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

Case 1:05-cv-00231-EJD

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

No. 05-231 T (Chief Judge Damich)

JZ Buckingham Investments LLC as Tax Matters Partner
of JBJZ Parners, a South Carolina general parnership,

Plaintiff,
v.

United States of America,
Defendant.

APPENDIX

#

Description
Declaration of Andrew 1. Kreiger

Pages
001-012

Exhibit A

-v-

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORAO

CAROS E. SALand
TINA ZAOLINI SALA,

)

Platiffs,
v.

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

UNTED STATES OF AMERICA,
. Defendant.

)
) )

DECLARTION OF ANDREW J. KRGER

I, Andrw J. Kreger, pursuat to 28 U.S.C. § 1746, declare and stte as follows:
1. I have personal knowledge of

the representations made in ths declaration.

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

Sometime in 1999 or 2000 I was introduced to the idea for the shelter by Michael Schwarz.
3. I was deposed in the above-cationed 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 conducting an

investigation into certin ta shelter transactions relating to a pending crminal case involving
Ernest & Y OWlg ta shelters.
5. I thereafter met with the USAO, and provided certain information wider a proffer

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

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about my involvement in the ta shelter at issue in the pending cr case. I al inormed

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

6. Sometie before the tral in ths mattr, I leared tht my depsition teony
wa to be offered by one or both of

the paes. I knew th pars of my depostion testiony

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

my testiony was

inconsistent With what I knew to be th tre facts regarding the motivations behind the shelter

traction at issue in Mr. Sala's cas. I was contiuig to review my testony for other

specific inconsistencies. My counel so advised the pares by letter dated Febru 27, 2008, a
tre and accurte copy of which i,s anexed hereto as Exhibit A. I was not willing to be re-

interviewed by the paries or provide sworn testimony in this case at that time because my
truth sttements would have incrinated me.
7. Subsequently, I authorize my counsel to advise counsel for the parties in Mr.

Sala's case offuer specific inconsistencies and possible inconsistencies. My counsel did so

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 testony. I stil was not willing to be re-interewed or
to provide sworn testimony in ths matter.

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 if! 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 cooperae with the USAO, the Tax Division of

the United States Deparent of Justice and

the Internl Revenue Servce.
9. I was advised by my counel th 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 called to testify pror to the execution of ths agreement, I would have followed my

.

counsel's intrction, asserted my Fift Amendment right, and refed to testify. Furer, in the

weeks prior to and dùrg Mr. Sala's tral, which I understad began on Mach 10,2008 and
concluded on March 19, 2008, I was out of the countr with no immediate plans to retu. I have

been residing in Dubai continuously since Augu 2007.
10.. As par of

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

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

other paricipants, including myself. I will collectively refer to these as the "ta trades."
i I. 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 progr." In

fact I was aware that the primar motivation for entering into thse ta tres and the

"investment progr" was to generate ta savings. As a result, certn portions ormy deposition
were intentionally false, misleading, and incomplete.

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

trthl

testimony are sumarzed briefly below with citations to examples of contrar 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 ecnomic retu. (Dep. Testimony 505:6-15). The ta
beefits were not "incidenta" to the ta tres, the intial "test perod," the remag trdes in

2000 or the remader of the ..investent progr." But for the need to generate tax losses for
the pacipants, I would not have executed the ta trades. Regaess of market conditions, I
was required to liquidate the positions by the predeteed strcte of

the traction. (Dep.

'f

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 converstions with Michael Schwa I understoo that I wa

required to p~chase roughy equal amounts of long and short options to generate ta losses for
the traction paricipants, includi Mr. Sala The amount of

long option premiums I was

instrcted to purchae as par of the ta trdes intentionally approxited 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 premiums.

c. Indeed. because the face amoWlts were so signficant, the normal transaction

costs tht Refco would have charged would have made the trdes cost prohibitive. Therefore, I
arged for my company, Beckenham 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 been

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 sepated the long and short

options.

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

trading program. Rather, the term ''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 that gave rise to the ta losses, includig the stctue imposed
on the paricipants and the use of an S corporaon and a general parership, were not designed
to 'assist in the creation of a profit or for any purose other tha the creation of ta losses. (Dep.
Testimony 453 :9-20 and 513 :9-5 i 5: 17). Instead, everng that occurred in 2000 consisted of
predetermined steps required by Mr. Schwartz, all 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

ths 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
Il. (Dep. Testimony 261 :1-9). My primar motivation in paricipating in the shelter was to
generate a ta 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 MayiL 2008 in (;¡e.i... c.1;-t-t

ANREW~~ER

~ .'
, New Jersey.

6

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PI C\. IU ØILW i-1O om

VI ELECTRNIC MAL

.Da D. Halle Esq_ ~1a.co
Chne & Halet ,
Watrfnt Plce One, Suit 803

da." perdu8doi.vov

. . Da N. Gei. Es. .

1011 Wesrn Avenue .
Seatte, WA98104

Re: Saa Yo Unlt Sf
Gentemen:

Case No. ~8-TBAC

.'

Tax Divsion: . CI Tril Sen, wes Reion
PO Box 683 . Ben Frankin Stion

Uri St Deparb of Juati

Washingt, DC 2004

. As yo kn, we repre An Krege whe deposi was laken in the
above mettr. We wish to ac you that subseqent to th depositn, Mr. Krer was

questne exnsivy by the Uni st Att who Is Invesgatng thé Ernst and

Young tax shelter mattr. We ha leared re that the bial of the abve maer Is . scheduled to begin on or about March 11th. '
Having had soe 6m to coder questns raise in the Sala. desin, it appers Mr. Krieg pred Infrmaton. to the Uni St government that may be

incsl8tent wi Infrmatin proed In the depitons. For ~mple, it is now Mr.
Krieger's view, base, upo his re and reuatIn of th clrncG, th the progrms in which Mr. Sala W8slnvolve we eslly ta drien 8S opp to pro

,-

drien. This, of course, does no chang any of Mr. Kris testny as to what Mr.
Sala told Mr. Krieger rearding his (SaI8's) motva nor does It afct any testny provied in the depoitin as to the lack of any knowede on Mr. Krieger's part as to the

007
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,¡

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ASCHER PORTR & ThOMA, P.C.
Oanel O. Hallet Es.

