[Senate Hearing 109-797]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-797

   TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS AND SECRECY--VOL. 1 OF 4

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             AUGUST 1, 2006

                               __________


       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs





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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
             Michael L. Alexander, Minority Staff Director
                  Trina Driessnack Tyrer, Chief Clerk



                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
TOM COBURN, Oklahoma                 DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island      THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

       Raymond V. Shepherd, III, Staff Director and Chief Counsel
                   Leland B. Erickson, Senior Counsel
                     Mark D. Nelson, Senior Counsel
    Elise J. Bean, Staff Director and Chief Counsel to the Minority
    Robert L. Roach, Counsel and Chief Investigator to the Minority
                Laura E. Stuber, Counsel to the Minority
      Zachary I. Schram, Professional Staff Member to the Minority
               Julie Davis, Counsel to Senator Carl Levin
                     Mary D. Robertson, Chief Clerk























                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coleman..............................................     1
    Senator Levin................................................     5
    Senator Collins..............................................    12
    Senator Lautenberg...........................................    13
    Senator Stevens..............................................    15
    Senator Dayton...............................................    15
    Senator Carper...............................................    76

                               WITNESSES
                        Tuesday, August 1, 2006

Hon. Mark Everson, Commissioner, Internal Revenue Service, 
  Washington, DC.................................................    15
Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University 
  of Michigan School of Law, Ann Arbor, Michigan.................    27
Gary M. Brown, Chairman, Corporate Department, Baker, Donelson, 
  Bearman, Caldwell and Berkowitz, Nashville, Tennessee..........    28
Haim Saban, Saban Capital Group, Inc., Los Angeles, California...    37
Robert Wood Johnson IV, New York, New York.......................    38
Michael C. French, Former Wyly Trust Protector, Dallas, Texas....    39
Louis J. Schaufele III, Securities Broker, Dallas, Texas.........    54
Jeffrey Greenstein, Chief Executive Officer, Quellos Group, LLC, 
  Seattle, Washington............................................    55
Michael G. Conn, Private Bank Northwest Region President, Bank of 
  America, San Francisco, California.............................    56
George T. Wendler, Senior Executive Vice President and Chief 
  Credit Officer, HSBC Bank USA, Marlboro, New Jersey............    58
Michael G. Chatzky, Chatzky and Associates, San Diego, California    79
John P. Barrie, Bryan Cave LLP, Washington, DC...................    82
Lewis R. Steinberg, Former Partner, Cravath, Swaine and Moore, 
  LLP, New York, New York........................................    82
Charles W. Blau, Meadows, Owens, Collier, Reed, Cousins and Blau, 
  Dallas, Texas..................................................    83

                     Alphabetical List of Witnesses

Avi-Yonah, Reuven S.:
    Testimony....................................................    27
    Prepared statement...........................................   111
Barrie, John P.:
    Testimony....................................................    82
Blau, Charles W.:
    Testimony....................................................    83
    Prepared statement...........................................   158
Brown, Gary M.:
    Testimony....................................................    28
    Prepared statement...........................................   120
Chatzky, Michael G.:
    Testimony....................................................    79
Conn, Michael G.:
    Testimony....................................................    56
    Prepared statement...........................................   147
Everson, Hon. Mark:
    Testimony....................................................    15
    Prepared statement with an attachment........................    99
French, Michael C.:
    Testimony....................................................    39
    Prepared statement...........................................   140
Greenstein, Jeffrey:
    Testimony....................................................    55
    Prepared statement...........................................   142
Johnson, Robert Wood IV:
    Testimony....................................................    38
Saban, Haim:
    Testimony....................................................    37
    Prepared statement...........................................   139
Schaufele, Louis J. III:
    Testimony....................................................    54
Steinberg, Lewis R.:
    Testimony....................................................    82
Wendler, George T.:
    Testimony....................................................    58
    Prepared statement...........................................   155

                                APPENDIX

Minority and Majority Staff Report entitled ``Tax Haven Abuses: 
  The Enablers, the Tools and Secrecy''..........................   161

                                EXHIBITS

 1. GWyly Offshore Structure, chart prepared by the Permanent 
  Subcommittee on Investigations, Minority Staff.................   622

 2. GPass-Through Loans, chart prepared by the Permanent 
  Subcommittee on Investigations, Minority Staff.................   623

 3. GTransferring Assets Offshore, chart prepared by the 
  Permanent Subcommittee on Investigations, Minority Staff.......   624

 4. GSome Directions By The Wyly Trust Protectors, chart prepared 
  by the Permanent Subcommittee on Investigations, Minority Staff   629

 5. GSome Directions By The Wylys, chart prepared by the 
  Permanent Subcommittee on Investigations, Minority Staff.......   677

 6. GPOINT Strategy, chart prepared by the Permanent Subcommittee 
  on Investigations, Minority Staff..............................   722

 7. GThe Truth Behind POINT, chart prepared by the Permanent 
  Subcommittee on Investigations, Minority Staff.................   723

 8. GBulldog Trust quote, chart prepared by the Permanent 
  Subcommittee on Investigations, Minority Staff.................   724

 9. a.-g. GCharts related to POINT Strategy prepared by the 
  Permanent Subcommittee on Investigations, Minority Staff.......   725

10. GSharyl Robertson/Michael French communications with Lorne 
  House Trust, dated April 1992, re: Pitkin Non-Grantor Trust and 
  Bulldog Non-Grantor Trust (. . . reporting/volume selling 
  requirements of these securities. . . . the securities in no 
  way need to be aggregated with the Settlors of the Trusts . . 
  .).............................................................   732

11. a. GSharyl Robertson (Maverick) Correspondence to Ronald 
  Buchanan (Lorne House Trust), dated October 1992, re: 
  Photomatrix Corporation (Mike French and I would like to 
  recommend to the Trustee to purchase the following security 
  from Sam Wyly: . . . shares of Photomatrix Corporation . . .)..   741

    b. GRonald Buchanan (Lorne House Trust) Correspondence to 
      Michael French, dated October 1992, re: Photomatrix 
      Corporation................................................   743

12. GCharles Lubar (Morgan, Lewis & Bockius) Memorandum to 
  Michael French, dated February 1994, re: Tax Consequences of 
  Grantor Trust..................................................   744

13. GRonald Buchanan (Lorne House Trust) Fax to Michael French 
  (Maverick), dated March 1995, re: The Scottish Annuity Company 
  (Cayman) Ltd...................................................   749

14. GMichael French (Maverick) Fax to Shaun Cairns (Wychwood 
  Trust Limited), dated October 1995, re: The Red Mountain Trust 
  and The Lafourche Trust........................................   751

15. GShaun Cairns (Wychwood Trust Limited) Fax to Michael French 
  (Maverick Capital), dated October 1995, re: Lafourche and Red 
  Mountain (We have made additional changes to the 4th Schedule 
  of Lafourche. . . . The genders were a bit mixed up. Could you 
  please let me have your views before I have them signed up and 
  dated. (Back dated).)..........................................   763

16. GShari Robertson (Maverick) Fax to David Bester (Trident 
  Trust), dated August 1997, re: LaFourche Trust (Sam Wyly has 
  executed a Letter of Wishes on behalf of LaFourche Trust.).....   764

17. a. GRonald Buchanan (Lorne House Trust) Fax to Michael French 
  (Maverick), dated March 1995, re: Bulldog & Plaquemines Trusts 
  (Since the purpose of the exercise, as I understand it, is to 
  divide the ownership of Sterling Software we need to split 
  ownership of the underlying companies which own SS between the 
  two trusts.)...................................................   765

    b. GBarbara Rhodes (Lorne House Trust Limited) Fax to Michael 
      French (Maverick), dated March 1995, re: Sterling Software 
      (We intend to transfer East Carroll Limited and East Baton 
      Rouge Limited from Bulldog to Plaquemines, this would mean 
      that Plaquemines would hold 350,000 shares and Bulldog 
      would hold 644,725 shares of Sterling Software.)...........   766

    c. GRB [Ronald Buchanan] Memorandum to AJB, JKB, Shaun 
      Cairns, RJC, FKVC, DJ, JEP, BAR, dated August 1995, re: 
      Plaquemines, Delhi, Assumption & Pueblo Trusts (Wychwood 
      must not be trustee of two sets of trusts which are buying 
      options simultaneously since the amount involved would 
      trigger a reporting requirement.)..........................   767

    d. GRonald Buchanan (Lorne House Trust) Correspondence to 
      A.J. Buchanan (The Wylys, who are officers of and 
      shareholders in SS, have been advised that, in consequence, 
      there is no reporting requirement under SEC regulations, . 
      . .).......................................................   768

18. GMichael French (Maverick) Fax to Ronald Buchanan (Lorne 
  House Trust), dated July 1995, re: Wychwood (Please dispose of 
  this fax after reading, as there will be ample documentation as 
  needed. . . . Wychwood would, in either case, be limited to 
  approximately 600,000 to 700,000 calls, in order to stay under 
  5% of the outstanding shares and avoid SEC reporting.).........   769

19. GShari Robertson Memorandum to Sam, Charles, Evan & Donnie, 
  dated November 1997, re: Compensation and year-end bonus 
  reviews........................................................   770

20. GMichelle Boucher (Irish Trust Group) emails, dated August 
  2001, re: URGENT email for Sam, we need a quick reply on this--
  thanks! (. . . foreign trust system:)..........................   771

21. a. GLouis Schaufele email, dated February 2002, re: accts. 
  (Should the offshore accounts come here they would come as 
  independent new entities, which I would work to maintain.).....   777

    b. GLouis Schaufele email, dated February 2002, re: changes 
      (I wanted to let you know that our entire team has left 
      Lehman Brothers and joined Banc of America Securities.)....   778

    c. GKeeley Hennington/Michelle Boucher emails, dated February 
      2002, re: Lehmans (Lou's move to BofA was final last week. 
      Sam & Charles have consented to moving all their stuff with 
      him.)......................................................   779

    d. GLouis Schaufele email, dated March 2002, re: IOM (I am 
      very aware of the know your customer rule and I know these 
      customers very well . . .).................................   781

    e. GZachary Pinard (Fidelity Investments) email, dated 
      January 2004, re: URGENT REQUEST FOR INFORMATION FOR: 
      [Acct. Redacted by Subcommittee] Devotion LTD--Bank of 
      America Correspondent (Who is the beneficial owner of this 
      account?)..................................................   782

    f. GMichele Crittenden/Margo Hursh emails, dated January 
      2004, re: URGENT REQUEST FOR INFORMATION FOR: [Acct. 
      Redacted by Subcommittee] Devotion LTD--Bank of America 
      Correspondent (Devotion Ltd. is an offshore corporation 
      (Incorporated in the Isle of Man), which serves as an 
      investment entity. The beneficial owner of the entity is an 
      offshore grantor trust . . . the beneficiaries of which are 
      U.S. individuals.).........................................   783

    g. GMargo Hursh/Denise Wollard emails, dated February 2004, 
      re: Account Inquiry--Various (My concern is that I do not 
      believe that this company is reporting the ownership of the 
      shares adequately.)........................................   785

    h. GBarry Harris/Louis Schaufele emails, dated March 2004, 
      re: need some offshore help (Is it sufficient to say that 
      the beneficiaries of the trust are members of the Charles 
      Wyly family and their immediate children and grandchildren 
      subject to the discretion of the trustee?).................   789

    i. GMichelle Boucher/Michele Crittenden emails, dated April 
      2004, re: bofa (Last week you mentioned that an acceptable 
      financial institution for purposes of providing 
      certification that BofA/NFS requires would be a US 
      regulated insurance company. Please confirm back to me that 
      Scottish Re Group Limited would be an acceptable entity.)..   791

    j. GLouis Schaufele email, dated April 2004, re: regular 
      (First let me say I am sorry for all of this run around on 
      the offshores.)............................................   792

    k. GLori Bensing email, dated April 2004, re: Michaels 
      Account (Here is where we are with the Michaels accounts. I 
      understand that Michele Boucher has agreed to give Bank of 
      America the beneficial ownership information, . . .).......   793

     l. GLouis Schaufele email, dated April 2004, re: same old 
      subject (do we need to set up a call with Phil, myself and 
      charles pulman?)...........................................   794

    m. GLouis Schaufele emails, dated May 2004, re: AML Issues 
      (What if we got a list of the beneficiaries that was 
      somewhat vague: . . .).....................................   795

    n. GLouis Schaufele email, dated May 2004, (I did talk to 
      David about giving a letter that stated names of 
      beneficiaries but did not tie the beneficiaries to a 
      specific acct.)............................................   796

    o. GLouis Schaufele email, dated May 2004, re: help (Also can 
      you get Meadows Owens . . .)...............................   797

    p. GDaniel Robey/Louis Schaufele emails, dated May 2004, re: 
      Isle of Man (IOM) (I am being told that because of the 
      Patriot Act we need to know whom the actual beneficiaries 
      are.)......................................................   798

    q. GLouis Schaufele email, dated May 2004, re: IOM (Set forth 
      below is the relevant text of Section 312 of Patriot Act.).   800

    r. GTimothy Maloney/Barry Harris emails, dated June 2004, re: 
      Wileys [sic]--Attorney/client Privileged (Participate in 
      the joint retention by all Wiley [sic] trust beneficiaries 
      . . . of an outside law firm . . . to perform the AML and 
      Patriot checks that BAI and NFS require.)..................   803

    s. GBarry Harris emails, dated July 2004, re: A/C 
      Privileged--Wyley [sic] Offshore Trust Accounts--Update (We 
      developed the following proposal: NFS will prepare written 
      questions which they need answered to continue to support 
      the accounts; BAI will add any questions which it believes 
      need to be answered.)......................................   807

    t. GLouis Schaufele/Lori Bensing/Margo Hursh emails, dated 
      July 2004, re: AML Inquiry--Account(s): Offshore Trident 
      Trusts (Please respond to the following questions regarding 
      the accounts listed below. . . . Who are the beneficial 
      owners, clients, principals, etc. of each account?)........   810

    u. GSteve Ganis (Anti-Money Laundering Officer, National 
      Financial Services LLC) Memorandum to Barry Harris (Chief 
      Counsel, Bank of America Investment Services, Inc.), dated 
      September 2004, re: Requests Concerning Certain Bank of 
      America Accounts (. . . here follows a list of questions to 
      be answered and information to be provided in order to 
      understand certain activity patterns in certain accounts 
      introduced to National Financial Services LLC (``NFS'') by 
      Bank of America Investment Securities, Inc.)...............   812

    v. GJennifer Moran emails, dated October 2004, re: new copy 
      for Barry Harris--MIK questions for BofA.doc (While I 
      understand the politics we feel that this is your customer 
      and that the list of questions should come from you as 
      broker dealer).............................................   817

    w. GPhil White/Louis Schaufele/Timothy Maloney emails, dated 
      October 2004, re: Michaels Stores (It seems that 144 and 
      affiliation is a question along with AML issues.)..........   819

    x. GTimothy Maloney (Bank of America) Correspondence to 
      Francis Webb (Trident Trust), dated October 22, 2004, (. . 
      . it is necessary for Bank of America to obtain the 
      information for each entity, natural person or trust that 
      directly or indirectly owns, controls or holds a beneficial 
      ownership interest in whole or in part in any of the 
      accounts listed below.)....................................   824

    y. GFrancis Webb (Trident Trust) Correspondence to Timothy 
      Maloney (Bank of America), dated October 2004, (I confirm 
      receipt of your letter dated 22 October 2004. . . . please 
      clarify the following items: Why the information is being 
      requested.)................................................   826

    z. GMichelle Boucher/Timothy Maloney Correspondence, dated 
      November 2004, (Given my vast experience in these matters I 
      would like to say that the manner in which your institution 
      has dealt with the due diligence collection process on the 
      above accounts appalls and enrages me.)....................   827

22. GSterling Software Trades, Date 12-Dec-95....................   831

23. GSSW Swap Execution Report, Sarnia, Greenbriar, Quayle, dated 
  October 13, 1999...............................................   832

24. GShari Robertson Memorandum to Lou Schaufele, dated July 
  1999, (. . . option exercise for some of the offshore entities 
  . . .).........................................................   833

25. GKeeley Hennington emails, dated October 2001, re: Urgent--
  Charles, Quayle (Hey, Charles called and wanted to sell 100,000 
  shares of MIKE at $42.00 or better today and asked me to call 
  Lehman. They were okay with my verbal and just need you to 
  follow up and get some instruction from the trustees also.)....   834

26. GRodney Owens email, dated February 2001, re: Sam Wyly Family 
  Foreign Trust Planning.........................................   837

27. a. GRodney Owens (Meadows, Owens, Collier, Reed, Cousins & 
  Blau, L.L.P.) Memorandum, dated December 1998, re: Plaquemines, 
  Bulldog and Pitkin Trust Matters (Plaquemines Reappointment 
  Matters).......................................................   865

    b. GDavid Harris/Rodney Owens email, dated December 1998, re: 
      Plaquemines etc. (Local counsel's preference is for 
      beneficiary consent to be obtained to the Bulldog and 
      Pitkin applications; . . .)................................   867

    c. GDavis Harris (IFG International Limited)/Meadows Owens 
      Fax, dated March 2004, (I attach a copy of the proposed 
      Deed of Declaration unwinding Bulldog II, . . .)...........   868

28. GMichelle Boucher (The Irish Trust Company (Cayman) Ltd) Fax 
  to Charles Wyly, dated October 2000, (. . . we have a 
  substantive meeting set up in Cayman for November 28th, which 
  we hope will move us well forward to establishing the Protector 
  Company.). Attached is List of Candidates for Protector or 
  Directors of the Protector Company:)...........................   869

29. a. GMichelle Boucher/Shari Robertson email, dated November 
  2000, re: split dollar life insurance in foreign trusts (Just a 
  quick outline of how it works, and how Rodney thinks we can use 
  it to effectively freeze growth in the 1992's).................   871

    b. GMichelle Boucher email, dated November 2000, re: sub-
      funds (At this point, we are looking at allocating 
      approximately 20% of the major trust assets to sub funds, . 
      . .).......................................................   872

    c. GMichelle Boucher/Evan Wyly email, dated December 2000, 
      re: subtrust (But, this will largely be a US tax issue.)...   874

    d. GMichelle Boucher Fax to Sam Wyly, dated May 2001, (I've 
      attached a schedule of allocations for the 6 sub-funds to 
      the offshore trusts.)......................................   875

    e. GMichelle Boucher email, dated May 2001, re: update on 
      sub-fund llc creation (Also, Keeley and I are also looking 
      at a structure that Rodney Owens outlined to us, . . . It 
      is a ``frozen LLC,'' . . .)................................   878

30. GBilling Breakdown related to Irish Trust....................   879

31. GMichelle Boucher/Louis Schaufele email, dated April 2004, 
  re: Charles Pulman.............................................   880

32. GSBC Communications Inc. Correspondence to Sam, Charles and 
  Evan Wyly, dated January 2001, re: SBC/Sterling Commerce (. . . 
  SBC is preparing to issue a Form 1099 to you/your trust showing 
  taxable income . . .)..........................................   882

33. a. GKeeley Hennington/Michelle Boucher email, dated January 
  2001, re: 1099's...............................................   885

    b. GKelley Hennington/Rodney Owens email, dated January 2001, 
      re: Option info (The option income SBC is concerned with 
      are those that were sold in 96 in exchange for private 
      annuities.)................................................   886

    c. GKeeley Hennington/Michelle Boucher email, dated January 
      2001, re: 1099 (Shari suggests that we ask Rodney to word 
      the letter to SBC in an opinion form, . . .)...............   887

    d. GKeeley Hennington/Michelle Boucher email, dated January 
      2001, (I am faxing Rodney's 1099 memo to you now.).........   888

    e. GCorrespondence of Rodney J. Owens (Meadows, Owens, 
      Collier, Reed, Cousins & Blau, L.L.P.), dated January 26, 
      2001, re: Purchase of Sterling Commerce Option from Elysium 
      Limited. (Elysium Limited is a foreign corporation 
      organized and residing in the Isle of Man. Accordingly, it 
      is not appropriate for SBC to file a Form 1099, . . .).....   889

    f. GCorrespondence of Rodney J. Owens (Meadows, Owens, 
      Collier, Reed, Cousins & Blau, L.L.P.), dated January 26, 
      2001, re: Purchase of Sterling Commerce Option from Moberly 
      Limited. (Moberly Limited is a foreign corporation 
      organized and residing in the Isle of Man. Accordingly, it 
      is not appropriate for SBC to file a Form 1099, . . .).....   891

    g. GCorrespondence of Rodney J. Owens (Meadows, Owens, 
      Collier, Reed, Cousins & Blau, L.L.P.), dated January 26, 
      2001, re: Purchase of Sterling Commerce Option from 
      Atlantis Limited. (Atlantis Limited is a foreign 
      corporation organized and residing in the Isle of Man. 
      Accordingly, it is not appropriate for SBC to file a Form 
      1099, . . .)...............................................   893

    h. GMichelle Boucher/Keeley Hennington email, dated June 
      2002, re: CA Audit (After discussions with Rodney I am 
      planning to make the following response to the guy at CA 
      that is working on the audit.).............................   895

34. a. GLegal Opinion prepared by David Tedder, Pratter, Tedder & 
  Graves, dated February and April 1992, re: Sterling Software 
  Warrants and Michaels Stores Options to a Nevada Corporation 
  for a Private Annuity..........................................   896

    b. GMichael Chatzky Correspondence to David Tedder/Michael 
      French, dated April 1992, attaching April 1992 Tax Opinion 
      prepared by Pratter, Tedder & Graves.......................   922

    c. GShari Robertson Memorandum to David Tedder, Mike Chatzky 
      and Bob Bere, dated February 1993, re: Tax Compliance 
      (Lorne House needs advice on the tax compliance issues that 
      must be met.)..............................................   939

    d. GLegal Opinion prepared by Chatzky and Associates, dated 
      February 1996, re: The Tallulah International Trust........   941

    e. GLegal Opinion prepared by Chatzky and Associates, dated 
      March 1996, re: The Woody International Trust..............   961

35. a. GCharles Wyly Memorandum to Michelle Boucher (Irish Trust 
  Group), dated March 2000, re: SSW Options (Sam and I recommend 
  to our protectors that all the Sterling Software options be 
  converted to CA options.)......................................   983

    b. GEvan Wyly/Sam Wyly/Michelle Boucher emails, dated April 
      2000, re: Michaels Shares (Sam recommends that the trustees 
      exercise and sell the remainder of the Michaels options 
      that expire this summer. Sell at $40 or better.)...........   984

    c. GKeeley Hennington/Michelle Boucher (Irish Trust Group) 
      emails, dated February 2001, (I was talking to Charles 
      yesterday and he was kind of thinking out loud on some 
      stuff. He was talking about use of off-shore cash . . .)...   985

    d. GEvan Wyly/Michelle Boucher (Irish Trust Group) emails, 
      dated November 2000, re: intelecon (Remember that it is 
      critical from a U.S. tax standpoint that there is no 
      appearance that the Wyly's are in control of the trusts or 
      the protectors.)...........................................   986

36. GMichelle Boucher (Irish Trust Group)/CWyly/Shari Robertson 
  email, dated March 2000, re: First Dallas International update.   988

37. GEvan Wyly/Michelle Boucher (Irish Trust Group) emails, dated 
  September 2000, re: michaels sales offshore (I spoke to Sam 
  today, he wants us to proceed with selling 200,000 Michaels 
  Stores shares from offshore to aid in raising funds for Ranger/
  Precept projects.).............................................   989

38. GDocument entitled, Bulldog Trust, dated June 2003, prepared 
  by IFG International Limited, Douglas, Isle of Man.............   990

39. GShari [Robertson] Memorandum, dated May 2000, re: Recap of 
  the Isle of Man Trip...........................................   992

40. G2001 foreign and domestic investments in Maverick, Ranger 
  and Precept....................................................   996

41. GTwo Mile Ranch Management Trust and Rosemary's Circle R 
  Ranch Management Trust, Priced at 12/31/01 and 12/31/04........   999

42. GKeeley Hennington/Michelle Boucher emails, dated June 2001, 
  re: allocations to LLCs........................................  1001

43. a. GRichard D. Eiseman Jewels Invoice, dated November 2000, 
  re: $667,000 Diamond Ring and $759,000 Diamond Necklace (The 
  invoices should be sent to: Soulieana, Ltd., Douglas, Isle of 
  Man.)..........................................................  1005

    b. GAmy Browing Fax, dated February 1997, re: Soulieana 
      Limited purchases (The Wyly name should not be noted on the 
      invoices.).................................................  1010

44. GDocuments regarding July 1996 acquisition of ``Noon Day 
  Rest'' painting................................................  1011

45. GEngagement letters--Haim Saban--2001:

    a. GQuellos Financial Advisors, LLC;.........................  1027

    b. GEuram Bank;..............................................  1038

    c. GQuellos Custom Strategies LLC............................  1043

46. GEngagement letter--Robert W. Johnson, IV and Quadra 
  Financial Group, L.P., 2000....................................  1052

47. a. GTitanium Trading Partners LLC, Final Consolidated 
  Profitability--11/13/01........................................  1058

    b. GTitanium Trading Partners LLC, Portfolio as of 9/24/01...  1060

    c. GTitanium Trading Partners LLC, Collar Analysis...........  1065

48. a. GRobert W. Johnson, IV, Reka Limited Purchase Analysis....  1067

    b. GBrian Hanson (Quellos) email, dated March 2002, re: Reka.  1069

    c. GPOINT--One Year Duration (Warrant Outstanding), One Year 
      Profitability Analysis: Projected P&L......................  1071

    d. GRobert W. Johnson, IV--Reka Limited, Summary as of June 
      5, 2000....................................................  1074

49. a. GJoel Latman (The Johnson Company, Inc.) Fax to Andy 
  Robbins (Quadra), dated April 2000, (The amount of Loss that we 
  use should be $145.)...........................................  1075

    b. GJeff Greenstein/Chuck Wilk emails, dated December 1999, 
      re: JETS (. . . until the losses are generated.)...........  1076

    c. GLarry Scheinfeld/Chuck Wilk emails, dated August 2000, 
      re: POINT (. . . we may be able to generate 2000 loss.)....  1077

    d. GJeff Greenstein email, dated May 2000, re: POINT (We will 
      try to add more positions to generate losses . . .)........  1078

50. a. GJeff Greenstein (Quadra)/Joel Latman (Johnson Company) 
  Fax, dated February 2000, (. . . upfront cash requirements to 
  be 6-7% of the anticipated losses . . .).......................  1080

    b. GJohn Baier email, dated April 2000, re: Woody docs (The 
      total PV fee of 2.7mm is 2% of the 135mm notional amount of 
      the trade.)................................................  1081

    c. GChuck Wilk/Rajan Puri/Christopher Hirata emails, dated 
      June 2000, re: Triskelion Wires (We understand you were 
      extracting fees representing 1% of the initial losses 
      generated . . .)...........................................  1082

    d. GLarry Scheinfeld email, dated November 2000, re: POINT 
      PRICING (. . . fees (they are based on the loss amount).)..  1084

51. a.-k. GStock purchase and lending agreements I60  1085-1128..

52. a. GJohn Staddon/Chuck Wilk emails, dated April 2000, re: 
  Point (. . . there is a commercial risk . . . that the client 
  turns round under a certain scenario and claims to have been 
  misled as to the nature of the share trading between the two 
  IoM companies.)................................................  1129

    b. GJohn Staddon/Jeff Greenstein/Chuck Wilk emails, dated 
      April 2000, re: [Name redacted by the Subcommittee] trade 
      (. . . I also need confirmation from you that [name 
      redacted by the Subcommittee] and/or his advisers is aware 
      of the book entry features of the structure.)..............  1131

53. a. GWoodglen I LLC Correspondence to Jeff Greenstein 
  (Quellos), dated October 2004, re: Reka Limited (We understand 
  from our representatives, that Quellos has indicated that no 
  actual shares may have been transferred.)......................  1133

    b. GCharles Wilk (Quellos) Correspondence to Woodglen I, LLC, 
      dated November 2004, (What was stated was that we believe 
      from the documents we have reviewed that the referenced 
      transactions were OTC contracts, and, therefore, there were 
      probably no exchange traded transactions of the shares.)...  1135

    c. GCharles Wilk (Quellos) Correspondence to Woodglen I, LLC, 
      dated November 2004, re: Reka Limited (. . . it appears 
      that the transactions involved over-the-counter (``OTC'') 
      sales of rights to an underlying portfolio of stock (the 
      ``Portfolio'') by Jackstones to Barnville.)................  1136

54. GCorrespondence between John Staddon (European American 
  Investment Group) and the Senate Permanent Subcommittee on 
  Investigations, dated July 2006, re: Barnville and Jackstones 
  (. . . the portfolio of securities traded by and between 
  Barnville and Jackstones was of a purely contractual book-entry 
  nature. . . . no physical transfer of shares were made. No 
  transactions took place over any exchange and no cash transfers 
  passed between bank accounts of the two companies.)............  1138

55. GJohn Staddon email, dated July 2000, re: Promissory note (I 
  had assumed that we would be having a circular funding pattern 
  . . . such that no cash would need to actually pass i.e. purely 
  book entry.)...................................................  1152

56. a. GChuck Wilk/Jeff Greenstein email, dated August 1999, re: 
  POINT STRATEGY.................................................  1153

    b. GRajan Puri (Euram)/Chuck Wilk (Quellos) emails, dated 
      April 2000, re: Further Revisions to POINT (. . . given the 
      ``virtual'' nature of the warrant issue . . .).............  1156

    c. GReka Limited, US Call Warrants due 2005, Subscription 
      Agreement, dated May 2000..................................  1158

    d. GEA Investment Services Limited Correspondence to Reka 
      Limited, dated June 2000, (. . . 1000 covered call warrants 
      issued by Reka Limited on 5 May 2000 . . .)................  1166

    e. GEA Investment Services Limited Correspondence to Titanium 
      Trading Partners LLC, dated November 2001, (. . . 1000 
      covered call warrants issued by Titanium Trading Partners 
      LLC on September 11, 2001 . . .)...........................  1168

57. a. GAnnual Return of Barnville Limited.......................  1171

    b. GFinancial Supervision Commission, Isle of Man, Barnville 
      Limited....................................................  1175

    c. GAnnual Return of Jackstones Limited......................  1176

    d. GFinancial Supervision Commission, Isle of Man, Jackstones 
      Limited....................................................  1179

58. GChuck Wilk emails, dated August 2001, re: Ownership 
  (Barnville is owned jointly by Claycroft Limited and Dalecroft 
  Limited, both Isle of Man companies. . . . I am not at all keen 
  on revealing the ultimate beneficial owner.)...................  1180

59. a. GHSBC Account Application for Barnville Limited...........  1181

    b. GMary Pan/Russell Schreiber (HSBC) email, dated August 
      2001, re: Barnville and Jackstone..........................  1183

    c. GHSBC Know Your Customer Information for Barnville Limited  1184

    d. GHSBC INDIVIDUAL INFORMATION--KNOW YOUR CLIENT for 
      Barnville Limited..........................................  1186

60. a. GHSBC Memorandum, dated August 2001, re: NON-CIB GROUP: 
  HAIM SABAN FAMILY GROUP........................................  1187

    b. GDocument regarding Quellos/HSBC transaction (The deferral 
      of $700-750 million for 5 to 10 years is the economic 
      benefit that provides Quellos with its fee.)...............  1190

    c. GRussell Schreiber/Mary Pan email, dated September 2001, 
      re: Silverlight Enterprises, L.P...........................  1192

61. a. GChuck Wilk/John Barrie emails, dated August 2001, re: 
  timing issues Revised Checklist (. . . from a tax standpoint, I 
  think Silverlight ought to hold newco with Titanium at least a 
  day or two to establish factually its ownership interest 
  (important for basis shift) to better avoid argument that 
  ownership is transitory and could be ignored on a step 
  transaction argument . . .)....................................  1193

    b. GChuck Wilk/John Barrie emails, dated August 2001, re: 
      Purchase Agreement.........................................  1195

    c. GJohn Barrie email, dated August 2001, re: Titanium 
      Trading Partners LLC (Returns are calculated based on the 
      sum of the costs of the collar, financing, loan fee and 
      structuring fees as a percentage of the net gain/(loss) for 
      each profitability scenario.)..............................  1196

    d. GLana Phillips email, dated September 2001, re: Revised 
      Consents (I'd rather not indicate the sequence of these 
      documents in their titles because the creation and 
      ownership of the LLC by Barnville and EAICS must be 
      completely independent. . . . Showing a clear sequence 
      seems to betray that independence.)........................  1197

    e. GElizabeth Smith/Chuck Wilk email, dated June 2002, (. . . 
      would it be reasonable to assume . . . that the opinion 
      should be done by the end of June?)........................  1198

62. a. GChuck Wilk email, dated December 1999, re: POINT trade (I 
  had a meeting this week with Lew Steinberg of Cravath Swaine & 
  Moore to finalize the draft of the opinion and to review the 
  economics of the trade.).......................................  1199

    b. GChristopher Hirata email, dated April 2000, re: POINT 
      (During our phone conference with Lew Steinberg, we 
      concluded that on 12/31/00 we would have a portion of the 
      loan balance outstanding, . . .)...........................  1200

    c. GJeff Greenstein/Andrew Robbins emails, dated September 
      2000, (Do we need to speak with Cravath to be certain as to 
      where to strike the call in order to provide enough 
      economics or do we already know this?).....................  1201

    d. GLegal Opinion prepared by Cravath, Swaine & Moore, dated 
      August 2000, re: POINT Strategy............................  1202

63. a. GLegal Opinion prepared by Bryan Cave LLP, dated October 
  2002, re: POINT Strategy.......................................  1226

    b. GRepresentation Certificate of Haim Saban for Legal 
      Opinion prepared by Bryan Cave LLP.........................  1287

    c. GRepresentation Certificate of Chuck Wilk for Legal 
      Opinion prepared by Bryan Cave LLP.........................  1292

    d. GRepresentation Certificate of Titanium Acquisition 
      Corporation for Legal Opinion prepared by Bryan Cave LLP...  1302

    e. GRepresentation Certificate of Titanium Trading Partners 
      LLC for Legal Opinion prepared by Bryan Cave LLP...........  1308

64. GCorrespondence from William A. Brewer III, Bickel & Brewer, 
  legal counsel to Charles and Sam Wyly, to the Permanent 
  Subcommittee on Investigations, dated July 2006, re: assertion 
  of rights under the Fifth Amendment............................  1310

65. GResponses to supplemental questions for the record submitted 
  to:

    a. GThe Honorable Mark Everson, Commissioner, Internal 
      Revenue Service;...........................................  1312

    b. GMichael Conn, Private Bank Northwest Region President, 
      Bank of America;...........................................  1317

    c. GGeorge T. Wendler, Senior Executive Vice President and 
      Chief Credit Officer, HSBC Bank USA, N.S.;.................  1320

    d. GJeffrey Greenstein, Chief Executive Officer, Quellos 
      Group, LLC;................................................  1329

    e. GLouis J. Schaufele III;..................................  1679

    f. GMichael Chatzky, Chatzky & Associates....................  1700

                                VOLUME 2

66. GMaterials relating to Footnotes and Additional Documents 
  cited in Tax Haven Abuses: The Enablers, The Tools, And 
  Offshore Secrecy, a Report prepared by the Minority and 
  Majority Staff of the Permanent Subcommittee on Investigations 
  in conjunction with the Subcommittee hearing held August 1, 
  2006:..........................................................  1743

[Note: Footnotes not listed are explanative, reference 
  Subcommittee interviews for which records are not available to 
  the public, or reference a widely available public document.]

  [*] Retained in the files of the Subcommittee.

Footnote No. 29, See Attachment..................................  1743

Footnote No. 33, See Attachment..................................  1749

Footnote No. 34, See Attachment..................................  1752

Footnote No. 38, See Attachment..................................  1753

Footnote No. 39, See Footnote No. 38 (above).....................  1753

Footnote No. 44, See Attachments (3).............................  1776

Footnote No. 48, See Attachment..................................  1779

Footnote No. 50, See Attachment..................................  1780

Footnote No. 51, See Attachment..................................  1781

Footnote No. 53, See Attachment..................................  1782

Footnote No. 54, See Attachment..................................  1783

Footnote No. 55, See Footnote No. 54 (above).....................  1783

Footnote No. 56, See Attachment..................................  1804

Footnote No. 61, See Attachment..................................  1832

Footnote No. 63, See Footnote No. 48 (above).....................  1779

Footnote No. 64, See Attachment..................................  1834

Footnote No. 65, See Footnote No. 64 (above).....................  1834

Footnote No. 70, See Attachment..................................  1839

Footnote No. 71, See Attachment..................................  1841

Footnote No. 77, See Attachment..................................  1843

Footnote No. 78, See Attachment..................................  1846

Footnote No. 79, See Attachment..................................  1847

Footnote No. 81, See Attachment..................................  1851

Footnote No. 82, See Attachment..................................  1852

Footnote No. 83, See Attachment..................................  1854

Footnote No. 84, See Attachment..................................  1862

Footnote No. 86, See Footnote No. 83 (above).....................  1854

Footnote No. 91, See Attachment..................................  1869

Footnote Nos. 92-94, See Footnote No. 91 (above).................  1869

Footnote No. 96, See Attachment..................................  1907

Footnote No. 97, See Attachment..................................  1908

Footnote No. 98, See Attachment..................................  1909

Footnote No. 113, See Attachment.................................  1910

Footnote No. 115, See Attachment.................................  1911

Footnote No. 116, See Attachment.................................  1912

Footnote No. 118, See Attachments (2)............................  1918

Footnote No. 119, See Attachments (2)............................  1920

Footnote No. 120, See Attachment.................................  1930

Footnote No. 121, See Attachment.................................  1932

Footnote No. 122, See Attachment.................................  1933

Footnote No. 123, See Footnote No. 122 (above)...................  1933

Footnote No. 124, See Attachment.................................  1945

Footnote No. 126, See Attachment.................................  1951

Footnote No. 129, See Attachments (2)............................  1952

Footnote No. 130, See Footnote No. 129 (above)...................  1952

Footnote No. 131 and 134, See Attachment.........................  1985

Footnote Nos. 135-137 and 139, See Footnote No. 129 (above)......  1952

Footnote No. 140, See Footnote No. 131 (above)...................  1985

Footnote No. 142, See Footnote No. 129 (above)...................  1952

Footnote No. 143, See Attachment and Footnote No. 129 (above) 
  I601993........................................................

Footnote Nos. 144, 146-147, and 149, See Footnote No. 143 (above) 
  I601993........................................................

