
38.

The conspirators agreed that Company X would send letters to the CDS

clients, announcing the opportunity to participate in a new "program" that would diversify their trading returns and enhance performance. Defendant ROBERT COPLAN also drafted a letter to ba sent to the CDS clients by E&Y. In that l e t t e r which COPLAN sent to defendants MARTIN NISSENBAUM, RICHARD SHAPIRO and BRIAN VAUGHN to review and edit - COPLAN also referred to Company X's desire "to diversify trading and enhance performance." As COPLAN explained to his co-defendants in an email, he deliberately drafted the letter in such a way as to conceal the fact that withdrawal from the Add-On LLC - a step necessary to generate the artificial losses that would defer the client's taxes - was planned from the outset: "I soflened the last reference to the liquidation of the interest in the LLC so it sounds less like an event that we know will happen in the near future." These letters were prepared in anticipation of possible hlure audits, in order to deceive the IRS into believing that the transaction was motivated by investment concerns, and that the steps leading to the tax result were not preplanned !?om the outset.

39.

During the marketing of CDS Add-On in 2000, the defendants took

additional steps to ensure that the true motivation behind the strategy was not revealed. A PowerPoint presentation was created by an individual outside the VIPEWSISG group, to illustrate the inter-relationship between CDS and CDS Add-On, and it was distributed to PFC personnel. In a series of emails that followed, defendant ROBERT COPLAN expressed concern that the PowerPoint presentation would undermine the story the conspirators had constructed to establish a business purpose for the strategy, and would thus reveal the tax motivation behind it:

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a)

On or about June 14,2000, COPLAN sent an email to VAUGHN

and defendant RICHARD SHAPIRO, explaining that the Add-On strategy would "lose all of its business purpose if it is reduced to steps in a PowerPoint slide. The tax objective will appear to b,e the driving force rather than the money manager's interest in consolidating the accounts." b) The same day, COPLAN sent an email to PFC personnel who had

received the PowerPoint presentation, stating that the slides were for internal use only, and were not to be shown when presenting CDS to clients. COPLAN cautioned, "There should be no materials in the client's hands - or even in their memory - that describe CDS as a single strategy that includes the Add-on feature." c) PowerPoint slides: COPLAN then wrote to the individual who had prepared the

I hope you can understand the problem with portraying the strategy as an integrated transaction designed to produce a capital gain deferral. If these slides ever made their way to the IRS . . . the entire business purpose argument that gives us the ability to distinguish this from COBRA would be out the window. Since we got the internal OK to do this add-on feature on the basis that there i s a much stronger business purpose than we had with COBRA, doing anything to undermine that business purpose would be creating unnecessary risk for our clients and unnecessaly risk for the PFC practice.
40.

In an email to defendant ROBERT COPLAN, defendant RICHARD

SHAPIRO also expressed his concern about linking the two strategies, stating, "I remain concerned of the formal pre-wired tie-in to cobra. I think it adversely impacts the story that we can tell regarding the purpose of the transaction." 41.

In order to persuade the IRS that the tax results achieved through the CDS

Add-On strategy were allowable, and to avoid the imposition ofpenalties on clients ifthe IRS

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were to disallow those results, the defendants and their co-conspirators caused Law Firm A to issue opinion letters which they knew contained false and fraudulent statements and omitted material facts, including but not limited to the following: a) The opinions stated that "organization of the LLC was based

upon probability analysis and engaging a well reputed expert in the largest and most active trading market in the world . . . in order to profit fiom a trading program," when in reality, the LLC was organized at the behest of the defendants, who recognized its potential to generate favorable tax benefits for clients b) The opinions stated that "[nlone of the business conducted by

the Partnership or the LLC [had] a predetern~ined outcome" and that "[nlone of the transactions [wcre] prearranged or structured to yield a predetermined economic result," when in reality,

E&Y had marketed to its clients, and the clients had paid fees to obtain, a strategy consisting of a
pre-planned series of steps leading to a predetermined outcome. c) The opinions stated that the partnership's "decision to maintain an

ir.vestment in the LLC or terminate such investment [was] no different than any other investment decision exhibited by the Partnership," when in reality, this decision was not an investment decision at all, but was based solely on the timing of desired tax losses. d) The opinions stated that the business purpose of the Add-On

