United States v. Daugerdas

• Decision Date: 21 September 2016
• Docket Number: August Term, 2015,No. 14–2437–cr,14–2437–cr
• Citation: 837 F.3d 212
• Parties: United States of America, Appellee, v. Paul M. Daugerdas, Defendant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

837 F.3d 212

United States of America, Appellee,

v.Paul M. Daugerdas, Defendant–Appellant.¹

No. 14–2437–cr

August Term, 2015

United States Court of Appeals, Second Circuit.

Argued: October 22, 2015

Decided: September 21, 2016

Stanley J. Okula, Jr. , Assistant United States Attorney (Brian A. Jacobs, Assistant United States Attorney; Nanette L. Davis, Special Assistant United States Attorney, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, for Appellee.

Henry E. Mazurek (Brian D. Linder, on the brief), Clayman & Rosenberg LLP, New York, NY, for, Defendant–Appellant.

Before: Kearse, Walker, and Cabranes, Circuit Judges.

John M. Walker, Jr.

, Circuit Judge:

Defendant Paul M. Daugerdas appeals from a judgment entered in the United States District Court for the Southern District of New York (Pauley, J. ) following a jury trial convicting him of (1) one count of conspiracy to defraud the Internal Revenue Service (“IRS”) in violation of 18 U.S.C. § 371

; see 26 U.S.C. § 7201 and 18 U.S.C. § 1343 ; (2) four counts of client tax evasion in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2 ; (3) one count of IRS obstruction in violation of 26 U.S.C. § 7212(a) ; and (4) one count of mail fraud in violation of 18 U.S.C. §§ 1341 and 1342. He was sentenced principally to 180 months' imprisonment, three years' supervised release, $164,737,500 in forfeiture, and $371,006,397 in restitution. He argues on appeal that (I) the evidence was insufficient to support his convictions; (II) the indictment was constructively amended; (III) the indictment was duplicitous; (IV) the accumulation of errors at trial violated his due process right to a fair trial; (V) the district court's supplemental instruction on the Annual Accounting Rule misled the jury; (VI) his sentence was procedurally and substantively unreasonable; and (VII) the government failed to establish the requisite nexus between his crimes and the property sought in forfeiture. Finding no merit in his arguments, we AFFIRM.

BACKGROUND

The evidence taken in the light most favorable to the government showed the following.

Paul M. Daugerdas was a Certified Public Accountant (“CPA”) and tax attorney at Arthur Andersen through August of 1994; the law firm Altheimer & Gray from the end of 1994 through 1998; and the Chicago office of the law firm Jenkens & Gilchrist (“J & G”) from 1999 through April 2004. Throughout his career, Daugerdas developed, sold, and implemented a variety of tax-reduction strategies for wealthy clients: the so-called Short Sale Shelter, Short Option Shelter, Swaps Shelter, and HOMER Shelter. Besides Daugerdas's employers, two other entities had significant involvement in this undertaking. The accounting firm BDO Seidman (“BDO”) referred its clients to J & G and helped to sell the shelters, and the investment bank Deutsche Bank Alex. Brown (“DB”) assisted J & G in the design of the shelters, held informational meetings with clients, and implemented the transactions that composed the shelters.

I. The Development and Sale of the Tax Shelters

Daugerdas designed and sold the shelters beginning in the early 1990s when he was a partner at Arthur Andersen. Although the transactions underlying the shelters changed over time, the facts surrounding their marketing and implementation varied little. Daugerdas designed the Short Sale Shelter, which created losses through the short sale of U.S. Treasury securities followed by transfers between a partnership, a limited liability company, and an S-corporation. In 1999, because Daugerdas and other J & G attorneys were concerned that pending legislation would render the Short Sale Shelter ineffective, they developed the Short Option Shelter as a substitute. This shelter generated losses through the sale of a digital currency option instead of through the short sale of Treasury securities but was otherwise similar to the Short Sale Shelter.

In August of 2000, the IRS announced that transactions like the Short Sale and Short Option Shelter would no longer provide the favorable tax treatment that J & G sought for its clients. To replace these two shelters, Daugerdas and his colleagues developed the Swaps Shelter, which simply replaced the digital currency option with a swap transaction. At approximately the same time as he was developing the Swaps Shelter, Daugerdas also worked on developing and implementing the HOMER Shelter. The structure of the HOMER Shelter's underlying transactions was more complex than the structures of the other shelters.