Footnote Nos. 155-158, See Footnote No. 129 (above)..............  1952

Footnote Nos. 159-163, See Footnote No. 131 (above)..............  1985

Footnote No. 164, See Footnote No. 129 (above)...................  1952

Footnote No. 165, See Attachment.................................  2006

Footnote No. 174, See Attachment.................................  2025

Footnote Nos. 175-176, See Footnote No. 174 (above)..............  2025

Footnote No. 179, See Attachments (3)............................  2030

Footnote No. 180, See Attachments (2)............................  2039

Footnote No. 181, See Footnote No. 179 (above)...................  2030

Footnote No. 183, See Attachment.................................  2043

Footnote No. 185, See Attachment.................................  2044

Footnote No. 186, See Attachment.................................  2045

Footnote No. 187, See Attachment.................................  2047

Footnote No. 188, See Attachment.................................  2048

Footnote No. 189, See Attachment.................................  2049

Footnote No. 195, See Attachments (2) (1 of 2 is a SEALED 
  EXHIBIT) *.....................................................  2050

Footnote No. 197, See Attachment.................................  2053

Footnote No. 199, See Attachment.................................  2056

Footnote No. 201, See Attachment.................................  2065

Footnote No. 202, See Attachment.................................  2069

Footnote No. 203, See Attachment.................................  2071

Footnote No. 204, See Attachment.................................  2074

Footnote No. 205, See Attachment.................................  2078

Footnote No. 206, See Footnote No. 201 (above)...................  2065

Footnote No. 207, See Attachments (6)............................  2082

Footnote No. 208, See Footnote No. 201 (above)...................  2065

Footnote No. 209, See Attachment.................................  2108

Footnote No. 211, See Attachment.................................  2111

Footnote No. 212, See Attachment.................................  2113

Footnote Nos. 214-215, See Footnote No. 211 (above)..............  2111

Footnote No. 216, See Attachments (3)............................  2115

Footnote No. 218, See Attachments (2)............................  2122

Footnote No. 219, See Attachment.................................  2124

Footnote No. 220, See Attachment.................................  2127

Footnote No. 221, See Attachments (2)............................  2131

Footnote No. 222, See Attachments (2)............................  2133

Footnote No. 223, See Attachments (2)............................  2147

Footnote No. 224, See Attachments (2)............................  2149

Footnote No. 226, See Attachments (2)............................  2157

Footnote No. 227, See Attachments (2)............................  2165

Footnote No. 228, See Footnote No. 226 (above)...................  2157

Footnote No. 229, See Attachments (2)............................  2179

Footnote No. 230, See Footnote No. 229 (above)...................  2179

Footnote No. 234, See Footnote Nos. 212 and 216 (above) I602113, 
  2115...........................................................

Footnote No. 235, See Footnote No. 209 (above)...................  2108

Footnote No. 236, See Footnote No. 195 (above)...................  2050

Footnote No. 237, See Attachment.................................  2186

Footnote No. 238, See Footnote No. 212 (above)...................  2113

Footnote No. 239, See Footnote No. 237 (above)...................  2186

Footnote No. 240, See Attachment.................................  2187

Footnote No. 242, See Attachments (3)............................  2192

Footnote No. 243, See Footnote No. 220 (above)...................  2127

Footnote No. 244, See Attachment.................................  2197

Footnote No. 245, See Attachment.................................  2199

Footnote No. 247, See Attachment.................................  2205

Footnote No. 248, See Attachments (2)............................  2207

Footnote No. 249, See Attachment.................................  2209

Footnote Nos. 250-251, See Footnote No. 249 (above)..............  2209

Footnote No. 252, See Attachment.................................  2210

Footnote No. 253, See Attachment.................................  2211

Footnote No. 254, See Attachment.................................  2212

Footnote No. 258, See Attachment.................................  2213

Footnote No. 260, See Attachment.................................  2214

Footnote No. 261, See Attachment.................................  2215

Footnote No. 262, See Attachment.................................  2216

Footnote No. 263, See Attachment.................................  2217

Footnote No. 264, See Footnote No. 180 (above)...................  2039

Footnote No. 267, See Attachments (3)............................  2218

Footnote No. 268, See Footnote No. 180 (above)...................  2039

Footnote No. 269, See Footnote No. 179 (above)...................  2030

Footnote No. 270, See Attachment.................................  2221

Footnote No. 271, See Attachments (2)............................  2228

Footnote No. 272, See Footnote No. 270 (above)...................  2221

Footnote No. 273, See Attachment.................................  2231

Footnote No. 274, See Attachment.................................  2234

Footnote No. 275, See Attachment.................................  2239

Footnote No. 276, See Attachment.................................  2256

Footnote No. 277, See Attachment.................................  2258

Footnote No. 278, See Attachment.................................  2259

Footnote No. 279, See Attachment.................................  2260

Footnote No. 280, See Attachment.................................  2261

Footnote No. 281, See Attachment.................................  2262

Footnote No. 282, See Attachment.................................  2264

Footnote No. 283, See Attachment.................................  2268

Footnote No. 284, See Attachments (3)............................  2269

Footnote No. 285, See Footnote No. 283 (above)...................  2268

Footnote No. 286, See Attachments (3)............................  2284

Footnote No. 287, See Attachment.................................  2299

Footnote No. 289, See Attachments (3)............................  2304

Footnote No. 291, See Attachments (2)............................  2307

Footnote No. 292, See Attachments (2)............................  2316

Footnote No. 296, See Attachment.................................  2336

Footnote No. 297, See Attachments (2)............................  2337

Footnote No. 298, See Attachment.................................  2341

Footnote No. 299, See Attachment.................................  2343

Footnote Nos. 300-301, See Footnote No. 299 (above)..............  2343

Footnote No. 302, See Attachment.................................  2346

Footnote No. 303, See Attachment.................................  2350

Footnote No. 304, See Attachment.................................  2352

Footnote No. 305, See Attachment.................................  2354

Footnote No. 306, See Attachments (2)............................  2355

Footnote No. 307, See Attachments (2)............................  2357

Footnote No. 309, See Attachment.................................  2359

Footnote No. 310, See Footnote Nos. 284 and 286 (above) I602269, 
  2284...........................................................

Footnote No. 311, See Attachment.................................  2360

Footnote No. 312, See Attachment.................................  2361

Footnote No. 313, See Attachments (3)............................  2362

Footnote No. 315, See Attachments (5)............................  2365

Footnote No. 318, See Attachment.................................  2382

Footnote No. 319, See Footnote No. 318 (above)...................  2382

Footnote No. 320, See Attachment.................................  2383

Footnote No. 321, See Attachment.................................  2384

Footnote No. 322, See Attachment.................................  2385

Footnote No. 323, See Attachment.................................  2386

Footnote No. 324, See Attachment.................................  2387

Footnote No. 325, See Attachment.................................  2388

Footnote No. 326, See Attachments (3)............................  2389

Footnote No. 327, See Attachments (2)............................  2392

Footnote No. 329, See Attachment.................................  2394

Footnote No. 330, See Attachments (2)............................  2400

Footnote No. 331, See Attachment.................................  2404

Footnote No. 332, See Attachment.................................  2409

Footnote No. 333, See Attachment.................................  2411

Footnote No. 335, See Attachment.................................  2413

Footnote No. 336, See Attachment.................................  2414

Footnote No. 337, See Attachments (2)............................  2415

Footnote No. 338, See Attachment.................................  2422

Footnote No. 339, See Attachment.................................  2424

Footnote Nos. 340-341, See Footnote No. 339 (above)..............  2424

Footnote No. 344, See Attachment.................................  2448

Footnote No. 347, See Attachment.................................  2450

Footnote Nos. 348-350, See Footnote No. 347 (above)..............  2450

Footnote No. 351, See Attachment.................................  2451

Footnote No. 352, See Footnote No. 351 (above)...................  2451

Footnote No. 353, See Attachment.................................  2452

Footnote No. 354, See Footnote No. 353 (above)...................  2452

Footnote No. 355, See Attachment.................................  2453

Footnote No. 356, See Attachment.................................  2455

Footnote No. 360, See Attachment.................................  2457

Footnote No. 367, See Footnote No. 195 (above)...................  2050

Footnote No. 368, See Attachment.................................  2458

Footnote No. 369, See Attachment.................................  2460

Footnote No. 370, See Attachment.................................  2461

Footnote No. 371, See Attachment and
  Footnote No. 195 (SEALED EXHIBIT) * (above) I602465............

Footnote No. 372, (SEALED EXHIBIT)...............................   *  

Footnote No. 373, See Attachment.................................  2466

Footnote No. 375, See Attachment.................................  2480

Footnote No. 376, See Attachments (2)............................  2483

Footnote No. 377, See Attachments (2)............................  2487

Footnote No. 378, See Attachment.................................  2489

Footnote No. 379, See Attachment.................................  2491

Footnote No. 380, See Attachment.................................  2504

Footnote No. 381, See Attachment.................................  2511

Footnote No. 382, See Attachment.................................  2532

Footnote No. 383, See Footnote No. 380 (above)...................  2504

Footnote No. 384, See Attachment.................................  2534

Footnote No. 385, See Attachment.................................  2572

Footnote No. 386, See Footnote No. 378 (above)...................  2489

Footnote No. 388, See Footnote No. 385 (above)...................  2572

Footnote No. 389, See Footnote Nos. 270 and 373 (above) I602221, 
  2466...........................................................

Footnote No. 390, See Attachment.................................  2590

Footnote No. 391, See Attachment.................................  2605

Footnote No. 393, See Attachments (2)............................  2616

Footnote No. 394, See Attachment.................................  2618

Footnote No. 396, See Footnote No. 393 (above)...................  2616

Footnote No. 397, See Attachment.................................  2623

Footnote No. 398, See Footnote No. 381 (above)...................  2511

Footnote No. 399, See Attachments (2)............................  2632

Footnote No. 401, See Footnote No. 380 (above)...................  2504

Footnote No. 402, See Attachment.................................  2633

Footnote No. 403, See Attachments (2)............................  2634

Footnote No. 404, See Attachment.................................  2636

Footnote No. 405, See Attachment.................................  2637

Footnote No. 406, See Attachments (2)............................  2638

Footnote No. 407, See Attachment.................................  2641

Footnote No. 408, See Attachment.................................  2643

Footnote No. 409, See Attachments (6) and Footnote No. 380 
  (above) I602644, 2504..........................................

Footnote No. 410, See Footnote No. 380 (above)...................  2504

Footnote No. 412, See Attachment.................................  2650

Footnote No. 413, See Attachment.................................  2651

Footnote No. 414, See Attachment.................................  2652

Footnote No. 415,
  See Attachment and Hearing Exhibit No. 63a (above) I602655, 
  1226...........................................................

Footnote No. 420, See Attachments (2)............................  2742

Footnote No. 421, See Attachment.................................  2744

Footnote Nos. 422-426, 429, 431-432,
  See Footnote No. 415, and Hearing Exhibit No. 63a (above) 
  I602655, 1226..................................................

Footnote No. 435, See Attachment.................................  2745

Footnote No. 438, See Attachment.................................  2751

Footnote No. 439, 441, See Footnote No. 380 (above)..............  2504

Footnote No. 442, See Attachment.................................  2761

Footnote No. 443, See Attachment.................................  2762

Footnote No. 444, See Attachment.................................  2763

Footnote No. 445, See Attachments (2)............................  2772

Footnote No. 446, See Footnote Nos. 380 and 443 (above) I602504, 
  2762...........................................................

Footnote No. 447, See Footnote No. 438 (above)...................  2751

Footnote No. 454, See Attachments (2)............................  2774

Footnote No. 458, See Attachment.................................  2783

Footnote No. 459, See Footnote No. 458 (above)...................  2784

Footnote No. 465, 468, 471, See Attachment.......................  2819

Footnote No. 472, 474, See Attachment............................  2833

Footnote No. 475, 476, 478 (SEALED EXHIBITS).....................   *  

Footnote No. 479, See Attachment.................................  2841

Footnote No. 482, See Attachment.................................  2842

Footnote No. 483, See Attachment.................................  2849

Footnote No. 487, See Attachment.................................  2851

Footnote No. 489, See Footnote No. 454 (above)...................  2774

Footnote Nos. 490-493, See Footnote No. 483 (above)..............  2849

Footnote No. 494, See Attachments (2) (Only reprinting 1 of 2) *.  2852

Footnote No. 495, See Attachment and Footnote No. 454 (above) 
  I602853, 2774..................................................

Footnote No. 496, See Attachment.................................  2856

Footnote No. 497, See Attachment.................................  2862

Footnote No. 498, See Footnote No. 454 (above)...................  2774

Footnote No. 499, See Attachments (3) and Footnote No. 497 
  (above) I602863, 2862..........................................

Footnote No. 501, See Attachment and Footnote No. 454 (above) 
  I602866, 2774..................................................

Footnote No. 503, See Attachments (8) (7 public and 1 SEALED 
  EXHIBIT) *
  and Footnote No. 454 (above) I602867, 2774.....................

Footnote No. 504, See Attachment.................................  2892

Footnote No. 506, See Attachments (2)............................  2894

Footnote No. 507, See Footnote No. 475 (above) (SEALED EXHIBIT)..   *  

Footnote No. 509, See Attachment and Footnote No. 454 (above) 
  I602896, 2774..................................................

Footnote No. 511, (SEALED EXHIBIT)...............................   *  

Footnote No. 512, See Attachments (2)............................  2904

Footnote No. 513, See Attachments (2)............................  2940

Footnote No. 519, See Attachment.................................  2972

Footnote No. 528, See Attachments (3)............................  2974

Footnote No. 530, See Attachments (2)............................  2977

Footnote No. 531, See Attachments (5)............................  2985

Footnote No. 532, See Attachments (2)............................  2997

Footnote No. 534, See Attachments (3)............................  3001

Footnote No. 535, See Attachments (9)............................  3004

Footnote No. 536, See Attachments (2)............................  3022

Footnote No. 537, See Attachments (7)............................  2031

Footnote No. 538, See Attachments (19)...........................  3041

Footnote No. 540, See Attachment.................................  3065

Footnote No. 541, See Attachments (2)............................  3067

Footnote No. 542, See Attachments (19)
  (1 public and 18 SEALED EXHIBITS) * and Footnote No. 536 
  I603070, 3022..................................................

Footnote No. 543, See Attachments (21)
  (2 public and 19 SEALED EHXIBITS) * and Footnote No. 536 
  I603073, 3022..................................................

Footnote No. 544, See Attachments (23)...........................  3075

Footnote No. 545, See Attachments (7)............................  3129

Footnote No. 546, See Attachments (5) and Footnote No. 544 
  (above) I603137, 3075..........................................

Footnote No. 548, See Attachments (2)............................  3130

Footnote No. 549, See Attachment.................................  3160

Footnote No. 550, See Attachment.................................  3162

Footnote No. 551, See Attachment.................................  3165

Footnote No. 552, See Attachment.................................  3166

Footnote No. 554, See Attachment.................................  3167

Footnote No. 555, See Attachment.................................  3169

Footnote No. 556, See Attachment.................................  3170

Footnote No. 557, See Attachment.................................  3171

Footnote No. 558, See Attachment.................................  3172

Footnote No. 559, See Attachment.................................  3173

Footnote No. 560, See Attachments (3)............................  3174

Footnote No. 561, See Attachment.................................  3193

Footnote No. 562, See Attachment.................................  3194

Footnote No. 563, See Attachments (2)............................  3196

Footnote No. 564, See Attachment.................................  3198

Footnote No. 570, See Attachments (2)............................  3199

Footnote No. 571, See Attachment.................................  3201

Footnote No. 572, See Attachment.................................  3204

Footnote No. 573, See Attachment.................................  3206

Footnote No. 574, (2 SEALED EXHIBITS)............................   *  

Footnote No. 582, See Attachment.................................  3207

Footnote No. 584, See Attachment.................................  3208

Footnote No. 586, See Attachments (2)............................  3209

Footnote No. 588, See Attachment.................................  3212

Footnote No. 589, See Attachment.................................  3213

Footnote No. 591, See Attachment.................................  3215

Footnote No. 592, See Attachment.................................  3216

Footnote No. 593, See Attachments (2) (Only reprinting 1 of 2) *.  3217

Footnote No. 595, See Attachments (2)............................  3218

Footnote No. 596, See Attachment.................................  3232

Footnote No. 597, See Attachments (2)............................  3233

Footnote No. 598, See Attachment.................................  3235

Footnote No. 600, See Attachment.................................  3239

Footnote No. 601, See Attachment.................................  3245

Footnote No. 602, See Attachment.................................  3247

Footnote No. 603, See Attachments (2)............................  3250

Footnote No. 604, See Attachment.................................  3253

Footnote No. 607, See Attachments (4)............................  3256

Footnote No. 608, See Attachments (5)............................  3261

Footnote No. 609, See Attachments (2)............................  3266

Footnote No. 611, See Attachment.................................  3268

Footnote No. 614, See Attachment.................................  3273

Additional Document Cited in Text of the Report..................  3274

Footnote No. 619, See Footnote No. 546 I603137...................

Footnote No. 620, See Attachment.................................  3285

Footnote No. 625, See Footnote No. 546 I603137...................

Footnote No. 646, See Attachments (3)............................  3287

Footnote No. 647, See Attachments (2)............................  3294

Footnote No. 650, See Attachments (Only reprinting 1 of 10) *....  3297

Footnote No. 651, See Attachments (5)............................  3308

Footnote No. 652, See Attachments (3)............................  3327

                                VOLUME 3

Footnote No. 653, See Attachments (3)............................  3333

Footnote No. 654, See Attachments (5)............................  3346

Footnote No. 656, See Attachments (5)............................  3359

Footnote No. 659, See Attachments (2)............................  3369

Footnote No. 660, See Attachment.................................  3375

Footnote No. 662, See Attachment.................................  3379

Footnote No. 663, See Attachments (2) (1 is a SEALED EXHIBIT) *..  3476

Footnote No. 664, See Footnote No. 662 (above)...................  3379

Footnote No. 665, See Attachment.................................  3492

Footnote No. 666, See Attachments (2)............................  3498

Footnote No. 667, See Attachments (2)............................  3507

Footnote No. 668.................................................   *  

Footnote No. 669, See Attachment.................................  3527

Footnote No. 670, See Attachments (2)............................  3529

Footnote No. 671, See Attachments (10) * (Only reprinting 1 of 
  10)............................................................  3532

Footnote No. 672, See Attachments (10)...........................  3547

Footnote No. 674, See Attachment.................................  3573

Footnote No. 676, See Attachment.................................  3574

Footnote Nos. 677-682, See Footnote No. 671 (above)..............  3532

Footnote No. 683, See Attachments (4) (Only reprinting 1 of 4) *.  3580

Footnote Nos. 684-686, See Footnote No. 683 (above)..............  3580

Footnote No. 687, See Attachments (2) (Only reprinting 1 of 2) *.  3600

Footnote No. 688, See Attachments (7) (Only reprinting 3 of 7) *.  3635

Footnote No. 689.................................................   *  

Footnote No. 690, See Footnote No. 689 (above)...................   *  

Footnote No. 691, See Attachments (3) and Footnote No. 666 
  (above) I603641, 3498..........................................

Footnote No. 692, See Attachments (6)............................  3649

Footnote Nos. 695-699, See Footnote No. 689 (above)..............   *  

Footnote No. 700, See Attachment.................................  3655

Footnote No. 701, See Footnote No. 700 (above)...................  3655

Footnote No. 702,
  See Attachment and Footnote Nos. 666 and 689 (above) I603656, 
  3498, *........................................................

Footnote No. 705, See Footnote No. 702 (above) I603656...........

Footnote No. 707, See Attachments (2)............................  3666

Footnote No. 709, See Attachment.................................  3671

Footnote No. 710, See Attachment.................................  3675

Footnote No. 711, See Attachments (2)............................  3684

Footnote No. 712, See Attachment and Footnote No. 711 (above) 
  I603686, 3684..................................................

Footnote No. 713, See Footnote No. 711 (above)...................  3684

Footnote No. 714, See Attachment.................................  3687

Footnote No. 715, See Attachments (2)............................  3688

Footnote No. 716, See Attachments (2)............................  3690

Footnote No. 717, See Attachments (2) (Only reprinting 1 of 2) *.  3694

Footnote No. 718, See Attachment.................................  3696

Footnote No. 720, See Attachments (2)............................  3697

Footnote No. 721, See Attachments (2)............................  3703

Footnote No. 723, See Attachments (3)............................  3705

Footnote No. 724, See Attachments (2)............................  3710

Footnote No. 725, See Attachment.................................  3719

Footnote No. 726, See Attachments (2)............................  3720

Footnote No. 727, See Attachment.................................  3722

Footnote No. 728, See Footnote No. 727 (above)...................  3722

Footnote Nos. 729-730, See Footnote No. 724 (above)..............  3710

Footnote No. 731, See Attachment.................................  3727

Footnote No. 732, See Attachment.................................  3729

Footnote No. 733,
  See Attachment and Footnote No. 543 (above) (SEALED EXHIBIT) * 
  I603731, 3073..................................................

Footnote No. 734, See Attachment.................................  3733

Footnote No. 735, See Attachment.................................  3734

Footnote No. 739, See Attachment.................................  3738

Footnote No. 740, See Attachments (2)............................  3740

Footnote No. 741, See Attachment.................................  3743

Footnote No. 749, See Attachment.................................  3744

Footnote No. 750, See Attachments (4)............................  3746

Footnote No. 751, See Attachments (10)...........................  3765

Footnote No. 752, See Attachments (16) and Footnote No. 751 
  (above) I603777, 3765..........................................

Footnote No. 753, See Attachments (5)............................  3803

Footnote No. 754, See Attachments (8)............................  3810

Footnote No. 755, See Attachments (10)...........................  3822

Footnote No. 757, See Attachments (2)............................  3845

Footnote No. 758, See Attachment.................................  3850

Footnote No. 761, See Attachments (5)............................  3851

Footnote No. 762, See Attachment.................................  3861

Footnote No. 763, See Attachment.................................  3862

Footnote No. 764, See Attachment.................................  3864

Footnote No. 765, See Attachment.................................  3865

Footnote No. 766, See Attachment.................................  3866

Footnote No. 767, See Attachments (4)............................  3868

Footnote No. 768, See Attachments (11)...........................  3875

Footnote No. 769, See Attachments (2) and
  Footnote Nos. 763, 766 and 767 (above) I603888, 3862, 3866, 
  3868...........................................................

Footnote No. 770, See Attachment.................................  3890

Footnote No. 772, See Attachment.................................  3900

Footnote No. 773, See Footnote Nos. 762 and 763 (above) I603861, 
  3862...........................................................

Footnote No. 776, See Attachments (3) and
  Footnote Nos. 755 and 768 (above) I603901, 3822, 3875..........

Footnote No. 778, See Attachments (3)............................  3904

Footnote No. 801, See Attachments (2)............................  3908

Footnote No. 806, See Attachment.................................  3928

Footnote No. 807, See Attachment.................................  3939

Footnote No. 808, See Attachment.................................  3945

Footnote No. 810, See Footnote No. 593 (above)...................  3217

Footnote No. 811, See Attachment.................................  3947

Footnote No. 812, See Attachment.................................  3948

Footnote No. 814, See Attachment.................................  3949

Footnote No. 815, See Attachment.................................  3951

Footnote No. 816, See Attachment.................................  3954

Footnote No. 817, See Attachment.................................  3955

Footnote No. 819, See Attachment.................................  3956

Footnote No. 820, See Attachment.................................  3957

Footnote No. 821, See Attachment.................................  3958

Footnote No. 827, See Attachments (2)............................  3959

Footnote No. 828, See Attachment.................................  3961

Footnote No. 833, See Attachment.................................  3962

Footnote No. 835, See Attachment.................................  3963

Footnote No. 836, See Attachment.................................  3964

Footnote No. 837, See Attachments (3)............................  3965

Footnote No. 840, See Footnote No. 836 (above)...................  3964

Footnote No. 842, See Attachments (3)............................  3972

Footnote No. 843, See Attachments (2)............................  3978

Footnote No. 844, See Attachment.................................  3980

Footnote No. 845, See Footnote No. 844 (above)...................  3980

Footnote No. 846, See Attachment.................................  3986

Footnote No. 847, See Attachment.................................  3987

Footnote No. 848, See Attachment.................................  3988

Footnote No. 849, See Attachment.................................  3989

Footnote No. 850, See Attachment.................................  3990

Footnote No. 851, See Attachment.................................  3991

Footnote No. 852, See Attachment.................................  3992

Footnote No. 853, See Attachment.................................  3993

Footnote No. 854, See Attachment.................................  3995

Footnote No. 855.................................................   *  

Footnote No. 856, See Attachments (2)............................  3996

Footnote No. 857, See Attachment.................................  3999

Footnote No. 858, See Footnote No. 856 (above)...................  3996

Footnote No. 859, See Footnote No. 854 (above)...................  3995

Footnote No. 862, See Attachment.................................  4000

Footnote No. 866, See Attachments (13)...........................  4004

Footnote No. 869, See Footnote No. 755 and 776 (above) I603822, 
  3901...........................................................

Footnote No. 870, See Attachments (2)............................  4032

Footnote No. 871, See Attachment and Footnote No. 755 (above) 
  I604034, 3822..................................................

Footnote No. 872, See Attachment.................................  4035

Footnote Nos. 873-875, See Footnote No. 872 (above)..............  4035

Footnote No. 876, See Attachment and Footnote No. 872 (above) 
  I604055, 4035..................................................

Footnote No. 877, See Attachment and Footnote No. 872 (above) 
  I604056, 4035..................................................

Footnote No. 878, See Footnote No. 872 (above)...................  4035

Footnote No. 880, See Attachments (2)............................  4058

Footnote No. 883, See Attachment and Footnote No. 872 (above) 
  I604063, 4035..................................................

Footnote Nos. 884, 886, See Footnote No. 872 (above).............  4035

Footnote No. 887, See Attachment and Footnote No. 872 (above) 
  I604065, 4035..................................................

Footnote Nos. 888-889, See Footnote No. 872 (above)..............  4035

Footnote No. 890, See Attachments (3)............................  4069

Footnote No. 891, See Attachments (5) and Footnote No. 890 
  (above) I604072, 4069..........................................

Footnote No. 892, See Attachment and Footnote No. 872 (above) 
  I604080, 4035..................................................

Footnote No. 893, See Attachments (2) and Footnote No. 872 
  (above) I604081, 4035..........................................

Footnote Nos. 894-895, See Footnote No. 872 (above)..............  4035

Footnote No. 896, See Attachments (11)...........................  4089

Footnote No. 897, See Attachments (6)............................  4103

Footnote No. 898, See Footnote No. 872 (above)...................  4035

Footnote No. 899, See Attachment.................................  4113

Footnote No. 900, See Attachment and Footnote No. 899 (above) 
  I604116, 4113..................................................

Footnote No. 902, See Footnote No. 872 (above)...................  4035

Footnote No. 904, See Attachments (2)............................  4117

Footnote No. 905, See Attachment.................................  4119

Footnote No. 906, See Footnote No. 872 (above)...................  4035

Footnote No. 907, See Attachment.................................  4125

Footnote No. 908, See Footnote No. 872 (above)...................  4035

Footnote No. 922, See Attachment.................................  4131

Footnote No. 923, See Footnote No. 922 (above)...................  4131

Footnote No. 924, See Attachment.................................  4137

Footnote No. 925, See Footnote No. 922 (above)...................  4131

Footnote No. 926, See Attachments (2) and Footnote No. 922 
  (above) I604139, 4131..........................................

Footnote No. 928, See Attachment.................................  4161

Footnote No. 929, See Attachments (3)............................  4162

Footnote No. 930, See Attachments (2)............................  4165

Footnote No. 931, See Attachment.................................  4169

Footnote Nos. 932-934, See Footnote No. 931 (above)..............  4169

Footnote No. 935, See Attachment.................................  4172

Footnote No. 936, See Attachment and Footnote No. 931 (above) 
  I604173, 4169..................................................

Footnote No. 937, See Footnote No. 543 (above) (SEALED EXHIBIT)..   *  

Footnote No. 939, 941, See Footnote No. 936 (above) I604173......

Footnote No. 942, See Attachment.................................  4180

Footnote No. 944, See Attachments (2)............................  4182

Footnote No. 947, See Footnote No. 936 (above) I604173...........

Footnote No. 948, See Footnote No. 922 (above)...................  4131

Footnote No. 949, See Attachment.................................  4197

Footnote No. 951, 953, See Footnote No. 936 (above) I604173......

Footnote No. 954.................................................   *  

Footnote No. 956, See Attachment.................................  4199

Footnote Nos. 957-959, See Footnote No. 931 (above)..............  4169

Footnote No. 961, See Attachment, Footnote No. 543 (SEALED 
  EXHIBIT) * and Footnote No. 944 (above) I604201, 4182..........

Footnote No. 962, See Footnote No. 543 (above) (SEALED EXHIBIT)..   *  

Footnote No. 963, See Attachments (2)............................  4203

Footnote No. 964, See Footnote No. 931 (above)...................  4169

Footnote No. 967, See Attachment.................................  4205

Footnote No. 968, See Attachments (2)............................  4206

Footnote No. 969, See Attachments (2)............................  4209

Footnote No. 970, See Attachment.................................  4211

Footnote No. 971, See Attachment.................................  4212

Footnote No. 972, See Attachment and Footnote No. 504 (above) 
  I604214, 2892..................................................

Footnote No. 973, See Attachment.................................  4216

Footnote No. 974, See Attachments (10) and
  Footnote Nos. 968 and 972 (above) I604217, 4206, 4214..........

Footnote No. 975, See Footnote Nos. 969 and 974 (above) I604209, 
  4217...........................................................

Footnote No. 976, (2 SEALED EXHIBITS)............................   *  

Footnote No. 977, See Attachment and Footnote No. 972 (above) 
  I604236, 4214..................................................

Footnote No. 978, See Attachment.................................  4238

Footnote No. 979, See Attachment.................................  4239

Footnote No. 980, See Attachment and Footnote No. 979 (above) 
  I604240, 4239..................................................

Footnote No. 981, See Attachment.................................  4251

Footnote No. 982, See Attachment.................................  4253

Footnote No. 983, See Attachment.................................  4254

Footnote No. 984, See Attachment and Footnote No. 983 (above) 
  I604264, 4254..................................................

Footnote No. 985, See Attachment.................................  4268

Footnote No. 986, See Attachment and Footnote No. 983 (above) 
  I604278, 4254..................................................

Footnote No. 987, See Attachments (6) and Footnote No. 968 
  (above) I604280, 4206..........................................

Footnote No. 988, See Footnote No. 981 (above)...................  4251

Footnote No. 989,
  See Attachment and Footnote Nos. 986 and 987 (above) I604294, 
  4278, 4280.....................................................

Footnote No. 990, See Attachment and Footnote No. 944 (above) 
  I604295, 4182..................................................

Footnote No. 992, See Attachments (2) and Footnote No. 944 
  (above) I604296, 4182..........................................

Footnote No. 993, See Attachment.................................  4301

Footnote No. 994, See Attachment.................................  4303

Footnote No. 995, See Attachment.................................  4305

Footnote No. 996, See Footnote No. 995 (above)...................  4305

Footnote No. 997, See Attachments (2)............................  4309

Footnote No. 998, See Attachments (2)............................  4311

Footnote No. 999, See Footnote No. 990 (above) I604295...........

Footnote No. 1000,
  See Attachment and Footnote Nos. 942 and 997 (above) I604313, 
  4180, 4309.....................................................

Footnote No. 1001, See Footnote No. 942 (above)..................  4180

Footnote No. 1002, See Footnote Nos. 942 and 990 (above) I604180, 
  4295...........................................................

Footnote No. 1003, See Footnote No. 942 (above)..................  4180

Footnote No. 1004, See Attachments (2)...........................  4315

Footnote No. 1006, See Footnote No. 942 (above)..................  4180

Footnote No. 1007, See Footnote No. 1004 (above).................  4315

Footnote No. 1008, See Attachments (2) and Footnote No. 944 
  (above) I604318, 4182..........................................

Footnote No. 1010, See Attachments (2)...........................  4320

Footnote No. 1011, See Attachments (2)...........................  4322

Footnote No. 1012, See Attachment................................  4324

Footnote No. 1013, See Footnote Nos. 1010 and 1011 (above) 
  I604320, 4322..................................................

Footnote No. 1014, See Attachment and Footnote No. 935 (above) 
  I604330, 4172..................................................

Footnote No. 1015,
  See Attachments (2) and Footnote No. 1012 (above) I604332, 4324

Footnote No. 1017, See Footnote No. 543 (SEALED EXHIBIT) * and
  Footnote No. 1012 (above) I603073, 4324........................

Footnote Nos. 1018-1022, See Footnote No. 1012 (above)...........  4324

Footnote No. 1023, See Attachments (4) and Footnote No. 543 
  (above)
  (SEALED EXHIBIT) * I604336, 3073...............................

Footnote No. 1024, See Attachments (2)...........................  4342

Footnote No. 1025, See Footnote Nos. 1023 and 1024 (above) 
  I604336, 4342..................................................

Footnote No. 1026, See Attachment and Footnote No. 944 (above) 
  I604344, 4182..................................................

Footnote No. 1027, See Footnote Nos. 944 and 1026 (above) 
  I604182, 4344..................................................

Footnote No. 1029, See Attachment................................  4347

Footnote No. 1031, See Footnote Nos. 936 and 944 (above) I604173, 
  4182...........................................................

Footnote No. 1033, See Attachment................................  4348

Footnote No. 1034, See Attachment................................  4356

Footnote No. 1035, See Footnote No. 1024 (above).................  4342

Footnote No. 1037, See Attachments (4)...........................  4357

Footnote No. 1038, See Attachments (3)...........................  4361

Footnote No. 1039, See Attachment................................  4364

Footnote No. 1040, See Attachment................................  4365

Footnote No. 1043, See Attachment................................  4366

Footnote No. 1044, See Attachment................................  4370

Footnote No. 1047, See Attachments (3)...........................  4391

Footnote No. 1048, See Attachment................................  4403

Footnote Nos. 1049-1050, See Footnote No. 1043 (above)...........  4366

Footnote No. 1052, See Attachment and
  Footnote Nos. 1037 and 1038 (above) I604404, 4357, 4361........

Footnote No. 1053, See Attachments (3)...........................  4405

Footnote No. 1054, See Attachments (16)..........................  4408

Footnote No. 1055, See Attachments (2)...........................  4426

Footnote No. 1057, See Attachment................................  4429

Footnote No. 1058, See Footnote No. 1057 (above).................  4429

Footnote No. 1059, See Attachment................................  4437

Footnote No. 1060, See Attachments (2) and
  Footnote No. 1040 (above) I604441, 4365........................

Footnote No. 1062, See Attachments (3) and
  Footnote No. 1039 (above) I604444, 4364........................

Footnote No. 1064, See Attachment * (reprinting only portion of 
  document)......................................................  4447

Footnote No. 1065, See Attachment * (reprinting only portion of 
  document)......................................................  4467

Footnote No. 1066, See Attachment................................  4495

Footnote No. 1067, See Attachments (3)...........................  4497

Footnote No. 1068, See Attachment................................  4506

Footnote Nos. 1069-1070, See Footnote No. 936 (above) I604173....

Footnote No. 1076, See Attachment................................  4507

Footnote No. 1078, See Attachment................................  4508

Footnote No. 1079, See Attachments (2) and Footnote No. 936 
  (above) I604511, 4173..........................................

Footnote No. 1081, See Attachment................................  4513

Footnote No. 1082, See Attachments (3)...........................  4515

Footnote No. 1088, See Attachments (6)...........................  4518

Footnote No. 1089, See Attachments (2)...........................  4526

Footnote No. 1090, See Footnote No. 1089 (above).................  4526

Footnote No. 1092, See Attachments (2)...........................  4583

Footnote No. 1093, See Attachments (2)...........................  4585

Footnote No. 1094, See Attachment................................  4587

Footnote No. 1095, See Attachments (2)...........................  4589

Footnote No. 1096, See Attachments (15)..........................  4591

Footnote No. 1097, See Attachments (7) and
  Footnote No. 1096 (above)......................................  4616

Footnote No. 1098, See Attachment and
  Footnote No. 1097 (above) I604631, 4616, 4591..................

Footnote No. 1099, See Attachments (5) and
  Footnote No. 1089 (above) I604636, 4526........................

Footnote No. 1100, See Attachment and
  Footnote Nos. 1089 and 1099 (above) I604648, 4526, 4636........

Footnote No. 1101, See Attachment and Footnote No. 1089 (above) 
  I604654, 4526..................................................

Footnote No. 1102, See Attachments (4)...........................  4655

Footnote No. 1103, See Attachment................................  4665

Footnote No. 1104, See Attachments (5) and
  Footnote No. 542 (above) (SEALED EXHIBIT) * I604670, 3070......

Footnote No. 1105, See Attachments (3)
  and Footnote No. 1104 (above) I604683, 4670....................

Footnote No. 1106, See Attachments (5) and
  Footnote No. 1104 (above) I604688, 4670........................

Footnote No. 1107, See Attachment and
  Footnote No. 542 (above) (SEALED EXHIBIT) * I604693, 3070......

Footnote No. 1108, See Attachments (3)...........................  4697

Footnote No. 1109, See Attachments (3)...........................  4707

Footnote No. 1110, See Attachments (11)..........................  4710

Footnote No. 1111, See Attachments (3)...........................  4723

Footnote No. 1112, See Attachments (2)...........................  4726

Footnote No. 1113, See Attachments (2)...........................  4729

Footnote No. 1114, See Attachments (3)...........................  4731

Footnote No. 1115, See Attachments (2)...........................  4734

Footnote No. 1116, See Attachments (2)...........................  4736

Footnote No. 1117, See Attachments (3)...........................  4738

Footnote No. 1119, See Attachments (2)...........................  4741

Footnote No. 1120, See Attachments (24)..........................  4744

Footnote No. 1121, See Attachments (4)...........................  4781

Footnote No. 1123, See Attachment and Footnote No. 1105 (above) 
  I604788, 4683..................................................

Footnote No. 1124, See Attachments (9) and
  Footnote No. 1123 (above) I604789, 4788........................

Footnote No. 1125, See Attachment................................  4805

Footnote No. 1126, See Attachment................................  4806

Footnote No. 1128, See Attachment................................  4812

Footnote No. 1129, See Attachment................................  4814

Footnote No. 1130, See Attachments (3)...........................  4816

Footnote No. 1131, See Attachment and Footnote No. 1129 (above) 
  I604819, 4814..................................................

Footnote No. 1132, See Footnote Nos. 1124 and 1131 (above) 
  I604789, 4819..................................................

Footnote No. 1133, See Footnote No. 1131 (above) I604819.........

Footnote No. 1134, See Attachments (3)...........................  4847

Footnote No. 1135, See Attachment................................  4850

Footnote No. 1136, See Attachment and Footnote No. 1120 (above) 
  I604851, 4744..................................................

Footnote No. 1137, See Attachments (4)...........................  4864

Footnote No. 1138, See Attachments (3) and
  Footnote No. 1137 (above) I604868, 4864........................

Footnote No. 1139, See Attachments (2) and
  Footnote Nos. 1120 and 1138 (above) I604872, 4744, 4868........

Footnote No. 1140, See Attachments (8)...........................  4874

Footnote No. 1142,
  See Footnote No. 543 (above) (SEALED EXHIBIT) * I603073........

