In a case dubbed “the biggest criminal tax fraud in history” by federal prosecutors, former lawyer Paul Daugardas was sentenced to 15 years in prison for helping wealthy clients dodge taxes. However, if you blinked, you might have missed it. Why? Mr. Daugedas was sentenced back on June 25, 2014, just a week after the IRS’s historic announcement that it had overhauled the voluntary disclosure program. Therefore, no matter how ground-breaking this story might have been, because it didn’t bear some relation to the major OVDP announcement, it was all but ignored by the media.
I’ve been following the Daugerdas saga ever since U.S. District Judge William Pauley threw out his earlier conviction and ordered a new trial. Right about now, you might be saying, “Wait. Back up. You’re telling me that Daugerdas had been previously convicted of these charges but that the judge dismissed the case?” Right. And that only made what already had the makings of a salacious Hollywood thriller (for us tax geeks in the tax community) that much more enticing.
On May 24, 2011, after a criminal trial that took three months and included testimony from forty-one witnesses, a different jury returned guilty verdicts against Daugerdas and three of his co-defendants. Judge Pauley dismissed the convictions of Guerin, Daugerdas, and Field after finding that Catherine Conrad, one of the deliberating jurors, had lied repeatedly about her background. Specifically, she hid the fact that she was a suspended attorney and an alcoholic in an effort to make herself “more marketable” as a juror.
Not surprisingly, Ms. Conrad had a sinister motive for doing so and it had nothing to do with being the lone voice to stop the government from skinning Daugerdas’s hide. On the contrary, she had it out for the defendants from the beginning, saying, “[Defendants are] frickin’ crooks and they should be in jail and you know that.” And poof! The “biggest tax prosecution ever” ended in a mistrial for Guerin, Daugerdas, and Field.
Co-defendant David Parse was not as fortunate. Judge Pauley let Parse’s conviction stand after ruling that his lawyers failed to disclose information they had obtained about Ms. Conrad during the course of the trial. Parse was later sentenced to three and-a-half years in prison, ordered to pay $ 115,700,000 in restitution, and to forfeit $ 1 million in property. If there was ever a time when a defendant had a colorful claim of ineffective assistance of counsel against his defense attorney, this would be it.
Three months later, Guerin pleaded guilty to conspiracy to defraud the United States and tax evasion. Daugerdas, meanwhile, continued to maintain his innocence.
Daugerdas’s new trial began in October of 2013 – perfect timing for an earnest and wide-eyed criminal defense attorney from New Jersey, passionate about tax law, to bear witness to what was a once in a lifetime opportunity: attending the biggest criminal tax fraud trial in history in person. And attend it I did. In fact, I was there from the very beginning to the very end. I sat in the front row, up close and personal, hanging on every syllable of every word uttered by every witness.
And just like “being there” helps one to enjoy certain sports that might otherwise be painful to watch on television – with professional ice hockey being the first one to come to mind – there is no substitute for being present in the courtroom.
Just like you can feel the intensity in the arena and practically reach out and touch the players on the ice surface, being in the courtroom gives you a “bird’s eye” view of things. Most notably, you get to see how the lawyers interact with each other and to the witnesses. Just like the final minutes of overtime in a hockey game is as nail-biting and jaw-dropping as the most suspenseful scene in an Alfred Hitchcock film, you can feel the same suspense in the courtroom.
And that suspension is not always manifested by the prosecutors and defense attorneys arguing. As was the case in the Daugerdas trial, sometimes the silence of a government’s co-operating witness alone – in the wake of a piercing question on cross-examination – was more deafening than the most heated arguments of the attorneys. And I can attest to the fact that there was more than one instance of that.
At the retrial, which lasted seven weeks, Daugerdas was convicted of the following crimes: (1) conspiring to defraud the IRS, (2) conspiring to evade taxes, (3) conspiring to commit mail and wire fraud, and (4) corruptly endeavoring to obstruct and impede the internal revenue laws. He was also convicted on four counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud.
“Mr. Daugerdas was a tax-shelter racketeer who tapped into the incredible greed of some of the super wealthy,” Judge Pauley said. “Just about everyone he came in contact with, he managed to corrupt.”
The tax shelters at the center of the case were sold from 1994 to 2004 to almost 1,000 people, creating $ 7 billion in fraudulent tax deductions and more than $ 1 billion in phony losses for customers.
Judge Pauley described the clients as “real estate tycoons, tire magnates and software developers” who refused to contribute to the country that “made their achievements possible.”
While fifteen years might sound harsh (or perhaps like a slap on the wrist depending upon your point of view), the reality is that it could have been much worse. The government sought a twenty-year sentence, arguing that a stiff sentence was needed in order to deter other would-be criminals and to account for Daugerdas’s greed and manipulation. However, Daugerdas’s attorney, Henry Mazurek – one hell of a criminal defense attorney – argued for a lighter sentence. He asked Judge Pauley not to overlook the 800-pound gorilla sitting in the room: namely, the fact that the government had failed to prove nine counts.
In the end, Judge Pauley agreed, declining to give Daugerdas the full twenty-year term.
Unfortunately for Daugerdas, fifteen years in prison was not the only sentence that Judge Pauley handed down. In addition to prison, Daugerdas was ordered to forfeit $ 164.7 million, including a lakefront home in Wisconsin, and over $ 20 million in various securities and financial accounts. He was also ordered to pay restitution, with other conspirators, of $ 371 million to the IRS.
His co-defendants fared better. As discussed above, Parse was sentenced to serve three and-a-half years in prison, to pay restitution, and to forfeit over $ 1.5 million in property. Guerin was sentenced to eight years in prison, ordered to pay $ 190 million in restitution, and to forfeit $ 1.6 million in property. Field was acquitted of all charges.
Daugerdas was said to have orchestrated this massive tax fraud scheme by marketing tax shelters to some of the wealthiest Americans, helping them to evade more than $ 1.6 billion in federal taxes. As a result of the scheme, Daugerdas received a whopping $ 95 million in fees. And now would be a good time to sit down before reading the next line.
Daugerdas used the tax shelters he marketed to reduce his own tax liability to less than $ 8,000. What would Daugerdas have owed the IRS without the shelters? Thanks to the IRS, that liability was calculated to a “T.” And perhaps that’s what keeps Daugerdas lying awake at night: $ 32 million in taxes.
Daugerdas was found to have participated in the scheme for a ten-year period, from 1994 through 2004. The government proved that he and his co-defendants prevented the IRS from understanding how the shelters worked: as cookie-cutter products intended to eliminate or reduce large tax liabilities for clients who were not seeking profit-making investments.
Co-conspirators helped create documents that gave the false impression that clients were using the shelters as investment vehicles. They also backdated shelter transactions, including some that failed to produce the amount or type of losses that clients sought. But instead of reporting those results, Daugerdas and others “corrected” transactions after the close of relevant years and then backdated documents to validate their reports.
What ever happened to Jenkens & Gilchrist, the firm that Daugerdas worked for? The firm negotiated a non-prosecution agreement with the U.S. government in March of 2007, admitting that it developed and marketed tax shelters that generated more than $ 1 billion in phony losses. The firm shut down shortly thereafter, with six hundred lawyers losing their jobs or moving to other firms.
For more on Daugerdas, see my blog, Helter Shelter: Unveiling the Secret World of Tax Shelters: Part II.