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Private Equity Guru Smith Got a Hell of a Deal (10/23/20)

Today, the Wall Street Journal published what, I understand,
is called an “explainer” about the Brockman indictment and the Smith
nonprosecution agreement (“NPA”).  See Laura
Saunders The IRS Reels in a Whale of an Offshore Tax Cheat—and Goes for Another
(WSJ 10/23/20), here.  I previously wrote
on these events.  One Big Fish Indicted
and Lesser Big Fish Achieves NPA for Cooperation
(10/16/20), here.  

The WSJ article provides a good bullet point high-level summary
of the events.  I write today to provide
some nuance to a sound bite quote that I gave for the article.  The quote, at the end, is:  “Jack Townsend, a lawyer who publishes the
Federal Tax Crimes blog, says, ‘He got a hell of a deal, considering what he
did.'”

My statement was based only on the publicly disclosed facts
in the NPA and the Statement of Facts (Exhibit A) with the NPA, which are here
and here, respectively.  Those publicly disclosed facts may not tell the whole story as to why Smith achieved an NPA rather than some other disposition (I discuss some possible other dispositions below.)  

Just on those facts, Smith’s deal is exceptionally good for
him.  He committed years of tax evasion,
then attempted to do a Streamlined disclosure (after being rejected from OVDP)
where he had to certify nonwillfulness and submit amended returns and
delinquent or amended FBARs which he did and which were false.  That pattern, particularly, the second step Streamlined disclosure was just incredibly stupid. 
If he had done only the OVDP and been accepted into OVDP, he likely
would have avoided prosecution if his OVDP submissions and cooperation were
truthful and complete.  Two caveats on that, however:
(i) OVDP did not “guarantee” nonprosecution but, as a practical matter it would
if the disclosure and cooperation were good (I am not aware of any prosecution of an OVDP participant whose cooperation was truthful and complete); and (ii) his behavior on the
subsequent Streamlined suggest at least that his amended return and delinquent
or amended FBAR submissions in the posited counterfactual OVDP if it had gotten that far likely would not
have been truthful and thus would not have resulted in the key relief generally
offered by OVDP – nonprosecution.

What I address today is why, given the facts in the NPA and Statement of Facts, DOJ would have given Smith an NPA for
such egregious behavior (by which I don’t mean just the dollars involved, but
more importantly his overall behavior to cheat and avoid getting caught with continued lies).

The Statement of Facts and the NPA do not really address
that issue, except that in the press release his cooperation was emphasized.  I presume that the cooperation is not only
the cooperation in exposing his own criminal conduct but more importantly in
indicting and prosecuting Brockman.  So,
this raises some speculations / questions.

1. Did Smith get an NPA because the Government did not have the
necessary proof to convict Smith and the NPA was the best the Government could
do, particularly if it helped nail a bigger fish?  In other words, the facts in the
Statement of Facts could have been provable only after Smith’s cooperation after his lawyers negotiated the commitment for an NPA.  Hence, rather than indicting Smith with a
weak case, the Government might have been motivated to grant the
NPA in order to get his cooperation against Brockman as well as obtain the
monetary benefits accorded by the NPA. 
That’s a matter of what each party’s hand was as they negotiated Smith’s
disposition.  I just don’t know that.

2. Did Smith get an NPA because his testimony would be critical
to the Brockman prosecution?  In other
words, if the Government stood a substantial chance of either not getting an
indictment against Brockman (not likely) or suffering a not guilty verdict
against Brockman without the Smith testimony, that could be a reason to give Smith
a substantial benefit.  Substantial
benefits for such testimony can take several forms.  Often for one with as egregious conduct as
Smith committed, the benefit of cooperation would take the form of a guilty plea
to a one or two felony crimes (perhaps tax perjury, § 7206(1), a three-year
felony or tax evasion, § 7201, a five-year felony.  (Whatever the plea, it would be accompanied by payment of tax, penalties and interest and FBAR civil willful penalties.)  If one count, then Smith’s incarceration
would be max of 3 or 5 years, respectively, and, with substantial cooperation,
the Government could agree to recommend substantial reduction, perhaps no
incarceration and minimum probation. 
(Readers will remember that Ty Warner whose conduct, in my judgment, was
not nearly as egregious as Smith’s pled to one count of tax evasion and got no
incarceration, although over the objection of the Government; the point though
is that he had to plead to one criminal felony count; of course, Warner did not have a bigger fish to deliver up.)

3. Could Smith have turned on Brockman by identifying Brockman before
the Government was onto Brockman?  If
that were the case, that might explain why the Government was so warm and fuzzy
with Smith.  (And, amazingly, had Smith
done that Smith might not only have saved his own skin, he might even be entitled
to a substantial whistleblower reward on collected proceeds from Brockman; keep
in mind that, so far as the known facts, Smith was not a material participant
in Brockman’s crimes.)

I could go on asking questions and speculating as to
answers.  I would hope that, given the unusual known facts, at some time in the future DOJ will give a fuller reckoning of its decision-making process on NPAs.  In the meantime, however, I wonder whether the Smith deal might be interpreted — correctly or incorrectly — as an indication that DOJ is receptive now to such sweetheart deals where I don’t think it has been in the past.  But, to get back to my quote
from the WSJ, on the facts I know from the NPA and the Statement of Facts, Smith got a hell  of a deal for really, really corrupt behavior.

One side comment:

I want to go back to the Streamlined submission which required a nonwillful certification.  The Statement of Facts establishes that the certification was willfully false and the returns and FBARs submitted with the Streamlined submission were false.  In the event Smith had lawyers on the Streamlined submission, one would hope that they did not know the facts, meaning that Smith lied to the lawyers.  I have previously written about lying to the lawyers who then submit false documents to the IRS: Second Circuit Affirms Application of Crime-Fraud Exception to the Attorney-Client Privilege (10/10/15; 5/24/16),  here; and Update on the Zukerman Indictment – Potential Waivable Conflicts of Interest of Advocate as Witness (5/28/16; 6/21/16), here,

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