Susan Goes To Victorville Federal Prison Camp (Chapter 11)

Despite the completion of my sentence in August of 2009, the sanctions my judge imposed upon me included a three-year term of supervised release. While under supervised release, a United States Probation Officer would monitor my activities. In order to travel outside the Los Angeles area, I would need his permission. The probation officer would keep tabs on where I lived, with whom I associated, how I earned a living, and monitor compliance with my financial obligation to pay a $234,418 settlement the judge imposed as part of my criminal sanction. Those restrictions and interferences didn’t trouble me because of my commitment to lead a transparent life.

This commitment to truth and correctness was not a part of my past. As I’ve written before, I used to be a liar. My willingness to lie was a necessary component of white-collar crime. The irony was that while living as the embodiment of deceit, I didn’t consider my actions as being wrong or inconsistent with self-perceptions of my essential goodness as a human being. Readings in Machiavelli suggested that while living in a corrupt world, success required a person to master the art of deception. I was deluded into believing that by lying I could get ahead and getting ahead was what I was all about.

With his theory of consequentialism, the ethicist John Stuart Mill wrote about the ends justifying the means. I once misinterpreted that theory. If earning more money was my end goal, then I didn’t consider what I would have to do to reach that goal, including selling my morals. As long as the price made the decisions worthwhile, selling my morals wasn’t such a stretch. Rather than living righteously, the question became how much it would take for me to abandon key concepts such as honesty and integrity.

Before I surrendered to prison, an awkward conversation clarified what honesty meant. I spoke with Neil Weinberg, a senior editor and journalist at Forbes who wrote extensively about white-collar crime. When Neil asked why I lied and cheated, I told him that what happened to me could happen to anyone. He rightfully took umbrage at my response. “It could never happen to me,” Neil asserted. “I would never lie or cheat to get ahead, regardless of the payoff, regardless of whether I thought I could get away with it.”

Neil’s comment stayed with me, and I credit him as being one of the role models who inspired me to change. I admired his self-assurance, his certainty that he would always make decisions that were consistent with his strong sense of ethics. Whereas I was weakened and abashed by my conviction of lying and cheating, Neil’s code of ethics endowed him with transparency. I admired the virtue, and in the spring of 2010, I got a sense of how empowering it was.

In early 2010 my accountant brought welcome news. As a consequence of the 2009 economic stimulus legislation, I was entitled to a five-figure refund of taxes that I had previously paid. The refund would bring a financial windfall, as I hadn’t been expecting it. What’s more, I wouldn’t have to do anything other than sign a form to receive the check. And since it was a tax refund rather than new taxable income, my understanding was the conditions of my release wouldn’t obligate me to disclose the refund to my probation officer. My previous mindset would have driven a decision to cash the check and use the funds as I saw fit. The commitment to transparency that role models like Neil Weinberg inspired, however, compelled me to reveal the refund to my probation officer. My forthrightness took him by surprise, I sensed, and in that moment, I felt the strength of character that came with being an honest man.

What did it take for someone to sell his or her morals? Since my transformation I committed to living as an honest man, determined to prove myself worthy of the trust that societal leaders like Neil Weinberg, Walt Pavlo, Jr., and Mark Whitacre placed in me. But there was a time when an envelope stuffed with a crisp, bonded stack of $10,000 could cause me to ignore some irregular trading patterns in an account I managed; a monthly commission check of $50,000 could induce me to ignore outright fraud.

How about others? Some people with whom I spoke in my consulting practice shared the pressure points that led to their demise. For most it was money, the lure and temptation to rake it in easily. For Susan, a CPA, the slide began with a simple aversion to saying no to her clients.

“I was never a people pleaser,” Susan told me. We met in her West LA office. She sat across from me in a high-backed leather chair, meticulously dressed, but lines in her face revealed the stress she was enduring. “I began my career at Arthur Andersen, and it didn’t take long before colleagues had revived my sobriquet from college—the Ice Queen. Strangely, I didn’t mind, as work was my identity. But my indifference to other people’s perceptions changed once I left Arthur Andersen to begin my own firm.”