LLC was "asset appreciation," when in reality, by virtue of the way the options were stmctured, they were likely to expire "out ofthe money," and generate no profits for the clients.
e)

The opinions failed to disclose that the purpose for entering into

the CDS Add-On transaction was for participating E&Y clients to obtain tax deferrals, and that

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the fees associated with the transaction were calculated on the basis of the intended tax losses to

be generated.

f)

The opinions failed to disclose that they were rendered by an

attorney who had assisted the defendants in structuring, marketing, and implementing the transaction, and therefore were not independent.

The Fraudulent PICO Shelters
42.

PIC0 was marketed and sold during 2000 and 2001. E&Y implemented

approximately 96 PIC0 transactions for approximately 150 wealthy individuals. E&Y generated more than $56 million in fees from PICO, charging its clients approximately 2% of the tax losses the clients sought to generate. Each PICO client was provided with a "more-likely-than-not" opinion letter from one of two law firms, Law Firm C and Law Firm D; the fees for those letters ranged between $50,000 and $100,000, depending on the size of the transaction.

43.

The objective of PICO was to defer taxation and, in some

cases, to convert ordinary income into capital gains. Within a period of a few months, a PICO

client would follow a pre-planncd series of steps, and generate artificial losses that could be used to defer taxes indefinitely on ll~elated income.
44.

PICO included the following essential steps: a)

A client seeking to defer tax liability would form an S-Corporation

(the "Personal Investment Corporation," or "PICO"), together with individuals affiliated with an entity that described itself as an "investment advisor," and purported to have special trading expertise ("Company Z"). The client was a 20% shareholder, and the other individuals were

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80% shareholders ("the Company Z shareholders"). The PICO client h d e d the S-Corporation

with an amount equal to approximately 4% of the tax loss the client wanted to generate (in other words, 4% of the income the client wished to shelter from taxes). b) The Company Z shareholder would then use those funds to engage

in trading activity, entering into financial instruments commonly known as "straddles." The "straddles" were designed to generate essentially off-setting gains and losses, which could be realized for tax purposes, or "triggered," separately. By pre-arrangement, the trading would be ciuried out for approximately 60-90 days, and then the gains would be triggered. When that occurred, 80% of the gains would be allocated to the majority shareholders for tax purposes, and only 20% would be allocated to the client.
c)

By further pre-arrangement, the client would then buy out or

"redeem" the Company Z shareholders, and trigger the trading losses. Because the client would, al that point, be the 100% shareholder of the PIC0 S-Corporation, 100% of the losses (an amount rc~ughly equivalent to the amount of income thc client was seeking to shelter), would be allocated to the client for tax purposes. These losses were artificial losses, in that there were no corresponding economic losses suffered by the client.
d) In order for the client to claim the full benefit of the losses

generated, the client would then contribute additional assets to the PICO entity. As long as the additional assets remained in the PICO entity, tax liability on the client's income would be deferred. When the assets were removed from the entity, those assets would be taxed at the capital gains rate.

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45.

As the conspirators knew, in order for the PICO strategy to survive IRS

scrutiny, it required a non-tax "business purpose." With lcnowledge that the true motivation behind the strategy was for the clients to obtain PICO's tax benefits, the conspirators developed a cover story to explain to the LRS - if the client were audited - why the client created an SCorporation together with the Company Z shareholders, only to "buy out" those shareholders alter 60-90 days. According to the cover story, the clients formed S-Corporations because they wanted to use those entities as their principal investment vehicles, and because they wanted to achieve asset protection and estate planning objectives. The clients included the Company Z shareholders in the S-Corporation, according to the story, because they wanted to "try out" Company Z's trading strategy, and intended to make a decision at the end of 60 or 90 days -based on trading performance --whether to continue with that strategy. According to the story, if the client was satisfied with the trading strategy, the client would buy out the other individuals, and then enter into a two-year asset management agreement with Company Z, or with one of Company 2's affiliates, so the client could continue to enjoy the benefit of Company Z's special trading expertise.
46.