Footnote No. 1143, See Attachments (4)...........................  4884

Footnote No. 1144, See Attachment................................  4888

Footnote No. 1145, See Attachment................................  4889

Footnote No. 1146, See Attachments (3)...........................  4890

Footnote No. 1147, See Attachment................................  4894

Footnote No. 1148, See Attachment................................  4908

Footnote No. 1149................................................   *  

Footnote No. 1150, See Attachments (3)...........................  4909

Footnote No. 1151, See Attachments (3)...........................  4917

                                VOLUME 4

Footnote No. 1152, See Attachments (6)...........................  4923

Footnote No. 1153 See Attachment.................................  4952

Additional Documents (12) Cited in Text of the Report............  4954

Footnote No. 1154, See Attachment................................  4967

Footnote No. 1155, See Attachment................................  4969

Additional Documents (4) Cited in Text of the Report.............  4972

Footnote No. 1156, See Attachments (2) and
  Footnote No. 1151 (above) I604977, 4917........................

Footnote No. 1157, See Attachment................................  4979

Additional Documents (5) Cited in Text of the Report.............  4980

Footnote No. 1158, See Attachment................................  4985

Additional Documents (2) Cited in Text of the Report.............  4986

Footnote No. 1160, See Attachment................................  4988

Additional Documents (3) Cited in Text of the Report,
  and Footnote No. 1147 (above) I604989, 4894....................

Footnote No. 1162, See Attachments (5)...........................  4995

Footnote No. 1163, See Attachments (5)...........................  5004

Footnote Nos. 1164-1165, See Attachments (2) and
  Footnote No. 1163 (above) I605010, 5004........................

Footnote No. 1166, See Attachments (4)...........................  5012

Additional Documents (8) Cited in Text of the Report.............  5016

Footnote No. 1167, See Attachments (4)...........................  5025

Footnote No. 1168, See Footnote No. 1152 (above).................  4923

Footnote Nos. 1196-1198, See Footnote No. 476 and 478 (above)
  (SEALED EXHIBIT)...............................................   *  

Footnote No. 1200, See Attachment................................  5031

Footnote No. 1201, See Attachment................................   *  

Additional Documents (2) Cited in Text of the Report.............  5033

Footnote No. 1202, See Attachment................................  5036

Footnote No. 1203, See Attachment................................  5037

Footnote No. 1205, See Attachment................................  5038

Footnote No. 1206, See Attachment................................  5039

Footnote No. 1207, See Attachment................................  5041

Footnote No. 1208, See Attachments (4)...........................  5042

Footnote No. 1209, See Attachment................................  5048

Footnote No. 1210, See Attachment................................  5051

Footnote No. 1211, See Footnote No. 1206 (above).................  5039

Footnote No. 1212, See Attachment................................  5053

Footnote No. 1213, See Attachment................................  5054

Footnote No. 1214, See Attachment................................  5055

Footnote No. 1215, See Attachment................................  5056

Footnote No. 1216, See Attachment................................  5057

Footnote No. 1217, See Attachment................................  5058

Footnote No. 1218, See Attachment................................  5059

Footnote No. 1219, See Attachment................................  5060

Footnote No. 1220, See Attachment................................  5062

Footnote No. 1221, See Attachment................................  5063

Footnote No. 1223, See Footnote No. 1207 (above).................  5041

Footnote No. 1225, See Attachment................................  5064

Footnote No. 1226, See Attachment................................  5068

Footnote No. 1227, See Attachment and Footnote No. 483 (above) 
  I605069, 2849..................................................

Footnote No. 1228, See Attachment................................  5071

Footnote No. 1229, See Attachment................................  5072

Footnote No. 1230, See Attachment................................  5073

Footnote No. 1231, See Attachment................................  5074

Footnote No. 1232, See Attachment................................  5075

Footnote No. 1233, See Footnote No. 1232 (above).................  5075

Additional Document Cited in Text of the Report..................  5078

Footnote No. 1234, See Attachment................................  5079

Footnote No. 1235, See Attachment................................  5080

Footnote No. 1236, See Attachment................................  5081
Footnote No. 1238, See Footnote No. 1236 (above).................  5081

Footnote No. 1239, See Attachment................................  5083

Footnote No. 1240, See Attachment................................  5084

Footnote No. 1241, See Attachment................................  5085

Footnote No. 1242, See Attachment................................  5087

Footnote No. 1243, See Attachment................................  5088

Footnote No. 1244, See Attachment................................  5091

Additional Documents (3) (1 of 3 not reprinted) Cited in Text of 
  the Report.....................................................  5092

Footnote No. 1245, See Attachment................................  5094

Footnote No. 1246, See Attachment................................  5095

Footnote Nos. 1247-1248, See Footnote No. 1245 (above)...........  5094

Additional Document Cited in Text of the Report..................  5096

Footnote No. 1249, See Attachments (3)...........................  5097

Footnote No. 1250, See Attachment................................  5100

Footnote No. 1251, See Attachment................................  5101

Footnote No. 1252, See Footnote No. 1251 (above).................  5101

Footnote No. 1253, See Attachment................................  5103

Footnote No. 1254, See Attachment................................  5104

Footnote Nos. 1255-1256, See Footnote No. 1254 (above)...........  5104

Additional Document Cited in Text of the Report..................  5108

Footnote No. 1257, See Attachment................................  5109

Footnote No. 1258, See Attachment................................  5110

Footnote No. 1259, See Attachment................................  5111

Footnote No. 1260, See Attachment................................  5112

Footnote No. 1261, See Attachment................................  5113

Footnote Nos. 1262-1263, See Footnote No. 1261 (above)...........  5113

Footnote No. 1264, See Attachments (2)...........................  5114

Footnote No. 1265, See Attachment................................  5116

Footnote No. 1267, See Attachment................................  5117

Footnote No. 1268, See Attachment................................  5118

Footnote Nos. 1269-1270, See Footnote No. 1268 (above)...........  5118

Footnote No. 1271, See Attachment................................  5120

Footnote No. 1272, See Attachment................................  5121

Footnote No. 1273, See Attachment................................  5122

Footnote No. 1274, See Attachment................................  5123

Footnote No. 1275, See Attachment................................  5124

Footnote No. 1276, See Footnote No. 1275 (above).................  5124

Additional Document Cited in Text of the Report..................  5127

Footnote No. 1277, See Attachment................................  5128

Footnote No. 1278, See Footnote No. 1277 (above).................  5128

Footnote No. 1279, See Attachment................................  5131

Footnote No. 1280, See Attachment................................  5132

Footnote No. 1281, See Attachment................................  5133

Footnote No. 1282, See Attachment................................  5134

Footnote No. 1283, See Attachment................................  5135

Footnote No. 1284, See Attachment................................  5139

Footnote No. 1285, See Attachment................................  5141

Footnote No. 1286, See Footnote No. 1285 (above).................  5141

Additional Document Cited in Text of the Report..................  5143

Footnote No. 1287, See Attachment................................  5146

Footnote No. 1289, See Attachments (5)...........................  5151

Footnote No. 1290, See Attachments (5)...........................  5161

Footnote No. 1291, See Attachments (9)...........................  5167

Additional Document Cited in Text of the Report (SEALED EXHIBIT).   *  

Footnote No. 1294, See Attachment and Footnote No. 872 (above) 
  I605183, 4035..................................................

Footnote No. 1295, See Attachments (2) and Footnote No. 872 
  (above) I605186, 4035..........................................

Footnote No. 1296, See Footnote No. 872 (above)..................  4035

Footnote No. 1297, See Attachments (4) and Footnote No. 872 
  (above) I605188, 4035..........................................

Footnote No. 1298, See Attachments (3) and
  Footnote No. 1038 (above) I605193, 4361........................

Footnote Nos. 1299-1300, See Footnote No. 872 (above)............  4035

Footnote No. 1301, See Attachments (5) and Footnote No. 872 
  (above) I605200, 4035..........................................

Footnote No. 1302, See Attachments (5)...........................  5211

Footnote No. 1303, See Footnote No. 872 (above)..................  4035

Footnote No. 1304, See Attachments (5) and
  Footnote Nos. 872 and 1055 (above) I605223, 4035, 4426.........

Footnote No. 1305, See Attachments (4) and Footnote No. 872 
  (above) I605228, 4035..........................................

Footnote No. 1306, See Attachment................................  5240

Footnote No. 1307, See Attachments (2) and Footnote No. 872 
  (above) I605247, 4035..........................................

Footnote No. 1308, See Footnote No. 872 (above)..................  4035

Footnote No. 1309, See Attachments (2)...........................  5249

Footnote No. 1310, See Attachments (2)...........................  5253

Footnote No. 1311, See Attachments (29)..........................  5255

Footnote No. 1312, See Attachments (5)...........................  5373

Footnote No. 1314, See Footnote No. 543 (SEALED EXHIBIT) *
  and Footnote No. 872 (above)...................................  4035

Footnote No. 1315, See Attachments (2) and Footnote No. 872 
  (above) I605390, 4035..........................................

Footnote No. 1316, See Attachments (15) and
  Footnote No. 872 (above) I605395, 4035.........................

Footnote No. 1317, See Footnote No. 543 (SEALED EXHIBIT) *
  and Footnote No. 872 (above)...................................  4035

Footnote No. 1318, See Footnote No. 872 (above)..................  4035

Footnote No. 1319, See Attachments (4) and Footnote No. 872 
  (above) I605419, 4035..........................................

Footnote No. 1320, See Attachments (5) and Footnote No. 872 
  (above) I605424, 4035..........................................

Footnote No. 1321, See Attachments (2)...........................  5435

Footnote No. 1322, See Attachments (2) and
  Footnote Nos. 872 and 1230 (above) I605441, 4035, 5073.........

Footnote No. 1323, See Footnote Nos. 872 and 1230 (above) 
  I604035, 5073..................................................

Footnote No. 1324, See Attachments (2)...........................  5446

Footnote No. 1325, See Attachments (11)
  and Footnote No. 872 (above) I605448, 4035.....................

Footnote No. 1326, See Attachments (4) and Footnote No. 872 
  (above) I605464, 4035..........................................

Footnote No. 1327, See Attachments (5) and
  Footnote Nos. 872 and 1326 (above) I605471, 4035, 5464.........

Footnote No. 1328, See Footnote No. 872 (above)..................  4035

Footnote No. 1329, See Attachments (6) and Footnote No. 872 
  (above) I605479, 4035..........................................

Footnote No. 1331, See Attachment................................  5493

Footnote No. 1332, See Attachments (2)
  and Footnote No. 1331 (above) I605494, 5493....................

Footnote No. 1333, See Attachments (3) and
  Footnote No. 1331 (above) I605496, 5493........................

Footnote No. 1334, See Attachment................................  5499

Footnote No. 1335, See Footnote No. 1333 (above).................  5493

Footnote No. 1336, See Attachment................................  5501

Footnote No. 1337, See Attachments (6)...........................  5503

Footnote No. 1338, See Attachments (5)...........................  5509

Footnote No. 1339, See Attachments (5)...........................  5514

Footnote No. 1340, See Attachments (2)...........................  5520

Footnote No. 1341, See Attachments (4) and
  Footnote No. 1340 (above) I605550, 5520........................

Footnote No. 1342, See Footnote No. 1340 (above).................  5520

Footnote No. 1343, See Attachments (2) and
  Footnote No. 1332 (above) I605564, 5494........................

Footnote No. 1344, See Attachments (4)...........................  5566

Footnote No. 1345, See Attachments (7) and
  Footnote No. 1344 (above) I605572, 5566........................

Footnote No. 1346, See Attachments (4)...........................  5579

Footnote No. 1347, See Attachments (3)...........................  5583

Footnote No. 1348, See Attachment and Footnote No. 1346 (above) 
  I605587, 5579..................................................

Footnote No. 1349, See Attachments (2)...........................  5588

Footnote No. 1350, See Attachments (4)...........................  5590

Footnote No. 1351, See Attachments (3)...........................  5594

Footnote No. 1352, See Attachments (2)...........................  5597

Footnote No. 1354, See Attachments (2)...........................  5599

Footnote No. 1355, See Attachments (2)...........................  5617

Footnote No. 1356, See Attachments (7)...........................  5621

Footnote No. 1357, See Attachment................................  5628

Footnote No. 1359, See Attachment................................  5630

Footnote No. 1360, See Attachments (3)...........................  5633

Footnote No. 1361, See Attachment................................  5637

Footnote No. 1362, See Attachments (7)...........................  5838

Footnote No. 1364, See Attachments (3) * (1 of 3 not reprinted)
  and Footnote No. 1359 (above) I605650, 5630....................

Footnote No. 1365, See Attachment and Footnote No. 1364 (above) 
  I605652, 5650..................................................

Footnote No. 1366, See Attachments (2) * (1 of 2 not reprinted)
  and Footnote No. 1365 (above) I605654, 5652....................

Footnote No. 1367, See Attachments (3) * (1 of 3 not reprinted)
  and Footnote No. 1365 (above) I605657, 5652....................

Footnote No. 1368, See Attachments (5)...........................  5660

Footnote No. 1369, See Footnote No. 1364 (above).................  5630

Footnote No. 1370, See Attachments (8)...........................  5665

Footnote No. 1372, See Attachments (6)...........................  5673

Footnote No. 1373, See Attachments (7)...........................  5680

Footnote No. 1374, See Attachments (6)...........................  5688

Footnote No. 1375, See Attachments (3)...........................  5694

Footnote No. 1376, See Attachments (5)...........................  5697

Footnote No. 1377, See Footnote No. 1362 (above).................  5638

Footnote No. 1378, See Attachment................................  5702

Footnote No. 1379, See Attachment................................  5703

Footnote No. 1380, See Footnote No. 1362 (above).................  5638

Footnote No. 1382, See Attachments (4)...........................  5704

Footnote No. 1383, See Attachment and Footnote No. 1306 (above) 
  I605711, 5240..................................................

Footnote No. 1384, See Attachment................................  5716

Footnote No. 1385, See Attachment................................  5727

Footnote No. 1386, See Attachments (10)..........................  5744

Footnote No. 1387, See Attachments (6)
  and Footnote No. 1382 (above) I605757, 5704....................

Footnote No. 1388, See Attachments (2)
  and Footnote No. 1306 (above) I605785, 5240....................

Footnote No. 1389, See Footnote No. 872 (above)..................  4035

Footnote No. 1391, See Attachments (2)...........................  5793

Footnote No. 1392, See Footnote No. 1305 (above).................  5228

Footnote No. 1393, See Attachments (2)...........................  5795

Footnote No. 1394, See Attachments (2)...........................  5799

Footnote No. 1395, See Attachments (4) * (2 of 4 not reprinted)
  and Footnote No. 1394 (above) I605801, 5799....................

Footnote No. 1396, See Footnote Nos. 1311 and 1388 (above) 
  I605255, 5785..................................................

Footnote No. 1397, See Attachments (2) and
  Footnote No. 1395 (above) I605804, 5801........................

Footnote No. 1398, See Attachments (3)...........................  5806

Footnote No. 1399, See Attachments (3) and Footnote No. 872 
  (above) I605810, 4035..........................................

Footnote No. 1400, See Footnote No. 465 (above)..................  2819

Footnote No. 1401, See Footnote No. 458 (above)..................  2783

Footnote No. 1402, See Attachment................................  5814

Footnote No. 1403, See Footnote Nos. 662 and 663 (above) I603379, 
  3476...........................................................

Footnote No. 1404, See Attachment................................  5815

Footnote No. 1405, See Attachment................................  5818

Footnote No. 1406, See Attachment................................  5820

Footnote No. 1407, See Attachment................................  5821

Footnote No. 1408, See Attachment................................  5822

Footnote No. 1409, See Attachments (2)...........................  5827

Footnote No. 1410, See Attachment and Footnote No. 683 (above) 
  I605829, 3580..................................................

Footnote No. 1411, See Footnote No. 687 (above)..................  3600

Footnote No. 1412, See Attachment................................  5830

Footnote No. 1413, See Attachment................................  5831

Footnote No. 1414, See Attachment................................  5832

Footnote No. 1415, See Footnote No. 848 (above)..................  3988

Footnote No. 1416, See Attachments (2)...........................  5833

Footnote No. 1417, See Attachment................................  5835

Footnote No. 1418, See Attachment................................  5837

Footnote No. 1419, See Attachment................................  5839

Footnote No. 1421, See Attachment................................  5840

Footnote No. 1422, See Footnote No. 848 (above)..................  3988

Footnote No. 1423, See Attachment................................  5841

Footnote No. 1424, See Footnote No. 716 (above)..................  3690

Footnote No. 1425, See Attachment................................  5842

Footnote No. 1427, See Attachment................................  5844

Footnote No. 1428, See Attachments (2)...........................  5845

Footnote No. 1431, See Footnote No. 872 (above)..................  4035

Footnote No. 1432, See Footnote No. 189 (above)..................  2049

Footnote No. 1433, See Footnote No. 188 (above)..................  2048

Footnote No. 1436, See Footnote No. 211 (above)..................  2111

Footnote Nos. 1438-1439, See Footnote No. 415 (above)............  2655

Footnote No. 1441, See Attachment................................  5871

Footnote No. 1442, See Footnote No. 415 (above) I602655..........

67. a.G Additional documents regarding POINT.....................  5872

    b. Additional documents regarding offshore trusts............  6100

  [*] Retained in the files of the Subcommittee.






 
   TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS AND SECRECY--VOL. 1 of 4

                              ----------                              


                        TUESDAY, AUGUST 1, 2006

                                   U.S. Senate,    
              Permanent Subcommittee on Investigations,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:03 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Norm Coleman, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coleman, Levin, Collins, Stevens, Carper, 
Dayton, and Lautenberg.
    Staff Present: Raymond V. Shepherd III, Staff Director and 
Chief Counsel; Mary D. Robertson, Chief Clerk; Leland B. 
Erickson, Senior Counsel; Mark D. Nelson, Senior Counsel; Elise 
J. Bean, Staff Director/Chief Counsel to the Minority; Robert 
L. Roach, Counsel and Chief Investigator to the Minority; Dan 
Berkovitz, Counsel to the Minority; Laura Stuber, Counsel to 
the Minority; Zachary Schram, Professional Staff Member to the 
Minority; Julie Davis, Counsel to Senator Levin; Eric J. 
Diamant, Detailee, GAO; John McDougal, Detailee, IRS; Ben 
Schweiger, Law Clerk; Amanda Wahlig, Law Clerk; Mark L. 
Greenblatt, Deputy Chief Counsel; Steven A. Groves, Senior 
Counsel; Jay Jennings, Senior Investigator; James McKay, 
Homeland Security and Governmental Affairs Committee/Senator 
Collins; Cindy Barnes, Detailee, GAO; Cathryn Sitteding, 
Intern; and Ryan Myers, Intern.

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. This hearing of the Senate Permanent 
Subcommittee on Investigations is called to order. I want to 
thank you all for attending today's hearing.
    I want to first thank the Subcommittee's Ranking Member, 
Senator Levin, for initiating this investigation, and I want to 
commend his tenacity in identifying tax shelter abuse by those 
willing to exploit loopholes in the system and engage in 
questionable conduct for the sole purpose of avoiding 
legitimate taxes. This has been a very extensive investigation, 
and the Ranking Member has been a champion of taxpayers across 
the board. We have done a number of investigations in this 
area, and we have joined in this, and I want to thank him and 
his staff for his extraordinary efforts.
    Senator Levin. Thank you, Mr. Chairman, very much.
    Senator Coleman. Today's hearing continues this effort by 
examining the extent to which U.S. individuals are abusing 
offshore jurisdictions to circumvent compliance with U.S. tax 
securities and anti-money-laundering laws. The offshore problem 
has become one of staggering proportions. Offshore tax havens 
and financial secrecy jurisdictions hold an estimated $1.5 
trillion in U.S. assets, resulting in a projected annual drain 
on the U.S. Treasury of $50 to $70 billion in lost taxes.
    While these jurisdictions claim to offer limited financial 
disclosures, light regulations, enhanced asset protection, and 
financial privacy, in reality they have become the Wild West of 
the financial world, havens for fraud and evasion. U.S. 
citizens have found ways to utilize these offshore tax and 
secrecy havens to conceal ownership of assets and obscure the 
economic reality underlying financial transactions, while 
staying one step ahead of U.S. law enforcement.
    All taxpayers are victimized by this behavior. Not only do 
these actions shift the burden to taxpayers who are in full 
compliance with our laws, but they also create a revenue 
shortfall depriving the Treasury of funds that could be used to 
finance education for our children, additional funding for 
health care, investment in alternative fuels and renewable 
energy, and our fight against terrorism--all the things that 
government does or tries to do are shortchanged by these 
actions. Our tax and securities laws must be strengthened to 
provide greater transparency in this secretive offshore world 
and bring those who seek to avoid our laws offshore into full 
compliance.
    Equally important, offshore jurisdictions that have 
tailored their laws to become havens for tax evasion and 
financial fraud must be prevented from receiving U.S. tax 
benefits afforded other countries that provide adequate 
disclosures of financial information.
    The nature of offshore abuse today ranges from the clearly 
criminal to the questionable. Most U.S. taxpayers do not go 
offshore alone. They are supported by an industry of domestic 
and offshore service professionals and asset protection 
specialists who encourage and assist them in moving their 
assets offshore. These professionals claim to offer their 
clients asset protection and financial privacy, but in reality 
they are offering asset protection with a wink and a nod. The 
real objective quite often is to shelter assets from U.S. law 
enforcement, especially the IRS. This objective is accomplished 
through the establishment of offshore trusts and corporations 
that in reality are often owned and controlled by the U.S. 
client, but on paper are owned by nominee officers and 
directors in the offshore jurisdictions.
    I am concerned about the conduct of these professionals and 
question whether an entire industry that purports to use 
creative legal solutions to help their clients has in too many 
cases become architects of strategies designed to avoid and 
abuse U.S. law. We need the professional community to be 
pillars of commerce rather than pillars for circumvention.
    Over the course of the year-long investigation, the 
Subcommittee explored many of the various ways U.S. citizens 
hide assets, avoid taxes, and use offshore structures to avoid 
or circumvent U.S. laws. A number of these cases involved fraud 
and criminal conspiracy and resulted in indictments and 
convictions.
    For example, the Subcommittee examined how promoter 
Lawrence Turpen provided Robert Holliday various shell 
corporations and offshore trusts. Mr. Turpen selected numerous 
offshore service providers to provide nominee directors and 
trustees for the newly created entities.
    According to Mr. Holliday, he was the ``puppet master'' to 
a team of offshore service providers to shelter and hide 
assets, allowing him to use the assets to pay his expenses 
onshore. Mr. Holliday and Mr. Turpen pled guilty to tax-related 
conspiracy charges.
    The story of Mr. Greaves is another example of a U.S. 
citizen who moved hundreds of thousands of dollars offshore and 
retained the ability to control and use the assets. Under the 
guidance of offshore promoter Terry Neal, Mr. Greaves became a 
``business consultant'' for an offshore structure he set up, 
and he was able to communicate instructions to his companies 
offshore. He created fake mortgages and insurance policies, and 
then took deductions for payments never made. In 2004, both men 
pled guilty to related Federal tax evasion.
    While these cases present clear cases of criminal tax 
evasion and fraud, others are more complex and not as clear.
    The complex cases that the Subcommittee reviewed are eye-
opening in revealing the extent to which an entire industry of 
onshore and offshore professionals, including attorneys, 
accountants, bankers, brokers, and corporate and trust service 
providers, are helping U.S. individuals undermine our tax, 
securities, and anti-money-laundering laws. While complicated, 
these strategies still raise the same issues. All work on the 
same theme, obscuring the economic reality behind the 
transactions and hiding U.S. ownership of offshore assets. 
Should U.S. citizens be allowed to use offshore secrecy laws to 
produce too good to be true tax results by hiding their 
activities from U.S. law enforcement? I also question at what 
point reliance on counsel simply becomes a convenient excuse, a 
way to cover one's tracks. The issue is simply one of where the 
line should be drawn.
    For more than a year, the Subcommittee examined the 
activities of Sam and Charles Wyly, high-net-worth individuals 
from Texas, who sheltered at least $190 million in stock option 
compensation in a complex network of 58 offshore trusts and 
shell corporations established to benefit their families. To 
shield these assets from the IRS SEC, and potential creditors, 
the Wylys disavowed ownership and control. The evidence 
reviewed by the Subcommittee tells a different story. The 
evidence shows that the Wylys and their representatives 
initiated and planned virtually every transaction that the 
offshore entities entered, and used quirks in offshore trust 
law and financial secrecy to direct the investment and use of 
the offshore assets for their own benefit and enjoyment. 
Indeed, during the 13-year period from 1992 to 2004 reviewed by 
the Subcommittee, the offshore entities transferred 
approximately $600 million in untaxed, offshore assets to 
support the Wylys in their business and personal interests. In 
many cases, offshore funds that the Wylys claimed not to 
control were used to purchase real estate and personal 
property, including art and jewelry used by the Wylys and their 
families, and even to loan offshore funds to the Wylys 
personally, on favorable, unsecured terms.
    For example, more than $140 million in loans were 
authorized by offshore trusts set up by the Wylys to advance 
Sam and Charles Wyly's personal and business interests; $85 
million was authorized by an offshore trust set up by the Wylys 
to purchase real estate in the United States that the Wylys 
were able to use, live in, and enjoy; and nearly $30 million 
was authorized by an offshore trust to purchase artwork, 
furnishings, and jewelry that members of the Wyly family were 
able to use and enjoy as their own.
    The Wyly facts are illustrative of the scope, breadth, and 
complexity of the efforts undertaken by U.S. individuals to 
utilize offshore jurisdictions to circumvent U.S. regulation 
and to hide their assets, but they are also indicative of the 
extent to which U.S. taxpayers are assisted in their efforts by 
attorneys and other professional advisors.
    At some point, however, the line is crossed, and reliance 
on counsel just becomes a convenient excuse. With respect to 
the Wylys, it strains credulity to believe that the Wylys did 
not have reason to know that their ability to direct and use 
these offshore assets contradicted their representation that 
they did not own or control these assets for U.S. tax and 
securities purposes.
    Another strategy investigated by the Subcommittee was 
designed and marketed by the Quellos Group, a Seattle-based 
investment firm, to a handful of its extremely high-net-worth 
U.S. clients. Known as POINT, this complex strategy was 
designed to delay and eliminate taxes on capital gains and 
relied in part on offshore secrecy in the Isle of Man to 
obscure the true nature of the transaction from U.S. law 
enforcement. Quellos sold this strategy to five high-net-worth 
taxpayers, who together sheltered $2 billion in investment 
gains, depriving the Treasury of an estimated $300 million in 
tax revenue.
    Quellos was assisted in its activities by prominent U.S. 
law firms, who provided advice on structuring the transactions 
and opinion letters validating them, U.S. financial 
institutions, who provided financing and technical assistance, 
and offshore investment advisors, who through the use of two 
Isle of Man shell corporations claim to have created a paper 
portfolio of over $9.6 billion in securities, including more 
than $1 billion in paper losses available for purchase by U.S. 
taxpayers who needed to offset their capital gains.
    Whether clearly criminal or complex and less clear, all of 
the cases examined by the Subcommittee demonstrate the need for 
greater transparency in this secretive offshore world. The 
bipartisan report issued in connection with today's hearing 
makes several recommendations to provide light behind the dark 
shroud of offshore secrecy. Our recommendations would 
accomplish this by: Tightening SEC and IRS disclosure 
requirements on offshore trusts and shell corporations in tax 
and secrecy havens; creating a presumption in U.S. tax, 
securities, and anti-money-laundering laws that these entities 
are controlled by any U.S. individuals who have contributed or 
direct the offshore assets; extending anti-money-laundering 
laws and the requirements to report suspicious transactions to 
law enforcement to foreign-based hedge funds that are 
affiliated with U.S. hedge funds and invest in the United 
States; and perhaps most important, by sanctioning tax and 
secrecy havens that do not cooperate with U.S. tax enforcement.
    I know this is a long opening statement, but it is a pretty 
thick report. I look forward to the testimony we will hear at 
today's hearing. It is imperative that Congress continue to 
ensure the efficiency and operation of the government and to 
ensure that honest taxpayers are not asked to carry an unfair 
and disproportionate burden.
    After today's hearing and assessing the testimony, I intend 
to work with Senator Levin to see what follow-up action we need 
to take in order to address the problems exposed by this 
investigation. stated simply, the abuse of offshore tax havens 
by U.S. individuals is shifting the tax burden to all of us. I 
intend to fix this problem.
    Last, I want to thank both the Majority and Minority 
Subcommittee staffs for all their hard work and collaboration 
over the course of this investigation.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Mr. Chairman, thank you for the hearing that 
you have scheduled for this morning. Thank you for the great 
support that you and your staff have given to this 
investigation, which includes the issuance of more than 70 
subpoenas, scheduling of more than 80 interviews, a bipartisan 
370-page report, and the review of more than 2 million pages of 
documents.
    I believe the findings in this report are explosive. The 
report blows the lid off tax haven abuses that make use of sham 
trusts, shell corporations, and fake economic transactions to 
help some people who have huge assets and income dodge the 
taxes that they owe to the U.S. Treasury.
    Experts estimate that tax haven abuses by individuals cost 
the U.S. Treasury somewhere between $40 and $70 billion every 
year in taxes that are owed but not collected. There is a large 
number that applies to the corporations which use tax havens.
    Ultimately, as you have said, Mr. Chairman, that tax gap 
must be made up by average, honest taxpayers whose faith in the 
fairness of our tax system is eroding when they realize that so 
many people are dodging their obligations through the use of 
these kind of tax haven gimmicks.
    Our report lays out six case studies illustrating the scope 
and seriousness of the problem. I will be focusing in my 
questioning, at least, on two of these particular issues.
    The key features of the offshore tax havens are low or no 
taxes, and a legal system that favors secrecy over 
transparency. Tax havens sell secrecy to attract business, and 
they are very successful. About 50 tax havens operate in the 
world today. These tax havens, in effect, have declared 
economic war on U.S. taxpayers by giving tax dodgers the means 
to avoid their tax bills and leave them for others to pay.
    These schemes are shrouded in the secrecy of tax havens 
because they cannot stand the light of day. Trusts and shell 
corporations established in offshore secrecy jurisdictions 
operate in a legal black box that allows them to hide assets, 
mask who controls them, and obscure how their assets are used.
    An armada of offshore service providers, lawyers, bankers, 
brokers, and others then join forces to exploit the black-box 
secrecy and help clients skirt U.S. tax, securities, and anti-
money-laundering laws. Many of the firms concocting or 
facilitating these schemes are respected names here in the 
United States.
    Our focus today, again, will be on two different schemes. 
The first scheme was used to avoid paying taxes on stock option 
compensation and investment income flowing from it. The second 
hid income that was earned from capital gains. At its core, 
each scheme relied on a key deception made possible by tax 
haven secrecy.
    The first case study looks at the tax haven schemes of Sam 
and Charles Wyly. For 13 years, the Wylys used the black box 
and its facilitators to direct and enjoy the benefits of 
hundreds of millions of dollars in stock option income that 
they sent offshore to supposedly independent entities.
    Between 1992 and 2005, Sam and Charles Wyly transferred 
over 17 million stock options and warrants worth about $190 
million to a complex array of 19 offshore trusts and 39 shell 
corporations. The 19 offshore trusts were either established by 
the Wylys or named them and their families as beneficiaries. 
These trusts owned the 39 shell corporations in the Isle of Man 
or the Cayman Islands. In return for most of the stock options, 
the offshore corporations gave the Wylys private annuities 
designed to make payments starting many years later. The Wylys 
took the position, on the advice of legal counsel, that because 
they exchanged their stock options for annuities of equivalent 
value, they did not have to pay any taxes on the compensation 
until the annuities were paid out.
    In the meantime, the offshore entities began cashing in the 
stock options. The proceeds were invested in securities, Wyly 
hedge funds, Wyly businesses, and real estate, as directed by 
the Wylys. The Subcommittee traced about $500 million in 
offshore dollars invested in Wyly business investments, about 
$85 million used to acquire or improve real estate used by Wyly 
family members, and about $30 million spent on art, 
furnishings, and jewelry for the personal use of the Wyly 
family members. In addition, about $140 million of the offshore 
dollars went back to the Wylys in the form of loans funneled 
through a Cayman shell corporation called Security Capital.
    This chart sums up the Wyly offshore empire.\1\ On the 
left, it starts with untaxed stock option compensation, most of 
which--$124 million--remains untaxed today. It grew with 
untaxed investment gains. And it provided a source of untaxed, 
offshore cash for loans or other uses that the Wylys wanted.
---------------------------------------------------------------------------
    \1\ See Exhibit 1 which appears in the Appendix on page 622.
---------------------------------------------------------------------------
    The key deception in this scheme is the Wyly claim that the 
58 offshore trusts and corporations were independent. Under 
U.S. tax law, the tax on the income of a truly independent 
trust is paid by the trustees. But if a U.S. person is the 
effective owner and controls the trust, then that trust's 
income is generally taxable to that person.
    The claim that the offshore trusts were independent of the 
Wylys is contradicted by overwhelming evidence. This is not a 
case where the Wylys handed over their stock options to 
independent trustees who operated the trusts and then awaited 
their annuity payments later on. Instead, for 13 years, the 
Wylys and their representatives continually told the trusts 
what to do--when to exercise the stock options, when to sell 
the shares, and what to do with the money. The Wylys conveyed 
their directions through so-called trust protectors, 
individuals selected by the Wylys, who worked for the Wylys, 
and who were empowered to fire any offshore trustee. The 
protectors transmitted the Wyly directions to the offshore 
trustees who consistently carried them out.
    The offshore entities exercised options and traded shares 
from three companies--Michaels Stores, Sterling Software, and 
Sterling Commerce--where the Wylys were founders and directors. 
The Wylys, on the advice of counsel, generally did not include 
the stock holdings of the offshore entities in their SEC 
filings, claiming again that the offshore entities were 
independent. When the offshore entities opened securities 
accounts at Bank of America and were asked to name their 
beneficial owners as required by new anti-money-laundering 
laws, they refused to do so, claiming again they were 
independent. Bank of America allowed the accounts to operate 
without getting the information required by law.
    By promoting the fiction that the trusts were independent, 
the Wylys participated in a 13-year scam and scheme to 
circumvent U.S. tax, securities, and anti-money-laundering 
requirements.
    Now, the next case study is called the POINT case, and by 
contrast, this focuses on one-time abusive tax shelter 
transactions.
    This scheme used the tax haven black box to facilitate the 
creation of a fake stock portfolio with phantom securities used 
to generate billions of dollars of fake losses. Once again, the 
armada was hard at work, generating hefty fees for themselves 
by designing complex partnership structures, executing 
transactions, and circulating impenetrable legal opinions to 
justify the deferral or elimination of taxes owed on $2 billion 
in real capital gains.
    A Seattle-based securities firm called Quellos designed, 
promoted, and implemented the tax shelter known as POINT--
Personally Optimized Investment Transaction--which it sold to 
six wealthy clients.
    The POINT strategy was designed to be impossible to pierce. 
Just take a quick glance at that chart.\1\ It is a bowl of 
spaghetti. It may look comical, but the sobering fact is that 
those six transactions cost the Treasury about $300 million in 
lost revenue, which, if these transactions are not reversed, 
will have to be made up by honest taxpayers.
---------------------------------------------------------------------------
    \1\ See Exhibit 6 which appears in the Appendix on page 722.
---------------------------------------------------------------------------
    POINT worked like this. Quellos put together a list of 
high-tech stocks, together worth about $9.5 billion, many of 
which had stock prices that they expected would drop.
    The list went to a shell corporation in the Isle of Man 
called Jackstones. Although Jackstones did not actually own any 
of the stocks, it conducted a fake stock sale to another shell 
corporation in the Isle of Man called Barnville. On paper, 
Barnville paid $9.5 billion which, of course, it did not have. 
Barnville then immediately lent the stock back to Jackstones in 
exchange for the same enormous sum, and the money which did not 
exist then became the security for the loan of the non-existent 
stock. Because the two companies did these deals 
simultaneously, the amounts of stock and cash they owed each 
other cancelled out. And in a sleight of hand worthy of 
Houdini, Barnville claimed to be left with a huge paper 
portfolio. Barnville then picked from its paper portfolio a 
selection of stocks with the amount of capital losses needed by 
a client to offset their capital gains and transferred those 
losses to a trading company owned by the client.
    So, to review, a phony Isle of Man corporation sold stock 
it did not own to another phony Isle of Man corporation for 
money it did not have. The fake stock was lent back with fake 
cash as security for repayment of the loan, and the fake loss 
on the stock price was transferred out to offset real gains. No 
real economic activity took place, but one critical thing 
happened: A $9 billion paper portfolio was created. This paper 
portfolio originated with Jackstones and Barnville, shell 
corporations with no employees, no offices, and--listen to 
this, folks--paid-in capital in each of those two shell 
corporations of about $5. They transferred $9.5 billion in 
paper stock, paying for it with $9.5 billion in cash. Two 
corporations that each had paid in two pounds, about $5 in 
capital.
    The final step in the POINT scheme was for Barnville to 
sell the paper losses to wealthy individuals, including Haim 
Saban and Robert Wood Johnson IV, who are with us this morning. 
These clients used the paper losses to offset real capital 
gains. Mr. Saban used POINT to offset about $1.5 billion in 
capital gains. Mr. Johnson offset about $143 million. Together, 
the fees that they paid to Quellos, the lawyers, the bankers, 
and others totaled about $75 million. One more proof that this 
sordid tale was used to concoct tax losses is the fact that the 
greater the loss generated for a client, the greater the fees 
charged by Quellos.
    The POINT tax shelter included transactions to create the 
appearance of a complex investment with real economic 
substance. In reality, the transactions were expertly designed 
to remove all risk, using circular transactions that cancelled 
out or were unwound. A 5-year warrant, for example, which was 
included in the transactions to produce the illusion of a 
profit potential, was always terminated before any profits were 
realized. In a transaction involving Mr. Saban, an $800 million 
loan and stock purchase were added to provide a patina of 
economic substance, but the way the transaction was structured, 
it could not realize a profit in comparison to or anywhere near 
the transaction's fees and other costs.
    Mr. Saban told the Subcommittee staff that POINT was not 
sold to him as an investment strategy. He was very 
straightforward with us. He said it was sold to him as a way to 
avoid taxes that he otherwise would have had to pay on a big 
capital gain. In his words, he was promised ``tax deferral ad 
infinitum'' on a $1.5 billion capital gain, and that is the 
fees that he paid for that tax deferral, ad infinitum.
    The key deception in POINT was the fake offshore portfolio 
that generated fake stock losses sold to partnerships with a 
false business purpose. The end result was $2 billion in real 
and taxable capital gains that were supposedly erased.
    This has gone on a long time, I know, Mr. Chairman, and I 
want to just apologize to you and other Members of the 
Subcommittee for its length. I will, of course, put the rest of 
it into the record in terms of the role of professionals that I 
believe had blinders on so that they would not see these 
transactions for what they were. And also, in addition to what 
you have said about remedies and the actions that we should 
take, I would agree with you that we must make some major 
reforms here. We will go into those later on, perhaps at the 
end of the hearing.
    One of the reforms, in addition to the one that you 
mentioned, which I believe is already the basis of a bill which 
you and I have introduced, would create a presumption regarding 
who controls an offshore entity and what purpose it is serving 
if that entity is located in a jurisdiction deemed to be a tax 
haven by the U.S. Secretary of the Treasury. Today, the burden 
is on the government to prove that an individual controls and 
directs a tax haven trust, or shell corporation. It is time to 
reverse that presumption when a U.S. taxpayer opens up or 
controls an offshore entity in a tax haven.
    Again, I want to thank you and join you, Mr. Chairman, in 
thanking our staffs, who have done really the most 
extraordinary job that I think have ever seen a staff do in 
addressing the challenge of over 2 million pieces of paper, 
documents that have come into this Subcommittee and that needed 
to be reviewed in order that we could get to the point where we 
are at.
    Thank you.
    Senator Coleman. Thank you, Senator Levin, and your full 
statement will be entered into the record.
    [The prepared statement of Senator Levin follows:]
                  PREPARED STATEMENT OF SENATOR LEVIN
    This morning, this Subcommittee is releasing the results of a year-
long, bipartisan investigation into tax haven abuses. I want to thank 
our Chairman Norm Coleman and his staff for the support they have given 
to this investigation, which included the issuance of more than 70 
subpoenas, the scheduling of more than 80 interviews, and the review of 
more than 2 million pages of documents. I believe the findings are 
explosive: The report blows the lid off tax haven abuses that make use 
of sham trusts, shell corporations, and fake economic transactions to 
help some people dodge taxes owed to the U.S. Treasury.
    Experts estimate that tax haven abuses by individuals cost the U.S. 
Treasury between $40 billion and $70 billion every year in taxes that 
are owed but not collected. Ultimately, that tax gap must be made up by 
average, honest taxpayers whose faith in the fairness of our tax system 
is eroding.
    Our report lays out six case studies illustrating the scope and 
seriousness of the problem. Today's hearing focuses on two of them.

