United States v. Coplan

Decision Date29 November 2012
Docket NumberDocket No. 10–583–cr.
Citation703 F.3d 46
PartiesUNITED STATES of America, Appellee, v. Robert COPLAN, Martin Nissenbaum, Richard Shapiro, Brian Vaughn, Charles Bolton, Defendants–Appellants, David L. Smith, Defendant.
CourtU.S. Court of Appeals — Second Circuit


Richard C. Tarlowe, Assistant United States Attorney, (Mark Lanpher, Andrea L. Surratt, and Katherine Polk Failla, Assistant United States Attorneys, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for Appellee United States of America.

Dennis P. Riordan, (Donald M. Horgan and Gary Dubcoff, on the brief), Riordan & Horgan, San Francisco, CA; Ted Sampsell Jones, William Mitchell College of Law, St. Paul, MN, for DefendantAppellant Robert Coplan.

Nathan Lewin, (Alyza D. Lewin, on the brief), Lewin & Lewin, LLP, Washington, DC, for DefendantAppellant Martin Nissenbaum.

Alexandra A.E. Shapiro, (Marc E. Isserles and James Darrow, on the brief), Shapiro, Arato & Isserles LLP, New York, NY; Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., New York, NY, of counsel; for DefendantAppellant Richard Shapiro.

Paul B. Bergman, Law Offices of Paul B. Bergman, PC, New York, NY; Robert G. Anderson, Donna Brown Jacobs, Butler, Snow, O'Mara, Stevens & Cannada, PLLC, Ridgeland, MS, for DefendantAppellant Brian Vaughn.

Marc N. Garber, The Garber Law Firm, P.C., Marietta, GA, for DefendantAppellant Charles Bolton.

Joshua L. Dratel, Joshua L. Dratel, P.C., New York, NY, for amicus curiae New York Council of Defense Lawyers; Laura Grossfield Birger and Rachel B. Kane, Cooley LLP, New York, NY, for amicus curiae National Association of Criminal Defense Lawyers; in support of DefendantsAppellants.

Before: KEARSE, McLAUGHLIN, and CABRANES, Circuit Judges.

Judge KEARSE dissents in part in a separate opinion.

JOSÉ A. CABRANES, Circuit Judge:

We consider here the fate of four partners and employees of Ernst & Young, LLP (“E & Y”), one of the largest accounting firms in the world, who appeal their convictions in connection with the development and defense of five “tax shelters” that were sold or implemented by E & Y between 1999 and 2001. At issue, among other things, is the scope of criminal liability in a conspiracy to defraud the United States under 18 U.S.C. § 371 and the sufficiency of the evidence with respect to the criminal intent of certain defendants.

The defendants in these consolidated actions are three tax attorneys, Robert Coplan, Martin Nissenbaum, and Richard Shapiro, and one accountant, Brian Vaughn, formerly employed by E & Y. A fifth defendant, Charles Bolton, was an investment advisor who owned and operated various asset-management companies. 1Coplan, Nissenbaum, Shapiro, and Vaughn (jointly, the “trial defendants) appeal from separate judgments of conviction entered by the United States District Court for the Southern District of New York (Sidney H. Stein, Judge), on February 17, 2010, following a 10–week jury trial on charges of conspiracy to defraud the Government, tax evasion, obstruction of the Internal Revenue Service (“IRS”), and false statements to the IRS. Bolton appeals from a judgment of conviction entered by the District Court on April 14, 2010, following his plea of guilty to a single conspiracy charge.2

For the reasons that follow, we reverse the convictions of Shapiro and Nissenbaum on Counts One, Two, and Three, and the conviction of Nissenbaum on Count Four, and we affirm the convictions of Coplan and Vaughn in their entirety. We affirm the District Court's order sentencing Bolton principally to 15 months of imprisonment, but we vacate and remand the portion of the judgment that imposed a fine of $3 million.


The evidence underlying the convictions, viewed “in the light most favorable to the prosecution,” Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979), established the following facts.