In addition to developing the false cover story, the conspirators took other

steps to conceal from the IRS the fact that PICO was primarily, if not exclusively, tax-motivated, and that it was designed, marketed and implemented as a pre-planned series of steps. Among other things: a) The defendants developed and used promotional materials that

referred to PICO as "a long-term personal investment vehicle, integrating investment management services with estate planning and asset protection services." These materials made

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no mention of tax benefits. b) Defendant ROBERT COPLAN directed that no promotional

materials be left with clients, in order to prevent those materials fiom falling into the hands of the

IRS. In an email sent in June 2001 to PFC personoel, as well as to defendants MARTIN
NISSENBAUM, RICHARD SHAPIRO and BRIAN VAUGHN, COPLAN stated, "PIC0 slides
are not to be left with clients, and this is a policy we must all adhere to. This is ultimately for the client's protection." In a later email, also copied to his co-defendants, COPLAN remarked that
"a fax of the materials to certain people in the

. . . government would have calamitous results,"

and urged, "Please take us seriously when we instruct that you not leave PICO materials behind at your presentations. . . . Impress upon [prospective PICO clients] that it [is] for their protection should they proceed with the strategy that we are not leaving them behind (i.e., in the event of an audit)."
C)

Defendant ROBERT COPLAN opposed a proposal by one PFC

plofessional to provide clients with a work plan that laid out the steps of the transaction. In an ernail copied to defendant RICHARD SHAPIRO, COPLAN stated, "[AIAer we go to the trouble to make sure the client does not have any documents that walk through the steps of the transaction, I cannot imagine that we would want to hand him a work plan that shows each minute step including the redemption of the S shareholder. I would strongly advise against providing a written document to the client that lays out these steps as a prearranged plan." d) Defendant ROBERT COPLAN directed that a promotional

brochure developed by Company Z, and biographical information concerning Company Z's officers, be provided not only to prospective PICO clients, but also to clients who had already

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completed PICO transactions. He explained that these documents "convey necessary information for the client to have made an informed decision to embark on a new investment program with [Company Z ] . e) Although E&Y's fee for the PICO transaction was calculated as

approximately 2% of the loss the client wished to generate, defendant ROBERT COPLAN directed that a fee of only $50,000 be listed in the client's engagement letter.
f)

The conspirators arranged for the remainder of E&Y's fee to be

paid by the client to Company Z or to one of its affiliates, and then for Company Z to pay the rema~nder E&Y. In order to justify such large payments from Company Z to E&Y, the to defendants created a phony contract under which E&Y claimed to have performed consulting services to an affiliate of Company Z. Those contracts - which were actually created and signed well after most of the clients' PICO fees had already been passed through Company Z to E&Y were back-dated in order to make this discrepancy less obvious. Defendant RICHARD SI4APIRO's conccm that the so-called "consulting contract" for the 2000 PICO transactions had not been executed as of April 2001 was reflected in an email he sent to individuals at Company Z and Law Firm C, in which he stated, "I STILL DO NOT HAVE THE TAX CONSULTING AGREEMENT FROM LAST YEAR. WITH MOST OF THE PAYMENTS MADE UNDER THAT AGREEMENT ALREADY, DON'T YOU THINK WE (AND YOUR CLIENTS) SHOULD HAVE A FINAL DRAFT THAT CAN BE SIGNED??????? WE MUST HAVE SOMETHING FOR OUR FILES."
g)

After it became apparent that PICO clients were not inclined

to continue conducting trading activities in their PICO entities after redeeming the Company Z

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shareholders, the defendants encouraged them to do so in order to protect the clients' claims that the shelter was not tax-motivated. In a March 2001 email to PFC professionals, with copies to his three co-defendants, defendant ROBERT COPLAN explained, "When the PICO strategy was developed, E&Y and [Company Z] understood that. the client's representations regarding his nontax investment motives and expectation of a pre-tax profit would depend on maintaining trading activity after the 80% shareholders were redeemed." COPLAN observed that this was apparently "not the preferred approach of clients," and therefore, that PFC persomel had to "establish some guidelines and properly manage client expectations[.]" The problem did not abate; a few months later, COPLAN followed up with a similar email, reiterating the need for clients to engage in trading activity in their PIC0 entities, and stating, "Because we see reports that this is not the direction certain clients are headed in, we feel it necessary to establish some guidelines."
47.

