Chapter 6
Tax Scam Sends Steve To Pensacola Federal Prison Camp
My past experiences of growing up as a privileged Jewish kid from Encino, and going on to play baseball at USC before beginning a lucrative career as a stockbroker may make it easy for university students and business executives to identify with me. The part of my personal story that distinguishes me from others was the diversion I took through the criminal justice system, the lessons I learned from prison, and the perspective that I have lived with since my mother drove me home from the prison camp in Taft, California. I’ve come to call that perspective ethics in motion.
The perspective implies my different understanding of my role in society. When I was a stockbroker I once joked that I would manage anyone’s money—including money that belonged to anti-Semitic groups. As events turned out, I had to accept that my warped sense of values led to business and personal decisions that became worse and worse. The consequences they brought convinced me of the need to change. In my case, I knew that change would require daily introspections—self-questioning about whether my motivations and actions were consistent with the values of honesty and integrity that I identified as driving me.
A few months after I established my consulting business that would specialize in guiding white-collar offenders who faced their own struggles with the criminal justice system, I received a call from Steve. That call would test my resolve. I had to pay bills and I was struggling through the cash flow problems that afflicted many small business owners. Steve’s call brought an opportunity to earn a few thousand dollars at a time when I could have really used the income.
Steve told me that he was being indicted for tax fraud and that he was facing up to 20 years in federal prison. I made clear to him that I was not an attorney. My area of expertise, I explained, was limited to sharing what I had learned through my prison experience. By doing so I would work to help others discover strategies to emerge stronger through their own challenges. Steve said he was working with counsel to persuade the government to reduce his exposure and that he wanted me to describe what he might expect. I told him my fee and Steve remitted payment thorough my website at once. The consultation began through our Web conference.
“Tell me about the charges you are facing,” I inquired about the problems that led him to me.
Prosecutors are alleging that I set up a tax scheme that resulted in the loss of $39 million worth of tax collections. It’s a preposterous allegation.”
“And how did prosecutors identify you as a target for this criminal prosecution?”
“A no-good snitch who was out to save his own behind,” Steve was still angry. “Guy was caught running a Ponzi scheme and sentenced to serve a few years for ripping off his investors. To reduce his federal prison sentence, he cut a deal with the feds. I was the bait.”
“Steve, as we begin it’s important to me that you understand my role. I’m here to listen, but ultimately, my goal is to give you a perspective that might help you reach the best possible outcome going forward.”
“Yeah I got you, I get it.”
“To reach that goal,” I continued, “we’re going to need some balance. We need to analyze all options objectively, and that requires us to suspend judgments as we evaluate how we can make the best overall decisions. Anger, or blaming others for the problems we face doesn’t help.”
“I’m with you,” Steve said. “I just get a little worked up when I think about it.”
“Good. Now help me understand why the informant would have given your name to the prosecutors.”
“I told you. He was guilty of running a Ponzi scheme. The only way he could reduce his sanction was to help prosecutors indict someone else.”
“But why did the informant give prosecutors your name? What did the informant say that you did?” I was careful with my words so as not to make a judgment call as to Steve’s guilt or innocence.
“I’m a CPA in Fort Lauderdale. My practice specializes in tax matters for high net-worth individuals. Besides preparing tax forms for clients, I also put investment syndications together for them and I serve as the general partner. The informant was a partner with me in a real estate project one of my syndications operated. As a partner, he was privy to the scheme.”
“Am I to understand you to say that there was a scheme?”
“Of course there was a scheme! What do you think we are talking about here, Sunday school? It just wasn’t a $39 million scheme.”
“So you’re not going to contest your quilt of participating in a tax fraud?” I needed some clarity. “You’re planning to cooperate with the government and to plead guilty, is that right?”
“That depends on whether my defense attorney can bring the prosecutors down from the $39 million.”
“I see. So it’s the amount of tax fraud that’s in dispute, not whether you engaged in fraud.”