I. Facts

In 1998, E & Y formed a new group tasked with designing tax strategies, or “tax shelters,” 3 to market to “high net worth” individuals who were seeking to shelter at least $20 million from income tax liability. Originally called the “VIPER” Group (for “Value Ideas Produce Extraordinary Results”), the group was renamed “SISG” (for “Strategic Individual Solutions Group”) in 2000. Coplan, Nissenbaum, Shapiro, and Vaughn were the core members of the VIPER Group/SISG. The facts of this case principally relate to the design, implementation, and audit defense of four tax shelters developed by the VIPER Group/SISG: the (1) Contingent Deferred Swap (“CDS”); (2) Currency Options Bring Reward Alternatives (“COBRA”); (3) CDS Add–On (“Add–On”); and (4) Personal Investment Corporation (“PICO”) shelters. Coplan, Nissenbaum, and Shapiro also personally invested in a fifth tax shelter, known as the “E & Y 11 Transaction” or “Tradehill,” which was not marketed to E & Y clients. Although the IRS audited all five tax shelters, only the Add–On shelter was later subject to tax evasion charges. With respect to the other four tax shelters, the charged conduct principally relates to alleged false or misleading statements made by the defendants in connection with the IRS audits, as demonstrated by the defendants' internal correspondence, deposition testimony, and written submissions to the IRS.

Since the details of the tax shelters and the supporting tax law are largely irrelevant on appeal, we briefly summarize the (necessarily oversimplified) operation of these transactions as follows.

A. The CDS Shelter

The CDS shelter was a tax “deferral and conversion” strategy that allowed a taxpayer to convert ordinary income into long-term capital gains and defer tax liability to the year after the income was earned. The taxpayer would form a securities trading partnership in which the taxpayer served as limited partner and another entity served as general partner. The partnership would then engage in a large volume of short-term trading and invest in an 18–month swap transaction. Because of the “trader” status of the partnership, swap payments made by the partnership were deducted as business expenses. If the swap was terminated early ( i.e., before maturity), but after 12 months, the payments received by the partnership were taxed at the (significantly lower) capital gains rate rather than the ordinary income rate. Treatment of these payments as capital gains depended upon the “early termination” of the swap, which allowed the payment to be characterized as a “termination payment” under the applicable regulations.

B. The COBRA Shelter

The COBRA shelter was a tax “elimination” strategy that involved creating an asset with a high “basis” for tax purposes, which the taxpayer could then sell and generate a deductible loss. The taxpayer would create a limited liability company (“LLC”) that would purchase a pair of offsetting “digital” 4 foreign currency options that involved a bet on how a particular foreign currency would perform against the U.S. dollar in 30 days. Prior to the maturity of the options, the taxpayer would contribute the option contracts to an investment partnership. After the options expired, the investment partnership was liquidated and the taxpayer's interest in the partnership was transferred to a Subchapter S corporation (“S corporation”),5 which would sell the assets and realize a deductible tax loss.

C. The Add–On Shelter

The Add–On shelter was a tax strategy marketed as a means to defer indefinitely income tax liability on capital gains, including the capital gains generated in the second year of the CDS strategy. Like COBRA, Add–On involved the purchase of offsetting digital option pairs, followed by a series of transactions designed to generate a tax loss. The offsetting options were structured so that there was a “one-pip” gap 6 between their strike prices, so that, in a theoretical “home run” scenario, a taxpayer could make a multimillion dollar profit. Unlike CDS and COBRA, however, there was no reasonable possibility of earning a profit from Add–On apart from the “home run” scenario, since the Add–On fee structure required payments to E & Y and the entity acting as general partner that exceeded the potential payoff. As a result, Add–On was the sole tax shelter developed by the defendants that was subject to substantive tax evasion charges.7

D. The PICO Shelter

The PICO shelter was a tax deferral and conversion strategy that involved an investment in an S corporation with another shareholder. The taxpayer would purchase 20% of the stock of the S corporation, while another person associated with the Bricolage investment firm (which helped to implement the transaction) would purchase the remaining 80% interest. The S corporation (also known as the Personal Investment Corporation, or “PICO”) would then purchase so-called “straddles,” financial instruments that generated offsetting gains and losses on foreign currencies, interest rates, or commodities. After building up a sufficient inventory of “losing” bets, the PICO would buy out the 80% shareholder. Under a tax regulation, the 80% shareholder would be allocated his share of the gains recognized by the PICO up to the time of redemption, and all the gains and losses recognized thereafter ( i.e., most of the losses) would be allocated to the taxpayer. After contributing additional assets to the PICO, the taxpayer could then take the desired deduction.

E. The Tradehill Shelter

Unlike the other four tax shelters, the Tradehill shelter was marketed only to E & Y partners. After E & Y sold the consulting arm of its business to a French company called Cap Gemini in 2000, each E & Y partner received an allocation of Cap Gemini stock. Eleven E & Y partners participated in Tradehill, which was designed to eliminate the tax due on the income they recognized from the Cap Gemini transaction. Like COBRA and Add–On, Tradehill involved the formation of numerous corporate...

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