In order to persuade the IRS that the tax results achieved through the PICO

strategy werc allowable, and to avoid the imposition of penalties on clients if the IRS were to disallow those results, the defendants and their co-conspirators arranged for Law Firm C and Law Film D to provide the clients with opinion letters. The defendants and their co-conspirators knew these opinion letters contained false and fraudulent statements and omitted material facts, including but not limited to the following: a) The opinion letters stated the PICO S-Corporations were not

formed to avoid or evade federal income taxes, but instead were designed to facilitate investment activities, provide asset protection and achieve estate planning objectives, when in reality, the SCorporations were formed precisely so that clients could avoid or evade taxes.

b)

The opinion letters stated that the Company Y shareholders

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became investors in the PIC0 in order to demonstrate the potential return available through interest rate arbitrage trading activity, when in reality, this step was necessary to accomplish the desired tax results. c) The opinion letters stated that the trading strategy was not

designed to produce a predetermined result, when in reality, E&Y had marketed to its clients, and the clients had paid fees to obtain, a strategy consisting of a pre-planned series of steps leading to

tax a predetenn~ned benefit.
d) The opinions issued by Law Firm C failed to disclose that they

were rendered by an attorney who had assisted the defendants in structuring, marketing, and implementing the transaction, and therefore were not independent.

T h e IRS's 2002 Voluntary Disclosure Initiative
48.

In or about December 2001, the IRS announced a program under which

taxpayers who had engaged in tax shelters could voluntarily disclose those transactions to the

RS, in exchange for amnesty from penalties that might otherwise be imposed if the IRS were to
audit the transactions and find a tax underpayment. In order to qualify for the program, taxpayers werc required to disclose the transaction to the IRS, and to include in their disclosure, among other things, a statement describing the "material facts" of the transaction; the names and addresses of parties who had promoted, solicited or recommended the transaction to the taxpayer, and parties who had collected fees from the transaction; a statement agreeing to provide various documents and materials relating to the transaction, including marketing materials and legal opinions; and a statement signed by the taxpayers, under penalties of perjury, that the taxpayers

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had examined the disclosure, and that to the best of their knowledge and belief, the disclosure contained all the relevant facts and was true, correct and complete.
49.

During 2002, defendants ROBERT COPLAN, MARTIN NISSENBAUM

and RICHARD SHAPIRO prepared, and assisted in preparing, templates that could be used by
E&Y clients who had engaged in tax shelters, and who wished to participate in the IRS's

voluntary disclosure initiative in order to eliminate the possibility of IRS penalties. Although the dzfendants knew that participation in the program required submission of a "true, correct and complete" disclosure to the IRS of "all relevant facts" in a statement that would subject their ciients to penalties of pejury, the defendants drafled template disclosure letters that contained many of the same false and fraudulent statements that had previously been included in transaction documents and opinion letters, and omitted many of the same material facts. Tax shelter clients who participated in the voluntary disclosure initiative thereafter submitted false, fraudulent and incomplete statements to the IRS.

The E&Y Promoter Penalty Audit

50.

In or about April 2002, the IRS began an examination of whether E&Y

had complied with various legal requirements applicable to the firm's tax shelter activities. In connection with that examination - commonly referred to as a "promoter penalty audit" -the M S sought documents and sworn testimony from individuals knowledgeable about the VIPERISISG tax shelters. In June and August of 2002, defendants ROBERT COPLAN, MARTIN NISSENBAUM, RICHARD SHAPIRO and BRIAN VAUGI-IN appeared before the
R S to answer questions. After being placed under oath, they sought to obstruct and impede the