                          Inside the Black Box

    The key features of offshore tax havens are low or no taxes and a 
legal system that favors secrecy over transparency. Tax havens sell 
secrecy to attack business. And they are very successful. About 50 tax 
havens operate in the world today. Those tax havens have, in effect, 
declared war on honest U.S. taxpayers, by giving tax dodgers the means 
to avoid their tax bills and leave them for others to pay.
    These schemes are shrouded in the secrecy of tax havens because 
they can't stand the light of day. Trusts and shell corporations 
established in offshore secrecy jurisdictions operate in a legal black 
box that allows them to hide assets, mask who controls them, and 
obscure how their assets are used.
    An armada of ``offshore service providers,'' lawyers, bankers, 
brokers, and others then joins forces to exploit the black box secrecy 
and help clients skirt U.S. tax, securities, and anti-money laundering 
laws. Many of the firms concocting or facilitating these schemes are 
respected names here in the United States.
    Our focus today is on two different schemes. The first scheme was 
used to avoid paying taxes on stock option compensation and investment 
income flowing from it. The second bid income from capital gains. At 
its core, each scheme relied on a key deception made possible by tax 
haven secrecy.

                            Wyly Case Study

    The first case study looks at the tax haven schemes of Sam and 
Charles Wyly. For thirteen years, the Wylys used the black box and its 
facilitators to direct and enjoy the benefits of hundreds of millions 
of dollars in stock option income that they sent offshore to supposedly 
independent entities.
    Between 1992 and 2005, Sam and Charles Wyly transferred over 17 
million stock options and warrants worth about $190 million to a 
complex array of 19 offshore trusts and 39 shell corporations. The 19 
offshore trusts were either established by the Wylys or named them as 
beneficiaries. These trusts owned the 39 shell corporations in the Isle 
of Man or the Cayman Islands. In return for most of the stock options, 
the offshore corporations gave the Wylys private annuities designed to 
make payments starting many years later. The Wylys took the position, 
on the advice of legal counsel, that because they exchanged their stock 
options for annuities of equivalent value, they didn't have to pay any 
taxes on the compensation until the annuities paid out.
    In the meantime, the offshore entities began cashing in the stock 
options. The proceeds were invested in securities. Wyly hedge funds, 
Wyly businesses, and real estate. The Subcommittee traced about $500 
million in offshore dollars invested in Wyly business investments, 
about $85 million used to acquire or improve real estate used by Wyly 
family members, and about $30 million spent on art, furnishings, and 
jewelry for the personal use of Wyly family members. In addition, about 
$140 million of the offshore dollars went back to the Wylys in the form 
of loans funneled through a Cayman shell corporation called Security 
Capital.
    This chart sums up the Wyly offshore empire. It started with 
untaxed stock option compensation, most of which--$124 million--remains 
untaxed today. It grew with untaxed investment gains. And it provided a 
ready source of untaxed, offshore cash for loans or other uses the 
Wylys wanted.
    The key deception in this scheme is the Wyly claim that the 58 
offshore trusts and corporations were independent. Under U.S. law, the 
tax on the income of a truly independent trust is paid by the trustees. 
But if a U.S. person controls the trust's assets and investments, then 
the trust's income is generally taxable to that person.
    The claim that the offshore trusts were independent of the Wylys is 
contradicted by overwhelming evidence. This is not a case where the 
Wylys handed over their stock options and awaited the annuity payments, 
while independent trustees operated the trusts. Instead, for thirteen 
years, the Wylys and their representatives continually told the trusts 
what to do--when to exercise the stock options, when to sell the 
shares, and what to do with the money. The Wylys conveyed their 
directions through so-called ``trust protectors,'' individuals selected 
by the Wylys, who worked for the Wylys, and who were empowered to fire 
any offshore trustee. The protectors transmitted the Wyly directions to 
the offshore trustees who consistently carried them out.
    The offshore entities exercised options and traded shares from 
three companies, Michaels Stores Inc., Sterling Software Inc. and 
Sterling Commerce Inc., where the Wylys were founders and directors. 
The Wylys, on the advice of counsel, generally did not include the 
stock holdings of the offshore entities in their SEC filings, claiming, 
again, that the offshore entities were independent. When the offshore 
entities opened securities accounts at Bank of America and were asked 
to name their beneficial owners as required by new U.S. anti-money 
laundering laws, they refused to do so, claiming again they were 
independent. Bank of America allowed the accounts to operate without 
getting the information required by law.
    By promoting the fiction that the trusts were independent, the 
Wylys participated in a 13-year sham to circumvent U.S. tax, 
securities, and anti-money laundering requirements.

                            POINT Case Study

    The Wyly case study traces the building of an offshore empire over 
13 years. The next case study, by contrast, focuses on one-time, 
abusive tax shelter transactions.
    This scheme used the tax haven black box to facilitate the creation 
of a fake stock portfolio with phantom securities used to generate 
billions of dollars of fake losses. Once again, the armada was hard at 
work, generating hefty fees for themselves by designing complex 
partnership structures, circular transactions, and impenetrable legal 
opinions to justify the deferral or elimination of taxes owed on $2 
billion in real capital gains.
    A Seattle-based securities firm called Quellos designed, promoted, 
and implemented the tax shelter known as POINT--Personally Optimized 
Investment Transaction--which it sold to five wealthy clients in six 
separate transactions.
    The POINT strategy was designed to be impossible to pierce. Take a 
look at this chart. It's a bowl of spaghetti and may look comical, but 
the sobering fact is that these six transactions cost the Treasury 
about $300 million in lost revenue--revenue which, if these 
transactions aren't reversed, will have to be made up by honest 
taxpayers.
    POINT worked like this. Quellos put together a list of high tech 
stocks, together worth about $9.5 billion, many of which had stock 
prices that were expected to drop. The list went to a shell corporation 
in the Isle of Man called Jackstones. Although Jackstones did not 
actually own any of the stocks, it conducted a fake stock sale to 
another shell corporation called Barnville. On paper, Barnville paid 
$9.5 billion which, of course, it didn't have. Barnville then 
immediately lent the stock back to Jackstones in exchange for the same 
enormous sum, and the money which didn't exist then became security for 
the loan of the non-existent stock. Because the two companies did these 
deals simultaneously, the amounts of stock and cash they owed each 
other cancelled out. In a sleight of hand worthy of Houdini, Barnville 
was left with a huge paper portfolio. Barnville then picked from its 
paper portfolio a selection of stocks with the amount of capital losses 
needed by a client to offset their capital gains, and transferred those 
losses to a trading partnership owned by the client.
    So, to review, a phony Isle of Man corporation sold stock it didn't 
own to another phony Isle of Man corporation for money it didn't have. 
The fake stock was lent back with fake cash as security for repayment 
of the loan, and the fake loss on the stock price was transferred out 
to offset real gains. No real economic activity took place, but one 
critical thing happened--a $9 billion paper portfolio was created. This 
paper portfolio originated with Jackstones and Barnville, shell 
operations with no employees, no offices, and paid-in capital of =2--
that's about $5 each.
    The final step in the POINT scheme was for Barnville to sell the 
paper losses to wealthy individuals, including Haim Saban and Robert 
Wood Johnson IV. These clients used the paper losses to offset real 
capital gains. Mr. Saban used POINT to offset about $1.5 billion in 
capital gains; Mr. Johnson offset about $143 million. Together, the 
fees they paid to Quellos, the lawyers, the bankers, and others totaled 
about $75 million. One more proof that this sordid tale was used to 
concoct tax losses is the fact that the greater the paper loss 
generated for a client, the greater the fees charged by Quellos.
    The POINT tax shelter included transactions to create the 
appearance of a complex investment with real economic substance. In 
reality, the transactions were expertly designed to remove all risk, 
using circular transactions that cancelled out or were unwound. A 5-
year warrant, for example, which was included in the transactions to 
produce the illusion of a profit potential, was always terminated 
before any profits were realized. In a transaction involving Mr. Saban, 
an $800 million loan and stock purchase were added to provide a patina 
of economic substance, but the way the transaction was structured, it 
could not realize a profit in comparison to the transaction's fees and 
other costs.  For example, the cost of a collar that capped possible 
profits at 8% of the total investment reduced a $130 million profit to 
$13 million, which was then dwarfed by fees totaling $53 million.
    Mr. Saban told the Subcommittee staff that POINT was not sold to 
him as an investment strategy; it was sold to him as a way to avoid 
taxes that he otherwise would have had to pay on a big capital gain. In 
his words, he was promised ``tax deferral ad infinitum'' on a $1.5 
billion capital gain, and that's what he paid for.
    The key deception in POINT was the fake offshore portfolio that 
generated fake stock losses sold to partnerships with a false business 
purpose. The end result was $2 billion in real and taxable capital 
gains that were supposedly erased.

                         Professional Blinders

    One of the most disturbing aspects of the POINT scheme was the 
degree to which reputable professionals aided and abetted this abusive 
tax shelter. Each of the facilitators--the lawyers, bankers, and 
brokers-- played critical roles, pulled in hefty fees, but then acted 
surprised at what the Subcommittee found when it lifted the lid off the 
black box. Most claimed they had been unaware that no securities had 
actually been bought or sold, and no real losses generated. No one knew 
who was behind the tax haven corporations with the $9 billion 
portfolio, Jackstones and Barnville. The professionals hid behind shaky 
legal opinions to justify their roles and donned blinders to block out 
indicators of the sordid business they were involved in. Each 
participant essentially told the Subcommittee: ``I was only responsible 
for my little piece of this. I didn't know the other parts. It's not my 
fault.''

      Quellos, the architect of the sham, says it doesn't know 
who owns Barnville and Jackstones.
      EURAM, the UK company that served as the agent in all the 
deals between Barnville and Jackstones and was paid millions in fees, 
says it doesn't know who is behind the shell corporations.
      HSBC, the global bank that loaned hundreds of millions of 
dollars to fuel some of these transactions and knew it was financing 
deals set up to avoid taxes, says it didn't know who Barnville and 
Jackstones were, didn't know about key steps in the transactions, and 
relied on the tax opinions provided by legal counsel.
      The Cravath Swaine partner who put the law firm's seal of 
approval on POINT and made $125,000 in fees, says he didn't know about 
the fake trades or the role of Barnville and Jackstones.
      Bryan Cave, another law firm that put its seal of 
approval on POINT and made over $1 million in fees, disavows knowledge 
of how the paper portfolio was formed and of the corporations that 
formed it.

    Could it be true that the banks and brokers and lawyers who 
participated in POINT didn't know what they were involved with? Or is 
it that they didn't want to know?

                               Conclusion

    The Wyly chart and the POINT chart say it all. They show how broken 
the system is, and how serious the tax haven abuses have become.
    These tax haven abuses are eating away at the fabric of the U.S. 
tax system, and undermining U.S. laws intended to safeguard our capital 
markets and financial systems from financial crime. It is long, long 
past time for our country to shut down their use by U.S. citizens.
    One of the reforms recommended in our report would address the key 
deceptions in the two case studies examined here: the fake economic 
activity offshore and the fake independence of the offshore trusts and 
corporations.
    This reform would create a presumption regarding who controls an 
offshore entity and what purpose it is serving, if that entity is 
located in a jurisdiction deemed to be a tax haven by the U.S. Treasury 
Secretary. Today, the government has the burden of proving that an 
individual controls a tax haven trust or shell corporation. It is time 
to reverse that presumption.
    In other words, if you create a trust or corporation in a tax haven 
jurisdiction, send it assets, or benefit from its actions, Congress 
should reform the tax law to presume that you control it, that any 
income is your income, and treat that income and that entity 
accordingly for tax, securities, and money laundering purposes. An 
individual could still establish that an offshore entity was 
independent, but the burden of proof would be on that individual, not 
the government.
    Congress should also enact S. 1565, the Tax Shelter and Tax Haven 
Reform Act that Senator Coleman and I introduced last year which, among 
other provisions, would authorize the Treasury Secretary to issue a 
list of tax havens that don't cooperate with U.S. tax enforcement and 
eliminate U.S. tax benefits for income in those jurisdictions. The 
ability to penalize uncooperative tax havens would hand our government 
a mighty club to combat tax haven abuses.
    This hearing and the report we are releasing today shine a needed 
spotlight into the black box of offshore tax havens. It reveals a 
system that is corrupt and corrupting. Honest Americans are footing the 
bill for tax haven abuses, and we need to shut those abuses down.
    Thank you, Mr. Chairman, for the important role you and your staff 
have played in this matter. Bipartisanship has been the hallmark of 
this Subcommittee, and you are helping to preserve that critically 
important tradition. I look forward to the testimony of our witnesses.

             OPENING STATEMENT OF CHAIRMAN COLLINS

    Chairman Collins. Thank you, Mr. Chairman. I can take a 
hint, and I will put my statement in the record.
    Let me just make one comment, and that is, no one enjoys 
paying taxes, but we understand our obligation to do so. And 
those who fail to pay their fair share of taxes by engaging in 
sham transactions or other abusive practices undermine the 
fairness of our tax system and the willingness of the average 
taxpayer to comply voluntarily. And that is why I think this 
exhaustive investigation that you and Senator Levin have 
conducted is so important. It is just plain wrong when more of 
the burden is put on ethical, law-abiding taxpayers because of 
the loss of tens of billions of dollars due to these offshore 
tax scams and schemes.
    So I congratulate you for this exhaustive investigation. 
Senator Levin, you beat the record of the Katrina investigation 
on the number of pages reviewed, but not on the number of 
witnesses interviewed. But I do congratulate you. This is very 
important work.
    Thank you.
    Senator Coleman. Thank you, Senator Collins. Your entire 
statement will be made part of the record.
    [The prepared statement of Chairman Collins follows:]
                 PREPARED STATEMENT OF SENATOR COLLINS
    Good Morning. Let me begin by thanking Senator Coleman and Senator 
Levin for investigating the use of offshore tax scams to evade 
compliance with United States tax, securities, and money laundering 
laws. This hearing will explore a problem that is costing the federal 
government billions of dollars in revenue each year. Shutting down 
these overseas tax scams is a matter of fundamental fairness for our 
tax system.
    There is nothing illegal or unethical about legitimate tax 
planning. Millions of Americans do it every year when they pay their 
taxes and plan their finances. However, when individuals try to avoid 
paying taxes by engaging in sham transactions, in financial 
transactions undertaken to conceal their true purpose, or in business 
deals whose only purpose is to hide the expatriation and repatriation 
of taxable assets, they may be crossing the line between proper tax 
planning and abusive tax sheltering.
    One of the most disturbing aspects of this problem is the fact that 
legitimate, respected banks, attorneys, and investment advisers appear 
to have helped facilitate or promote these abusive transactions. The 
fact is, some of these transactions are so complicated that they 
require a small army of highly trained professionals to plan and 
execute. They are often hidden behind a curtain of secrecy in overseas 
jurisdictions, concealed from the view of the authorities in this 
country. This studied obfuscation makes exposing these transactions 
extraordinarily difficult.
    Unfortunately, problems like this are not new. In 2005 the 
Government Accountability Office placed the federal government's 
enforcement of its tax laws on its ``High Risk List'' of major 
challenges. In fact, this area has been included in every High Risk 
List going back to the first list in 1990.
    This February, the Internal Revenue Service listed the use of 
offshore transactions to illegally hide income on its ``Dirty Dozen'' 
list of notorious tax scams. I understand that IRS Commissioner Mark 
Everson will be testifying here today. I look forward to hearing what 
the agency he leads is doing to meet this challenge.
    The bottom line is that the use of these schemes to evade taxes 
places more of a burden on ethical, law-abiding taxpayers. This is just 
plain wrong. It is one thing to hire someone to help you understand 
your legal options. It is another to hire someone to help you conceal 
your income through sham transactions to avoid paying your lawful share 
of taxes.
    No one likes paying taxes, but we understand our obligation to do 
so. Those who fail to pay their fair share of taxes by engaging in sham 
transactions or other abusive practices undermine the fairness of our 
tax system and the willingness of the average taxpayer to comply 
voluntarily.Thank you, Mr. Chairman.

    Senator Coleman. Senator Lautenberg.

            OPENING STATEMENT OF SENATOR LAUTENBERG

    Senator Lautenberg. Mr. Chairman, I commend you and Senator 
Levin for your thorough work in this area, and to note the 
shock that goes across the country when we look at something 
like this. Every major paper has got a front-page story about 
this, front page of the Business Section, front page of the 
Wall Street Journal, front page of the Washington Post. And you 
see it all over.
    I would only ask for a little more time because this report 
was hard to lift, no less to read, and we got it last night, 
and it was hard to keep from dozing off as I got to page 4, I 
must tell you. [Laughter.]
    But on a very serious note, the suggestion that people who 
made this kind of money were naive and did not ask the critical 
question, perhaps there will be no finding of violation of law 
here, but where is the morality that should accompany the kind 
of successes that have been realized in this country.
    I come out of the business world, and I knew the Wylys in 
the start of their days. I think they were failing then. But 
the fact of the matter is that they are not here, Mr. Chairman, 
and I do not understand why they are not here to sit at that 
table and be a witness and why we haven't got them here in 
front of us to swear to the honesty of their statements. It is 
outrageous that we do not have those two here as witnesses.
    So it is discouraging when the United States is in the 
financial condition that it is, with millions of people without 
health care and our soldiers in Iraq and families having to 
make up for the loss not only of their lives and their family 
relationships, but the income that we are casually--and I say 
that intentionally--casually ignoring this opportunity to 
capture a lot, lot more funding for our Treasury. In these 
cases, the numbers are so high that they stagger the 
imagination.
    But right now what IRS has decided to do is move people out 
of the estate tax enforcement section to a different section so 
that they can audit casual returns.
    If we had been a little bit better at the awareness factor 
and made these discoveries, I think that we could have 
increased our revenue a lot better. And I ask those who made 
the money and those who participated in this scheme, whether it 
is as a beneficiary or as a professional consultant, how they 
feel about their lives in America. Are their lives made better 
because they beat the rap, so to speak? I do not think so.
    So, Mr. Chairman, once again I thank you, and I thank 
Senator Levin for the thoroughness and for the exposure of this 
problem. And I hope we carry it to its fullest extent.
    Unfortunately, I would please ask, the next time when we 
are going to get a report like this, which is critical, and 
understanding the problem, give us a little more time, please, 
maybe two nights.
    Thank you very much.
    Senator Coleman. I appreciate your concerns. I think it 
should be noted, because it is a matter of public record, that 
the Wylys are subject to an ongoing investigation. We were 
asked by the Department of Justice not to compel their 
attendance here because of the impact that compelling their 
testimony may have had on the active, ongoing investigation. So 
that is why that decision was made.
    Senator Levin. Mr. Chairman. I think also that we did 
receive a letter from them indicating that they would assert 
their constitutional rights. If that is true, I would ask that 
letter be made part of the record.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit 64 which appears in the Appendix on page 1310.
---------------------------------------------------------------------------
    Senator Lautenberg. Constitutional right for?
    Senator Levin. Not to testify under the Fifth Amendment.
    Senator Coleman. It shall be made part of the record. Thank 
you, Senator Levin.

              OPENING STATEMENT OF SENATOR STEVENS

    Senator Stevens. I congratulate both of you, and I am here 
to hear some witnesses, I hope.
    Senator Coleman. Thank you, Senator Stevens.
    I think that is a hint, Senator Dayton.

              OPENING STATEMENT OF SENATOR DAYTON

    Senator Dayton. That is a strong hint. I will just join 
with my colleagues in thanking the Chairman and the Ranking 
Member for their excellent work, and their staffs, and I share 
the feelings and the outrage that Senator Lautenberg so well 
expressed. So I associate myself with his remarks, and I agree, 
let's get on to the witnesses.
    Senator Coleman. Thank you, Senator Dayton.
    I would now like to welcome our first witness to this 
morning's important hearing. It is my pleasure to introduce the 
Hon. Mark Everson, the Commissioner of the Internal Revenue 
Service.
    Commissioner, I appreciate your attendance at today's 
hearing and look forward to your testimony and perspective on 
the use of offshore secrecy havens to hide assets from U.S. 
taxation.
    This is the fifth time you have testified before this 
Subcommittee in the 3 years I have been Chairman, so I think 
you know the drill. Before we begin, pursuant to Rule VI, all 
witnesses who testify before the Subcommittee are required to 
be sworn. At this time, I would ask you to please stand, raise 
your right hand. Do you swear that the testimony you are about 
to give before this Subcommittee is the truth, the whole truth, 
and nothing but the truth, so help you, God?
    Mr. Everson. I do.
    Senator Coleman. Thank you. Commissioner Everson, we will 
be using the timing system. Again, you are familiar with it. 
The amber light will come on before the red light. If you can 
at that point conclude your testimony, your written testimony 
will be printed in the record in its entirety, and we ask that 
you limit your oral testimony to no more than 5 minutes.
    You may proceed, Commissioner.

   TESTIMONY OF HON. MARK EVERSON,\2\ COMMISSIONER, INTERNAL 
                REVENUE SERVICE, WASHINGTON, DC

    Mr. Everson. Chairman Collins, Chairman Coleman, Senator 
Levin, and Members of the Subcommittee, thank you for inviting 
me to discuss offshore abuses. As always, I appreciate the 
opportunity to testify before the Subcommittee. In particular, 
I appreciate your strong support for strengthening the 
integrity of our tax system and for enhanced enforcement. This 
Subcommittee has shown impressive leadership in combating 
abusive tax shelters and those who play fast and loose with the 
Tax Code. I know that you have a full morning, so I shall be 
brief.
---------------------------------------------------------------------------
    \2\ The prepared statement of Mr. Everson with an attachment 
appears in the Appendix on page 99.
---------------------------------------------------------------------------
    U.S. tax administration is complicated by the rapid pace at 
which our overall economy is becoming more global. A growing 
percentage of large and mid-sized business tax filings are from 
multinational companies that have a myriad of subsidiaries, 
affiliates and partnerships operating within an enterprise 
structure where the ultimate parent may turn out to be foreign 
or domestic. In addition, a growing number of U.S. businesses 
acquire raw materials, inventory, financing, products, and 
services, some unthinkable just a few years ago, from foreign 
businesses.
    These events are natural outcomes of an increasingly global 
economy, and businesses have the right to optimize their global 
structures. Nonetheless, the complexities of globalization and 
cross-border activity continue to challenge U.S. tax 
administration. With multiple domestic and global tiered 
entities, it is often difficult to determine the full scope and 
resulting tax impact of a single transaction or series of 
transactions. Complexities of globalization and cross-border 
activity create opportunities for aggressive tax planning, and 
even outright evasion.
    It is not just large corporations taking advantage of this 
globalization. Wealthy individuals often seek ways to shelter 
income by moving it offshore or participating in tax shelters, 
some organized by unscrupulous promoters who operate under the 
veneer of legitimacy in the shadows of the global economy.
    This trend toward ever greater globalization makes our job 
at the IRS more challenging each year and is compounded by the 
complexity of the Tax Code itself and by the relative lack of 
transparency in the transactions that businesses and 
individuals often conduct offshore. And not only are the 
transactions themselves often intentionally designed or carried 
out in a manner to be opaque, but the taxpayers engaging in the 
transaction and their roles are often difficult to identify.
    This chart depicts the compliance risk associated with 
offshore activity.\1\ On the left we have businesses, and on 
the right we have individuals, although there is some 
overlapping in the vehicles that are used. What this indicates 
is that the compliance risk increases as the transparency 
diminishes.
---------------------------------------------------------------------------
    \1\ Chart attached to prepared testimony of Commissioner Mark 
Everson which appears in the Appendix on page 110.
---------------------------------------------------------------------------
    I do not want to suggest that all of the activities on this 
chart are bad. In many instances, they can be entirely proper. 
But they run from things where we see technical problems, 
taking advantage of that complexity in the Code to structure 
more tax credit generated transactions or hybrid instruments 
that can be set up where you are paying taxes neither in this 
country nor another country because of the difference between 
debt and equity treatment, to what you are talking about today, 
where there is outright hiding of the ball.
    This is a particular problem because, as you get down here 
where there is no transparency, we have real difficulties in 
finding out what is going on.
    At the IRS we have a variety of initiatives to address 
these challenges. In particular, I would note steps we are 
taking to increase our cooperation with other international tax 
administrations. Just this year, we have formed a new grouping 
of tax commissioners from ten countries, including many of the 
traditional economic powers as well as for the first time, 
China and India. Our conversations are noticeably enforcement 
oriented. Further, we are seeing positive results from the 
Washington-based Joint International Tax Shelter Information 
Center, where specialists from Australia, Canada, the United 
Kingdom, and the United States work side by side to track new 
cross-border schemes.
    Additionally, I would share with the Subcommittee that I 
have just been elected Chair of the OECD Forum on Tax 
Administration. In September, I will be chairing a forum 
meeting of some 40 tax administrators in Seoul, Korea, where 
the focus of our agenda will also be on international 
enforcement.
    Many of my counterparts in the international tax community 
have expressed the need for greater cooperation to fight the 
proliferation of abusive tax practices. Still, in this area of 
our activities, where some businesses and individuals do 
whatever they can to hide within the seams of the Internal 
Revenue Code or to escape IRS notice, our challenges are acute 
and ever growing. Offshore abuses are a real problem, one which 
merits all of our concern.
    I appreciate your efforts, and I look forward to the 
results of your inquiry. Thank you.
    Senator Coleman. Thank you very much, Commissioner.
    Is there any way to give us an estimate on the extent of 
the problem? The report identifies just two transactions in 
which there is $300 million of potential tax liability that was 
not collected. One of the witnesses--I think Professor Avi-
Yonah, who testifies on the next panel--has thrown out a figure 
of approximately $50 billion that is lost each year due to 
offshore tax shelters. Perhaps you can verify this. I believe a 
few years ago the IRS recovered $3.2 billion in taxes from one 
Cayman bank with about 1,100 depositors.
    First of all, could you verify whether that is an accurate 
statement?
    Mr. Everson. Well, I do not want to comment on any 
particular matter because of the confidentiality standards, but 
I can confirm that settlements, when we have pursued entities 
working on tax shelters, abusive shelters, have exceeded $1 
billion in some instances.
    Senator Coleman. And the overall extent of the problem, in 
your best guess?
    Mr. Everson. What I would say, sir, is that it runs into 
the tens of billions of dollars each year. Again, that is 
through a combination of what I would call technical abuses and 
then what you really are pursuing today, the outright hiding 
the ball and what reaches criminal activity.
    Senator Coleman. You used the phrase ``relative lack of 
transparency'' in these offshore activities. The bottom line is 
in some cases it is difficult, if not impossible, to find out 
who is actually controlling an offshore trust. Is that correct?
    Mr. Everson. I think that is correct. As you both indicated 
in your statements, the control is nominal; it is not real.
    Senator Coleman. So, in other words, what you have is an 
individual who can create a trust. They have, of course, the 
trustees, who operate perhaps in the Isle of Man and the 
Caymans, or somewhere like that, and then trust protectors who 
are, in effect, often the individual's person. The trust 
protectors then tell the trusts what to do, and the trust 
protectors are often told by the grantor what to do. Is that a 
fair summary of what you have encountered?
    Mr. Everson. I think what you see is you see two things: An 
ever more complex, as the charts indicate, series of 
transactions and also of people and relationships that oversee 
those transactions. So that unraveling this takes a lot of 
effort--and a lot of time, I might add.
    Senator Coleman. What kind of tools do you have today to 
unravel that? And perhaps the more important question is, What 
kind of tools do you need to do that job?
    Mr. Everson. Well, I would suggest to you we have a lot of 
tools. We have many good people who are working on this. We 
have a lot of information that we have in this country. But the 
degree to which the secrecy laws that have been mentioned are 
in place, that presents difficulties.
    Under Secretary O'Neill, agreements were reached with some 
of these countries to share information. Those agreements are 
just now taking effect, so it will be a little bit of time 
before we see how well they work. Oftentimes, however, the 
agreements, they do not run past the provision of information 
to actually helping us collect money. Let's suppose we make an 
assessment. There is nothing in there that would help us get 
the money from that tax haven country, even if we got the 
information and then were able to make the case that it should 
be taxed.
    Senator Coleman. But help me on the transparency issue, 
because it is my sense it kind of goes to the heart of this.
    Mr. Everson. Yes.
    Senator Coleman. Is there insider trading? You do not know. 
You could have somebody who has a high percentage of shares in 
a particular corporation, but you do not know who is actually 
controlling these shares. It is not your issue, but the SEC, 
they have no knowledge. How do you cut through the veil of 
secrecy here?
    Mr. Everson. Well, it depends. On the corporate side, we 
have something called the M3, which affords a reconciliation 
between the book income, which would be picking up a lot of the 
income, obviously, and the taxable income, where the company is 
trying to minimize that income. I have testified about this 
before at Finance. One of the real problems, we think, that 
exists on the corporate side is the difference between the 
system where companies want to maximize book earnings to drive 
shareholder price, and then minimize taxable earnings. To the 
extent that there is greater transparency of those differences, 
which I favor, I think that will help governance.
    On the individual side, there is a basic issue of honesty. 
What you, Senator Levin, and Senator Lautenberg have talked 
about is that these are people, vastly wealthy, who do not need 
the money, who ought to know better and do know better in many 
instances. So they aren't filling out the forms that indicate 
the bank accounts--people are supposed to fill out forms when 
they have foreign bank accounts--but they are not doing that in 
all instances because that starts to unravel the whole scheme.
    Senator Coleman. How important a priority is this for the 
Internal Revenue Service to go after the tax liability of folks 
involved in offshore activities?
    Mr. Everson. This is a very important priority for us--the 
abusive tax area in general. I think you know that the 
centerpiece of our efforts over the 3-plus years of my tenure 
has been to increase our audits of high-income individuals and 
corporations. We have done that. And where we work and focus on 
the abusive transactions, a big chunk of that is in the 
offshore area.
    Senator Coleman. In terms of the countries, the places that 
provide a haven for this, what kind of sanctions, what kind of 
pressure can we put on them to be more cooperative so we can 
pierce this shroud that now covers these transactions?
    Mr. Everson. Well, I think a lot comes through our 
international relations and trying to increase cooperation of 
other countries.
    Part of the difficulty here is that it is not all black and 
white. There are countries, low-tax countries, commonly seen as 
tax havens, where there are a lot of economic and real business 
activities that take place.
    So where you draw this line, you are talking about a 
presumption that it is a tax avoidance transaction, it is a 
hard thing to do. So we would need to carefully, I think, have 
a discussion on what to do.
    What I would suggest to you is that the most profitable 
avenue of this is greater scrutiny of the professions and 
standards for the professions, and perhaps an opinion should 
not provide protection against penalties for somebody if he or 
she is operating in a tax haven.
    Senator Coleman. I appreciate the recommendation, but the 
ability to distinguish between what is legitimate asset 
protection versus efforts to defraud the U.S. Government, to 
avoid paying taxes without a legitimate basis, or to operate 
through sham transactions, is limited by lack of transparency. 
We do not know at this point who is controlling, or who owns 
the assets.
    Mr. Everson. Yes.
    Senator Coleman. If you could cut through that, it would at 
least allow us then to have the discussion that you said we 
should have.
    Mr. Everson. Yes, I agree.
    Senator Coleman. We will have a lot more to talk about, 
Commissioner. Let me just ask this very quickly: The IRS went 
through a period of time where there was concern about abusive 
enforcement, and in many ways the IRS was cut back. And you 
have been before us a number of times, and we have identified 
areas where people are clearly defrauding the Federal 
Government of resources.
    If you were to get more resources, one of the concerns 
would be to make offshore abuses a priority. Is there a way for 
you to actually prioritize and say we are going to go after 
these high-net-worth folks, we are going to go after these 
offshore activities with additional enforcement dollars?
    Mr. Everson. There is, and we have asked for more money. 
The Senate has provided thus far good funding for this. The 
House has not. I am sure Senator Lautenberg will come back with 
the estate tax question. But what we are trying to do with the 
reallocation of the resources here is--these resources from 
drawing down the estate tax people because the volume of 
returns has gone down by some 70 percent, we would put them, 
Senator, in just this area--I think you used the words ``casual 
returns.'' That is not the intent. They would be used for 
abusive transactions and just this kind of work that we are 
talking about today, people who are generating a million 
dollars or more of income on their individual returns, income 
returns.
    Senator Coleman. Thank you, Commissioner. Senator Levin.
    Senator Levin. Thank you.
    Commissioner, you made a reference about where control is 
nominal and not real. You were referring, I believe, to the 
trusts. Is that correct?
    Mr. Everson. Yes. That takes place in a series of different 
kinds of transactions where there would be a purported economic 
viability or a real substance to the transaction or actually 
there is no tax that is going to come because of the trust, as 
you are indicating, presumably because somebody else is calling 
the shots. But, with a lot of these offshore trusts in their 
worst elements, that does not take place, as you have 
indicated.
    Senator Levin. And who is in those worst elements calling 
the shots?
    Mr. Everson. I think the people who are benefitting from--
when you unwind the transaction, it is the people who have the 
money or the options or the shares, whatever it was that was of 
value to begin within.
    Senator Levin. That transferred those to the trust?
    Mr. Everson. In many instances, yes, sir. That would be our 
concern.
    Senator Levin. Right, and the concern is then in those 
cases that the control of that trust by the trustees is 
nominal. They are the nominal trustees, but the real control in 
that grouping is by the people who put the money or the asset 
into the trust to begin with.
    Mr. Everson. That is exactly right. There are two 
questions. Does the transaction itself work through all the 
complexity? And then is it real as purported on paper? And what 
you are getting to, it is not real because nothing really 
happened. The same people are still in charge.
    Senator Levin. Now, the amount of effort that you are 
putting in to crack the secrecy walls that surround these 
jurisdictions, when you are auditing returns or in your 
enforcement division, how would you compare that effort? What 
do you need and what are you getting to mount that effort?
    Mr. Everson. Well, abusive transactions overall are still a 
relatively small portion of our revenue agent work on 
individuals. It is something like one in six, maybe, of all the 
efforts we make are in that area.
    Now, there has been a much greater focus, as you know from 
our work on Son of Boss when we worked with the Subcommittee, 
on other areas, stock--we had a stock options settlement 
agreement. But more resources are definitely needed here. But, 
again, the real answer is making sure that the professions are 
not providing lousy advice and that we have a return to 
integrity in the professions, as you indicated.
    Senator Levin. Yes, well, we all would agree that is 
important. But in terms of resources being needed, are more 
resources needed in this enforcement area?
    Mr. Everson. I can always use more resources on this, sir.
    Senator Levin. Have you asked for them?
    Mr. Everson. Yes.
    Senator Levin. Can you give us some idea as to what could 
be useful in this area, what you believe? Would it be a 50-
percent increase? Give us some flavor here of what you believe 
you could usefully use?
    Mr. Everson. I would want to reflect on that, sir. As you 
know, within the Executive Branch, those conversations run 
through OMB where a series of weighting factors take place.
    Let me suggest another thing that could be very helpful: 
Third-party reporting. This Subcommittee knows--and, in fact, 
going back to the work you have done on contractors, government 
contractors, the Congress just passed third-party reporting 
and, in fact, withholding on some government contractors, much 
along the lines of what you have suggested.
    I would draw to your attention in this area of transparency 
that the Administration does have before the Congress some 
proposals for increased third-party reporting, most notably for 
credit card issuers, that will help not in this offshore area, 
but very much in the under eporting of income.
    So if we are going to work on this tax gap and on the 
transparency issue, we need to look at reporting, not just only 
resources.
    Senator Levin. You talked in your testimony about the 
question of where the real control is on a foreign entity, 
particularly in a tax haven. Right now, because of the secrecy 
laws of those jurisdictions, it is very difficult, as we can 
see just from the effort we had to put forth to get to where we 
are, to crack that veil of secrecy.
    Would you work with this Subcommittee in drafting or 
considering legislation which would create a presumption, which 
would be rebuttable, that in a tax haven, if you create a 
trust, that there is a presumption in a tax haven, as 
identified by the Secretary of Treasury, that control remains 
in the person who put the asset into the trust?
    Mr. Everson. Certainly we will consider that, sir. You 
mentioned it yesterday when we chatted on the phone, and I have 
sort of reflected on that, and that is how I came to this point 
of maybe it would be better to attack this, because there are 
many things that can be legitimate in these countries. And I do 
not want to tar everybody with this broad brush. But maybe what 
we ought to do is think about the protections that are afforded 
from penalties by the legal opinion. If the legal opinion is 
really at issue here, maybe a starting point would be to take 
away the penalty protection, which would get you, I would 
think, a lot of what you are looking at, because in these 
instances, they are oftentimes relying on a lot of paperwork 
and opinions that are put together by, as you have indicated, 
leading law firms many times.
    Senator Levin. Thank you, Mr. Commissioner. Thank you, Mr. 
Chairman.
    Senator Coleman. Thank you, Senator Levin. Senator Collins.
    Chairman Collins. Thank you, Mr. Chairman.
    Mr. Commissioner, unfortunately, the problem of the use of 
these offshore tax havens is not a new one. The Government 
Accountability Office has placed the Federal Government's 
enforcement of its tax laws on its high-risk list, going back 
to 1990, the very first year that it comes out, and it was 
repeated most recently last year.
    So it is troubling that the issue of tax evasion has been 
with us for so long, and what has happened is over the years 
the schemes have grown ever more complex, which means that the 
Federal Government is losing ever more dollars.
    The GAO has discussed three general strategies for reducing 
the tax gap. First, GAO has suggested that we need to greatly 
simplify the Tax Code. Second, the GAO has recommended 
providing the IRS with additional enforcement authority and 
tools. And, third--and you have just had this exchange with 
Senator Levin--GAO has recommended devoting additional 
resources to enforcing existing tax laws.
    Looking at those three strategies, where do you think our 
emphasis should be? What do you think would really make the 
difference if we want to crack down once and for all on this 
long-standing problem?
    Mr. Everson. Well, Senator, I think we need to do all of 
those things, and I think we also do need to take a serious 
look, again, at third-party reporting as we go down the road, 
because we know where there is third-party reporting, there is 
increased compliance. I will give you the simplest example.
    In 1986, the last real reform, it was mandated that the 
Social Security number of dependents be put on a 1040. The next 
year 5 million dependents vanished. So third-party reporting or 
reporting works. People do not cheat on their wages. There is 
only a 1-percent noncompliance rate there as opposed to 
unreported business income, which is more like a 50-percent 
problem.
    So I would extend your list to include a careful look at 
third-party reporting. But GAO is right, all three of those 
areas are terribly important. In particular, I would say 
simplification of the Code. The other thing I would say is what 
the Congress does is it constantly changes the Code. An 
environment of stability would help both compliance through 
better understanding and also would help us in terms of getting 
after those who do not comply.
    Chairman Collins. Commissioner, in February, the IRS 
announced its ``Dirty Dozen'' list of the most notorious tax 
scams, and on this list was the use of offshore transactions to 
avoid U.S. taxes by hiding income offshore. Some of the other 
dirty dozen tax scams included the misuse of trusts and the 
abuse of charitable organizations and deductions.
    I am trying to get a sense of the relative problems of the 
dirty dozen. How widespread is the abuse of offshore 
transactions relative to the other tax schemes that you listed 
as being particular problems?
    Mr. Everson. Right. Let me say first that Americans, by and 
large, are compliant. We have a great record in this country. 
The vast majority of Americans pay their taxes honestly and 
accurately. I do not think that is changing. What I think is 
changing is that in areas like this, you have increasing 
opportunism because of the changes in the global economy and 
the changes in technology.
    One thing that the Subcommittee report draws out that has 
not been mentioned thus far is the fact that some of this is 
migrating to less well-to-do taxpayers through things like 
advertisements in airline magazines. This is not only about the 
super-rich. This is also about preying on people who are of 
lesser means.
    So I do think, particularly for individuals, this is an 
area of growing concern.
    Chairman Collins. Thank you. Thank you, Mr. Chairman.
    Senator Coleman. Thank you, Senator Collins. Senator 
Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    Commissioner, as you know, it is very hard to run an 
Executive Branch agency from the Legislative Branch.
    Mr. Everson. That does not stop some Senators, sir.
    Senator Dayton. I realize that. And when they fail, it gets 
even more tempting, and I am not referring to your agency 
specifically, but there is that tendency when there are these 
kinds of egregious problems.
    You say that tax evasion is not a problem, but I believe 
the figure cited is some $300 billion a year that is not 
collected that is owed?
    Mr. Everson. Sir, I did not say it is not a problem. What I 
said is we have every right to be proud of our system because 
the vast majority of Americans pay honestly and accurately.
    Senator Dayton. Well, I would agree with that, and I think 
even more so given that your agency has really had, as others 
have said and I think you have acknowledged, so many of its 
resources taken away from it. And I think if we are looking at 
culprits here, as we should, Congress--and I would say it is 
previous Congresses because I am not aware of this Congress 
doing anything along those lines. But it has systematically cut 
back on your capability, and so the fact that so many Americans 
do pay their taxes from all income brackets, with the increased 
likelihood that they will not be audited no matter what they 
do, you are right, is a credit to the system. But that is still 
a very significant figure, and when you look at the deficits we 
are facing now chronically, that is money that would be--and 
you are agreeing. We are in agreement on that.
    Mr. Everson. Sir, I spent a lot of time arguing for 
reducing the tax gap. We are on the same side.
    Senator Dayton. I realize your hands are bound by the 
Office of Management and Budget and those deliberations and the 
like. But when we read the report last week, that almost half 
of your estate tax lawyers and 17 of the support staff are 
going to be cut, according to one report, six of the IRS 
lawyers are likely to be laid off, acknowledge that the cuts 
were simply the latest moves behind the scenes at the IRS to 
protect people with political connections and complex tax 
avoidance schemes from detailed audits.
    Could you comment on that, please?
    Mr. Everson. Yes, I think that is garbage. That is total 
garbage. I run a clean agency. The Chairman and Senator Levin 
would both agree, I would hope, on that. There are two 
political appointees there. There is no politics in this at 
all, and I find that assertion offensive. The number of estate 
tax returns that have been filed is going down by 70 percent. 
Any sane businessman would adjust his activities. We will take 
those resources and put them into things like what we are 
talking about today.
    Let me make one other point. The hourly rate of return on 
work like the abusive tax transactions is double the rate of 
return on the smaller estates. So it makes good sense to do it, 
and until the Congress gives me the resources that I ask for, I 
have got to do things like this to make it work, sir.
    Senator Dayton. And I think this would be very helpful. 
What resources, additional resources, do you need either that 
you have asked for here to date or that you have not been able 
to that you do need? I think Members of this Subcommittee on 
both sides are willing, are desirous to provide what you need. 
It is very hard to find out, often, when this gets filtered 
through OMB.
    Mr. Everson. Sure. And I hope that what will happen, sir--
and I do not mean to get mad at you, but I am mad at the 
assertion that was made.
    Senator Dayton. I have people mad at me all the time. 
[Laughter.]
    Almost as many as mad at you.
    Mr. Everson. Almost--well, I am not sure.
    But what you can do right here and now is make sure we get 
our funding that is in the 2007 request, because as I 
indicated, the House has cut that request by some $100 or $110 
million, and that will hurt us and result in layoffs. The 
Senate right now has full funding. It has topped it up I 
believe even just a little bit more. So that would be the first 
request I would make, sir.
    Senator Dayton. All right. That is a good start.
    Somebody was referencing here what for me was a very 
helpful set of recommendations by Robert S. McIntyre, head of 
the Citizens for Tax Justice, and he said we need to provide 
stiff fines on entities, including charities, pension plans, 
and local governments, that cooperate with tax shelter schemes. 
I would like to just recite these and ask for your comments, 
please. ``We need to fight the lawyers and accountants with 
monetary penalties for abusive behavior so they stop selling 
and blessing tax shelter behavior. We need to force tax lawyers 
to file their often bogus tax-shelter-blessing opinion letters 
with the IRS so that schemes that rely on non-detection and 
playing the audit lottery will get scrutinized. We need to fix 
the loopholes in our anti-tax haven laws and expand the court-
made rule that tax deductions must have some real economic 
substance.''
    Do any of those stand out as ones you support or ones that 
you disagree with?
    Mr. Everson. Well, you moved through those pretty quickly. 
Let me speak about the first one.
    The use of tax in different entities for tax abusive 
transactions is a real problem. There are actions that are 
taking place to curb that. We have certainly set as one of our 
four enforcement priorities greater scrutiny of the tax-exempt 
sector. So that is a real problem. Finance and others are 
continually looking at that. We need to continue our efforts 
there.
    The second two points you mentioned are about the 
professions. As I indicated before, we are not going to fix 
this only through statutory or IRS actions. We have to have a 
cleaner set of professionals who help people pay no more than 
what they owe but what they owe.
    And the last point, yes, there are always loopholes, but, 
again, the real answer here, I think, is simplification of the 
Code, because every time you try to close a loophole, in this 
complex world you are oftentimes creating an opportunity for 
something else.
    Senator Dayton. My time has expired. Thank you, Mr. 
Chairman.
    Senator Coleman. Thanks, Senator Dayton.
    Senator Levin, I understand you had one follow-up question.
    Senator Levin. One more question. Thank you, Mr. Chairman.
    Under the PATRIOT Act, the financial institutions are now 
required to identify the beneficial owners of foreign entities. 
They are not required at this point to report that, but they 
are required to identify the owners of foreign entities and 
keep that information in their records.
    Would it be helpful to you if the 1099s that they file 
were--added to that requirement of 1099s would be the 
requirement that where a U.S. person is identified by them to 
be the owner of a foreign entity, that they would notify you 
with a 1099?
    Mr. Everson. That sounds like it would be useful on the 
face of it, sir. I would want to make sure there was not some 
wrinkle in it. But, generally speaking, more information is of 
use to us, again, if we have a good infrastructure to process 
the information and it is actually usable.
    Another problem we have not discussed here is with all this 
complexity and all the transactions, your spaghetti chart, 
people count on the fact that there will be so much information 
coming into us that we are not going to be able to decipher it 
one way or the other. So if we get more information, we need to 
be able to process it and understand it.
    Senator Levin. But I am asking you, where the financial 
institutions identifies an American entity as the beneficial 
owner.
    Mr. Everson. On the face of it, that may very well be quite 
useful. I would want to get back to you after some reflection.
    Senator Levin. All right. Because they are the ones who 
have to cut through all the spaghetti and reach their own 
conclusion. They do it now.
    Mr. Everson. Yes, I understand.
    Senator Levin. And if they do it now for their own purposes 
inside their own file cabinets, why not share that with the 
IRS?
    Mr. Everson. Yes, Senator, you have made some very 
important recommendations in the report. I feel somewhat akin 
to Senator Lautenberg here. We just got it. They raise a lot of 
important issues. Before giving any particular reaction, I 
would like to make sure we had a chance to really look at it.
    Senator Levin. Let us know for the record.\1\
---------------------------------------------------------------------------
    \1\ At the conclusion of the hearing, Commissioner Everson 
responded as follows: ``Senator Levin, the Subcommittee has made some 
very thoughtful recommendations in its report. Because most of these 
proposals involve significant policy issues, I have shared them with 
the Treasury Department's Office of Tax Policy. I am sure that office 
would be glad to discuss them with you. I would note, however, that we 
would generally welcome changes that are designed to promote more 
disclosure and greater transparency. Furthermore, tax law 
simplification would greatly reduce opportunities for tax avoidance.''
---------------------------------------------------------------------------
    Mr. Everson. Yes, sir, of course.
    Senator Levin. Thank you. Thank you, Mr. Chairman.
    Senator Coleman. Thank you, Commissioner. Just two 
observations. You mentioned that the issues we are dealing with 
now are not just focused on high-net-worth individuals, that 
average taxpayers go online and are attempting to make use of 
some of these same benefits.
    I would note that if you Google ``offshore asset 
protection,'' you get 479,000 references. So there is quite an 
industry that is out there.
    I also want to note for the record that you are not 
escaping Senator Lautenberg's gaze. He has indicated that he 
will submit questions that he would like responses to, so that 
will become part of the record. Thank you, Commissioner.
    Mr. Everson. Thank you.
    Senator Coleman. I would now like to welcome our second 
panel: Professor Reuven Avi-Yonah, the Irwin I. Cohn Professor 
of Law at the University of Michigan School of Law in Ann 
Arbor, Michigan; and Gary Brown, attorney at Baker, Donelson, 
Bearman, Caldwell and Berkowitz in Nashville, Tennessee.
    I would note that Mr. Brown was formerly special counsel 
for my colleague, Senator Fred Thompson, and worked on this 
Subcommittee during its investigation of Enron. I welcome you 
back to Washington, Mr. Brown.
    Professor Avi-Yonah's and Mr. Brown's expertise are in the 
fields of securities and tax law.
    Gentlemen, I appreciate your attendance at today's hearing 
and look forward to your testimony and perspective on the use 
of offshore jurisdictions by U.S. individuals to shelter assets 
from taxation. I am equally concerned about corporate insiders 
and large shareholders conducting securities transactions 
offshore, what challenges this presents under our Federal 
securities laws, and whether we have enough safeguards to 
protect the investing public. And I look forward to hearing 
both of your thoughts on these critical issues.
    Before we begin, pursuant to Rule VI, all witnesses before 
this Subcommittee are required to be sworn in. I would ask you 
to stand, as you have done, and raise your right hand. Do you 
swear that the testimony you are about to give before this 
Subcommittee is the truth, the whole truth, and nothing but the 
truth, so help you, God?
    Mr. Avi-Yonah. I do.
    Mr. Brown. I do.
    Senator Coleman. As you have observed with the 
Commissioner, we are using a timing system. Approximately one 
minute before the red light comes on, you will see an amber 
light. At that point you can conclude your testimony, give your 
concluding remarks. Your written testimony will be printed in 
the record in its entirety. We do ask that you limit your oral 
testimony to no more than 5 minutes.
    Professor Avi-Yonah, we will have you go first, followed by 
Mr. Brown. After we have heard your testimony, we will turn to 
questions. Professor, please proceed.