Susan was awaiting sentencing as a result of her pleading guilty to criminal charges under Title 18 of the United States Code, Section 1519. That statute reads as follows:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter with the jurisdiction of any department of agency of the United States…Shall be fined under this title, imprisoned not more than 20 years, or both.

“The prosecutor wants to lock me in federal prison for years!” Susan clenched her jaw, then shook her head. “I can’t get over how I allowed myself to stumble into this mess. It was like quicksand, just gradually pulling me in deeper and deeper. In a reckless attempt to please a client, my entire life’s work has been ravaged.”

“You talk about one client,” I pointed out. “Was it only one?”

“Well, as a small business owner I needed to provide excellent service to all of my clients. But I had one client, Oliver, an art broker in Beverly Hills, and his business was important because he referred many others to me. His importance as a client to my firm clouded my judgment.”

“What did Oliver ask of you?”

“I had been Oliver’s accountant for 11 years, and I prepared his tax returns based on the records that he provided. My problems stemmed from his tax return for 2007.”

“What kind of records did Oliver provide you to complete his tax return?”

“The standard records. I had his bank statements, check stubs, and checkbook sheets that recorded cash receipts and disbursements. Oliver and his wife regularly reported income from commissions he received on art sales. But the 2007 return included a sizeable income that I should’ve been more diligent in verifying.”

“What happened in 2007,” I asked. “Why was that year different?”

“When I received the records from Oliver for that year, they showed an income of $190,000 from commissions. I recorded the commissions on the Schedule C as self-employment income. But the checkbook sheet included a deposit entry for $1.3 million. It didn’t show where the income came from. So I called Oliver and asked him how I should classify the deposit. He was evasive, reluctant to provide details, but when I told him that I needed to classify the income on the tax return Oliver told me that he had sold a painting from his collection. Getting information from him was like pulling teeth. If he hadn’t referred so many clients to me, I would’ve dropped him years before.”

Susan went on to say that over the years, she and Oliver had had numerous conversations about income classifications. He understood the difference between ordinary income from his self-employment, which was to be reported on the Schedule C of a federal income tax return, and income from capital gains, which was to be reported on the Schedule D.

“Oliver was well aware of the tax implications of short-term versus long-term capital gains. When I pressed him on how long he had owned the painting, he said that he had owned it for longer than one year, that I should classify the $1.3 million deposit as a long-term capital gain.”

Five months after filing Oliver’s 2007 tax return, two IRS agents approached Susan to discuss the tax documents. The agents were inquiring about Susan’s telephone conversation with Oliver regarding the painting that he said he had sold from his collection. She told the agents that Oliver said he had owned the paintings for longer than one year, and that when she pressed him for a date of when he had acquired the painting, Oliver told her that he wasn’t sure, but that she should use a date of just over a year before he sold it. The agents took notes, then served Susan with a subpoena to appear before a grand jury. When she appeared before the grand jury, a federal prosecutor questioned her about the telephone conversation she had with Oliver regarding the painting that he said he had sold from his collection for $1.3 million, and she testified truthfully in the same way that she had answered the IRS agents when they questioned her in her office.

Through the use of the grand jury, the prosecutor was investigating whether Oliver had filed a false tax return in violation of Title 26 of the Unites States Code, Section 7206. In addition to gathering testimony from Susan, the prosecutor called upon others who were involved with Oliver’s transaction. That investigation uncovered Oliver’s intricate deceit.

“Oliver never owned the painting at all.” Susan told me. “As it turned out, he lied to me from the start and I was caught in the cover up.”

“What do you mean,” I asked.

“Maria was a client of Oliver’s, and she owned a painting by Pablo Picasso that she asked Oliver to sell. Maria set an asking price of $4 million and agreed to pay Oliver a 10 percent commission if he sold the Picasso. Oliver than approached Jonathan, an affluent art buyer, and Jonathan agreed to buy the Picasso for $5.1 million. The commission apparently, wasn’t enough for Oliver. So he deceived Maria by telling her that he had found a buyer who had offered $3.6 million for the Picasso; if she accepted, Oliver said, Oliver said he would waive his commission. Maria agreed.