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IRS by providing false and misleading testimony concerning the origin, design, marketing and
inlplementatio~~ E&Y's tax shelters. of a) Among other things, COPLAN provided the following false

and misleading testimony: that E&Y had no involvement in the operation of the CDS trading partnerships; that the CDS clients were not sure whether the CDS swaps would terminate early, and thus did not know whether the income they received in the second year of the swap would be characterized as capital gains; that the fees charged to CDS clients were "fixed fees" rather than fees calculated based on a percentage of the tax benefits; that when E&Y became involved with CDS Add-On, the CDS partnerships were already planning to consolidate digital options in a single LLC, and that E&Y learned about the plan as a "fortuitous circumstance"; that no promotional materials had been distributed or shown to CDS Add-On clients because COPLAN and others "didn't think the transaction was that complicated; that the fees paid by the PICO investment advisor to E&Y were paid "for consulting with them on the tax aspects of the PICO transaction"; and that the reason an S-Corporation was used for PICO instead of a partnership was that clients viewed the S-Corporation as a "good family investment vehicle." b) Among other things, VAUGHN provided the following false

and misleading testimony: that the VPERISISG group was not involved in the wide-spread marketing of tax shelters, but instead merely responded to questions and proposals that came &om clients; that the CDS Add-On transaction was brought to E&Y's attention by the CDS general partner, who had already created a fund, and had offered E&Y's clients an opportunity to participate in that fund; that the digital options used in the Add-On transaction were purchased "from the investment standpoint," and were '3ust part of [the client's] investing"; that the fees

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charged by E&Y for the digital option transactions were "fixed fees" calculated based on E&Y's assessment of how much time would be spent by particular E&Y personnel involved with a particular transaction for a specific client; that E&Y did not set fees based upon a percentage of tax results; that E&Y ''typically" encouraged its clients to use their own counsel, and recommended counsel if the clients felt their own counsel were "not competent in digital option taxation"; that the VIPERISISG group maintained no database of documents relating to its tax shelters; that E&Y did not develop its own brand of digital option trade, and that there was "no tax strategy, per se, that was developed internally by E&Y's individual tax practice"; that there were no predetermined tax benefits for the Add-On strategy, and that "it was very difficult" to estimate the Add-On tax benefits until afler the transactions were complete; and that he could not r(:call the nature of COPLAN's involvement in the Add-On strategy, or that SHAPIRO provided the subject matter expertise for the digital option transactions. c) Among other things, NISSENBAUM provided the following

misleading testimony: that the CDS partnership was a "trading pamership"; and that the partnership "would be trading in short-term securities to get as much short-term profit as possible." d) Among other things, SHAPIRO provided the following false and

misleading testimony: that E&Y "received fees for tax consulting services" provided to Company
2, in

connection with the development of PICO; and that COBRA was designed to provide an

investor with the ability to obtain a return of approximately 31% with "a probability of success of just under 40%."

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The Fraudulent Tradehill Shelter 51.

In addition to designing, marketing and implementing fraudulent tax

shelters for clients and prospective clients of E&Y, defendants ROBERT COPLAN, MARTIN NISSENBAUM and RICHARD SHAF'JRO developed and utilized a tax shelter to evade their own taxes, and assisted eight other E&Y partners to do the same. The strategy they employed was a short option strategy, similar to a COBRA shelter. 52.

In or about late 1999 or early 2000, E&Y announced a proposal to sell its

global consulting business to a French company called Cap Gemini. In that transaction, E&Y partners would receive shares of stock in the new company. Those shares would be denominated in euros, and would not be transferable for a period of time that was unknown, but that was expected to exceed four years. Although the stock received by the partners could not be sold, the E&Y partners were told that their receipt of the stock would constitute income on which they would he taxed in 2000. Accordingly, in order to assist the partners in paying their tax liabilities on the stock received, E&Y proposed to sell some of the Cap Gemini stock at the time of the transaction, and to give each partner
-

in addition to shares of Cap Gemini stock - cash that

could be used by that partner to cover his or her 2000 personal income tax liability generated by receipt of the stock. 53. After a vote of E&Y's partners, the transaction took place in or about May

2000, and on or about May 23,2000, defendants ROBERT COPLAN, MARTIN
NISSENBAUM, and RICHARD SHAPJRO, as well as other E&Y partners, each received a

distribution of Cap Gemini stock. An amount of cash was set aside by E&Y for their use in paying income taxes on the stock they received.