TESTIMONY OF REUVEN S. AVI-YONAH,\1\ IRWIN I. COHN PROFESSOR OF 
 LAW, UNIVERSITY OF MICHIGAN SCHOOL OF LAW, ANN ARBOR, MICHIGAN

    Mr. Avi-Yonah. Thank you very much, Senator Coleman, 
Senator Levin. Thank you very much for inviting me, and thank 
you to the Subcommittee staff for their amazing work. I also 
only got this last night, so I cannot say I have read every 
word in the 370 pages, but, nevertheless, I consider this is a 
very impressive piece of work, and some parts of it I had the 
opportunity to examine earlier.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Avi-Yonah appears in the Appendix 
on page 111.
---------------------------------------------------------------------------
    What I want to talk about is what I call the international 
part of the tax gap. As we have heard from Commissioner Everson 
earlier, the IRS has estimated there is about $300 billion of 
taxes that are owed each year and not collected. I have 
estimated that there is about a $50 billion part of that that 
is due to offshore transactions involving tax havens. That is a 
significant number. It is larger comparatively than some of the 
other numbers that the IRS has identified and maybe focus more 
on, like corporate tax shelters or EITC fraud. And it is 
something that is worth paying attention to.
    These transactions make use of offshore entities, trusts, 
corporations, and the like, that are located in jurisdictions 
that, as Senator Levin mentioned before, have two 
characteristics: One is a low or non-existent income tax, and 
the second one is a legal system that assures bank secrecy and 
the privacy of corporations so that it is impossible to know 
who is behind them.
    The use of the secrecy is essentially as a shield in order 
to prevent the IRS and other tax administrations from finding 
out who is, in fact, the beneficial owner of these 
transactions.
    Now, as Senator Collins mentioned before, we have had 
hearings like this going all the way back at least to 1937, and 
we have had a set of rules written in the tax laws that are 
designed to prevent U.S. citizens, U.S. taxpayers from abusing 
offshore trusts and offshore entities. So we have, for example, 
a whole set of rules that require U.S. shareholders in foreign 
corporations to pay tax currently on certain types of income, 
investment income that is earned through such entities.
    The problem is that, as illustrated by some of these 
transactions that the Subcommittee has examined, in particular 
the Wyly transactions, there are loopholes in these rules, and 
unless these loopholes are closed, I am afraid that the IRS may 
not be able to enforce them adequately. In particular, as was 
indicated by some of the questioning before, if you as a U.S. 
taxpayer set up a trust in, let's say, the Isle of Man, and 
that trust is nominally independent of you in the sense that it 
has independent trustees, which can be a trust management 
company, and it has independent protectors, which are maybe 
your friends, maybe your employees, people that will do your 
bidding but they are not your family and they are not formally 
related to you so that the law does not consider them to be 
your related parties or affiliates, then this trust is 
considered independent and any corporations that it owns in a 
tax haven will also be considered independent. And the result 
of that is that if you just follow the form of the tax law, 
these types of trusts and corporations can then engage in 
transactions that clearly benefit you, such as the purchase of 
U.S. real estate, lending money, etc., to the U.S. taxpayer, 
without subjecting the U.S. taxpayer to current tax.
    We do have a set of rules regarding trusts. We have, for 
example, a provision that says that any foreign trust that has 
a current U.S. beneficiary will be treated as a grantor trust, 
and that means that it is treated as owned and controlled by 
the U.S. taxpayer and the U.S. taxpayer has to pay tax 
currently on all of the income of that trust. But the problem 
is that these trusts are not set up with current U.S. 
beneficiaries. They are set up with current foreign charitable 
beneficiaries, but the protectors make sure that the trust 
distributes no income to such charities, and in the future 
there are contingent U.S. beneficiaries that kick in, let's 
say, after the settlor's death, and they will be able to 
recover the income that way. So under current law, that is not 
caught.
    There are provisions in the law also, the other grantor 
trust provision, that say that if, in fact, a U.S. person, the 
settlor or grantor, controls the trust in certain ways, such 
as, for example, directing distributions and/or changing the 
mix of assets of the trust and so on, or having the right to 
force a reversion of the assets of the trust back to the United 
States, then, again, this is treated as a grantor trust.
    But the problem is those provisions also are interpreted 
very technically and narrowly, and the result is that you can 
avoid them by drafting the trust in the way that I suggested 
and essentially trusting the protectors to do their job. So, by 
and large, this is a significant loophole that I think it will 
be good to close in the ways that the Subcommittee report has 
suggested.
    I would just like to conclude by saying that--echoing some 
of the statements that were made before. This is a significant 
problem when rich U.S. individuals are able to avoid paying 
their U.S. taxes, whether legally or illegally, at a time where 
regular U.S. taxpayers that just get wage income and get 
withheld on or just have interest income that is reported to 
the IRS have to pay their taxes, and this undermines confidence 
in the system, and I think something should be done about it. 
Thank you very much.
    Senator Coleman. Thank you very much, Professor. Mr. Brown.

TESTIMONY OF GARY M. BROWN,\1\ CHAIRMAN, CORPORATE DEPARTMENT, 
 BAKER, DONELSON, BEARMAN, CALDWELL AND BERKOWITZ, NASHVILLE, 
                           TENNESSEE

    Mr. Brown. Thank you, Chairman Coleman, Ranking Member 
Levin, Senator Collins--good to see you--Members of the 
Subcommittee. Thank you for the invitation to appear before you 
and share my thoughts on the U.S. Federal securities law 
implications of certain aspects of your investigation into tax 
havens and offshore tax shelters. I have prepared detailed 
written testimony that addresses several of the significant 
securities law aspects of the transactions that you have under 
investigation, and I would request that the full test of that 
be entered into the record.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Brown appears in the Appendix on 
page 120.
---------------------------------------------------------------------------
    Senator Coleman. It shall, without objection.
    Mr. Brown. The U.S. Federal securities laws are based upon 
principles of full disclosure. The disclosure that is required 
by those laws comes in many forms--information that is required 
when a company is selling securities, information about the 
persons seeking to acquire ownership of U.S. public companies, 
and also information about the directors, officers, and 
significant shareholders of U.S. public companies.
    To the extent the information that is required to be 
disclosed by U.S. securities laws is complete and accurate, the 
investing public has information with which to make an informed 
investment decision. From that comes the most important by-
product in the U.S. securities marketplaces, and that is trust. 
Without trust in the underlying information that is disclosed 
about companies, the markets will simply not function or will 
do so in a very imperfect manner.
    We have all seen what happens when the investing public 
loses trust and confidence in the financial markets--think 
Enron, WorldCom, Tyco, etc. One of the purposes of the 
Sarbanes-Oxley Act of 2002 was to attempt to restore the public 
trust in the marketplace and to make financial statements of 
public companies transparent and reliable.
    For example, would you or anyone else take your 401(k), 
take it to Las Vegas, put it in a poker game that you think is 
rigged for the house? And that is in many respects how some 
people felt and continue to feel about the U.S. securities 
markets.
    But there is a lot more to transparency than what is 
required to and should be disclosed by the companies offering 
securities in the United States. Some of those requirements and 
their importance are detailed in my written testimony. The 
concerns that these requirements are meant to address include, 
in the context of your particular investigation, purported 
private placements of securities by U.S. companies to 
``independent'' entities that, in fact, are controlled by 
promoters or affiliates of U.S. companies. Promoters have used 
these offshore vehicles to trade illegally in their own stocks, 
to engage in practices known as ``painting the tape,'' 
generating fictitious trades to drive up securities prices, and 
these securities are then resold, sometimes to U.S. investors, 
without full disclosure--the types of transactions that strike 
at the very heart of the purpose of the Securities Act of 1933 
and sometimes violate the provisions of that Act.
    Concentration of share ownership in U.S. public companies 
by affiliated groups that exceeds reporting thresholds imposed 
by the Securities Exchange Act of 1934--these prevent the 
companies in question from determining the identities of large 
beneficial owners and can give the appearance of greater 
liquidity in the way of public float for the market for the 
securities in question.
    To the extent that overseas companies are used to shield 
information that is difficult to discern even in a domestic 
context, the use of offshore entities in so-called secrecy 
jurisdictions without question exacerbates the issue of lack of 
transparency in the U.S. marketplaces, and I have given the 
example in my written statement here of a situation where a 
company and several executives were convicted in the late 1990s 
for engaging in transactions that violated Regulation S.
    I venture to say that the principal attraction of doing 
business in these havens is not the tax benefits. The benefits 
that are always present are also strict bank and corporate 
secrecy, lack of transparency in financial dealings, and the 
lack of any meaningful regulation or supervision in the 
financial services area. Lack of transparency and strict 
secrecy is particularly troublesome because it prevents 
regulators from, among other things, determining true 
beneficial ownership of offshore entities, particularly when 
ownership sometimes is evidenced by mere bearer instruments.
    Numerous Internet websites, as the Commissioner mentioned a 
moment ago, allow the opportunity to open offshore accounts, 
even set up offshore banks. A site that I visited just over the 
weekend when I was looking up some things said, ``Click here 
for details,'' and what that does is illustrate the ease with 
which people can either take advantage of or be taken advantage 
of by these venues.
    The U.S. should continue to explore--and some of those 
items have been mentioned this morning--effective means to 
break down the culture of secrecy to obstruction that prevails 
in many of these jurisdictions. Measures could include 
legislation and regulations and make doing business in those 
jurisdictions less attractive. Senator Levin and you, Senator 
Coleman, have mentioned some of those. Some of the policy 
considerations are also addressed in my written statement.
    But, above all, I have heard several times this morning 
instances about the professionals in this area. I believe and I 
can assure you that aggressive enforcement of the securities as 
well as the tax laws is a sound step in continuing to restore 
confidence in the fairness of the American securities market. I 
can tell you in the now 5 years since the collapse of Enron, 
there is nothing that gets the attention of the business world 
more than watching investment bankers, lawyers, executives, and 
others who manipulate the securities system convicted and sent 
to prison.
    So let me finish where I began, and that is with trust. You 
cannot legislate trust, but you can, however, ensure that the 
laws and the regulations require complete disclosure, and the 
penalties for betraying the trust reposed by the investing 
public are severe and certain.
    Thank you again, Mr. Chairman. Your Subcommittee has a 
great tradition, and I am very honored to appear before you 
today, and I would be happy to respond to any questions.
    Senator Coleman. Thank you, Mr. Brown.
    It appears to me that there are two issues that we are 
dealing with here. One is the issue of trust and confidence in 
the system, and, Mr. Brown, you have talked about that. And, 
Professor, you have talked about the individuals who are kind 
of avoiding liability and the burden that really places on the 
rest of us.
    Let me start first with you, Mr. Brown, on this trust and 
confidence issue and the actions that undermine that. Could you 
turn to Exhibit 18,\1\ the real thick book there?
---------------------------------------------------------------------------
    \1\ See Exhibit 18 which appears in the Appendix on page 769.
---------------------------------------------------------------------------
    Mr. Brown. Yes, sir.
    Senator Coleman. Exhibit 18 purports to be a document from 
a trust protector to a particular trustee. And if you look at 
the next to the last paragraph--and this is one of the Wyly 
trusts--a purchase is to be limited to approximately 600,000, 
700,000 calls in order to stay under 5 percent of outstanding 
shares and avoid SEC reporting. So, in other words, trustees 
are being directed to kind of stay below the radar. The SEC 
would not know the volume of shares that this trust would have. 
Is that correct?
    Mr. Brown. That is correct, and I would point out, I think 
I mentioned in my detailed statement that there are specific 
SEC regulations that provide--when there is the use of a trust 
or other device specifically to avoid the reporting threshold, 
then you are deemed the beneficial owner. So this in and of 
itself violates the spirit of that regulation.
    Senator Coleman. So, in other words, if you had two or 
three trusts and the set-up was to split the shares among the 
trusts to avoid the SEC reporting requirement, that would be 
problematic from your perspective.
    Mr. Brown. Yes, it would.
    Senator Coleman. Professor Avi-Yonah, you talk about trusts 
being nominally independent, and what I am hearing is that an 
individual could set up a trust, and the trust could have a 
trust protector, and as you indicated, as long as the protector 
is not family, then the grantor can add the protector as a kind 
of a layer of protection. But if in the end that trust were to 
provide the grantor with jewelry worth tens of thousands of 
dollars and loans would there be nothing technically illegal 
about that?
    Mr. Avi-Yonah. Well, it depends. I mean, it is just like 
the Commissioner talked about before. You have to go through 
two layers. One is kind of the technical transaction. As a 
technical transaction, I think if you believe that this trust 
is independent, then independent people can lend you money and 
can buy you jewelry and can do whatever they want.
    I think if the IRS knows about this, they can argue that 
this is a disguised distribution and that you are really the 
beneficiary, and then they can catch you.
    The problem is this was done in some of these transactions 
through the Caymans, and the Caymans have a pretty strict 
secrecy provision. So then how does the IRS know that the money 
is really coming from a trust that is controlled by the U.S. 
grantor.
    Senator Coleman. What you have is a shield by the laws in 
the Caymans and Nevis and the Isle of Man as to who the real 
beneficial owner is.
    Mr. Avi-Yonah. Right.
    Senator Coleman. And that goes to Mr. Brown's comments that 
massive stock transactions that may actually benefit an 
individual, but nobody knows.
    I think you used the words, Professor, the form--with trust 
protectors, that the form of the tax law is not violated, but 
there is an issue here between form and substance.
    Mr. Avi-Yonah. Right. I think as a substantive matter it is 
clear in this case that the U.S. taxpayers, in fact, control 
the trust, and as a result they should be treated as the owners 
and grantors, and these should be treated as grantor trusts.
    Senator Coleman. So if you had a situation where there was 
a repeated pattern of very specific and explicit directions 
being given by the grantor to the trust protectors and then 
specific repetitive instructions from the trust protectors to 
the trustee, who on almost every instance followed the 
instructions, would that raise a question as to who the 
beneficial owner is?
    Mr. Avi-Yonah. Yes, I think that clearly would indicate 
that the beneficial owners are really the U.S. settlors.
    Senator Coleman. And what about loans of trust assets to a 
U.S. person? Again, when you have a situation where the 
grantor, the person who set up the trust, gives directions to a 
trust protector, who then goes to the trust itself, and in 
almost each and every instance, the trust then provides loans 
of paintings, jewelry, shouldn't these be treated as taxable 
distributions?
    Mr. Avi-Yonah. They should be.
    Senator Coleman. But the issue here is that the lawyers can 
look at this and say from a form perspective there is a 
question about who the beneficial owner is?
    Mr. Avi-Yonah. I frankly find it hard to believe that any 
lawyer would actually condone these kinds of transactions that 
include the loans and the flowing of the money back to the 
United States. The documents that I have seen all had to do 
with the outflow of money. I mean the transfer of the options 
in exchange for the annuities and so on, these are blessed with 
legal opinions. I think it will be hard to find a lawyer who 
would actually say that there is no problem with all of these 
essentially distributions of trust assets back to the United 
States. That I think crosses the line.
    Senator Coleman. I think it crosses the line, too, and this 
is not my area of law. This is not my expertise. But common 
sense would dictate that when you have this repetitive pattern 
you have got a problem.
    Does the trust protector have some responsibility there?
    Mr. Avi-Yonah. I think the trust protectors have 
responsibility, but under current U.S. law--the trust protector 
is not a common concept in U.S. trust law. It is common in the 
laws of these other jurisdictions, so we do not really have 
this concept and, therefore, we do not impose any particular 
responsibility on the trust protectors as a legal matter.
    I mean, I certainly think that this is an area that we 
should perhaps be looking at.
    Senator Coleman. Let me, if I can, go to solutions. First 
of all, I think, Professor, you testified that the Organization 
of Economic Cooperation and Development could help us address 
the problem. Commissioner Everson said that he is not sure of 
that.
    Mr. Avi-Yonah. Yes.
    Senator Coleman. Can you tell us how the Organization of 
Economic Cooperation and Development could help? And then, Mr. 
Brown, if you would respond, what can we do to close these 
loopholes? What can we do to make sure that we somehow bolster 
the confidence in a system that right now has loopholes that 
people are driving big trucks through?
    Mr. Avi-Yonah. The OECD, the Organization of Economic 
Cooperation and Development, has had a project since 1998 to 
crack down on tax haven abuses, and we have a patchy history of 
cooperation with that project. That varied, I think. Basically, 
initially we cooperated very nicely. Then we did not cooperate 
very much. And after September 11, we realized that there may 
be terrorist money-laundering types of issues associated, so we 
started cooperating a little bit more.
    One particular example that I think would be helpful is 
that they have developed, the OECD has developed an exchange of 
information agreement in the model tax treaty and also model 
tax exchange of information agreement that is far in advance of 
anything that we have in our tax treaties today. And I think it 
would be very helpful if we renegotiate these agreements, for 
example, that Secretary O'Neill negotiated early on in the Bush 
Administration with the tax havens along those lines, because 
it provides for much more extensive, much more elaborate 
exchange of information than what is available today from any 
jurisdiction.
    Senator Coleman. Thank you. Mr. Brown.
    Mr. Brown. Well, since you are focusing on the offshore 
aspects of this, I think we should look at possibly tightening 
up the Regulation S requirements, which I have referred to in 
my statement. Those were tightened up already in 1997 or 1998 
in response to some abuses at that point, so some further 
tightening there. And a couple of people have already mentioned 
today further focus on the professionals and the companies 
handling these transactions.
    Senator Coleman. Thank you, Mr. Brown. Senator Levin.
    Senator Levin. Professor Avi-Yonah, just to kind of expand 
on your testimony here, the control--I do not know if you can 
see this. This is Exhibit 1 in your book,\1\ by the way, if it 
is easier for you. But just looking at that second column from 
the right, these securities were purchased at the direction of 
the Wylys, real estate purchased at the direction of the Wylys, 
business ventures invested in at the direction of the Wylys. 
This is what all the evidence is through e-mails and others and 
another witness, who was one of the protectors, will 
subsequently tell us about. Art and jewelry used by the Wyly 
families, paintings of the Wylys.
---------------------------------------------------------------------------
    \1\ See Exhibit 1 which appears in the Appendix on page 622.
---------------------------------------------------------------------------
    What that shows, according to your testimony, is basically 
the beneficial--as you put it, that these should be treated, 
put it this way, as taxable transactions, basically. Is that 
correct?
    Mr. Avi-Yonah. I think what this would make is to render 
all of these trusts that are in your first column in the left 
into grantor trusts, which means that the assets are treated as 
assets of the Wylys and they get taxed on all of their income, 
not just the income that flows back into the United States, but 
the entire----
    Senator Levin. All the income of the trust?
    Mr. Avi-Yonah. Yes.
    Senator Levin. Not just the second from the right column.
    Mr. Avi-Yonah. Correct.
    Senator Levin. Very specifically, in both areas, Professor, 
first you said that you have taken a look at some of the 
recommendations that we make in our report to try to pierce 
this veil of secrecy and to try to look at the substance rather 
than at the form and to try to make our laws much stronger, 
tougher, get rid of loopholes which focus on form rather than 
substance, which allow these kind of charades to occur.
    Specifically, what would be the one or two most important 
things that you think we could do in that regard?
    Mr. Avi-Yonah. Well, I think the main focus should be on 
this question of who controls various foreign entities, and I 
think it is a very good idea, what you recommended, that there 
will be a presumption that if a U.S. person sets up an entity 
in a tax haven jurisdiction, then there will be a rebuttable 
presumption that he or she controls that entity, which they can 
rebut. But currently, as you pointed out, the IRS bears the 
burden of proving it.
    The other aspect of this, I think, that needs to be 
addressed is the secrecy issue, that is, how will the IRS know 
that these entities in tax havens exist. And I think about that 
I would encourage giving the IRS more resources to focus on 
this area. I would encourage renegotiating, as I mentioned 
before, the exchange of information agreements to make them 
broader and more automatic and the like.
    Senator Levin. Thank you.
    Now, Mr. Brown, if someone directs the investment 
activities of offshore entities, should they include those 
stockholdings, basically, of those entities in their own SEC 
filings?
    Mr. Brown. In my opinion, yes. Even unexercised control is 
control.
    Senator Levin. And where it is exercised, it is really 
control.
    Mr. Brown. It is really control.
    Senator Levin. Thank you.
    Mr. Chairman, thank you, and I want to thank this panel, 
not just for their presentation here today, but they have also 
been very helpful to us in preparing for today, answering 
technical questions, and we are very grateful.
    Senator Coleman. Thank you, Senator Levin. Senator 
Lautenberg.
    Senator Lautenberg. Mr. Chairman, unfortunately I was not 
able to hear the testimony nor the questions that were 
previously asked, and I do not want to take up a lot of time, 
and I will reserve the opportunity to send questions in writing 
and look for a response. But I would just ask this, if it is 
not redundant, and I would appreciate your response:
    Have IRS resources kept up with the burgeoning tax shelter 
growth that we have seen over the past 10 years?
    Mr. Avi-Yonah. I think the answer is clearly no. The 
previous Commissioner, Commissioner Rossotti, testified in 2004 
that there was a loss of about 20,000 full-time positions 
between the early 1990s and 2004. This has to some extent been 
made up since then, but not fully, and you have to remember 
that in the meantime the complexity of the tax law is 
increasing all the time, and the complexity of the economy is 
increasing all the time. So I think the answer is no, that they 
don't have enough resources.
    Senator Lautenberg. Mr. Brown, do you have a view on that?
    Mr. Brown. I really do not have a view as to the IRS. You 
might ask a similar question as to the other regulatory 
agencies, like the SEC, for example. They have had substantial 
increases in staff and funding, but you might ask whether that 
is appropriate levels for these areas.
    Senator Lautenberg. In short form, what is the SEC's role? 
What would the SEC's role be here?
    Mr. Brown. In policing the securities aspects of these 
international transaction that violate Regulation S, the 1933 
Act and violate the reporting provisions of Section 130 of the 
1934 Act.
    Senator Lautenberg. But doesn't that fall, Mr. Brown, to 
the IRS to ferret out these abuses and enforce the rules as 
they exist? One thing is obvious, and that is that the rules 
are inadequate in managing what should be routine reporting.
    So I think it is fair to say that--and I understand that 
Mr. Everson had some things to say after I left about the 
resources that the Administration was going to supply to IRS 
was adequate and that we should support it. But the fact is 
that the numbers are easy to deal with, and that is, there is a 
significant cut coming in terms of the number of people that--
there are going to have to be reductions in force. So that 
there is a design, as far as I am concerned--and I stand on 
this. There is a design to not make it too tough on people who 
are so fortunate as to have amassed fortunes beyond the belief 
of most people in the country. And they are still not content 
with those, and we have--I recognize we are not writing laws on 
morality here, but that is too bad. But the fact is that where 
things are inadequate to the mission and when we see the 
revenues lost, when the deficit continues to burgeon, and we go 
happily along our path of making sure that taxes for the 
wealthy and the super-wealthy are diminished.
    I did not do badly in business, but I am not in that 
league, and I would not do it in the first place.
    Thanks, Mr. Chairman.
    Senator Coleman. Thank you, Senator Lautenberg. Senator 
Dayton.
    Senator Dayton. All I can say to my colleague Senator 
Lautenberg is if this were a tome on morality, it would be 
extremely short, because there is not any morality here. These 
ventures are amoral at best, and immoral, as you said very 
eloquently in your opening statement, at worse.
    I do not have any specific questions of this panel, Mr. 
Chairman. Thank you.
    Senator Coleman. Thanks, Senator Dayton.
    I just want to, if I can, ask one follow-up question of the 
professor. These offshore jurisdictions, the Caymans, Isle of 
Man, Trinidad, Tobago, Jersey, and Guernsey, they depend on 
these offshore transactions. They are a big part of their 
economy. So do we have any leverage? Is there a carrot and a 
stick approach that we can use to, in effect, force them to 
work with us, to cut through the shroud of secrecy? Do we have 
the ability to get them to step up to the plate, to work with 
us to make sure that we can pierce the veil where, in fact, 
transactions are being conducted to perpetuate a fraud?
    Mr. Avi-Yonah. Yes, I think we certainly do. As far as the 
carrot is concerned, I think it would be a good idea to 
consider some form of aid to wean them off the offshore sector. 
A lot of the benefits of the offshore sector go to 
professionals that reside in the United States or in other rich 
jurisdictions. These fees and the transactions were not paid to 
people in the Caymans or in the Isle of Man. Those people do--I 
mean, these are shell corporations. They do ministerial things. 
They do not earn a lot of money. But, of course, for those 
jurisdictions this is a significant amount. For peanuts, we 
could really enable them to restore all of that income, and it 
is a very small percentage compared to the trillions of dollars 
that they handle.
    As far as the stick is concerned, I think fundamentally the 
reality is that nobody, except for maybe drug launderers, 
leaves their money in any of these jurisdictions. They have to 
go back into the United States or into other rich countries 
because that is where the investment opportunities are. So we 
can, I think, close up the tax havens overnight if we said 
something like if you don't cooperate with the exchange of 
information, the payments to you will not be deductible, or 
they will not qualify for the interest exemption which would 
mean no withholding tax.
    If we did that, and we can do that in cooperation with the 
Europeans, who are very interested, and with the Japanese, we 
can shut them off within a week completely.
    Senator Coleman. Mr. Brown.
    Mr. Brown. Two things along those lines, and, Senator 
Levin, the presumption of control that is much less problematic 
in the securities aspect than I think it would be in the tax 
aspect. The other is in the Regulation S offering, following up 
on what the professor was saying, that if you identify certain 
of these jurisdictions, the issue in some of the securities 
transactions is what I will call flowback into the United 
States, that is, the security leaves the United States and you 
do not want it coming back to the United States unless the 
protections are set. So require a longer holding period, for 
example, for securities that go into some of the jurisdictions 
that you have identified as abusive jurisdictions.
    Senator Coleman. Thank you, Mr. Brown. Thank you, 
Professor. The panel is excused.
    I would now like to call our third panel of witnesses: Haim 
Saban, Robert Wood Johnson IV, and Michael C. French.
    Mr. Saban and Mr. Johnson are two individuals who were 
advised to execute the POINT tax strategy to defer and 
eliminate capital gains from taxation. I am appreciative that 
they can testify before us today and look forward to 
understanding what their various advisors told them they could 
do, what they understood the POINT transaction could 
accomplish, as well as their understanding as to the validity 
of the transaction.
    Mr. Saban, I want to thank you on behalf of my children, 
who grew up watching the Mighty Morphin Power Rangers. You 
brought years of entertainment to my family.
    Mr. Johnson, I grew up in Brooklyn, New York, went to 
school at Hofstra, which is the training grounds for the New 
York Jets, and I wish you luck in the upcoming season.
    And I want to mention on the record that the Subcommittee 
invited Sam and Charles Wyly to testify before us today. I have 
been advised that the Wylys, along with Sharyl Robertson, who 
was involved in the operation of the Wyly offshore trusts as a 
trust protector, have all declined to testify, citing their 
Fifth Amendment privileges. It is unfortunate that the Wylys 
and Ms. Robertson are not before us today, but I respect their 
constitutional rights and privileges. However, I am looking 
forward to hearing from Michael French who was involved with 
the Wylys offshore network as a trust protector and will shed 
some light and details on the Wyly offshore trusts.
    To all witnesses, I appreciate your attendance at today's 
hearing and look forward to your testimony. As you will note, 
before we begin, pursuant to Rule VI, all witnesses before this 
Subcommittee are required to be sworn. I would ask you to 
please stand and raise your right hand. Do you swear that the 
testimony you are about to give before this Subcommittee is the 
truth, the whole truth, and nothing but the truth, so help you, 
God?
    Mr. Saban. I do.
    Mr. French. I do.
    Mr. Johnson. I do.
    Senator Coleman. Again, we will be using a timing system. 
At approximately one minute before the red light comes on, 
which means you should conclude your testimony, the light will 
go from green to yellow and will give you the clue to conclude 
your testimony. Your written testimony will be presented in the 
record in its entirety. We ask that you limit your oral 
testimony to no more than 5 minutes.
    Mr. Saban, we will have you go first, followed by Mr. 
Johnson. We will finish up with Mr. French. After we have heard 
your testimony, we will turn to questions. Mr. Saban, you may 
proceed.