Jon M. Colvin, Es.
Febru 27, 2008
Page 2

1
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ultmate utlzon by Sa of any gain. an lose in th prepara of any ta rems.

of Mr: Krs depit 1here 8nt otr speifc Breas In which thre ant marilncocl and moifns in Mr.
We ar In the pr of maki a mo de11e re and subent infnnat pred by Mr. Krr an, to1he mdnt th

Krts depitn temoy, we shall ad you at th ~liest posslle dat.
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008

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FISCHER PORTER THOMAS & REINFELD, P.C.
,Jy D. F1HER

ARUR L PO. JR.

A"TRl~ AT lAw
440 SVL.VAN AVENUE, SUIT J 30

AL C. 'IMA"

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TEONE, t2121 11411-io21 TEOPER; 12121 545102
I 55 NO MAIN sr. NEW aT. NY 1005&38110

NEYO NY IOI07-leoC

2150 W£S7'W

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MAORIE Eo KLE

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BA J. EA.

HOAR P. DAV1S

jfcher(/aaw.ec

· N.Y. BA ONLY N.J. BA ONLY
II N.Y.. N.J, & C.C. BARS

Mar 12,2008

lEON W731 227.2777
F'ACILE: Ig731 227-5440

PINE EIK, No 0705737

70 BL.Mf' AVE

. N.J. & PA. BAS
. N.Y. 5. C.T. BAR
t N.J.. N.Y. 5. ,. BAAS

PLE REPOD TO

ENL£ CUFl. N. OFCE

VIA ELECTRONIC MAIL

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

david.n.aeiertãusdoi.iiov
David N. Geier, Esq. United Stated Department of Justce Tax Division Civil Tnal Secion, Wesern Region

1011 Western Avenue SeatUe, WA 98104

Washington, DC 2000

Re: ANREW KRER
Gentlemen:
Peter Tilem of Counsel to oW' fi ha reviewed the Anew Kreger deposition in the

Sala case and has put together a lit of areas that are inconsistent with stents th were made
by Kneger to the.

he believes are inconsstet. The UIited State Atorney's offce ba mvilfed ths list and agee that the sttements in ths list ar inconsistent but have their ow adon whch ar highighted

below. .
Page 427 J ~ines 3-15
THE WISS: I

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

recl tht

the investors were testin the water
and that they wanted to watch the trg,

have a chance to get to experence the

stategy for a few month.
And, at which point, they would

009
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FISCHER PORTFl THOMAS & REINFELD, P.C.

March 12, 2008
Page 2

then either have the option to go in
volunty in the longer tc program

which would be five yes or they would they automacaly be reed to, if
went thugh the eiti te peod and we showed substan or renable

profits; is what I underd.

Page 428, Lines 20-23

TH WIS: With regards
to the progr itsc~ achevg the ta loss was completely melevat. Our
. purose was to mae money.

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

program was implemented; to what extent,
if any, wa achievig a ta loss, a goal that you had
witb resect to the operation of

the progr?

Answer: It wasn't

Question: What was the goal?

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

Paize 453. Lines 9-20

Queson: Whýl Anwer: 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.

010

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.. I
FISCHER PORTER THOMAS õ. REINFELD, P.C.
Marh 12, 2008
Page 3

I had been tradg prfessionally for a lon tie an bistoncaly,
we mae money over time. And thatI underoo ,
were exacy tht; they

there might be incidenta ta bents, but they were incidenta and not

the pri reaon for inves.

Page 505. Lies 7-15

Queson: Loki at your pmpose with reec to those tractiOl, and ifit's dient with respect to differt tractions,
please tell me on Exhbit-ll, wha

was the

purse of entering into those trsaction.

Aner: The Puiose was to eam profits.
In' addition to the foregoing, member of the United States Attrneys Ofce wanted us to
include the below listig. When they reviewed the trcrt they reviewed it to detee whether Andrew Krieger's tesony today would be diert frm how he tefied in the Sala

depsition. We did not review the deposition using thei test but only usg the test of whether he actuly stted someth in his meetigs with the Unte States Attrney's Offce that was
inconsstent with hi tesmony in the Sala depositiòn. Oter th the fi lie in the following

listg. we do not necessarly agre tht the other items wart consdeaton; however we
include them in the interest of completeness.
Page 165 Lie 4 through 166 line 23.

Page 161 lies 3-14 '
Page 246

lie 20 through 247 line 13

Page 261 Line 2-9 Page 263 Line 2-4
Page 456 Lie 4 thugh 457 Line 5

Page 5 i 3 Line 8 thugh 5 i 4 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 trcript with Mr. Krieger because of the fact tht he lives fa '
away.

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FI5CHE:R PORTER ThOMA 0. REINFELD, P.C.

Marh 12, 2008
Page 4

2. Th bece of

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

exusve lis of innsstecies but have done our bes to iden t1 innsencies
given the tie consdeons and th fat thii our clien redes fa away.
3. That we hae only dicused some of

the tesony with our cJent but not al.

4. That if given imty hi testiony may dier in oth ar.
Please contat me if you have ÏUy additiona questions about ths.

~
cc: Deborah Landis, Deborah.Landis~usdoi.gov

Ver'tnyyO~
Jay D. Fiscer

Andrew Krieger
JDFllc

012