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54.

Upon learning of the intended Cap Gemini transaction, defendant

MARTIN NISSENBAUM began discussing with other E&Y partners the possibility of using a t&x shelter to eliminate the income tax liability arising from their receipt of the Cap Gemini stock. By late October 2000, a group of eleven E&Y partners, including defendants ROBERT COPLAN, MARTIN NISSENBAUM, and RICHARD SHAPIRO, had decided to form an entity called Tradehill Investments, LLC ("Tradehill"), and to use Tradehill to carry out a transaction similar to COBRA, thereby eliminating all or most of their tax liability on the Cap Gemini stock ("the Tradehill transaction"). The three defendants undertook to act as representatives for the other E&Y partners.
55.
In order to execute the transaction, defendant MARTIN NISSENBAUM,

working in conjunction with a tax shelter promoter and with attorneys from Law Firm D, created Tradehill, in which all eleven E&Y partners were members. The Operating Agreement for Tradehill falsely stated that Tradehill was organized "for investment purposes." The defendants created a second entity called Churchwind Investments, LLC ("Churchwind"), which was wholly owned by Tradehill. The Operating Agreement for Churchwind - which was signed by NISSENBAUM, as well as by defendants ROBERT COPLAN and RICHARD SHAPJRO falsely stated that Churchwind was organized "for investment purposes.
56.

The eleven members of Tradehill collectively contributed $350,000 in

cash, and on or about November 1,2000, defendant MARTIN NISSENBAUM caused Churchwind to purchase three almost completely offsetting pairs of euroldollar currency options. The premiums paid for the three long options totaled $25 million, but the actual cost to the partners (the "net premium") was $350,000. The three options all had different maturity dates,

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~

one in Aplil2001, one in May 2001, and one in June 2001. 57. On or about November 13,2000, defendant MARTIN NISSENBAUM.

acting on behalf of the group, caused Tradehill to contribute the three pairs of currency options to

an entity called AD International FX Fund, LLC ("ADFX"), in exchange for 90% ownership of
ADFX. The other ~o owners of ADFX were tax shelter promoters who had contributed a total
of $30,000 in cash to the entity. 58. In or about mid-December 2000, ADFX sold one of the euro/dollar option

pairs that had been contributed by Tradehill, and purchased shares of stock. Then, on or about December 19,2000, defendant MARTIN NISSENBAUM caused Tradehill to resign from ADFX in exchange for stock, dollars and euros worth approximately $187,246. At that time, none ofthe three option pairs contributed to ADFX by Tradehill was "in the money," and the maturity dates of the three options were approximately four, five and six months away. 59. On or about December 26,2000, defendant MARTIN NISSENBAUM

caused 'Tradehill to distribute the stock it had received upon resignation from ADFX to two new entities, Hiddenbrook Holding, LLC ("Hiddenbrook"), and Greenoak Holdings, LLC C'Greenoak"). Hiddenbrook- which had been created only days earlier - had five members, including defendants MARTIN NISSENBAUM, ROBERT COPLAN and RICHARD SHAPIRO. The members of Greenoak - which had also been created only days before - were the other six E&Y partners. The same day, NISSENBAUM directed the immediate sale of the

stock distributed to Hiddenbrook, and a member of Greenoak directed that Greenoak's shares be sold. The shares were sold the following day, triggering artificial losses.

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60.

From in or about December 2000 through in or about mid-April 2001, an

attorney at Law Finn D, working together with defendant MARTIN NISSENBAUM, drafted a legal opinion. The opinion was intended to be used to support the position that the losses triggered by the sale of stock by Hiddenbrook and Greenoak could be used by the eleven E&Y partners to eliminate the tax liabilityrelated to their Cap Gemini stock, and to protect the eleven partners against R S penalties.
61.