   TESTIMONY OF HAIM SABAN,\1\ SABAN CAPITAL GROUP, INC, LOS 
                      ANGELES, CALIFORNIA

    Mr. Saban. Thank you. Good morning, Mr. Chairman, Senator 
Levin, and Members of the Subcommittee. I understand that the 
Subcommittee's focus this morning is on the role of 
professional firms and advisors with regard to certain tax-
related transactions. Thank you for the invitation to testify 
regarding my own experience with the promoters of a 2001 
transaction that you have referred to as ``the POINT 
transaction.''
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Saban appears in the Appendix on 
page 139.
---------------------------------------------------------------------------
    To the extent that my testimony can in some way assist you 
in strengthening and improving public policy in this area, I am 
pleased to be able to do so.
    You asked that I be prepared to address a number of 
specific questions regarding the POINT transaction. If you 
would allow me, I would like to first give you some background 
on how I became involved with this transaction, and then I will 
be happy to answer specific questions that you may have.
    Since my arrival in this country in 1983 and my subsequent 
naturalization as an American citizen, I have been fortunate in 
countless ways, both in my personal life and in business. I 
have had the benefit of some very successful investment 
opportunities. In 2001, I found myself in a situation where it 
seemed likely that I would be receiving a significant amount of 
income from the anticipated sale of Fox Family Worldwide. I 
consulted my trusted tax and legal advisor, whose advice I have 
followed for 15 years, and asked that he explore tax planning 
possibilities regarding the expected income.
    After several months, my advisor, accompanied by an 
individual from Quellos, came to me with what appeared to be a 
very complicated proposal for tax deferral. It involved 
numerous steps and entities. I did not understand the structure 
of the transaction, but I did have two concerns that I raised 
with my advisor: That the transaction be legal, and that a 
reputable law firm would say so.
    My advisor assured me that this was the case. I am neither 
a lawyer nor an accountant. In fact, my formal education ended 
when I finished high school. As a result, I relied on those 
assurances and left the structures and details of the 
transaction to others.
    Long after the transaction was concluded, I learned that I 
had been poorly advised in 2001 and that there were problems 
with the assurances that I received at the time. I was quite 
upset, to say the least. I am now in the process of arranging 
with the IRS and State authorities to pay the taxes, interest, 
and substantial penalties.
    Again, I appreciate the opportunity to share my experience 
with you, and I would be happy to answer your questions.
    Senator Coleman. Thank you, Mr. Saban. Mr. Johnson.

    TESTIMONY OF ROBERT WOOD JOHNSON IV, NEW YORK, NEW YORK

    Mr. Johnson. My name is Woody Johnson, and I am here in 
response to the Subcommittee's request to discuss a transaction 
that occurred more than 6 years ago.
    I have been in business for 30 years, and over that time I 
have entered into many transactions. In each transaction, I 
have always relied on advisors and counsel. In 2000, I entered 
into a financial transaction with complex tax implications. 
Before entering into this transaction, I was advised by my 
long-standing accountant, Larry Sheinfeld, an investment 
advisor at Quellos, and Cravath, Swaine and Moore, one of the 
most prestigious and well-established law firms in the country, 
that their analysis of the tax implications was consistent with 
the Tax Code. In short, I was assured by my advisors that this 
transaction was legal. I would never have entered this 
transaction had I believed otherwise. I even asked for and 
received a formal legal opinion from Cravath approving the 
transaction.
    I want to emphasize for the Subcommittee that I did not and 
do not have any personal knowledge about the particular steps 
or details of the transaction. As I do for all of my business 
dealings, even substantial ones, I relied on my staff and on 
our attorneys, accountants, and investment advisor to handle 
those details. And, therefore, I have previously told the 
Subcommittee I cannot answer necessarily specific questions 
about the details of the transaction.
    In 2002, again relying on the advice of my attorneys and 
accountants, I voluntarily came forward and fully disclosed 
this transaction to the IRS. In subsequent years, the IRS 
audited the transaction and challenged the claimed tax 
treatment. I then settled with the IRS and agreed to pay 100 
percent of the tax owed, plus all interest.
    Also, I would be willing to answer questions that I am 
capable of answering.
    Senator Coleman. Mr. French.

TESTIMONY OF MICHAEL C. FRENCH,\1\ FORMER WYLY TRUST PROTECTOR, 
                         DALLAS, TEXAS

    Mr. French. Thank you, Mr. Chairman. Mr. Chairman, Senator 
Levin, and Members of the Subcommittee, I would like to begin 
by thanking the Subcommittee staff, in particular Robert Roach 
and Mark Nelson, for their courtesy and professionalism with 
respect to this matter.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. French appears in the Appendix on 
page 140.
---------------------------------------------------------------------------
    My name is Michael C. French. I reside in Dallas, Texas. I 
am the retired chairman of the board of Scottish Re Group 
Limited, a life reinsurance company that I founded and took 
public in 1998 and listed on the New York Stock Exchange. It 
has become one of the largest life reinsurance companies in 
North America.
    I practiced law in Dallas from 1970 to 1992 with the firm 
of Jackson and Walker, focused primarily on corporate 
transactions. Some of my largest clients in the law practice 
were companies in which the Wyly family in Dallas had 
interests.
    At the end of 1992, I left the active practice of law and 
formed a relationship with the Wyly family, joining several of 
their companies as a director and consultant. And I was also 
very active in the establishment, in 1993, of Maverick Capital, 
an investment management business that was sponsored by the 
family, and I remained active in that business until 2000, by 
which time Maverick had grown to have over $7 billion under 
management.
    I severed my relationship with the Wyly family and sold my 
interest in Maverick in the year 2000.
    It is important to note that in testifying today I am 
constrained by several factors. First, I have been instructed 
by the Wyly's counsel that they consider me to have been 
providing legal services to them during the period from 1993 to 
2000, and further instructing me not to disclose any privileged 
attorney-client communications or attorney work product.
    I am also limited in that I severed my ties with the Wyly 
family and their companies over 6 years ago and have very 
little knowledge of their activities since that time. And for 
that matter, a substantial portion of my time for up to 3 years 
before I severed my relationship with them was spent much more 
in building and operation Scottish Re on a full-time basis and 
not on Wyly family matters.
    In addition, my separation from the Wyly family was not 
entirely cordial and under the terms of a settlement agreement, 
I was required to return to them or destroy any documents I had 
relating to their affairs.
    And last, I am not an expert on tax issues relating to 
foreign trusts and have never practiced law in that area, 
although I was exposed over the years to the advice of a number 
of attorneys who did.
    In addition to my other activities, I served as a protector 
of various Wyly family trusts in the Isle of Man from 1992 
until late 2000. Both the Wyly family and I received advice 
from various lawyers and law firms regarding the establishment, 
structure, and operation of those trusts. To the extent that 
advice related to me individually, as opposed to me as a 
representative of the Wyly family, I am able to discuss it and 
I am not constrained by their attorneys' instructions regarding 
their attorney-client privileges.
    In that regard, I was a beneficiary of an Isle of Man trust 
similar to some of the Wyly trusts and while I believed, based 
on the legal advice that was given to me, that the trust was a 
legally effective mechanism, I became concerned that it was too 
aggressive in light of the newer IRS pronouncements that 
started coming out around 2000. Therefore, I unwound the 
deferral mechanism in February 2001 and had the trust 
domesticated to the United States at the end of 2002.
    And with that, I will be pleased to try and answer any of 
your questions.
    Senator Coleman. Thank you very much, Mr. French. We 
appreciate your candor. We understand there are some 
limitations on your testimony
    Just first, Mr. Saban and Mr. Johnson, each of you were 
involved in transactions where you were going to realize a 
significant amount of gain, capital gain. And I presume it is 
not unusual in those circumstances to go to your lawyers and 
say hey, we would like to minimize our tax liability within the 
bounds of the law. I presume that is not an unusual thing to 
do?
    Mr. Johnson. That is right, it is not unusual.
    Senator Coleman. Mr. Saban.
    Mr. Saban. I concur.
    Senator Coleman. Mr. Saban, you then went to Bryan Cave, a 
very prominent law firm in St. Louis. And Mr. Johnson, you went 
to Cravath, Swaine, which is a very prominent law firm in New 
York. Is that correct?
    Mr. Johnson. Correct.
    Senator Coleman. Mr. Saban.
    Mr. Saban. I did not go to Bryan Cave.
    Senator Coleman. Let me back up. You requested that one, 
the POINT deal be kosher; and two, that prominent law would 
provide an opinion letter indicating that it was kosher. Is 
that correct?
    Mr. Saban. This is accurate.
    Senator Coleman. And so, in the end, you got an opinion 
from a very prominent firm essentially saying this was a kosher 
deal?
    Mr. Saban. Correct.
    Senator Coleman. If I can use Senator Levin's chart on the 
POINT strategy,\1\ I have a couple more questions.
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    \1\ See Exhibit 6 which appears in the Appendix on page 722.
---------------------------------------------------------------------------
    Mr. Johnson, did anyone ever talk to you about the entities 
known as Jackstones or Barnville that were set up in the Isle 
of Man?
    Mr. Johnson. I testified before your Subcommittee and I did 
not recall that.
    Senator Coleman. Mr. Saban, did anyone talk to you about 
setting up entities in the Isle of Man named Barnville and 
Jackstones? Do you recall that?
    Mr. Saban. When this chart was presented to me by my 
advisor I said to him, I am sorry, I cannot even begin to get 
my arms around this.
    Senator Coleman. Even if you had a college degree, Mr. 
Saban, it would be difficult getting your arms around this.
    Mr. Saban. If I was a professor, I do not think I could get 
my arms around this. I just said answer those two questions. Is 
it kosher? And can we get a reputable firm to say so?
    Senator Coleman. One of the things involved in these 
transactions to support the tax benefits was an investment 
piece. Did anybody talk to you about the investment piece and 
why an investment piece was necessary for you to cover some tax 
losses, either Mr. Saban or Mr. Johnson?
    Mr. Johnson. I do not recall being told what the 
implication of the investment piece was, no.
    Senator Coleman. Mr. Saban.
    Mr. Saban. It was mentioned to me that there were two 
components, the tax deferral component as well as the 
investment piece.
    Senator Coleman. Did Quellos indicate to you which was the 
main part of this deal, what this was all about?
    Mr. Saban. It was very clear to me that the main part of 
the deal was tax deferral.
    Senator Coleman. This is a pretty significant way to write 
off a lot of gain. Did that raise any questions in your mind 
about the amount of gain that could be written off by this kind 
of complex transaction? Mr. Johnson.
    Mr. Johnson. I thought it was a deferral mechanism, rather 
than an ability not to ever pay those taxes. But it was one 
that I think we paid a fairly large fee, so I assumed that it 
had been carefully researched.
    Senator Coleman. Do you recall what your fee was?
    Mr. Johnson. I think it was over $5 million.
    Senator Coleman. Mr. Saban, do you recall what your fee 
was?
    Mr. Saban. Close to $50 million.
    Senator Coleman. Mr. French, can you explain to the 
Subcommittee what a trust protector does, from your 
perspective?
    Mr. French. In the context that I was involved----
    Senator Coleman. Specifically, from 1992 to 2000, regarding 
the offshore trusts of Sam and Charles Wyly, can you tell me 
what you saw your responsibilities to be?
    Mr. French. First, the--probably pretty much the only power 
that a protector had under those trust documents was to remove 
the trustee. In connection--and that essentially was it. There 
may have been a few other collateral powers, but not many.
    But in connection with my being appointed as a protector in 
those trusts in 1992, I personally asked for advice from the 
attorneys who were setting all of that up about what exactly is 
the role of a protector. And was told by them that one of the 
functions would be to serve as a communication trail between 
the beneficiaries and the trustees, that recommendations with 
respect to transactions could be made.
    And so that was what I understood to be part of the role 
and part of the role that was blessed by the attorneys who set 
up the entire structure.
    Senator Coleman. So, as trust protector, you would get 
recommendations from the grantor and the beneficiaries, and 
give them to the trustees themselves, who would then have the 
option of executing the recommendations; is that correct?
    Mr. French. That is correct.
    Senator Coleman. How many recommendations do you think you 
were involved in making?
    Mr. French. I really do not recall anymore, Senator.
    Senator Coleman. Can you give me a ballpark figure?
    Mr. French. It was a long time ago. No, I really do not 
because I phased out of that somewhere after the mid-1990s and 
I really do not recall. I saw a number of documents in the 
document list when I was testifying before the staff, but I 
never counted them, so really cannot.
    Senator Coleman. Do you recall a recommendation ever being 
rejected by the trustees?
    Mr. French. Not rejected. I do recall a few situations 
where the trustees had some concerns about some specific 
investments. Frankly, I do not recall making recommendations 
with respect to those investments. But they expressed a concern 
to me later about some investments they had.
    Senator Coleman. But not rejecting a recommendation?
    Mr. French. No.
    Senator Coleman. If I can ask you to look at Exhibit 10,\1\ 
it is a letter in the exhibit book over there. If you would 
just open that up and turn to Exhibit 10, the big thick book 
there.
---------------------------------------------------------------------------
    \1\ See Exhibit 10 which appears in the Appendix on page 732.
---------------------------------------------------------------------------
    Mr. French. OK, I have Exhibit--a letter dated April 20?
    Senator Coleman. This purports to be a letter--I think this 
is from you, is it not? Your signature is on this, yours and 
Sharyl Robertson's. This is to Lorne House Trust, whom I 
presume to be the trustee.
    And the letter is very detailed. ``Pursuant to Section 8 of 
the Pitkin Non-Grantor Trustee Agreement,'' etc. ``To exercise 
100,000 Michaels Stores options held in Roaring Creek, Limited, 
which is owned by the Pitkin Non-Grantor Trust using a cashless 
exercise through First Boston Corporation and Lou Schaufele 
being the broker.'' ``The committee recommends selling all the 
stock at a price to exceed at least $20 per share.'' ``The 
exercise price is $3.00 a share, requiring $300,000 to exercise 
the stock with Michaels Stores.'' ``Cash in excess of''--and so 
on.
    This is a very detailed letter that you sent. Where did 
this information come from?
    Mr. French. The information?
    Senator Coleman. Excuse me, where did the recommendation 
come from?
    Mr. French. The recommendation came from the Wylys.
    Senator Coleman. And that recommendation was then given to 
the trustee, who then executed this transaction?
    Mr. French. That is correct. I should note----
    Senator Coleman. This transaction.
    Mr. French. Yes. I should note that the attorneys, again, 
that were involved in setting up these trusts were aware of 
this and had advised me that this was OK.
    Senator Coleman. Again, if you can turn to Exhibit 18 in 
the book.\1\
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    \1\ See Exhibit 18 which appears in the Appendix on page 769.
---------------------------------------------------------------------------
    Mr. French. Yes.
    Senator Coleman. This is a fax transmittal from you to 
Ronald Buchanan. Was Mr. Buchanan a trustee at Lorne House 
Trust?
    Mr. French. Yes, he managed Lorne House Trust.
    Senator Coleman. Exhibit 18 starts off with ``Please 
dispose of this fax after reading, as there will be ample 
documentation as needed.''
    And then it says ``It is expected that a recommendation 
will be made to Wychwood that the Plaquemines Trust, and 
another trust settled with Wychwood by Pitkin, should contact 
Lehman regarding acquiring call options on SSW, probably for 
about 2 years in the market. Wychwood would finance the 
transactions through loans from Lorne House entities. It is 
likely that a portion of the price could be financed through 
Lehman.''
    Again, this direction came from where?
    Mr. French. This direction came from the Wylys.
    Senator Coleman. And by the way, this fax says ``Wychwood 
would, in either case, be limited to approximately 600,000 to 
700,000 calls, in order to stay under 5 percent of outstanding 
shares and avoid SEC reporting.'' Is that correct?
    Mr. French. That is what it says, yes.
    Senator Coleman. Did that ever raise any concerns to you, 
as a protector, that directions were being given here to avoid 
SEC reporting?
    Mr. French. The SEC--the 13(d) rules is what I think you 
have made reference to, and they were a little bit legalistic 
in the way they--and I think they still are, as a matter of 
fact. They literally look to who has the legal power to vote 
the shares, who has the legal power to sell the shares. And 
then there are other provisions in there.
    But I think--no, I did not--at the time, I thought this was 
OK.
    Senator Coleman. My time is up. I will turn to Senator 
Levin. I will come back to the witness.
    Senator Levin. First, let me thank all of our witnesses for 
coming here today. I know that, Mr. Saban, you had to travel a 
long way to get here and you are returning that distance. I do 
not know how far the other two came, but we appreciate your 
being here and just frankly, wish the Wylys were also here to 
give us their position. But they had a right to assert those 
constitutional rights. They did so. But it does mean that you 
should all be aware of the fact that your presence here is very 
much appreciated by this Sybcommittee.
    Mr. Saban, you made reference to the fact that at some 
point in the presentation of this tax structure to you of this 
tax shelter, that you were told that there needed to be an 
investment piece added to it; is that correct?
    Mr. Saban. Correct.
    Senator Levin. And that you were told, as I understand, 
that the investment piece was needed so that the tax deferral 
piece would ``hold water?''
    Mr. Saban. Correct.
    Senator Levin. And that the tax deferral was ``ad 
infinitum.''
    Mr. Saban. Correct.
    Senator Levin. Mr. Johnson, were you also told, when you 
were told that this was just a tax deferral and not tax 
avoidance that this was an ad infinitum tax deferral?
    Mr. Johnson. No, I do not recall that, no.
    Senator Levin. Did they tell you how long it would be 
deferred?
    Mr. Johnson. No.
    Senator Levin. Did you ask them how long it would be 
deferred?
    Mr. Johnson. I do not think--I do not remember doing that, 
no.
    Senator Levin. So that, in terms of what this bought you, 
in terms of what you thought it bought you--put it that way--
which would be a tax loss to offset a tax gain, in your case, 
Mr. Saban, as I understood it, you had a taxable capital gain 
of about $1.5 billion; is that correct?
    Mr. Saban. Correct.
    Senator Levin. And the cost to you, including that so-
called investment piece, was $50 million?
    Mr. Saban. I think it is a little more than $50 million, 
including various fees but it is the ballpark.
    Senator Levin. So in the ballpark of $50 million. You were 
informed by your lawyer and adviser that you could obtain a 
capital loss to offset your capital gain of $1.5 billion.
    Now you are a businessman. Did that not raise alarm bells 
in your head? I know $50 million is a lot of money. It is about 
$49-plus million more than I will ever have, and $49.9 million 
than most Americans will ever have. So I am not talking in 
terms of that not being a lot of money. I am talking about 
relative to what you were buying, a tax loss of $1.5 billion. 
That is about a 2,500 percent return on that investment.
    Did that not ring off some alarm bells in your head?
    Mr. Saban. It did, which is why I asked my advisor, who has 
been by my side for 15 years, is this completely kosher; i.e. 
legal? And would a reputable law firm say so? And the man who 
was with me for 15 years assured me that this is the case.
    Senator Levin. Have things really gotten so bad in this 
country that avoiding taxes to the extent that you thought you 
were doing--of not paying capital gains on a $1.5 billion--
could be purchased with such a relatively small cost?
    It seems to me that is the fundamental question that you 
both face as legitimate business people. Have we really gotten 
to that point where you do not say something is wrong here? 
Something smells here. Something is rotten here?
    Mr. Johnson, did you have alarm bells go off in your head 
when you, for a few million dollars as I remember, were 
purchasing a tax loss of about--what was that, $145 million?
    Mr. Johnson. I think it is safe to say that--yes. And that 
is why I relied on my advisors, both legal advisers and 
investment advisers, and we got that opinion from Cravath 
because we wanted to make sure that this deferral strategy was 
correct and legal and copacetic with the IRS code.
    Senator Levin. It turns out it was not copacetic with the 
IRS, to put it mildly. And it is not copacetic or acceptable 
to, I think, any kind of average person who says what is going 
on here that professionals are giving advice to people who have 
huge capital gains that they can shed those capital gains, just 
shed them like a piece of clothing for a relatively tiny cost?
    We are going to press these professionals who come before 
us later. But I have to tell you I believe that there is some 
responsibility in you to just say to these people, something 
has got to be wrong here, have you folks checked out the 
transactions that underlie this creation?
    I will leave it at that for you.
    Mr. French, it appears that the Wyly protectors, and you 
being one of them, the trust protectors, made recommendations 
to the trustees. You have already testified to the Chairman's 
question that these recommendations to the trustees were 
invariably carried out. There may have been an exception, but 
basically how many recommendations would have been made to the 
trustees? Would it be in the hundreds?
    Mr. French. I do not think I participated in that many 
recommendations but I do not have----
    Senator Levin. Would it be a lot over the years? Would 
there be a significant number of what you call recommendations 
that were made?
    I am going to put in front of you Exhibit 4.\1\ These are 
recommendation after recommendation after recommendation. We 
have identified about 100 of them. Let me just give you some of 
the recommendations that were made to you--made to the 
protectors, first of all.
---------------------------------------------------------------------------
    \1\ See Exhibit 4 which appears in the Appendix on page 629.
---------------------------------------------------------------------------
    In Exhibit 4, there is a letter from Shari Robertson. 
``Mike French and I would like to recommend to the trustee to 
purchase the following security from Sam Wyly . . . in one of 
the foreign corporations owned by Bulldog Trust.''
    Another one, ``the protectors are prepared to recommend . . 
. to move a stock a block out at $15 a share.''
    Another e-mail, ``Here's a brief outline of the usual 
process . . . for acquisitions [of art].'' Acquisitions of art. 
``I usually get the invoice and forward it to the Isle of Man . 
. . indicating that `the protectors recommend payment.' ''
    Next, ``The protectorate committee recommended that you 
consider that the Tyler Trust consider the purchase of 
collectibles and art work. I am attaching following invoices 
totaling $450,000.''
    Next, ``Shari Robertson and I, as protectors, recommend 
that the trustee consider contributing $10,000 to the lobbying 
effort''--this is a fax from you.
    And so forth, page after page of recommendations, so-
called, to the nominal trustees here.
    Do you remember making these kinds of recommendations?
    Mr. French. Yes, to the extent that these reflect that they 
came from me, although some of the dates do not look right 
because the first one says 2002. I was long gone from the Wyly 
organization long before that.
    Senator Levin. But you remember these kind of 
recommendations being made?
    Mr. French. Not so much with respect to some of the 
artwork. There were a few that I recall about art, but not all 
of these, I do not believe. French Empire chandeliers and 
things like that.
    I believe when I went over this with the staff they had 
some--these were faxes, not e-mails, and a lot of them may have 
had my name on it but no signature. And some others did not 
have my name on it, at all.
    Senator Levin. It says here, talking about chandeliers, 
``The protectors,'' that is you, ``recommend the purchase of 
French Empire chandelier for $24,421.'' That was from Shari 
Robertson and you. Do you remember that?
    Mr. French. I believe if you go back and find that 
document, it has my name on it but I did not sign that 
document.
    Senator Levin. Were you aware of that kind of----
    Mr. French. Actually no, not really. These in the later 
years, a lot of recommendations appeared to have been made that 
I was not aware of, particularly with respect to personal 
matters.
    Senator Levin. How about things like real estate 
investments and recommendations?
    Mr. French. I do not recall ever making a recommendation 
with respect to a real estate transaction.
    Senator Levin. What kind of recommendations did you make, 
that you recall?
    Mr. French. They were earlier on and they related to 
dealing with investments that were held by the trust, either 
investments in some of the companies, Sterling Software, 
Michaels Stores, etc., or Maverick Fund, things like that.
    Senator Levin. Where were those requests to you from?
    Mr. French. The request that you make the recommendation?
    Senator Levin. Yes.
    Mr. French. Those directions or instructions or requests, 
whatever, generally were communicated to me from the Wylys, 
usually via Shari Robertson.
    Senator Levin. My time is up. I hope there will be another 
round, though.
    Senator Coleman. We will have another round, Senator Levin.
    Senator Levin. Thank you.
    Senator Coleman. Senator Lautenberg.
    Senator Lautenberg. Thanks, Mr. Chairman.
    I want to thank our people at the witness table, Mr. Saban, 
Mr. Johnson, and Mr. French. I want to say this: I know both of 
you, not directly but through content, and have respect for you 
and your business accomplishments. Mr. Johnson, I know more 
about you because we come from the same State and respect what 
you have done.
    One of you shows that in America you can succeed as no 
other place. The other of you has taken family wealth acquired 
over a lot of years and used it for many good purposes, 
charitable in each case.
    But I am disturbed and the advantage that Senator Levin, he 
had the opportunity to ask my questions first. And that is--and 
by the way, Mr. Chairman, do any of these signs say disregard 
Lautenberg?
    Senator Levin. Exhibit 4.\1\
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    \1\ See Exhibit 4 which appears in the Appendix on page 629.
---------------------------------------------------------------------------
    Senator Lautenberg. Exhibit 4 for the witnesses to see.
    Whether we use the words kosher or copacetic, I think I 
sense an area of discomfort in the use of the words, because 
there has to be an awareness of some sort that you are paying 
less tax. You both each said yes, deferred taxes.
    But why were taxes being deferred? Is that not, in your 
view, an obligation of citizenship? Either Mr. Saban or you, 
Mr. Johnson.
    Mr. Johnson. I agree 100 percent, it is an obligation.
    Mr. Saban. I concur.
    Senator Lautenberg. So then why not? I almost feel on the 
other side of the table, and I started a company with a couple 
of other poor boys and we succeeded beyond our wildest 
expectation.
    But I feel that just being in this country, when my 
grandparents came they brought my parents as very small 
children, is such a distinct honor, such a distinct miracle.
    And believe me, I am not happy when my taxes or my 
estimates have to be paid and so forth. There is always some 
concern about what am I doing.
    And then when I think about the fact that we are spending 
money on research against cancer and diabetes and things of 
that nature, I say what a treat, that we are spending money on 
educating people. Not enough. But I think wow, what a wonderful 
opportunity this is.
    So forgive me each of you, we are just on a different 
telescope, I guess.
    Because some alarm had to be raised or some concern had to 
be raised with the fact that you were actually laying out very 
little cash, on a relative basis. We heard your discussion, Mr. 
Saban, with Senator Levin as he compared the down payment to 
the ultimate savings.
    I do not want to continue to ask the obvious but you sought 
the shelters, you got the shelters. And now, when they are out 
here in the public light, they do not look nice for either one 
of you for the kind of people that you are and the kind of 
people that you represent, in many cases so well.
    Mr. Chairman, I am going to conclude my comments with one 
thing I wanted to ask Mr. French, one thing could be two or 
three but in keeping within the time constraint as you have 
laid out.
    Mr. French, what was the value of Maverick when you joined 
them in 1993?
    Mr. French. Maverick Capital was a startup enterprise that 
was going in the investment management business. It is a hedge 
fund manager. In the summer of 1993 we brought in an investment 
manager named Lee Ainsley from Tiger Management in New York and 
started looking for outside investors.
    Senator Lautenberg. Do you remember what the capital was?
    Mr. French. The capital of?
    Senator Lautenberg. That was put in initially by the Wylys.
    Mr. French. Some of the Wyly Trust were investors in the 
original fund. I do not recall how much that was. I think it 
was about $40 million.
    I do not know what the investment in Maverick Capital, the 
management company itself, was.
    Senator Lautenberg. Because it grew to $7 billion by 2000--
--
    Mr. French. Yes. The assets under management grew to at 
least $7 billion at the end of 2000.
    Senator Lautenberg. And your being an educated man in the 
law and so forth, I hear from your comments some discomfort 
with the reach for these shelters that were overseas; am I 
correct?
    Mr. French. I think that might be getting into legal advice 
or something like that, Senator.
    Senator Lautenberg. I do not want you to overstep a bound, 
but can I ask your opinion? If the Wylys were at the table with 
you, do you think that they could say they were not aware of 
the value of these shelters?
    Mr. French. Unfortunately, Senator, I cannot speak for 
them. I do not know what they would say.
    Senator Lautenberg. Yes, well, you know them well enough to 
have an opinion about them.
    Mr. French. No. I really do not have that opinion.
    Senator Lautenberg. Thank you, Mr. Chairman.
    Senator Coleman. Thank you, Senator Lautenberg.
    I would know and I would associate myself with the concerns 
raised by Senator Lautenberg. But I would say to my friend from 
New Jersey that not every American is as thrilled and as 
exhilarated by paying taxes, and the arrival of April 15 is not 
a day of celebration for many Americans. I just wanted to 
reflect on that a little bit.
     Let me get to Mr. French. I have a follow-up, Mr. French, 
about Exhibit 18.\1\
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    \1\ See Exhibit 18 which appears in the Appendix on page 769.
---------------------------------------------------------------------------
    When you were interviewed by staff you explained the reason 
that you asked that this document be destroyed is that you were 
worried the instructions from the protectors were becoming too 
detailed; is that correct?
    Mr. French. I think that is not quite what I said, Senator. 
First of all I do not specifically recall this situation, 
because it was 11 years ago in terms of the specific 
conversations. But I was concerned--I had become concerned with 
the whole issue of making recommendations. These were fairly 
specific recommendations. And I just was not that happy with 
being asked to continue to make these sorts of recommendations.
    Senator Coleman. Again, the recommendations came from the 
Wylys to you, and you then forwarded them on to the trustees 
who then, invariably, on almost every occasion, executed the 
recommendations; is that correct?
    Mr. French. That is correct. To the extent that I was 
involved in recommendations, that is correct.
    Senator Coleman. The Ranking Member raised the issue of 
protectors recommending personal property purchases, in one 
case a painting. I am reflecting on something that was in the 
Wall Street Journal yesterday, I am not going to give that 
automatic credence. I am rather going to ask you.
    The paper noted that, in 1996, Sam Wyly successfully bid at 
Sotheby's for a painting by John William Godward. Shortly 
thereafter, another Wyly-funded company in the Cayman Islands 
sent a letter to Mr. Buchanan at Lorne House stating, ``The 
protectorate committee recommended buying the painting.'' The 
article goes on to note that Buchanan responded a few days 
later questioning whether the painting was a wise investment. 
Then the article says he received a strong letter from Mr. 
French stating that ``we need to resolve this issue at once,'' 
and insisting that Mr. Buchanan had ``no legal grounds to 
question this transaction.''
    Did you, in fact write a letter to Mr. Buchanan regarding 
the painting by John William Godward?
    Mr. French. I do not recall the painting but the answer is 
yes. I think it is one of the exhibits around here someplace or 
it is referenced in this report. I am looking for it right now 
but I cannot quite find it.
    That letter basically pointed out to Mr. Buchanan that 
under the terms of the trust, the instrument, the trust was 
permitted to do these kinds of transactions.
    Senator Coleman. But Sam Wyly himself in this regard was 
worried very strongly about purchasing this painting; is that 
correct? You were not reflecting your own personal feeling 
about this painting. You had been instructed by the Wylys to 
push this matter.
    Mr. French. I had no personal feelings about the painting, 
Senator.
    Senator Coleman. Did Mr. Buchanan, in fact, apologize to 
you about this afterwards?
    Mr. French. Again I cannot find the document.
    Senator Coleman. I think Exhibit 44 is the document.\1\
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    \1\ See Exhibit 44 which appears in the Appendix on page 1011.
---------------------------------------------------------------------------
    It reads, ``Attached is language from the Deed of 
Settlement of the Bessie Trust. This language clearly 
authorizes a purchase of personal property for personal use and 
enjoyment,'' etc., ``unless there is a clear and unequivocal 
requirement of IOM law (which I doubt), that any such purchase 
that is specifically authorized by the trust agreement must 
nevertheless be weighed against the investment,'' etc. ``The 
protectors have already recommended this transaction. Please 
advise if you are unwilling to proceed on that basis in light 
of the explicit authorization for the transaction contained in 
the Trust Deed.''
    Were you directed to prepare this message to Mr. Buchanan?
    Mr. French. It was my instruction, yes, to contact the 
trustee and see to it that this was accomplished, because it 
was permitted by the trust agreement.
    Senator Coleman. Again, you are not providing legal counsel 
here, but it is similar to the question that the Ranking Member 
asked Mr. Saban and Mr. Johnson. You are watching this go on, 
you are making very specific recommendations, and you have some 
knowledge that these trusts are supposed to have some 
independence.
    At some point, do you say to yourself that a line is being 
crossed here? When detailed, specific instructions are not 
being followed, you come back with stern warnings. Viscerally 
and internally, did a light not go on and say, ``We are 
crossing a line here that should not be crossed?''
    Mr. French. Not in connection with this particular 
transaction, Senator. I am not sure where I can go with what my 
feelings were here as we got into the later part of the 1990s, 
because that may be getting into these attorney-client 
privilege issues.
    Senator Coleman. I am not asking you about any advice you 
gave the Wylys. Just internally, your own internal sense, did 
you have sense that these recommendations were too specific, 
too direct, and were you concerned about crossing a line?
    Mr. French. I was concerned. Whether they were or they were 
not, I cannot say because we had been advised long ago by the 
counsel that was involved in this that this--I have been 
advised by the counsel that were involved in this that this was 
OK. Notwithstanding that, it began to trouble me.
    Senator Coleman. Senator Levin.
    Senator Levin. Thank you.
    First, Mr. French, I made a reference to Exhibit 4 in the 
first direction that was given by you to the nominal trustees, 
where it said, ``Mike French and I would like to recommend to 
the trustee to purchase the following security and one of the 
following corporations owned by the Bulldog trust.''
    And then, underneath it says, an October 9, 2002 letter. 
That is a misprint and we will correct that. You said you were 
not there in 2002. It should have been 1992.
    Mr. French. It was probably 1992. Yes.
    Senator Levin. Do you remember that, now that it is 1992?
    Mr. French. I still do not remember it.
    This was right after these, not too long after these trusts 
were set up. And again, the advice to me from the counsel who 
set all of these up was that it was OK to make these kinds of 
recommendations.
    Senator Levin. The exhibit that this refers to, by the way, 
is exhibit 11a, where you got a copy of the letter to the 
trustee from Cheryl Robertson, which is--we are on Exhibit 11a, 
it says, ``Carbon copy, Michael French.'' \1\
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    \1\ See Exhibit 11a which appears in the Appendix on page 741.
---------------------------------------------------------------------------
    Mr. French. Yes. Is this the one about the Photomatrix 
Corporation?
    Senator Levin. Yes. But you still do not remember that one?
    Mr. French. I thought you had referenced that other one and 
I apologize, Senator. Yes. I recall this.
    Senator Levin. Where did that recommendation to you come 
from--that request, come from?
    Mr. French. I do not specifically remember. I believe it 
came from Shari Robertson.
    Senator Levin. Where would she have gotten it from?
    Mr. French. From Mr. Wyly.
    Senator Levin. Which one? Which Wyly would that have been?
    Mr. French. Probably Sam Wyly, since it says to buy the 
security from Sam Wyly.
    Senator Levin. Mr. Saban, I just want to be real clear on 
the motive--your motive and the reason and rationale for 
entering into this transaction. Am I real clear that the 
purpose of your entering into this transaction was that it was 
to reduce taxes?
    Mr. Saban. That is correct.
    Senator Levin. Now, were you told by the Quellos people 
that the source of the securities portfolio was a series of 
book entry trades that involved no real stock and no real cash? 
Were you ever informed of that?
    Mr. Saban. No.
    Senator Levin. Would you take a look if you would, Mr. 
Saban, at Exhibit 63b.\1\
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    \1\ See Exhibit 63b which appears in the Appendix on page 1287.
---------------------------------------------------------------------------
    Mr. Saban. Is there a tab on 63b? Because I only see 63.
    Senator Levin. You do not see a 63b on there?
    Mr. Saban. There is no tab.
    Senator Levin. I just want to make sure that is a document 
that you signed. It is called: ``Haim Saban Representation 
Certificate for Titanium Trading Partners LLC Federal Income 
Tax Opinion.''
    Mr. Saban. Thank you.
    Senator Levin. I guess that is the last page in the book.
    Mr. Saban. That is my signature.
    Senator Levin. Did you read that document?
    Mr. Saban. No.
    Senator Levin. That document purports to relate to an 
investment of some kind. But the investment that was made here 
was just so the tax shelter would ``hold water?''
    You did not get into this whole deal to make money, other 
than the benefit that you intended to receive from the tax 
loss; is that correct?
    Mr. Saban. That was the main purpose.
    Senator Levin. Was there any other purpose?
    Mr. Saban. There was a theoretical possibility of making 
money on the transaction of buying and selling stock.
    Senator Levin. That was not what motivated you; is that 
fair to say?
    Mr. Saban. No.
    Senator Levin. That is fair to say that, then?
    Mr. Saban. That is fair to say.
    Senator Levin. All right. Thank you.
    Now, Mr. Johnson, did Quellos ever inform you that the 
source of the security's portfolio was a series of book entry 
trades involving no real stock and no real cash?
    Mr. Johnson. No.
    Senator Levin. Mr. French if you would take a look at 
Exhibit 38 for me.\1\
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    \1\ See Exhibit 38 which appears in the Appendix on page 990.
---------------------------------------------------------------------------
    This is a chart that we have. Number 8 is taken from this 
exhibit. This relates to the Bulldog Trust.
    Mr. French. I have the exhibit.
    Senator Levin. All right.
    This was prepared I guess after you left by a Wyly trustee. 
He prepared a document describing the Bulldog Trust, which was 
a 1992 trust. If you look at Exhibit 38, you will see the first 
line there says that, ``The Bulldog Trust was created by a 
trust agreement dated March 11, 1992, between Sam Wyly, a 
wealthy U.S. person, and Lorne House Trust Company Limited. The 
current trustee of the trust is IFG International Trust Company 
Limited.''
    Then the next paragraph is what I want to ask you about. 
``The reason for creating the trust was tax driven. Its purpose 
was to take the assets held/to become held within the trust and 
various Isle of Man companies owned by it outside of the 
settlor's estate for U.S. gifts and estate tax purposes and at 
the same time to create a fund the income and gains of which 
were not attributable to any of the settlor or his family. The 
assets within the trust are now very substantial.''
    Was that an accurate description, from your recollection, 
of the Bulldog Trust?
    Mr. French. Senator, one of the things I am not an expert 
on is the attorney-client privilege. Let me make sure I am not 
stepping over the line again. [Consults attorney.]
    Yes. That was my understanding. I apologize.
    Senator Levin. That is OK. That was an accurate statement 
of the Bulldog Trust?
    Mr. French. Yes.
    Senator Levin. It was tax driven?
    Mr. French. Yes.
    Senator Levin. Thank you, Mr. Chairman.
    Thank you again, all the witnesses. I do not know if 
Senator Lautenberg has any questions.
    Senator Coleman. Senator Lautenberg.
    Senator Lautenberg. I will be brief, Mr. Chairman.
    Once again it is obvious that our friends with the 
professional talent that they call upon would not knowingly do 
anything that it was illegal, that was against the law. And I 
respect that. The legal question is not one that I am looking 
at here at all.
    But there is something that goes beyond the legality that 
talks about what other kinds of obligations that one has. It is 
a strange anomaly, because I see two gentleman before me who 
have a conscience and have a commitment to America. But yet, in 
this world of acquisition and, if I may say, even greed, there 
are things that are maybe legal but I do not think are 
appropriate or, to use a trite word, nice.
    Mr. Chairman, I come away with the conclusion that if 
things bear out what is said here, that is, that there is a 
lack of awareness which I find shocking for such good 
businesspeople not to know they were getting a super deal on 
something that beats all of the odds and that permits them to 
avoid responsibility to provide their share of the load that we 
all have as citizens in this country.
    And I think that is something I have learned, Mr. Chairman, 
that is, that we can point fingers here for bad judgment, but I 
think we have to look at the IRS and its enforcement process 
and see how lack of diligence was permitted because these 
things should never have escaped. And maybe we have to change 
the laws and we should do it--the tax law. But we also want to 
make sure that the Department of Internal Revenue knows that it 
has a responsibility to go after people and not be content with 
shortcuts, and resources, and movement of people that arouses 
suspicion within the framework.
    So, there is a lesson I think that we are all learning from 
this investigation and these hearings. And once again, I 
commend my colleagues Senator Coleman and Senator Levin for 
their diligence and thoroughness in this pursuit.
    Mr. Chairman, that concludes my interest in the questioning 
of these witnesses.
    Senator Coleman. Thank you, Senator Lautenberg.
    I would just note, from the last comments upon Exhibit 63 
in which you signed your representation certificate. That is 
based on an 80-page opinion. I take it you did not read the 80-
page opinion.
    Mr. Saban. I did not.
    Senator Coleman. This is the 80-page opinion that told you 
this deal was kosher?
    Mr. Saban. That is what my adviser told me.
    Senator Coleman. I want to thank all of the members of this 
panel. I appreciate your cooperation with this investigation. 
We appreciate your appearing here today. We understand the 
difficult circumstances under which you appeared in front of 
this Subcommittee--Mr. French, particularly--this Subcommittee 
is appreciative of all your efforts and cooperation.
    With that, this panel is excused.
    I would like to call our fourth panel of witnesses.
    Louis Schaufele is a securities broker, formerly with the 
Bank of America, Credit Swisse, First Boston, and currently 
with Stanford Group Co.
    Jeffrey Greenstein, Chief Executive Officer of the Quellos 
Group.
    Michael Conn, Bank of America's Private Bank, Northwest 
Region President.
    And finally, George T. Wendler, Senior Executive Vice 
President, and Chief Credit Officer of HSBC Bank, U.S.A.
    Mr. Schaufele was a securities broker for various offshore 
accounts associated with the Wylys. I am looking forward to 
hearing details about securities transactions involving Wyly-
related offshore corporations.
    I am concerned that efforts were made to circumvent or 
avoid Federal security laws reporting.
    Mr. Conn, I am eager to hear your understanding of various 
security transactions involving Wyly-related offshore accounts, 
and whether the Bank of America properly complied with anti-
money laundering requirements.
    Mr. Greenstein, I want to thank you for coming this 
morning. I recall that you testified before us in 2003 during 
our previous investigation into tax shelters. I do have 
questions about the Quellos-designed POINT strategy, which 
appears to have been designed to offset capital gains and 
minimize taxes. I am looking forward to your testimony this 
morning.
    Mr. Wendler, I am looking forward to hearing about your 
understanding of the POINT transaction, as I want to understand 
the extent to which banks should be concerned with providing 
financial services to support highly aggressive tax 
transactions.
    I want to, again, thank you all for coming to this 
important hearing. I look forward to your testimony.
    Pursuant to Rule 6, all witnesses before this Subcommittee 
are required to be sworn at this point. I would ask you all to 
please stand and raise your right hand.
    Do you swear the testimony you are about to give before 
this Subcommittee is the truth, the whole truth, and nothing 
but the truth, so help you, God.
    Mr. Schaufele. I do.
    Mr. Conn. I do.
    Mr. Greenstein. I do.
    Mr. Wendler. I do.
    Senator Coleman. Again, we will be using a timing system. I 
would like you to keep your remarks to within 5 minutes. Your 
entire written statement will be entered into the record, as a 
whole. When the lights go from green to amber, that will tell 
you that you have about a minute left and you should conclude 
your testimony.
    Mr. Schaufele, we will have you go first, followed by Mr. 
Greenstein, then Mr. Conn. We will finish up with Mr. Wendler. 
After we have heard your testimony, we will turn to questions.
    Mr. Schaufele, you may proceed.