“With the sale cinched, Oliver instructed the buyer, Jonathan, to wire the $5.1 million to Oliver’s escrow attorney. With the wire transfer complete, Oliver instructed the escrow attorney to deduct $10,000 as an escrow fee, and to remit the $3.6 million sales price to Maria. He also gave instructions for the escrow attorney to send payments totaling $180,000 to various others. Those additional payments didn’t have any relationship to the sale of the Picasso, but by instructing his attorney to remit the payments from the escrow account, Oliver avoided the record of such funds passing through his own account. Finally, Oliver told his attorney to wire him the $1.3 million that remained from the sale of Maria’s Picasso.”

“It sounds like Oliver ripped off Maria for more than a million dollars.” I said.

“Well he deceived her, but she agreed to sell the painting. I know Maria is pursuing a civil case against him for fraud. But Oliver dragged me into this mess by claiming that the income was a long-term capital gain rather than ordinary income.”

“I don’t understand how this became your problem,” I said to Susan. “All you did was prepare a tax return that you based on the information Oliver provided. When the IRS agents questioned you, you answered truthfully. And you said that you testified truthfully to the grand jury. Why were you charged with a crime?”

“Like I said, the investigation into Oliver’s taxes was ongoing long after I spoke with the IRS agents and after I testified in front of the grand jury. When I responded to the questions, I didn’t know the intricacies of Oliver’s scheme or that the agents were looking into Schedule C versus Schedule D income on Oliver’s tax return. I had taken Oliver at his word that he had sold a painting he had owned in his collection. Yet Oliver had lied to me, and when he learned that the IRS was investigating his tax return for the year 2007, he started changing his story and pressuring me to go along with him.”

Susan told Oliver about the inquiry by the IRS and her grand jury appearance. He then began badgering her with questions about what she had been asked and precisely how she had answered. When Susan said that she had responded honestly, Oliver insisted that she accompany him to a meeting with his lawyer. Susan told me that she hadn’t been enthusiastic about meeting with Oliver’s lawyer, but because of Oliver’s support for her practice over the years she felt obliged to help him. Before attending the meeting with Oliver and his lawyer, Susan drafted notes in which she again reiterated that Oliver had told her that he had sold a painting he had owned for longer than one year.

“While we were in front of the lawyer,” Susan told me, “Oliver began denying that he had ever said he ‘owned’ the painting. Instead, he began insisting that what he said was that he ‘had’ the painting for longer than one year—not owned it. He was trying to lay the blame on me for misunderstanding him.”

“Was a misunderstanding of what he said a possibility,” I asked.

“Not a possibility.” Susan held her hand up, as if showing me the stop sign. “If Oliver had not told me that he owned the painting, the length of time the Picasso was in his collection wouldn’t have had any relevance. I knew that, Oliver knew that, and the lawyer knew that. Without his owning the painting, there wouldn’t have been an issue of capital gains at all. The $1.3 million would have been ordinary self-employment income. I would have itemized it as a commission on the Schedule C of the tax return if Oliver hadn’t told me he owned the painting for longer than one year. But the lawyer asked me the same questions you did—whether I could’ve misunderstood Oliver.”

“And how did you answer the lawyer?”

“Well I should have put a stop to the charade right then and there,” Susan said. “But at that moment I felt trapped. I don’t even think that I answered. I just looked over at Oliver, shaking my head, silent, wondering how he could be asking me to lie. But while I was shaking my head no, Oliver was nodding his head yes, then saying that of course I misunderstood him.”

At the time of Susan’s meeting with Oliver and his lawyer, Susan didn’t know anything about the Picasso transaction between Oliver and Maria, nor did she know about the shady way Oliver had instructed his attorney to disburse funds—and in so doing—concealing another $200,000 in ordinary income that Oliver didn’t report.

As I listened to Susan describe her meeting with Oliver and his lawyer, I was painfully reminded of a similar meeting I once had with a hedge-fund manager, his client, and a team of the client’s advisors. I was supposed to be overseeing the hedge fund, but in that moment I was put on the spot. Whereas Susan’s pressure point was that she wanted to help a valued client, mine was in trying to protect a monthly income stream that the hedge fund was generating fraudulently. I told Susan about my experience, where it led me, and what I learned from it. Then I asked what she did in the meeting.