In connection with the drafiing of that opinion, defendant MARTIN

NISSENBAUM assisted in preparing a "Certificate of Facts." The "Certificate of Facts" -which

contained false and fraudulent statements - was intended to be incorporated by reference into Law Firm D's opinion, and was intended to deceive the IRS into believing that the E&Y partnen executed the various steps of the Tradehill transaction for investment reasons rather than tax reasons. Among other things, the document falsely stated: I) that "[tlhe purpose and purchase aud sale of [the] Options [was] that Tradehill believed that such investments could result in substantial profits with only limited downside risk"; 2) that Tradehill contributed its membership interest in Churchwind to ADFX to "diversify its risk"; 3) that Tradehill's "primary motivation" in participating in the transaction "was to attain, on a risk-adjusted basis, an attractive return on its investment . . . without regard to tax benefits"; and 4) that "the decision to withdraw from
[ADFX] was based on a variety of factors, including anticipated future market conditions,

currency exchange rates, interest rates, the availability of alternative investments, and Tradehill's financial situation."

62.

In or about April 2001, Law Firm D - which had assisted the defendants in

creating the entities used to execute thc shelter - issued a back-dated opinion letter to

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Hiddenbrook and Greenoak. The opinion letter incorporated the false statements contained in the "Certificate of Facts" described in paragraph 61, above. In addition, the opinion letter falsely stated, among other things, that all "pertinent facts" relating to the transaction had been set forth in the opinion. 63. From in or about April 2001 through in or about October 2001, defendants

ROBERT COPLAN, MARTIN NISSENBAUM and RICHARD SHAPIRO, as well as their eight partners, filed tax returns on which they used the losses generated through the Tradehill transaction to eliminate tax liability on all or most of the income they received in the form of stock and cash from the Cap Gemini transaction.
64.

In or about May 2003, the IRS notified the eleven participants in the

Tradehill transaction that their 2000 tax returns were being audited. In connection with that audit, the LRS sent each of the eleven partners who had participated in the Tradehill transaction an Information Document Request ("IDR #I"), requesting both information and documents. 'The members of'the group made arrangements for an attorney at Law Firm D to represent them in responding. Defendant MARTIN NISSENBAUM assisted that attorney in drafting responses on behalf of each partner to IDR #1, as well as to a second IDR ("IDR #2") and a third ("IDR #3"). A copy of each partner's letter was sent to defendant MARTIN NISSENBAUM.
65.

The responses to IDR #2 were sent to the IRS on or about September 25,

2003. Those responses contained false and misleading statements, including but not limited to
the following: 1) statements that he and the other E&Y partners had entered into the Tradehill transaction in order to generate profits, when in reality the transaction had no reasonable possibility of generating a profit; 2) a statement that the Tradehill transaction was intended fully

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to hedge the partners' exposure to fluctuation in the euro, when in reality, the transaction had no capacity to do so; 3) a statement that there were no unwritten understandings between the participants in the Tradehill transaction, when in reality, there was an understanding among all the parties to the transaction that the E&Y partners would exit their option positions before the end of 2000, in order to claim tax losses they could use to offset their Cap Gemini income; and 4) a statement that there was no expectation or referral of any future business to Law Firm D, when in reality, in 2001, the defendants referred PIC0 clients to Law Firm D for opinion letters.

Statutory A l l e w

66.

From in or at least early 1998 through at least in or about 2003,

ROBERT COPLAN, MARTIN NISSENBAUM, RICHARD SHAPIRO and BRIAN VAUGHN, the dcfendants, together and with each other and with others known and unknown, unlawfully, willfully and knowingly did combine, conspire, confederate and agree to defraud the United States and an agency thereof, to wit, the Internal Revenue Service ("IRS") of the United States Department of Treasury, and to commit offenses against the United States, to wit, violations of Title 26, United States Code, Sections 7201 and 7212, and Title 18, United States Code, Section 1001.
67.

It was a part and an object of the conspiracy that ROBERT COPLAN,

MARTIN NISSENBAUM, RICHARD SHAPIRO and B U N VAUGHN, the defendants, and their co-conspirators, unlawfully, wilfully and knowingly would and did defraud the United States and the IRS by impeding, impairing, defeating and obstructing the lawful governmental functions of the IRS in the asceminment, evaluation, assessment, and collection of income taxes.