    TESTIMONY OF LOUIS J. SCHAUFELE, III, SECURITIES BROKER.

    Mr. Schaufele. Thank you so much, Mr. Chairman and Senator 
Levin, for the invitation.
    One thing I would like to correct early on, I believe that 
in employment history, you stated that I was currently at UBS. 
I am actually at Stanford Management Group.
    Senator Coleman. That will be corrected in the record, Mr. 
Schaufele.
    Mr. Schaufele. Mr. Chairman, I voluntarily met with the 
Subcommittee staff twice, and I have come today to answer 
questions that the Subcommittee may have. I have provided 
everything that the Subcommittee staff has asked of me.
    My work with the offshore companies has been subject to the 
compliance and guidance requirements of the firms where I have 
been employed.
    I welcome whatever questions the Subcommittee may have, and 
will do my best to answer them. Thank you.
    Senator Coleman. Thank you, Mr. Schaufele. Mr. Greenstein.

 TESTIMONY OF JEFFREY GREENSTEIN,\1\ CHIEF EXECUTIVE OFFICER, 
            QUELLOS GROUP, LLC, SEATTLE, WASHINGTON

    Mr. Greenstein. Chairman Coleman, Senator Levin, Members of 
the Subcommittee, my name is Jeff Greenstein. I am Chief 
Executive Officer, Quellos Group, and I appear here 
voluntarily.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Greenstein appears in the 
Appendix on page 142.
---------------------------------------------------------------------------
    Quellos is an investment management firm founded in 1994 
and headquartered in Seattle. Globally, we employ 270 people 
and manage more than $15 billion in assets for financial 
institutions, private and government employee pension plans, 
university endowments, foundations, and private clients. For 
several months, Quellos has cooperated with the staff of the 
Subcommittee during its review of a tax advantage strategy 
called POINT. Quellos employees voluntarily participated in 
interviews and we produced tens of thousands of pages of 
documents.
    Yesterday, the staff of this Subcommittee issued its 
report. We believe the report is unfair, one-sided, and 
inaccurate. I apologize in advance if I seem frustrated, but 
from my position, and I am neither a lawyer nor a tax expert, 
the report seems to have glossed over several basic facts. 
Unfortunately, I don't have time in my opening statement to 
address all the mistakes and errors, but in my limited time, I 
wanted to briefly describe the POINT transaction and then 
highlight some of the fundamental errors.
    Six POINT transactions were executed 5 to 6 years ago by 
Quellos Custom Strategies, a small and now dormant subsidiary 
of the firm. The transaction combined a popular investment 
strategy with a tax strategy frequently executed in the United 
States by major investment banks. This Subcommittee should be 
aware of a couple fundamental aspects as it relates to POINT.
    These transactions were executed based on extensive 
consultation with leading tax lawyers, several of whom gave tax 
opinions approving the transactions. Each transaction had 
substantial opportunity for economic profit. Indeed, the report 
acknowledged that millions of dollars in gross trading profits 
were earned. Every client consulted his or her own professional 
advisors regarding the strategy. In fact, several directed us 
to communicate with their chosen advisors, and as a result, 
each of the transactions had significant differences. And 
finally, from the outset, we told the IRS about POINT by 
registering it.
    Let me now address several glaring problems with the staff 
report. First, the report indicates inaccurately that the POINT 
transaction is a black box that Quellos and others sought to 
hide from the U.S. Government. Nothing could be further from 
the truth. Almost 6 years ago, we registered the POINT 
transaction with the IRS as a tax shelter. We shared with the 
IRS information required by its disclosure regulation, and as a 
result, the IRS is reviewing this transaction. Thus, as opposed 
to being a black box, POINT was disclosed by us to the Federal 
Government early on.
    Second, the report suggests that the POINT transaction did 
not offer an opportunity for profit. In fact, POINT gave 
investors the potential either to earn profit or losses 
incurred based solely on market fluctuations. For the report to 
suggest otherwise is flat out wrong.
    Third, the report erroneously characterizes book entry 
transactions as fake. Every day, trillions of dollars of 
securities, commodities, and Treasury obligations are traded on 
a book entry basis. Over-the-counter derivatives and swap 
transactions are contracts that obligate parties to pay amounts 
based upon market movements in the underlying security or 
commodity involved. Because POINT had real opportunities for 
profit and loss, we and the clients or their advisors closely 
followed their portfolios.
    Finally, the report criticizes our involvement with 
offshore entities. However, we worked with and relied upon the 
European-American Investment Group because of its reputation--
because of the reputation and broad experience of the 
principals in the over-the-counter markets. Euram assured us 
about its abilities to establish the portfolio. Euram, not us, 
selected the offshore entities, and Euram, not us, vouched for 
the abilities of those entities to engage in the transaction. 
Barnville and Jackstones satisfied their financial obligations 
to the partnerships, including the payment of millions of 
dollars and the delivery of shares when requested.
    Quellos is a well-regarded investment advisor. It has not 
implemented POINT or any similar transaction since 2001. 
Quellos has established an independently advised transaction 
review committee to review transactions with tax aspects. We 
take these issues and our reputation seriously.
    I hope these remarks have put things in better perspective, 
Mr. Chairman, Senator Levin. Thank you again for giving Quellos 
the opportunity to speak here today.
    Senator Coleman. Mr. Conn.

TESTIMONY OF MICHAEL G. CONN,\1\ PRIVATE BANK NORTHWEST REGION 
     PRESIDENT, BANK OF AMERICA, SAN FRANCISCO, CALIFORNIA

    Mr. Conn. Good morning, Chairman Coleman, Ranking Member 
Levin, and Members of the Subcommittee. I appreciate the 
invitation to appear before the Permanent Subcommittee on 
Investigations to discuss certain domestic brokerage accounts 
maintained by offshore private investment corporations that are 
the subject of the Subcommittee's letter.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Conn appears in the Appendix on 
page 147.
---------------------------------------------------------------------------
    My name is Michael Conn and I am a Regional President of 
the Private Bank of America. I have spent 26 years in the 
brokerage business and have been in private banking for the 
last 4 years.
    I would like to begin by emphasizing that Bank of America 
takes very seriously its regulatory obligations to know its 
customers, report suspicious activity, and assist law 
enforcement and its regulators in the fight against money 
laundering and other illegal activity. We are committed to 
improving our systems and process in an ever-changing and 
challenging world.
    We believe that our cooperation with the Subcommittee staff 
during the last year is an example of the bank's commitment to 
cooperation with regulatory and law enforcement authorities. 
The bank fully recognizes that its delay in demanding specific 
beneficial ownership information from the customers of the 
brokerage accounts that we will discuss today was inconsistent 
with the bank's commitment to knowing its customer. As I will 
explain in a moment, a number of factors explain but do not 
excuse the delay in demanding this information.
    Upon review of the facts here, senior management instructed 
bank personnel to demand that the customers provide the 
beneficial ownership information, ordered that the accounts be 
closed when the customers did not provide the information, and 
directed that significant remedial action be taken. Moreover, 
we have made numerous changes in response to the issues we 
identified during our review of our conduct with respect to 
these accounts.
    The Subcommittee has asked us to testify about the bank's 
relationship with Sam and Charles Wyly. The Wyly relationship 
with the Private Bank began in 1994. It included checking and 
savings accounts, lines of credit, and mortgages. The Private 
Investment Corporation (PIC) accounts were transferred to Bank 
of America Securities (BAS) in February 2002, when BAS hired a 
broker from another financial institution who brought the 
accounts with him. The broker understood that the PICs were 
owned by trusts that were endowed by Charles and Sam Wyly for 
the benefit of the Wyly family members. The bank's policies at 
the time were less stringent than they are today and did not 
always require that beneficial ownership information be 
obtained at account opening. In this case, the bank did not 
obtain specific beneficial ownership information as we would 
today.
    In August 2003, these accounts were transferred as part of 
a wholesale move of all retail accounts from BAS to BAI. NFS is 
the clearing firm for Bank of American Investment Services 
(BAI). In 2004, NFS asked BAI compliance for certain 
information concerning certain of the PICs, including 
beneficial ownership information. The inquiries led to a 
dialogue between BAI associates, in-house lawyers, and 
compliance personnel in NFS. This dialogue continued for 
months, as various alternative proposals for obtaining the 
beneficial ownership were considered. The customers' 
representative maintained that they were not required by law to 
disclose such information, even if the information was required 
by BAI's policies. The customers told BAI through the broker 
and other BAI associates that their reluctance to provide this 
information was motivated by confidentiality and asset 
protection considerations.
    Ultimately, BAI decided to require the customers to provide 
specific beneficial information. BAI and NFS agreed upon a list 
of questions to send to the customers requesting beneficial 
ownership information and other information about the accounts. 
Around this time, the bank received governmental inquiries 
relating to these accounts. When senior management became 
involved, the bank demanded beneficial ownership information 
from the customers. When the customers did not provide this 
information, BAI closed the accounts. The bank also decided to 
terminate its broader private banking relationship with the 
Wylys.
    The bank recognizes that, looking back, this process took 
way too long and it is difficult to understand the delay. In 
evaluating the delay, it is important to consider several 
important factors. BAI associates had a good faith belief that 
the accounts were not being used for illegal activity, which 
meant that the BAI personnel did not view this issue as 
requiring immediate resolution. The Wyly family had a 
longstanding private bank relationship. The Wyly brothers are 
well-known businessmen and philanthropists in the Dallas 
community and nationally. There were extensive discussions 
between BAI and the customers and their representatives as to 
whether the beneficial ownership was legally required. The 
customers, through their representative, maintained that other 
similar institutions did not require such information.
    Ultimately, the bank took remedial action. As mentioned 
previously, the bank closed the accounts for the PICs and the 
broader Wyly relationship. The bank also took disciplinary 
action and personnel action with respect to BAI associates who 
were involved with discussions on this issue and did not 
immediately demand that the customers provide beneficial 
ownership information.
    Following a review of the facts underlying this matter, the 
bank took numerous other remedial steps, including improving 
compliance processes and structures, improving lines of 
communication with NFS, improving training, enhancing account 
opening and closure procedures, review of certain accounts, 
including PICs. Chairman Coleman and Senator Levin and others, 
I am now prepared to answer questions and welcome the 
opportunity to discuss these issues with you. Thank you.
    Chairman Coleman. Thank you very much, Mr. Conn. Mr. 
Wendler.

   TESTIMONY OF GEORGE T. WENDLER,\1\ SENIOR EXECUTIVE VICE 
 PRESIDENT AND CHIEF CREDIT OFFICER, HSBC BANK USA, MARLBORO, 
                           NEW JERSEY