“The client’s always right,” Susan said. “It was against my better judgment and I regret what I did, but I went along with the plan by agreeing it was possible that I could’ve misunderstood Oliver. I felt dirty as soon as I said it, though that was only the start. As soon as I agreed that it was possible I could’ve misunderstood Oliver, the lawyer produced an affidavit for my signature.”

“What did the affidavit say?”

“It was a frame up, attributing the misclassification of Oliver’s profit to my own mistake and error. It went on to say that Oliver was in no way attempting to misrepresent the transaction concerning the painting and that the issue arose from nothing more than a miscommunication.”

Susan told the lawyer she wasn’t comfortable with the affidavit and suggested modifications that would make it more vague. Then Oliver ratcheted up the pressure by saying that based upon their longstanding relationship he didn’t want to have to take legal action against Susan. She interpreted Oliver’s words as a threat of a malpractice suit. As a compromise, Oliver’s lawyer drafted a document releasing Susan from all liability for her role in preparing the 2007 tax return. With that signed release, Susan signed the affidavit for Oliver.

Susan then prepared and filed an amended tax return for Oliver. In the amended return, the $1.3 million was filed appropriately on the Schedule C as gross income rather than as a capital gain, and it included the additional tax payment that Oliver owed.

“But I take it that the amended return didn’t resolve Oliver’s problem,” I said.

“Not only did it not resolve his problem, it created a massive problem for me.” Susan folded her arms and leaned back in her chair. “Six months later, the IRS agents who initially interviewed me about Oliver returned to my office. They brought with them Oliver’s original tax return, the amended tax return, the affidavit I signed, their notes from the previous time they questioned me, and transcripts from testimony that I gave to the grand jury. After pointing out the conflicting statements I gave about Oliver’s supposed ownership of the Picasso and the income classification, they threatened me. They told me it was one crime to lie to federal officers. It was another crime to lie to a grand jury. It was another crime to obstruct a federal investigation. And it was another crime to fabricate records. Their aggression really shook me, humiliating me in my office.”

Susan said that she tried to reason with the IRS agents, feebly claiming that she had simply signed the affidavit to relieve pressures of an angry client and that all she wanted to do was make the problem go away. But the agents were livid, as if she had offended them personally. They told her what their investigation had uncovered. Oliver had not only cheated the IRS with the fraudulent tax return, they said, he had also cheated Maria out of more than a million dollars by deceiving her, and he filed a second fraudulent tax return by not revealing the $200,000 in additional income he concealed by inappropriately instructing his attorney to disburse those funds from the escrow account.

“The agents accused me of being complicit in all of Oliver’s crimes and told me that I would be going to prison for 20 years. I had to hire a criminal defense attorney. I pleaded guilty to one count of fabricating records to obstruct justice, but I still don’t know what’s going to happen to me. All of this for trying to help a client out of his own mess. It’s been going on for a year now, ruining my practice and driving me out of my mind. I can’t believe this happened. I can’t believe it.”

Susan may have been trying to please a valued client, but the pressure to do so resulted in the compromising of her morals. She wasn’t as venal as I readily acknowledge I was in my former career as a stockbroker. She would not have considered abandoning her honesty and morality for a dollar amount. Rather, she was pressured during a heated meeting with a trusted client and his lawyer and not thinking about self-aggrandizement. Yet the law did not distinguish motivations for committing a crime. Whether a person accepted a kickback, participated in a fraud for financial gain, or as Susan had done, signed documents that would obstruct a federal investigation, disgrace and imprisonment could result.

As one who has experienced the criminal justice system and all of its ancillary consequences, I could help Susan prepare for the challenges ahead. I explained what she could anticipate as she approached sentencing, steps she could take to ease her adjustment to prison and help her understand that complexities of supervised release. Yet the most valuable advice I could offer her—or anyone for that matter—was to live with the confidence that Neil Weinberg and other role models expressed to me. Such confidence could only come with a full commitment to living an honest life, with a commitment to never sell out morality or ethics.

Chapter Eleven Questions

  • How can a professional resolve a dilemma between a valued client’s unethical demands and the professional’s individual commitment to honesty?
  • In what ways can ambition threaten an individual’s integrity?
  • Describe the relationship between ethics in business and ethics in one’s personal life?