“That’s right.”
“And how do you feel about admitting to being involved in a fraud?”
“What do you mean?”
“Well, have you given any thought to the victims from the fraud?” I was trying to gauge whether Steve felt any remorse for his criminal actions.
“Victims?” Steve was taken aback by my question. “What are you talking about? The only victim here is me. I couldn’t care less about any victims! Besides, the government is hardly a victim. Don’t you know the government is the biggest crook of all? Every time one of those politicians passes a bill, don’t think for a second that he’s not lining his own pockets with some kind of perk.”
“But how does wrongdoing by someone else excuse our own actions?” I was trying to nudge Steve, gently, into recognizing and accepting responsibility, or at least to consider it, so we could create a strategy that would begin a reconciliation. “Shouldn’t we at least strive to live honestly?”
“Look pal, I don’t know where you’ve worked. In my town, if an accountant is going to be worth his salt, he’s got to be willing to push the envelope. That’s it. He can’t get all sentimental about the nonsense. How else is he going to survive? If I couldn’t cut or eliminate tax bills, what’s to distinguish me from the next guy?”
I continued to try bringing Steve around, but after 30 minutes of conversation, I told him that I was going to refund his money. That was a big step for me because the money was in my account already and I really needed it. If I were to accept the money, I would be living contrary to the values of honesty and integrity that I committed to living every day. I didn’t want that kind of contradiction or disharmony.
“What do you mean you’re refunding my money?” Steve was incredulous.
“I just don’t think we’re going to be able to work together,” I said. “I can’t help you.”
“Look I know you might not be able to get me out of this,” Steve wanted to continue. “But I need some advice on how to get through it. I’m facing 20 years man, and I’m paying you big money. I got a right to tell it like it is.”
Steve was looking for someone who would feed into his I’m-a-victim mentality, and some kind of artifice that might lessen his liability. “I’m sorry,” I told him. “The services I offer differ from my competitors. I wish you the best, but I’m going to have to pass.” I refunded the retainer in full.
When I was a stockbroker, I would have more readily agreed to part with a limb than to return a client’s money. I wouldn’t have cared what would I would have had to say, but the money was staying with the firm. Despite the corporate codes, my brokerage firm paid me to build account balances—not to return funds because I was troubled with pangs of conscience.
As a federal prison consultant, deceit would have been much easier. I knew that Steve was in a vulnerable state and I knew what he wanted to hear. He eagerly wanted to pay someone who would agree that fraud was acceptable, and he sought guidance on how to perpetuate the fraud with tricks that might somehow give him an edge or lower his exposure to sanctions. Yet with the commitment I had made to ethics, I couldn’t permit myself to become part of anything that wasn’t consistent with good values. Somehow, my response to Steve’s refusal to act responsibly strengthened me inside, even if it weakened my bank account.
When I spoke in corporate training seminars, I suggested that businesses could advance their long-term interests by rewarding executives who acted in accordance with good ethics. My experience in the corporate environment was that businesses rewarded executives for closing deals, but not always for doing the right thing. If an executive came across a deal that failed to pass the ethical test, then the executive shouldn’t have any dilemma about turning it down. Employers should encourage and applaud such leadership, and they should recognize the enterprise value of honesty in a meaningful way.
When executives perceived such appreciation from their profession, more would refrain from ethical misconduct that could expose the individual and the corporation to severe sanctions for white-collar crimes. Sometimes that commitment to honesty would yield even more value down the line, as I surprisingly discovered when Steve called me back a few days later after I had returned his money.
“I know I said some things that I shouldn’t have the last time we spoke,” Steve told me. “I’m under a lot of stress right now, as this is the first time I’ve faced criminal charges. But after speaking with a few others who offered to help, I realized that I liked your approach best and I’d appreciate it if you would work with me to get through these problems.”