As an essential part of the marketing of all the tax shelters, Daugerdas and his colleagues issued “more-likely-than-not” opinion letters to clients who purchased the shelters. Such letters state that “under current U.S. federal income tax law it is more likely than not that” the transactions comprising the shelters are legal and will have the effect sought by the clients. They protect clients from the IRS's imposition of a financial penalty in the event that the IRS does not permit the losses generated by the shelter to reduce the client's tax liability. Paralegals or attorneys who worked for Daugerdas generated these letters and Daugerdas often reviewed and signed them himself. The letters stated that the clients had knowledge of the particular transactions underlying the shelter and that the clients were entering into the shelter for non-tax business reasons. Multiple clients testified that they never made representations of knowledge to Daugerdas or his associates and that, in any event, these representations were false because the clients knew little or nothing about the underlying transactions and entered into the shelters only to reduce their tax liability.

Because Daugerdas and his colleagues designed the transactions with a focus on their tax consequences rather than their profitability, they generally did not generate meaningful returns. For example, the clients who engaged in the Short Sale shelter in 1998 lost approximately $685,000 as part of the shelter. Clients who used the Short Option Shelter had a 4.6% to 37.6% chance of doubling their 1% investment. If they did not double their investment, they lost it in its entirety. Swaps Shelter clients were even less likely to profit from their transaction; of the approximately 60 participants in the trade, only two made a profit on the trade, one of whom made only one dollar. The chance of any client profiting from the HOMER shelter as it was originally designed was negligible—J & G associate attorney John Beery informed Daugerdas that an implementation issue would prevent any of the HOMER clients from realizing a profit from the transaction. Nevertheless, Daugerdas chose to proceed and even issued “more-likely-than-not” opinion letters falsely stating that some of the transactions had a reasonable possibility of producing a profit. Moreover, the already-low profit potential of all the shelters disappeared entirely when the fees charged by J & G, BDO, and DB for the shelters were taken into account.

II. The Backdating of Shelter Transactions

As part of the implementation of the Swaps and Short Option Shelters, Daugerdas either directly or through his team at J & G participated in the correction and backdating of certain transactions that had originally been incorrectly implemented on behalf of (1) Matthew Coleman and Greg Blair; (2) Michael Toporek; and (3) the Aronoff family. A lawyer who worked with Daugerdas testified that he discussed with Daugerdas the backdating of transactions and how they could justify it. Another witness testified that Daugerdas was the head of the team of lawyers with whom she communicated regarding backdated transactions.

In 2001, to obtain ordinary losses, business partners Coleman and Blair consulted with Daugerdas and decided to enter into the Swaps Shelter. In December 2001, DB broker David Parse's assistant, Carrie Yackee, received authorization from J & G to complete the purchase and sale of Cisco shares as part of the shelter. In February 2002, J & G attorneys realized that this transaction had generated capital losses rather than ordinary losses. To correct this error, J & G faxed to Parse an undated letter asking him to reverse the Cisco sale, along with letters dated December 24 and 28, 2001, directing him to implement transactions that would have the effect of generating the ordinary losses requested by Coleman and Blair. Yackee received these faxes, and ensured that DB carried out the instructions they requested. She eventually returned to J & G the account statements containing the backdated transactions. These statements were used in the preparation of Coleman and Blair's 2001 tax returns.

For 2001 and 2002, Toporek sought from the Swaps Shelter $1.3 million in ordinary losses and $700,000 in capital losses. J & G made a mistake in the instructions given to Parse, requesting the reverse: $700,000 in ordinary losses and $1.3 million in capital losses. In March 2002, J & G became aware of this error. After internal discussions regarding how to proceed, Beery asked Parse to implement several transactions in April 2002 but date them to December 28, 2001. After DB implemented the corrective transactions, Daugerdas sent Toporek's tax preparer, Judith Quedenfeld, a letter falsely indicating that the transactions had been completed in 2001 and seeking the return of a prior opinion, which had detailed the original, erroneous transaction. Quedenfeld used documentation of the corrected transaction in the preparation of Toporek's tax returns and, as a result, Toporek was able to claim the losses he had originally sought.

J & G attorneys and DB employees engaged in a similar course of conduct to correct mistakes that were made in the implementation of the Short Option Shelter for the Aronoff family. This incident is not at issue in this appeal.

III. Daugerdas's Personal Use of Tax Shelters

Daugerdas also used tax shelters to reduce his personal tax liability. From 1993 to ...