“The thing about it,” I told Steve, “is that my approach centers on the need to accept responsibility. That means finding or creating steps we can take to demonstrate that we know we’ve done something wrong, taking actions that show we want to reconcile with society for the bad decisions we’ve made, and showing our commitment to righting our values so we can live as honorable, contributing members of society.”
“I can’t make promises,” Steve said. “But I’m willing to listen and to learn.”
“And I appreciate your sincerity, but I won’t take anyone’s money if I don’t think I can help. To help you I would I need to understand more about the motivations that led to tax fraud and to believe that you would join me in finding solutions that might demonstrate your remorse. That was the strategy I used to turn my life around, and it’s the one I believe in. If you think that’s what you’re after, we can work together, otherwise I can’t help you.”
“Let’s move forward,” Steve agreed.
“Okay. Tell me what happened, what you did—not about the informant snitching on you, but what you’re responsible for.”
“I told you that my accounting practice specialized on taxation services for wealthy individuals. My clients frequently invested in syndications I put together that delivered healthy income streams. Those syndications usually offered investors a great return, but the real appreciation was in depreciating benefits that could offset their income. On occasion, as economies turned unexpectedly and a deal didn’t work out as expected. Anyone could boast that every deal wasn’t a winner, but a loser did surface every now and again. That’s just the way business works out.”
“Was it a loser that brought you these problems,” I asked.
“Not the deal so much as the way I converted an investment that was losing money into a net winner for the participating investors.”
“And how did you do that.”
“By checking a box basically,” Steve was proud of the creative thinking it took to come up with the tax ruse.
“The investment had turned, with depreciation resulting in millions of dollars of annual losses. I was the general partner, and all the investors in the syndication were clients of my accounting practice. There were big earners, each with W-2 forms showing several million dollars worth of annual income. As passive investors they weren’t entitled to write off the operating cost of the syndication. To help them lower their income-tax obligations I created the appearance that passive investors were actually active in the business. That ruse permitted them to offset losses against their income, substantially decreasing each investor’s annual tax bill.”
“So you knew what you were doing was illegal?”
“Of course.”
“Why would you knowingly commit a crime and expose yourself to possible criminal sanctions if the benefits would only flow to wealthy investors?”
“Those investors were my clients and I had an obligation to serve them to the best of my ability.”
“That obligation didn’t include fraud,” I pointed out. “You put them into a legitimate investment that didn’t turn out well. Those investors were big boys, with millions in annual income. Presumably, they understood the risk. Why did you have to break the law?”
“Look,” Steve wanted to explain himself. “I liked the challenge of figuring out solutions to complex problems. That’s what I do, it’s the reasons my clients pay me. If one of my partners hadn’t been indicted for running a Ponzi scheme, then cut his losses by informing on this case, no one would have known.”
“Have you thought at all about the victims that resulted in your participation in a fraud?”
“Who’s the victim?” Steve didn’t see any wrong in the felony he committed. “Are you telling me that I’m supposed to consider the government a victim? The IRS? That’s ridiculous.”
“How about your wife, your children?” I asked. “Have you thought about how being indicted for fraud might influence their lives? One of the lessons I learned from my experience with the criminal justice system was that I wasn’t alone. I was part of a community. When I was perpetuating lies as a stockbroker, I didn’t consider anything but my income, my desires. Yet after my troubles with the law began, I saw the pain and humiliation my crimes brought to the people I loved. My mother had to begin therapy with a psychologist to work through the pain I caused. What would a conviction for fraud and long prison sentence do those who love you? Have you thought about that?”
Steve paused. “My wife wouldn’t be able to handle the disgrace.”
“How about all of the employees who work for your firm? How about all the people who trust you, and your obligations to your profession? And what about your clients? How will they feel about government investigators inquiring about their business affairs or finances because your ingenious fraud that supposedly no one could discover brought them to the attention of IRS agents?”
Steve looked at me through the Web camera but he was silent, as if all the ancillary consequences that accompany criminal problems were suddenly becoming clear to him, lunch an unexpected punch to the nose.
“You may not feel morally impugned for using your intelligence to cheat the government out of tax revenues, but what about your reputation? Another lesson I learned from my experience was that in breaking the law, I dealt a real blow to my sense of good character.”
“I hadn’t thought about the problems in those terms,” Steve was speaking with less energy, as if he had been deflated.
“That’s understandable,’ I said. “Instead of seeing the problems we create with clarity, we seem to have a default mechanism of denial. I know I did. Denial can blind us into even accepting that we’ve done anything wrong. More than three years passed before I came to terms with all the damage I had caused through my participation in deceit, and it’s going to take me a lifetime to make things right. I’m still working every day to redeem myself. But I’ve got to tell you, a liberty and a sense of cleansing comes once we begin working to set things right.”
“I wouldn’t even know where to begin.”
“To begin,” I told Steve, “you have to acknowledge that you’re part of a larger community than yourself.” As members of that community, we all have a duty to live honestly, to act fairly, transparently. If prosecutors are threatening to charge you with a $39-million dollar fraud, and you’re contesting the amount of the fraud—as opposed to whether a fraud was committed—perhaps we ought to begin by working to restore some of your credibility.
Steve came on board. While his attorney continued negotiations with prosecutors, Steve took an active role by volunteering as a mentor in a local community center for at-risk kids. In working closely with teens who came from disadvantaged backgrounds, Steve said that he began to appreciate the responsibility that accompanied his privileged position in society.
“These kids have had a rough start,” Steve observed. “With the struggles of their parents, and their lack of positive role models, it’s no surprise they’re in trouble. I don’t have an excuse.” His change in perspective led to a more hands-on approach to resolving his problem with the government.
After several more months of negations, Steve’s defense attorney had convinced prosecutors to reduce Steve’s culpability from a $39 million fraud to a $21 million fraud, but the government was still inclined to indict him on charges that could bring a nine-year sentence. In an effort to clarify his actions I worked with Steve to draft a narrative—from start to finish—that described his role in orchestrating the tax ruse. He included a detailed spread sheet that identified the tax obligations of each individual involved, explained his motivations for putting the scheme together, and described why he came to regret his actions. Steve used the report to persuade those investors who benefited to settle with the government. Instead of a $39 million loss, or a $21 million loss, Steve showed that the total loss to the government was $9 million in uncollected income tax. Of the 11 investors who had participated, 10 agreed to make things right by paying all back taxes, penalties and interest while amending their previous tax returns; Steve accepted full responsibility for creating the tax scheme, but through the narrative and with the amended tax returns, he showed that the total loss to the government was less than $1 million in uncollected income tax.
The documentation Steve provided, along with his success in persuading his clients to settle their tax obligations, his acceptance of responsibility, and the extensive efforts he made to contribute to society while working through the investigation made the prosecutor more inclined to show Steve leniency. Rather than indicting him for a fraud that would have exposed Steve to 20 years in prison, the government entered into a plea agreement with him. The agreement permitted Steve to plead guilty to a single count under Title 26 of the US code, Section 7201, for the crime of “Attempt to evade or defeat tax,” which exposed him to a maximum sanction of five years imprisonment.
Before setting myself on this new course of ethics in motion, I would not have invested the energy to work with Steve to the extent that I did. Instead I would have accepted his payment and told him exactly what he wanted to hear—that the problems weren’t his fault that the informant was to blame for all of Steve’s problems.
I will not allow those deceptions to poison my life of business practices again, as I have found life much more rewarding when I rely upon honesty and integrity as my guides. Steve has made the same change, as he introduced me to his attorney and colleagues, telling them that I’ve influenced his perspective on life. Those recommendations from Steve brought opportunities to expand my speaking and consulting business, further convincing me that honest is the best policy.
Describe how community service can influence values.
Why would Steve observe that as a professional he had a higher level of culpability that his clients who benefited from the scheme?
How does lack of a perceptible victim influence the possibility for white-collar crime?