    Mr. Wendler. Thank you, Mr. Chairman, Senator Levin, and 
Members of the Subcommittee. My name is George T. Wendler. I am 
Senior Executive Vice President and Chief Credit Officer for 
HSBC Bank USA, N.A. I am here primarily to answer the 
Subcommittee's questions about the bridge loan and derivative 
collar services that HSBC provided to two Quellos-advised 
clients between the years 2000 and 2002.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wendler appears in the Appendix 
on page 155.
---------------------------------------------------------------------------
    Bank personnel have only recently learned of Quellos using 
the phrase POINT strategy to describe a series of transactions 
that included our bridge loan and derivative collar services. I 
will also describe briefly the changes in law and bank policies 
that have occurred since the transactions took place. Because 
of those changes, HSBC would not provide support for the 
Quellos-advised POINT transactions if we were presented with 
them today. HSBC is committed to ensuring that it operates its 
business in full compliance with applicable laws and 
regulations and in accordance with best practices to limit the 
risk of our bank's involvement in abusive tax shelters.
    I was Chief Credit Officer of HSBC Bank USA between 2000 
and 2002 and I serve in that role today. I trust the 
Subcommittee will understand that my business expertise is in 
credit matters and not in compliance or know-your-customer 
matters. I also was not the client contact or relationship 
officer. As a result, some of the information from my testimony 
was provided to me by bank personnel. They have greater 
knowledge than me on such matters. Having said that, I will do 
my best to answer all of your questions.
    HSBC's domestic private bank was approached by the Quellos 
Group in the fall of 2000. It was asked to make a competitive 
bid on a bridge loan and derivative collar for a very high net 
worth Quellos client. The private bank was told that the client 
needed short-term financing to make an investment and that the 
collar was part of the investment strategy. During the course 
of negotiations for the loan and collar, the private bank 
learned more about the transaction. It learned that some of the 
Quellos-advised transactions involved acquisitions of LLC units 
and underlying technology stocks from Isle of Man companies and 
that a potential benefit would include U.S. tax deferral as 
well as an investment gain opportunity.
    HSBC was not the client's tax advisor. Consistent with HSBC 
policies at the time, the private bank took steps to determine 
that the bank's transactions with the client would be 
adequately collateralized, that they were highly likely to be 
repaid, and they were being entered into with reputable 
individuals and entities. This included personal meetings with 
the clients and consultations with other involved entities.
    The private bank also insisted that the flow of funds and 
stocks take place in cash and custody accounts established and 
monitored by HSBC, that the private bank's internal and 
external counsel have the opportunity to review a tax opinion 
from a leading U.S. law firm before the transactions were 
executed, that the client acknowledge in writing that it was 
relying on independent tax and investment advice, and that it 
was not relying on any such advice from HSBC. HSBC also took 
steps to determine that the private bank itself had no tax 
shelter registration or any other tax reporting obligations 
relating to the transaction.
    The private bank did provide a loan and collar in the 2000 
transaction and again in a larger 2001 transaction involving a 
second Quellos client. Finally, HSBC provided a collar to the 
first client again in a similar 2002 transaction.
    We believe our involvement, level of review, and diligence 
with respect to these transactions was lawful and consistent 
with general industry standards at the time. We are confident 
that the bank complied fully with its legal obligations.
    But I want to emphasize that for any similar proposal 
today, the bank would take significant additional steps. This 
is in part because the law has changed. For example, large loss 
transaction now require additional IRS reports, and know-your-
customer and diligence requirements are more robust. They have 
new emphasis on complex structured finance activities. In 
addition, HSBC's prudential requirements for diligence, lending 
and structuring services are significantly different today. In 
retrospect, there were some warning signs. Today, they would 
lead us to make additional inquiries and analyses concerning 
the underlying transactions and parties involved. If presented 
with the POINT transaction today, we would not participate.
    My written statement provides additional descriptions of 
our current credit approval and compliance policies. There was 
a December 2005 letter to our private bank managers that 
provides a good summary of HSBC's standards today. I quote from 
that letter. ``No customer or business arrangement is worth our 
reputation. Knowing our customers makes good business sense and 
helps us preserve our reputation for integrity and fair 
dealing. This responsibility cannot be delegated or abdicated 
and should never be taken lightly.'' Let me assure the 
Subcommittee that HSBC does its best to live up to those 
standards in its daily business dealings.
    Thank you for the opportunity to appear today. I will be 
pleased to answer any of your questions.
    Chairman Coleman. Thank you very much, Mr. Wendler.
    I wonder if we could look at Exhibit 5 regarding the POINT 
strategy.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit 5 which appears in the Appendix on page 677.
---------------------------------------------------------------------------
    Mr. Greenstein, I am going to start with you, and there is 
a lot that we need to cover in this panel. One, is it your 
testimony that the POINT transaction represented a popular 
investment strategy?
    Mr. Greenstein. My testimony was some of the initial 
genesis of the POINT transaction represented a popular 
investment strategy from Western Europe, and that was a piece 
of the transaction.
    Chairman Coleman. But we have heard testimony that the 
purpose of the POINT strategy from the investors', the clients' 
perspective, was tax deferral. Tax avoidance was the purpose of 
POINT, is that correct?
    Mr. Greenstein. Clearly, tax deferral was a key objective. 
There were investment opportunities associated with it, as 
well.
    Chairman Coleman. But clearly, the investment opportunities 
were de minimis. You heard both Mr. Johnson and Mr. Saban 
talking--do you believe they had any intent or any belief that 
this was an investment opportunity?
    Mr. Greenstein. There was, as I said, clearly tax deferral. 
Once the clients, and in the case of Mr. Johnson and Mr. Saban, 
we talked to their advisors on a regular basis, once they had 
the profit and loss exposure associated with the equity 
securities, we talked to many of the clients almost daily 
because they were very concerned about the price movement in 
those securities. So while the tax deferral component was a 
large and important factor, there nonetheless was a profit and 
loss opportunity and it is not inconsistent for there to be 
investment attributes as well as tax attributes in a strategy.
    Chairman Coleman. Now, the transactions between Jackstones 
and Barnville, both Isle of Man entities, were what one would 
call netted or circular transactions. In other words, stock 
wasn't actually exchanged. What Jackstones purported to own, 
$9.6 billion of shares, Barnville purports to buy, but 
Barnville loans the same securities back to Jackstones, which 
loans Barnville back the purchase price--no cash and no 
services are actually transferred, is that correct?
    Mr. Greenstein. These transactions that you are referring 
to were legal contracts, not dissimilar to swaps or contract 
for differences or single stock futures, where in all of those 
cases there is no cash transfer but there is a legal obligation 
and there is no ownership transfer of specific entities unless 
the delivery is requested. And in the case of these 
transactions, when clients requested delivery, the delivery of 
the shares was made.
    Chairman Coleman. Were you aware that Jackstones and 
Barnville were capitalized with two pounds, five dollars? That 
is the extent of capital in these----
    Mr. Greenstein. No, I don't believe that representation is 
correct. That would be analogous if the par value, say, in a 
stock in the United States, is a penny, the assets of the 
company and the share value could be significantly more. So I 
believe that amount represented the amount that the company was 
formed with but did not represent the assets, and we received 
assurances from the professionals at European American 
Investment Group that the entities had the wherewithal and the 
willingness to enter into the various contractual obligations.
    Chairman Coleman. Did you know that--and again, you talk 
about the willingness and the wherewithal--these were net 
obligations between Jackstones and Barnville. You could have 
picked 9.5 billion. You could have picked X-billion, whatever 
it was. In effect, the obligations went back and forth and 
there was no net profit or anything to be made on this.
    Mr. Greenstein. They entered into the transactions and then 
hedged those transactions and we reviewed--it is my 
understanding that these transactions, the nature of the 
transactions were reviewed extensively with the lawyers 
involved and opining on the transaction.
    Chairman Coleman. Did you share that with clients?
    Mr. Greenstein. Yes, with the clients' advisors. It is my 
understanding--I had, again, very little interaction with many 
of the advisors, but it is my understanding we went through 
these in detail, and in fact, one of the clients asked for 
verification along those lines and Euram went out and hired one 
of the top U.K. chartered accounting firms to actually verify 
the books and records of Euram--excuse me, Barnville and 
Jackstones as it related to the contractual obligations.
    Chairman Coleman. Mr. Wendler, looking at Exhibit 60b,\1\ 
Barnville and Jackstones, Limited were Isle of Man companies, 
each owned by trusts with mutually overlapping boards. Were you 
aware of the netting transactions and the nature of the 
relationship between Jackstones and Barnville?
---------------------------------------------------------------------------
    \1\ See Exhibit 60b which appears in the Appedix on page 1190.
---------------------------------------------------------------------------
    Mr. Wendler. No, sir.
    Chairman Coleman. And you have indicated, if presented with 
the POINT strategy today, you wouldn't go forward with that 
strategy, would you?
    Mr. Wendler. Yes, correct.
    Chairman Coleman. I have more questions. Let me turn to 
another avenue of inquiry, but we will come back to this.
    Mr. Schaufele, I am trying to understand this issue of 
control in regard to security transactions. I understand from 
the testimony from Mr. French that the protectors would make 
recommendations to the trustees and ultimately the trustees 
would approve those recommendations, is that correct?
    Mr. Schaufele. What I understood was the protectorates 
would make a recommendation to the trustee and the trustee then 
would make an order or whatever to me. That is correct.
    Chairman Coleman. Now, you understood this issue of being 
an independent entity, is that correct?
    Mr. Schaufele. That is correct.
    Chairman Coleman. There had to be independence here. If I 
can turn to Exhibit 21a,\1\ when you changed jobs from Lehman 
Brothers to Bank of America in 2002, you informed the Wylys 
that their offshore accounts were being transferred to Bank of 
America as totally separate entities without any linkage. Can 
you explain what you meant when you said that?
---------------------------------------------------------------------------
    \1\ See Exhibit 21a which appears in the Appendix on page 777.
---------------------------------------------------------------------------
    Mr. Schaufele. Yes. As you heard, the onshore, the Wyly 
family onshore was a large client of Bank of America. They were 
a large creditor to Bank of America. The offshore was moving 
assets to Bank of America. The family wanted to make sure that 
these were treated totally separately, i.e., if there was a 
default by the onshore of one of their loans, that the bank 
wouldn't go in and grab these offshore assets.
    Chairman Coleman. But you note in the--you noted that you 
want this to be sent to Charles and Sam. While the accounts 
were at Lehman, Lehman came to view some of the accounts as 
linked. Lehman went so far as getting counsel from Michael's on 
the phone to see if they viewed the offshore accounts as 
affiliates. Even though the counsel did not view the offshore 
as affiliates, Lehman chose to treat them as affiliates.
    Mr. Schaufele. And what--that happened in a transaction 
that we were proposing to both the Sam Wyly and to the 
Devotion, that Lehman viewed that the relationship between Sam 
and Devotion was going to be an affiliate relationship. We got 
counsel on the phone, all right. Sam then chose to proceed with 
the transaction on his side, which was just selling it. 
Devotion did nothing. Then nothing happened from the 
standpoint, from a Lehman's standpoint of were they viewing 
these accounts as affiliates.
    If Lehman had chosen to view these as affiliates, we would 
have had to--I would have been instructed to treat them 
differently, whether that is in increased margin costs, 
transactions, etc., and no instructions came from Lehman after 
that. So it was somewhat dropped, sir.
    Chairman Coleman. Wasn't, though, the purpose of this 
treatment of accounts as separate entities to make sure they 
would not be considered affiliates of Michael Stores under SEC 
regulations with limited transactions involving company stock 
held by corporate insiders?
    Mr. Schaufele. I am sorry, would you say your question 
again?
    Chairman Coleman. Sam Wyly and others, they are corporate 
insiders in terms of Michael's, right?
    Mr. Schaufele. Correct.
    Chairman Coleman. They are doing transactions in these 
offshore accounts and there are SEC regulations that limit 
transactions involving company insiders.
    Mr. Schaufele. Correct.
    Chairman Coleman. And did the Wylys comply with these SEC 
regulations regarding limitations on insider trading?
    Mr. Schaufele. The offshore entities, all right, we had 
counsel from both internal counsel of Michael Stores and their 
outside counsel of Michael Stores and Lehman Brothers and 
subsequently Bank of America legal people say that they felt 
that they were not affiliates.
    Chairman Coleman. So Sam Wyly is making specific 
recommendations about the sale of Michael's options, Michael's 
stock, and the opinion is that they are not affiliates?
    Mr. Schaufele. No, sir. Sam Wyly never made specific 
recommendations to me. The recommendations came from the 
trustee or the protectorate.
    Chairman Coleman. Your testimony is that the 
recommendations about these sales came from the trustees and 
from the trust protectors?
    Mr. Schaufele. That is--and the trustees, yes.
    Chairman Coleman. And Mr. French testified as a trust 
protector that the recommendations came directly from Sam Wyly.
    Mr. Schaufele. To the protectors. I had no contact with Sam 
or Charles regarding any orders or anything of that nature.
    Chairman Coleman. If we look at Exhibit 5,\1\ I think the 
directions are from Sam Wyly, not the protectors. This is a 4/
26/2000 e-mail from Evan Wyly. ``Sam recommends the trustees 
exercise and sell the remainder of the Michael options at $40 
or better.'' Sam wants additional cash in Edinburgh so it is up 
to $20 million by the anniversary date. Fund it with offshore 
cash since it will take time. He wanted to know what he 
expects. Just spoke to Sam, he recommends proceeding with the 
exercise of sale of 1250 Michael options held by offshore 
entity .  .  .'' All of these recommendations were communicated 
to trust protectors and communicated to trustees and were 
executed.
---------------------------------------------------------------------------
    \1\ See Exhibit 5 which appears in the Appendix on page 677.
---------------------------------------------------------------------------
    Mr. Schaufele. Correct.
    Chairman Coleman. Your testimony is that you were not aware 
that these recommendations were coming from Sam to the trust 
protector?
    Mr. Schaufele. That is correct.
    Chairman Coleman. All right. I have no further questions at 
this time. Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    Chairman Coleman. Because my time has expired, but we will 
come back to this line of questioning.
    Senator Levin. Mr. Greenstein, would you take a look at 
Exhibit 49d? \2\
---------------------------------------------------------------------------
    \2\ See Exhibit 49d which appears in the Appendix on page 1078.
---------------------------------------------------------------------------
    Mr. Greenstein. Yes, Senator.
    Senator Levin. Now, 49d is a series of e-mails in May 2000 
between you and your Quellos associates, Chuck Wilk and Larry 
Scheinfeld, is that correct?
    Mr. Greenstein. Yes.
    Senator Levin. Mr. Scheinfeld writes, if you look at the 
bottom of that page where the correspondence begins, ``It looks 
like we have no more room on the POINT trade. We would be very 
careful about selling any more.'' When he says no more room, 
what does he mean by that?
    Mr. Greenstein. That there was a portfolio where the high 
basis was different than the fair market value of the stock, 
and because, again, looking back at these periods in the 
market, technology and telecommunications stocks were extremely 
volatile, so that basis differential was changing literally on 
a daily basis. So it could be, for example, that the market 
rallied significantly and there would be no more basis 
differential or opportunity----
    Senator Levin. What was the limit that you could reach in 
that portfolio? Was it $9 billion?
    Mr. Greenstein. No. It was really a function of----
    Senator Levin. What was the number, dollar? The limit. How 
much could you sell?
    Mr. Greenstein. It was a function of the market prices for 
it to be----
    Senator Levin. Approximately what was it?
    Mr. Greenstein. I think it was--and it varied over 
different periods of time--maybe a billion dollars, a billion-
five, maximum.
    Senator Levin. Didn't Mr. Saban alone have a tax loss of a 
billion-five?
    Mr. Greenstein. To the best of my understanding, the basis 
differential using the stocks that we did amounted to about 
$1.3, $1.4 billion in deferral.
    Senator Levin. And that is the list you put together?
    Mr. Greenstein. That was the portfolio. So when----
    Senator Levin. Did you put that portfolio together?
    Mr. Greenstein. Yes. I put the portfolios together.
    Senator Levin. And then you sent those portfolios over to 
Euram?
    Mr. Greenstein. Well, what we did, if we start, we entered 
a series of transactions on a large portfolio. Some of the 
prices of the portfolio appreciated. Some of them depreciated. 
For each one of the POINT transactions, a diversified basket of 
stocks were taken out of that larger pool. So I was involved 
with both of those.
    Senator Levin. You would take out that basket?
    Mr. Greenstein. Yes.
    Senator Levin. Which would have a loss in it?
    Mr. Greenstein. It would have a differential----
    Senator Levin. Which was a loss?
    Mr. Greenstein. An unrealized loss, yes.
    Senator Levin. Unrealized loss. And then that loss 
differential, as you put it, was sent over to Euram?
    Mr. Greenstein. No. That----
    Senator Levin. How did that get to Euram?
    Mr. Greenstein. That loss, and again, it is my 
understanding because I am not a tax expert on the nuances of 
the transaction, but those positions were put into a 
partnership that U.S. investors----
    Senator Levin. You are way ahead of the game.
    Mr. Greenstein. Sorry.
    Senator Levin. How did Euram get the list from you? You 
made up the list. How did it get to Euram? Did you send it to 
them?
    Mr. Greenstein. I communicated that to them, yes.
    Senator Levin. OK. So you communicated the list----
    Mr. Greenstein. Correct.
    Senator Levin [continuing]. Which had these tax losses in 
the list to Euram, is that correct? Unrealized tax losses in 
the list, right?
    Mr. Greenstein. Yes, to what stocks.
    Senator Levin. Right. And you connected the loss to the 
stocks that you had selected, is that correct?
    Mr. Greenstein. If I understand your question, what we 
would do is build a portfolio that had a basis differential, 
and that basis differential would reflect the amount of tax 
deferral the client was seeking.
    Senator Levin. And that was an unrealized loss, is that 
correct?
    Mr. Greenstein. Correct.
    Senator Levin. So the clients were seeking losses, is that 
correct?
    Mr. Greenstein. Yes.
    Senator Levin. And that is why they signed up with your 
structure, is that correct?
    Mr. Greenstein. Yes. The clients that executed the POINT 
transaction, it is my understanding, had been evaluating a 
number of different tax deferral strategies.
    Senator Levin. And the losses here, if you could look back 
at that Exhibit 49d again, were dependent on--the amount of the 
loss was dependent on market moves, is that correct?
    Mr. Greenstein. Yes.
    Senator Levin. And the market was moving to reduce the 
amount of the loss, so you said in this--they said in this e-
mail that you better move quickly, is that correct?
    Mr. Greenstein. Yes. The 2000-2001 period, particularly in 
the NASDAQ and technology stocks, was very volatile and----
    Senator Levin. And you were losing losses there pretty 
rapidly, right?
    Mr. Greenstein. Yes.
    Senator Levin. Losses were shrinking. And that was bad news 
for your structure, wasn't it? People had better move quickly. 
Step up, folks. Get your loss quick before they are all sold 
out. That is basically what that e-mail says, is that correct?
    Mr. Greenstein. Yes. There was limited capacity and it was 
first come, first serve.
    Senator Levin. And then it says here that we will try to 
add more positions to generate losses, right? That is what the 
goal was, generating losses, right?
    Mr. Greenstein. On this structure, yes.
    Senator Levin. That is a hell of an investment strategy. 
When you say there is an element of investment strategy here, I 
have to tell you, it totally runs against every e-mail that you 
or anyone else wrote, which showed your purpose was to generate 
losses. I know there was an investment strategy attached to it 
very minutely. We had the dollars. We got that from Mr. Saban 
and Mr. Johnson today. That was the detail which you wanted to 
wag the dog. But it doesn't wag the dog legally. Legally, it 
has got to be a significant investment strategy in proportion 
to the loss.
    And now let me go back to ask you a question. You then say 
here that people, unless they move quickly--excuse me. You said 
that there is only a billion-four in usable losses at the 
beginning of the morning, but at the close, you only had $1.15 
billion. So you were losing the opportunity to sell your 
structure quickly in 1 day. You lost the possibility of selling 
$285 million of losses, and so the e-mail was saying, we had 
better get on with this thing and get this sold pretty quickly. 
Is that the gist of it?
    Mr. Greenstein. The e-mail was saying the opportunity is 
squarely linked to the market price, and the market price is 
changing----
    Senator Levin. And they are going up, right? The loss is 
shrinking today. Isn't that what that e-mail says?
    Mr. Greenstein. Today. There were periods during that time 
period where it was changing--it was going the other way.
    Senator Levin. Right.
    Mr. Greenstein. But the point was, yes, and we had a number 
of clients who had expressed interest in this transaction and 
that is what we were communicating.
    Senator Levin. Right, and did you sell to anybody that 
didn't need a capital loss?
    Mr. Greenstein. No.
    Senator Levin. That sort of says it all, doesn't it, in 
terms of any investment strategy?
    You are not touting this transaction to people who are 
trying to invest money and make money on their investment. You 
are touting this, you are selling this to people who have 
capital gains and need to offset those capital gains with 
capital losses, is that not true?
    Mr. Greenstein. Yes, that is true, Senator----
    Senator Levin. All right.
    Mr. Greenstein [continuing]. But I would say your question 
does not accurately characterize the economics because there 
were, in fact, economics. But as I have stated, the tax 
deferral element, and as the witnesses earlier stated, was a 
primary motivator in the transaction.
    Senator Levin. How do you feel when clients of yours 
testify in front of us under oath what they went through 
because of the structure that you sold? What is your reaction 
to that? You heard here this morning from two business people 
in this country, when you sold structures to them--one of whom 
has already had to pay off the IRS for the amount of taxes that 
he owed plus interest, the other one is negotiating right now--
do you have a feeling about that? These were customers of 
yours.
    Mr. Greenstein. These are--these were strategies that, 
again, the clients, I think as they have testified, were 
seeking a tax deferral strategy. We were providing that 
strategy in working with, again, some of, in our opinion, the 
preeminent tax lawyers in this country on a strategy that was 
legally permissible to accomplish those objectives.
    Senator Levin. My question is, what do you feel like when 
customers of yours testify as they did today? These are people 
who have had legitimate business careers, who were sold 
strategies by your company that now are costing them dearly, 
and, by the way, should cost them dearly, should cost them, 
because these are as phony as a three-dollar bill, these 
strategies. Now, what is your feeling? How do you feel?
    Mr. Greenstein. First of all, I disagree with the 
characterization, but in one of the cases, in Mr. Johnson's 
case, that was a registered tax shelter.
    Senator Levin. Do you feel badly when a customer of yours 
has to settle with IRS, pay the entire amount of the tax gain 
subject to a capital gains tax and pay interest on top of that? 
Do you feel anything?
    Mr. Greenstein. I think every client or the client's 
professional advisor clearly understood the risk, the tax risk 
associated with the transaction and in consultation with the 
lawyers were comfortable in pursuing that. They were very aware 
that the tax opinion by the appropriate lawyers was a more 
likely than not. A more likely than not is certainly not a 100 
percent, so they knew there was very significant risk. Would we 
have preferred that not be the case? Yes, but this was a 
strategy that we had done a lot of work on and consulted a lot 
of people.
    Senator Levin. By the way, did you tell the lawyers that 
the tax loss was the primary purpose of the strategy?
    Mr. Greenstein. The tax deferral? I think the lawyers----
    Senator Levin. Did you tell them that?
    Mr. Greenstein. Yes. That is my understanding. I would add 
that----
    Senator Levin. It is your understanding that you told them 
that?
    Mr. Greenstein. I rarely spoke with the tax lawyers. It is 
my understanding that they understood all of the details and 
the objectives for the transaction, and it is also my 
understanding that they met directly with the clients.
    Senator Levin. Did you or your firm tell the tax lawyers 
that the primary purpose of this was a tax loss sale? Did you 
tell them that, or did anyone in your firm tell them that?
    Mr. Greenstein. I don't know. I know there were very 
extensive conversations between members of our firm with the 
tax lawyers. I was not involved in those conversations.
    Senator Levin. If I could just ask one more question in 
this round, Mr. Chairman. Is this all right? Did you assure 
Euram, did you give them assurances that the book entry nature 
of these transactions was known by the counsel with whom you 
developed the strategy?
    Mr. Greenstein. I didn't speak extensively with Euram as it 
related to this issue. My understanding was that was the case, 
and in fact, I think in the report, it acknowledges that one of 
the law firms had all of the documentation describing the 
various transactions between the offshore entities. So as a 
result of having all of that documentation and highlighting it 
in the report, I would assume that was the case.
    Senator Levin. I want to ask the question again. Did you 
give Euram assurances that the book entry nature of these 
transactions was known by the attorneys with whom you developed 
the strategy?
    Mr. Greenstein. Again, my understanding was that was the 
case.
    Senator Levin. That you did give those assurances?
    Mr. Greenstein. Are you asking if I did personally----
    Senator Levin. No, your firm.
    Mr. Greenstein. That was my understanding, yes.
    Senator Levin. Thank you.
    Chairman Coleman. Senator Collins.
    Chairman Collins. Thank you.
    Mr. Greenstein, I want to follow up on the line of 
questioning from Senator Levin. In your written statement, you 
are very critical of the Subcommittee's report and you say that 
the report is, ``flat wrong in suggesting that the POINT 
transaction did not offer an opportunity for a profit.'' You go 
on to say, ``In fact, POINT gave investors the potential to 
either earn profits or incur losses based solely on market 
fluctuations.'' But, in fact, the whole point, not to make a 
bad pun here, but the whole purpose of the POINT strategy was 
to generate capital losses. It wasn't to generate profits. It 
was to generate losses. So, in fact, what the Subcommittee's 
report says is correct.
    Mr. Greenstein. The opportunity to generate a profit or the 
opportunity to generate a loss based on the positions held was 
very distinct. I am not denying that the prime objective was 
tax deferral. But, in fact, in one of the transactions, in Mr. 
Saban's transaction, a fee element was tied to the performance 
of the stock basket. A component of Quellos's fee was linked to 
how that stock basket did. So while the primary motivator was 
tax deferral, there was clearly economic risk and reward and 
that is why the duration on every POINT strategy was different.
    Chairman Collins. Wasn't this marketed as a tax product, 
the purpose of which was to allow your clients to avoid paying 
taxes on gains?
    Mr. Greenstein. Yes. It was a tax-advantaged strategy, and 
my only point, Senator, was that there were economics 
associated with the tax-advantaged strategy.
    Chairman Collins. Do you believe that the POINT strategy 
was a legitimate transaction?
    Mr. Greenstein. Absolutely. We consulted, again, some of 
the top law firms in this country.
    Chairman Collins. I am not asking, did you believe at the 
time. I am saying, in view of the fact that Mr. Johnson got 
audited and had to pay back taxes and interest due, are you 
still maintaining that this was a legitimate tax strategy?
    Mr. Greenstein. It was a legitimate tax strategy--and 
again, I am not a tax lawyer so I am qualifying that--it was a 
legitimate tax strategy that was registered with the IRS as a 
tax shelter, so they had the information. They had the road 
map. And the IRS determined that it was not a viable strategy--
--
    Chairman Collins. Then how can you maintain to this day 
that it was a legitimate strategy? If it was a legitimate 
strategy, then poor Mr. Johnson should not have been saddled 
with back taxes and penalties and interest.
    Mr. Greenstein. My understanding was the strategy was 
legitimate and legal. The IRS disagreed with the conclusions. 
But I don't believe that means it is not legitimate.
    Chairman Collins. Well, I can tell you that I would think 
your clients would think it wasn't legitimate if it resulted in 
back taxes, interest, and penalties for them.
    Mr. Greenstein. Well, I think in that case, Senator, the 
process worked. The clients had a more likely than not opinion, 
so they knew going into it this was far from a sure thing. 
Otherwise, it would have been a much different opinion. It was 
registered as a tax shelter in Mr. Johnson's case, so the IRS 
had knowledge and it was registered 6 years ago. The IRS had 
knowledge of the transaction. We provided the information. They 
evaluated it. And whether a client settled with the IRS or took 
it to court, that was really an issue up to them.
    Chairman Collins. I don't see how you can argue with what 
was the outcome of the IRS's audit of your client. I am not 
saying that Mr. Johnson escapes responsibility here. He does 
have his own advisors. But the fact is that it did not work out 
well for him and this transaction ultimately was found to not 
pass the smell test.
    Mr. Greenstein. No, and we understood, again, like the 
clients, that there was no guarantee that it would pass the 
smell test.
    Chairman Collins. I guess that brings me full circle to my 
question. I don't know how you can sit here today and say that 
you still view the POINT strategy as a legitimate one when it 
has been rejected by the IRS.
    Mr. Greenstein. Again, and I am not a tax expert, so trying 
to understand the tax legitimacy, I can't comment on that. Was 
it legitimate to enter into that transaction based on the 
advice and information we know? Yes. As it turns out, it was 
not a viable strategy and we respect that and we knew that the 
IRS interpretation, or again, my understanding was that the IRS 
interpretation could rule against that and that was 
appropriate. And I think, again, my understanding is that is 
how the system is supposed to work.
    Chairman Collins. Mr. Conn, I give Bank of America credit 
for acknowledging that the bank's performance was not what it 
should have been in reviewing the Wyly transactions, and you 
have outlined in your testimony a number of remedial actions 
that the bank has taken. That brings me to a fundamental 
question for you and that is, are you confident that the new 
measures that you have put in place would have prevented the 
bank's involvement in the kinds of transactions that are the 
focus of this investigation? In other words, if you had the 
procedures, the safeguards, the processes, arguably the culture 
that you have now, had that been in place prior to your 
entering into these transactions, would those reforms have 
prevented your involvement?
    Mr. Conn. Thank you, Senator, for acknowledging our 
remedial actions. To make one point clear, we were not involved 
in the POINT transaction----
    Chairman Collins. No, but you were in the Wyly 
transactions, which were discussed earlier.
    Mr. Conn. With regard to the Wylys--the answer to your 
question, yes, our remedial actions, I feel confident that we 
would not--and ultimately come to the same conclusion. We would 
do that, and that was we needed the beneficial ownership 
information, and if it is not supplied, we will not entertain 
opening those accounts. And so I believe that would be a 
continuation of our policy that we ultimately had. So I believe 
it would have been quicker and we would not have those accounts 
if the client would not give us the information, which they 
ultimately would not, and we would never have opened the 
accounts.
    Chairman Collins. Just one final question if I may, Mr. 
Chairman. Is it sufficient for Congress to rely on banks such 
as yours to put in place the reforms that are needed, or do we 
need to pass new legislation or new regulations to make sure 
that you maintain this kind of commitment going forward or that 
other institutions that haven't adopted the reforms that you so 
painfully had to adopt don't make the same kinds of errors?
    Mr. Conn. Senator, I believe it would be a partnership. I 
believe that our institutions, working with the government, 
should come to a conclusion, do we need better laws? That is 
how I could answer that question. Ultimately, a partnership 
between corporate America and the government to make those 
decisions.
    Chairman Collins. Thank you, Mr. Chairman.
    Chairman Coleman. I just want to follow up a little bit 
more on this issue of the profit. Would it be fair to say, Mr. 
Greenstein, that the source of the purported economic profit on 
the transaction was the warrant premiums?
    Mr. Greenstein. That was one potential. The main source of 
the profits was the basket of securities----
    Chairman Coleman. The gain in the baskets here, that was 
capped at 8 percent, wasn't it? You have a cap on that, is that 
correct?
    Mr. Greenstein. There was a 90-day collar. That collar, 
there were several situations where we had discussions to 
change that collar. So that could have been rolled. It could 
have been reduced. It could have been extended, and we explored 
for our clients different options, again based on how the 
portfolio had moved and what the prevailing----
    Chairman Coleman. You are picking stocks that you believe 
are going to fall in value.
    Mr. Greenstein. No, the stocks that were originally put in 
the portfolio, let us say we took an example, Microsoft, and 
Microsoft hypothetically, let us say, fell from 100 to 25 and 
then it was put into the partnership that the client bought. 
Once the client owned it at 25, that price could go up or down 
and the reason the portfolio was built the way it was was to 
try to take advantage of some of the opportunities in the 
market, again remembering back that we had the technology and 
the telecommunication meltdown, so to try to take advantage of 
some of those opportunities to earn the money back.
    Chairman Coleman. You would disagree with an assertion that 
a very significant source of the purported economic profit on 
the transaction was to be the warrant premium?
    Mr. Greenstein. That was a potential, as was the potential 
on the stock. So I would not disagree with the question as you 
asked it, Senator.
    Chairman Coleman. But the benefit of the warrant premium 
was that it was one that would accrue to the individual if it 
was held for a period of time, is that correct?
    Mr. Greenstein. To the best of my recollection, it was my 
understanding that the structure that involved the warrants was 
to replicate a common investment vehicle in Europe that was 
known as a BLOC or a HYPO, and essentially, what that was was a 
portfolio of equity securities with a long-dated call option 
written against it, or a warrant in this case, and then that 
was sold potentially to investors. So that would be the 
opportunity, which would require holding the equity basket for 
a considerable time----
    Chairman Coleman. But in this transaction, in each and 
every case, the warrant was unwound. A certain loss was 
achieved and the warrant was unwound at that time, so there was 
no long-term hold. It was simply unwound at a certain point in 
time when you got the loss you needed.
    Mr. Greenstein. Yes, Senator.
    Chairman Coleman. I think that is part of the problem, I 
would suspect, from the IRS is perspective. To claim that there 
is an intent here to generate some profit or benefit from a 
warrant that ostensibly is going to gain value over a long 
period of time, but in each and every instance is unwound, I 
think is obviously one of the problems here.
    Mr. Greenstein. Well, I agree that is one opportunity to 
make profit. The other is just the outright ownership of the 
equity basket, and that varied considerably investor by 
investor in terms of when they wanted to get out.
    Chairman Coleman. But that opportunity, again, it was 
consistently cut off. At the time you got your loss, you 
unwound the warrant and you were out, even though the 
projection in terms of gain was for holding those warrants for 
an extended period of time, is that correct?
    Mr. Greenstein. Yes, they were closed early.
    Chairman Coleman. And if I can get back, Mr. Conn, and I 
appreciate the recognition by Senator Collins about the change 
in policy, in terms of the Wyly-related offshore trusts and 
corporations, from 2002 to 2005, what were the procedures that 
were followed? Could you just give me an overview of when the 
accounts were opened and how did the implementation of the 
PATRIOT Act modify or change the bank's procedures related to 
these accounts?
    Mr. Conn. Certainly, Senator. Just to give you a history, 
the accounts were transferred into Bank of America in February 
2002. We did not actively or do not actively open these type of 
accounts up as a type of product that we offer for U.S. 
citizens. We don't--it is just not something that the Private 
Bank actively does. So we get the accounts, and at that point 
in time, we believe we were complying with the PATRIOT Act when 
it came to knowing your client.
    What had happened, because I think at that time there was a 
question whether we needed specific information about 
beneficial owner. I am not here to split hairs, but I think 
there was legal interpretation in February 2002 that you really 
didn't need that. Now, I am not saying that we ultimately 
didn't come to the conclusion. Our policy ultimately became, as 
the law evolved, you need that information.
    Chairman Coleman. But that is part of the problem here. The 
Wylys are the beneficial owners and no one is revealing that. 
You know they are the beneficial owners.
    Mr. Conn. We believed that the actual beneficial owners, we 
were told, were relatives of the Wylys, grandchildren, specific 
charities. Now, when this was highlighted to us at NFS, and 
this is one thing that came up through our relationship with 
them, what they do for us, they are our clearing agent, just to 
make that clear, that what NFS does is they highlight 
situations that we need to further investigate. That came up in 
January that we needed that, I believe, and we went through a 
process and a dialogue with the representatives of the trust--
we were not talking to the Wylys because we believed this was 
separate--that we wanted this information. And they came back 
to us saying, well, we understand from your competitors that 
you do not have to get this information.
    Our policy was at that time, and still is, we need that 
information. So we entertained a dialogue with the 
representatives, is there a way to get that information without 
violating their confidentiality requests. We came to the 
conclusion that, no, there was no way we could do that, and I 
believe it was in June. We went to NFS and said, put together a 
series of questions that we have to ask and want to ask the 
beneficiaries, or the representatives of the trust, and if we 
do that and they don't answer them, we are prepared to take 
appropriate action, and that is what we did.
    We ultimately asked for the information on beneficial 
ownership. They refused to give it to us. We closed the 
accounts and filed the appropriate forms.
    Chairman Coleman. If I have no objection from my 
colleagues, I just want to follow up with another question. Mr. 
Schaufele to tie into this, could you talk a little bit about 
the concept of beneficial ownership? I take it you are familiar 
with security laws and the requirement that large shareholders 
declare their beneficial ownership in a publicly-traded 
company, is that correct?
    Mr. Schaufele. I am not a lawyer, I am a broker, but I know 
large shareholders do have to, if they are an insider or own 
more than 5 percent, there is a filing that does need to be 
made, yes, sir.
    Chairman Coleman. We see instances where offshore accounts 
are set up by the Wylys. I think there were, by the way, 65 
securities accounts set up by Bank of America, is that correct, 
Mr. Conn?
    Mr. Conn. I don't know the exact number, Senator, at this 
time of how many security accounts there were.
    Chairman Coleman. The record indicates that there were 65 
opened by your bank. We have offshore accounts opened by the 
Wylys holding large amounts of stock that were originally 
deposited by the Wylys. Mr. Conn or Mr. Schaufele, at the time 
this was happening, were there any concerns that the Wylys were 
attempting to circumvent disclosure obligations under security 
laws by using the offshore trusts?
    Mr. Schaufele. There was no concern from my standpoint. The 
firms that I was with knew that the Wylys were beneficial 
owners of these accounts and I relied on the compliance folks 
for what they would recommend to do. At one point, this was 
back, I believe, at Lehman Brothers--and I believe it says this 
in the report--some of these accounts actually were 13(d) 
filers.
    Chairman Coleman. But there was an effort in at least one 
instance where a number of the offshore accounts actually kind 
of split shares among themselves to reach a level of holdings 
underneath 13(d) filers. But you are saying you had no 
knowledge of that?
    Mr. Schaufele. That is correct.
    Chairman Coleman. Mr. Conn.
    Mr. Conn. As I understand it, we were assured by the 
protectorate, the trustees of the accounts that there was no 
affiliation. While we believed through our financial advisors 
that the Wylys endowed the accounts, we felt that through the 
representation of the individuals that there was not an 
affiliation there, that it was entirely independent.
    Chairman Coleman. Senator Levin.
    Senator Levin. Mr. Greenstein, is it true that it was 
always your understanding that there would be no cash transfers 
passed between those two companies?
    Mr. Greenstein. No. I did not understand the ultimate 
mechanics of those. We relied upon Euram, European American, to 
execute those.
    Senator Levin. Do you know who John Staddon is?
    Mr. Greenstein. Yes.
    Senator Levin. Take a look, if you would, at Exhibit 54.\1\ 
Who is John Staddon? Is he with Euram?
---------------------------------------------------------------------------
    \1\ See Exhibit 54 which appears in the Appendix on page 1138.
---------------------------------------------------------------------------
    Mr. Greenstein. Yes.
    Senator Levin. So you had a lot of dealings with him, did 
you?
    Mr. Greenstein. I had more dealings when he was in the 
legal department at UBS than I did at Euram.
    Senator Levin. Then you had dealings with him at Euram?
    Mr. Greenstein. Yes.
    Senator Levin. OK. Now, look on page 2 of that document, 
near the bottom, the third paragraph from the bottom where it 
says, ``Because the transactions--'' Do you see that paragraph?
    Mr. Greenstein. The third paragraph?
    Senator Levin. This says page 2 on here. It is page 5. I 
have the wrong page number. Near the bottom of page 5. 
``Because the transactions were conducted--'' Do you see that 
paragraph?
    Mr. Greenstein. Yes.
    Senator Levin. I want to read it to you now and you can 
follow it. ``Because the transactions were conducted in this 
manner through the enclosed documents, no physical transfer of 
shares were made, no transactions took place over any exchange, 
and no cash transfers passed between bank accounts of the two 
companies. This, however, was always understood to be the case. 
Euram obtained assurances from Quellos that the book entry 
nature of these transactions had been known by the counsel with 
whom they developed the strategy and that it would be disclosed 
to any client advisor and opinion provider involved in any 
subsequent implementation.'' So far, do you agree with that?
    Mr. Greenstein. Yes. These are common over-the-counter----
    Senator Levin. But a minute ago, you said that you did not 
understand that there would not be cash transactions. Now you 
say you did understand that no cash transfers passed between 
bank accounts of the two companies.
    Mr. Greenstein. I was referring to, and I apologize if I 
misinterpreted your question, when the transaction was 
initially initiated, that was the case. Yes. These are 
descriptions of standard over-the-counter-type agreements.
    Senator Levin. I know that is your testimony, but is this 
the accurate description of what was going on with those two 
shell companies in the Isle of Man? Were you aware of that 
fact?
    Mr. Greenstein. I don't understand the movement of cash. 
What I do know is that when there were obligations by Barnville 
or Jackstones to pay cash to the client, to deliver shares to 
the client upon request, they met those financial obligations 
in all cases. So in that respect, certainly if there was cash 
paid to a client, there had to have been cash movement between 
those entities. What that is, I don't have knowledge of that 
and wasn't involved in that level of detail.
    Senator Levin. Now you are saying you did believe there was 
cash that moved between those two entities, whereas I just read 
you a statement that came from Euram to us that said that it 
was well known--let me get the exact words here--``no 
transactions took place over any exchange and no cash transfers 
passed between bank accounts of the two companies.'' And it 
says, ``This, however, was always understood to be the case.'' 
Did you understand that to be the case?
    Mr. Greenstein. Yes. If I could respond to comments that 
you made in your question. First of all, I am puzzled why 
Euram, who it is my understanding refused to be interviewed by 
the staff, submits a written statement that is contradictory to 
oral and written communication they had given to us many years 
ago, and that is assumed to be fact.
    Senator Levin. I am just asking you if it is a fact. I 
don't assume anything. I am asking you, and you said it--first, 
you said it is true, and then you said it is not true.
    Mr. Greenstein. My understanding, and the way I was trying 
to answer your question, Senator, is that there were 
obligations entered into between those two entities.
    Senator Levin. Did cash transfer between those two 
entities?
    Mr. Greenstein. No. Up front, these are legal contractual 
obligations, which I believe he referred to. As is the case, 
say, with a contract for differences or a swap, there is no 
cash transaction that occurs immediately. I was referring to 
that. But at the end----
    Senator Levin. Not immediately----
    Mr. Greenstein. At the end, there has got to be some 
settling between those entities of whether it is delivering 
stock, whether it is paying obligations. So as it relates to a 
cash movement on the settling of the contractual obligations, 
yes, I believe there was--or it was my understanding and my 
assurance, I received assurance that there was that movement at 
that portion. So I misinterpreted and I apologize----
    Senator Levin. Would you present that understanding that 
you received from Euram to the Subcommittee?
    Mr. Greenstein. Would I present that?
    Senator Levin. Yes, will you give it to us.
    Mr. Greenstein. My understanding----
    Senator Levin. You said you got written assurance from them 
early. Would you provide that to us after this hearing is over?
    Mr. Greenstein. I believe we have, and I was referring to--
yes, I believe you have correspondence from Euram from us, and 
also there was verbal assurances that we received. As an 
example, in your report, they told us that the owners of 
Barnville and Jackstones were authorized to enter these 
transactions, that there was complex ownership, and I think in 
the e-mail that you had in your report, they said, we are not 
keen on disclosing who those owners are. So that was what they 
told us. They didn't say, we don't know who the owners are, 
like they communicated to you.
    Senator Levin. Did you know who the owners were?
    Mr. Greenstein. No. We relied upon them.
    Senator Levin. Did Euram know who the owners were?
    Mr. Greenstein. They had communicated to us that they knew 
and they were--as the e-mail said--keen not to disclose it. So 
it was our understanding, and again, relying on the reputation 
and past dealings we had with them, that when they said they 
were keen on not disclosing it, that we could take comfort in 
that.
    Senator Levin. So you view Euram as being an honest--you 
have always dealt with them and felt that they are an honest 
company?
    Mr. Greenstein. At that point in time, that was the case. 
When I see statements made today that contradict that, that is 
disappointing to me.
    Senator Levin. I want to go back to that value of the 
portfolios that you selected and that you sent to Euram. You 
insisted that the total value was only about a billion-and-a-
half and I want to go through that with you, because I add up 
to $9.5 billion.
    Mr. Greenstein. OK.
    Senator Levin. Take a look at Exhibit 51.\1\
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    \1\ See Exhibit 51 a-k which appears in the Appendix on page 1085.
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    Mr. Greenstein. Any particular page?
    Senator Levin. No. If you look at the value of the stocks 
that were identified that you passed along to Euram, that is 
$397 million on that day. By the way, these documents came from 
you, from your company. So just round it off. December 28, the 
portfolio that you sent the names of was $400 million.
    Then take a look at Exhibit 51b, and these documents, these 
are contracts between the two shell companies in the Isle of 
Man, this back-and-forth money and cash--excuse me, cash and 
stocks that didn't exist. This is Exhibit 51b, and the amount 
of this list that you provided to them is $1.648 billion. 
Someone is adding these up for me back there.
    Take a look now at Exhibit 51c. This is another portfolio 
that you created for them, $1.1 billion.
    Now look at Exhibit 51d. This portfolio of stocks that you 
created and sent them the list, this one was $3.3 billion.
    Exhibit 51e, which is dated June 6, $3 billion almost even. 
That totals $9.6 billion.
    Mr. Greenstein. Sure.
    Senator Levin. Is that true?
    Mr. Greenstein. That is true. What I was responding to 
earlier was the question as it related to the basis 
differential, the difference between----
    Senator Levin. Excuse me, Mr. Greenstein. I was very 
careful when I asked you about the total value of those stocks, 
the list of which you sent to Euram. You said it was one-point-
something billion dollars. Whether you said that or not, the 
record will speak for itself. Are you now acknowledging that 
the lists of stocks that you sent to Euram that would then be 
sent to one of these two companies to be exchanged with the 
other company totaled about $9.6 billion?
    Mr. Greenstein. Yes, and I apologize if I misunderstood 
your question. I thought you had asked about the basis 
differential, which is my recollection, $1.4 billion. I know we 
were talking about those two interchangeably, so those two 
numbers would be correct.
    Senator Levin. The basis differential is the amount that 
you had to sell, right?
    Mr. Greenstein. The potential tax deferral amount, yes.
    Senator Levin. That you were selling to taxpayers looking 
for tax losses, right?
    Mr. Greenstein. Correct, tax deferral.
    Senator Levin. Were you aware of the fact that those 
companies had two pounds each paid-in capital?
    Mr. Greenstein. Again, as I had stated earlier, paid in 
capital might be analogous to par value, where you might look 
at in the United States, the par value of a share is a penny, 
and that has no relationship whatsoever to what the share price 
is or the assets. So paid in capital, it is not unusual in an 
offshore investment company to have a very nominal paid in 
capital and very significant assets. So I don't think it 
represents the assets or the liabilities of the company.
    Senator Levin. Do you have any idea what those assets or 
liabilities were in those two companies?
    Mr. Greenstein. No, and as I had testified earlier, that is 
where we relied upon Euram and where Euram was paid a 
significant amount of money to assist in aspects of the 
transaction which this was clearly one of them.
    Senator Levin. Thank you. Thank you, Mr. Chairman.
    Chairman Coleman. Thank you, Senator Levin.
    I notice Senator Carper has joined us. Senator Carper.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thanks, Mr. Chairman. Not long ago, I was 
talking with someone back in my own State, a fellow who was not 
particularly happy with paying taxes. He said to me, I would 
feel a lot better about paying the taxes that I do if I were 
convinced that a lot of other people who have a whole lot more 
money than I do were paying their fair share, as well.
    I know Mark Everson was here and testified earlier today in 
the hearing. He has testified before our Subcommittee, as well, 
and he testified to us that there was $300 billion in taxes 
that were owed last year that were not collected. In some 
cases, they have a pretty good idea who owed the money, the 
magnitude of the money that was owed. They just don't have the 
resources to go out and get it. Our tax laws are vague enough 
and people are smart enough to find ways to avoid their 
responsibilities.
    I just want to thank you and particularly Senator Levin for 
convening this hearing today and for the kind of dogged 
determination that I know you bring to this pursuit. We face 
huge budget deficits in this country, $300, $400 billion a 
year, and as we look ahead to my generation retiring, we note 
that they are not going to get much smaller as long as we are 
involved in wars in Afghanistan and Iraq and problems like 
Katrina to deal with and people in my generation becoming 
eligible eventually for Medicare and Social Security and all. 
It is important that we find out who owes money and to make 
sure that they pay their fair share so that the rest of us 
don't have to pay more than our fair share.
    I have some questions I would like to ask for the record. I 
am not going to ask them here at this time. But I want to thank 
you both for holding this hearing and for airing these issues, 
which they certainly need to be aired.
    The last thing I would say, it is important for us 
collectively to provide the resources that the IRS needs, not 
just dollars and cents personnel to go out and do their job, 
but also to make sure that we pass legislation here and that it 
is in a form that somebody who is enforcing our tax laws can 
understand it and can go out and collect the monies that are 
actually owed. Thank you.
    Chairman Coleman. Thank you, Senator Carper. You represent 
a State, Delaware, in which banking and financial institutions 
are important to your State economy. Financial institutions 
depend upon trust and confidence, and when that subdues, I 
think it has a negative impact on the entire system. So I 
appreciate your presence and I appreciate your interest and 
involvement in these issues.
    I think Senator Levin, I understand, had one other line of 
questioning.
    Senator Levin. I did. You made reference to your fees, Mr. 
Greenstein. You said that there was in one case, at least, that 
a part of your fee was tied to any profit that might be earned 
in that incremental piece of this transaction, is that correct?
    Mr. Greenstein. Vaguely, I believe that is the case, yes.
    Senator Levin. Is it not the case that the greater the 
losses here, the greater your fees?
    Mr. Greenstein. Our fees, the tax deferral was really the 
starting point for the fee negotiation. So in answer to your 
question, yes. From that starting point, other things were 
included, be it estate planning or investment management. But 
the starting point was correct, yes, the tax deferral.
    Senator Levin. So the key component to your fee was the 
size of the loss?
    Mr. Greenstein. That was the starting point, yes.
    Senator Levin. Was it also the key component of your fee as 
well as the starting point?
    Mr. Greenstein. Yes.
    Senator Levin. And the greater the loss, the greater your 
fee?
    Mr. Greenstein. Correct.
    Senator Levin. I think that speaks volumes as to what this 
is all about. You weren't selling investments. You were selling 
losses, and your fees went up with the loss. It is just as 
clear as can be.
    You can say that there were possibilities here of 
investment gains, and I guess there were theoretically tiny 
possibilities, but what you can't say is that the purpose of 
this was anything other than to create a tax loss by using two 
shell corporations, which have no capital, $5 each in capital. 
You have no idea what assets they have beyond that. That is 
what Euram told you. Nobody knows who owns them. And then you 
send to them $9.6 billion in stocks that you identify that you 
know will be just swapped back and forth for nonexistent cash, 
unless you think that those companies had $9.6 billion in cash, 
which I don't think you believe. And so what it comes down to 
is this absolutely strains credulity.
    I don't believe anybody looking at this transaction, 
including lawyers who we are now going to talk to, knowing what 
they now know, can believe that these transactions represented 
economic substance. What these transactions represented was a 
concoction to create tax losses which were then sold to 
taxpayers to offset capital gains.
    Mr. Greenstein, I think that any fair reading of this leads 
not only inevitably, but immediately to that conclusion.
    I have questions for the record for our other three 
witnesses. I am sorry, I don't know if they are sorry, but I am 
sorry that I didn't have a chance to ask them some questions. 
But I want to thank our witnesses for coming forward.
    Chairman Coleman. Mr. Greenstein, do you want to reply?
    Mr. Greenstein. I didn't know if there was a question 
there. I strongly disagree with a number of the points, but----
    Chairman Coleman. I want to thank the panel, Mr. Conn in 
particular, Bank of America and HSBC. We do appreciate the 
changes that you have made in dealing with this.
    My concern. as this panel leaves, is that lawyers, experts, 
and everyone else told clients they could do this. So much of 
this flies in the face of common sense and strains credulity, 
that there were folks with beneficial interests directing 
assets and transactions, that there weren't concerns that POINT 
clearly was not a strategy designed to generate profit. As a 
result, a lot of people, or a number of people with great 
wealth, ultimately paid the price, but beyond that, I think the 
entire economic system and all of us who pay taxes are openly 
hurt by these transactions and that is what is so disturbing 
here.
    With that, I want to thank the panel and we will call our 
last panel.
    Our final panel today, the witnesses for today's hearing 
are Michael G. Chatzky of Chatzky and Associates; Lewis R. 
Steinberg, a former partner at Cravath, Swaine and Moore; John 
P. Barrie of Bryan Cave; and finally, Charles W. Blau of 
Meadows, Owens, Collier, Reed, Cousins and Blau.
    Mr. Chatzky and Mr. Blau, I understand that you or your 
firms assisted in providing advice on the Wylys' offshore 
network. I have concerns about whether the offshore structures 
comported with our laws and look forward to hearing each of 
your testimony.
    Mr. Steinberg and Mr. Barrie, I understand that you advised 
clients purchasing the Quellos-designed POINT transaction. 
Lawyers played a central role in this transaction, representing 
to clients that these strategies were within the letter of the 
law. I am concerned that our legal profession may be called 
upon to analyze these transactions possibly without a full 
understanding of the material facts. I appreciate your 
attendance at today's hearing and look forward to your 
testimony and perspective on the role of counsel in 
facilitating these types of transactions.
    Mr. Steinberg, I want to add that I sincerely appreciate 
your changing your scheduled family vacation to accommodate us 
at today's hearing.
    Before we begin, again, pursuant to Rule 6, all witnesses 
who testify before this Subcommittee are required to be sworn 
in. Please stand and raise your right hand. Do you swear the 
testimony you are about to give before this Subcommittee is the 
truth, the whole truth, and nothing but the truth, so help you, 
God?
    Mr. Chatzky. I do.
    Mr. Steinberg. I do.
    Mr. Barrie. I do.
    Mr. Blau. I do.
    Chairman Coleman. I would like to ask you to limit your 
testimony to 5 minutes. When the lights turn from green to 
amber, you have a minute left to conclude your testimony. Your 
written statements will be included in the record in their 
entirety.
    Mr. Chatzky, we will have you go first, followed by Mr. 
Steinberg, then Mr. Barrie, and Mr. Blau, we will have you 
conclude. Mr. Chatzky, please proceed.

 TESTIMONY OF MICHAEL G. CHATZKY, CHATZKY AND ASSOCIATES, SAN 
                       DIEGO, CALIFORNIA

    Mr. Chatzky. Thank you very much, Chairman Coleman. 
Chairman Coleman, Ranking Member Levin, Members of the 
Subcommittee, and the Permanent Subcommittee on Investigations 
staff, I appreciate your inviting me to participate at this 
morning's hearing, and I would also especially like to commend 
the professionalism, or the professional way I was treated by 
the staff. Especially, I would like to commend Laura Stuber, 
Mark Nelson, and Robert Roach for their very kind method in 
treating me.
    My background is I have been practicing law since 1970. I 
am a California attorney. My practice is primarily engaged in 
the field of wealth protection. That includes several different 
aspects, including taxation, estate planning, business 
planning, and asset protection.
    A wealth protection attorney, such as myself, normally 
addresses issues which pertain to wealth erosions, in other 
words, threats against your wealth, and those particular 
threats generally consist of the following: Probate, estate 
tax, income tax, and lawsuits. So if you have accumulated 
wealth, which is very commendable, that is fine, but you need 
to be concerned about these threats to your wealth because they 
can lower your net worth. And so as a lawyer, what we normally 
do is we inform people about these threats and ways and means 
to address them.
    We have freedom of choice in our country in which we can 
explore alternatives. For example, if someone is starting a new 
business, they have the choice. They can start the business as 
a sole proprietorship, as a corporation, or they can start it 
as a corporation that makes a Subchapter S selection, or they 
might be able to start it in States that permit it as a limited 
liability company with a sole member. Each one of those 
alternatives has different legal consequences. Each one of 
those alternatives has different tax consequences.
    Privacy may exist in the foreign area. This morning, we 
heard ample testimony and had ample discussion on the privacy 
concerns that this Subcommittee is very correctly raising. 
However, one thing that I did not hear this morning that I 
think is critically important is that privacy in foreign 
jurisdictions, which have legislation that states that members 
of the financial services sector are not allowed to freely 
disclose transactions or it can be a criminal offense, that 
doesn't pertain to U.S. people and from a different angle, and 
that different angle is the following.
    If you are a U.S. citizen and you establish a foreign 
trust, then you are required by the Internal Revenue Service 
and by the Internal Revenue Code to file a form with the 
Internal Revenue Service. That form is Form 3520. Form 3520 in 
the last 10 years or thereabouts has been greatly modified. It 
now includes not just reporting who you are--you are a U.S. 
citizen, you are forming a foreign trust--but you also have to 
provide very specific information about the trust.
    So even though members of the foreign financial services 
sector, such as a trust company in another jurisdiction, are 
not allowed to reveal information about the trust, as a U.S. 
citizen who forms the trust, you are required to inform the 
Internal Revenue Service all about the trust, and when I say 
all about the trust, Form 3520 includes such items as your name 
and Social Security number. You have to provide a copy of the 
trust instrument itself. If the trust instrument has been 
amended, you have to provide a copy with the amendment or any 
modifications to the trust instrument. If there is a written 
understanding between you and the trustee, you have to provide 
that written understanding and attach it to your Form 3520. If 
there is no written understanding but there is an oral 
understanding, you have to reduce the oral understanding to 
writing and attach that to Form 3520.
    So the point is that Form 3520 has been changed in recent 
years with respect to reporting requirements. It has been 
additionally changed in recent years with respect to penalties. 
It used to be if you didn't file Form 3520, the penalty was a 
fine of $1,000. Well, if you are someone who is quite wealthy, 
a thousand-dollar fine might not be that horrible. The current 
penalty, however, is much more serious than that. It begins at 
an amount of 35 percent of the trust assets that you 
transferred to the trust, and then if the IRS demands payment 
of that fine and you refuse to pay the fine, it goes up in 
increments of $10,000. So the point is if you transfer a 
substantial amount of money to a foreign trust, you not only 
have to reveal it to the Internal Revenue Service in great 
detail, but you also run the risk of being subject to a very 
significant fine.
    In addition, there have been some other changes in the last 
10 years or thereabouts that have certainly beefed up 
enforcement and, you might say, removed the cloak of privacy in 
the field of foreign planning. The Internal Revenue Service in 
the year 2000 proposed new regulations dealing with Internal 
Revenue Code Sections 679 and 684. Section 679 is a statute 
that, in essence, says if you are a U.S. citizen who transfers 
assets to a foreign trust that has or is capable of having at 
least one U.S. beneficiary during the year, then you, the U.S. 
transferror, will be taxable on the income generated from the 
assets you transferred to that trust until your death. Internal 
Revenue Code Section 684 is a section that has to do with a 
taxation on the transfer of appreciated assets to a foreign 
trust.
    The Internal Revenue Service came out in the year 2000 with 
some proposed regulations. The proposed regulations were very 
detailed. They were very voluminous and they were very tough. I 
don't think they were very fair, but they are very tough and 
they are in existence and they are what we have to face today.
    Those regulations make it very difficult for any U.S. 
citizen to effectively use a foreign trust to save taxes. In my 
career, which spans several decades, from 1970 all the way to 
today, I found that people who come to our firm and are seeking 
a foreign trust have done so for a different purpose.
    In the 1970s, especially the early 1970s, the primary 
reason why someone would want a foreign trust was to save 
income taxes, specifically to defer income tax, because a 
foreign trust could be effectively designed in that era so that 
the income from the trust would not be currently taxable. It 
would only be taxable when it was distributed, and there were 
very many, very attractive ways and means to distribute funds 
from a foreign trust effectively without having the funds be 
considered a taxable distribution.
    However, that changed in the 1976 Tax Reform Act. However, 
the 1976 Tax Reform Act, which is the statute, or which is the 
Act that enacted Section 679, which taxes U.S. transferrors to 
foreign trusts, that Act did not have any guidance for 
taxpayers until the year 2000 other than the legislative 
history and other than textual writings that could be found in 
law review articles and other legal journals.
    In the year 2000, the Internal Revenue Service decided to 
address that concern and came out with very voluminous, very 
detailed regulations that were proposed to stop U.S. people 
from using different approaches to save taxes with foreign 
trusts. Those regulations were largely finalized in the year 
2001 by the Internal Revenue Service.
    Just in concluding my talk, I just want to point out some 
other, very briefly, some other changes that have been made. 
The Internal Revenue Service has come out recently with 
Circular 230 changes, which has to do with tax opinions, making 
it very difficult for a law firm to come out with a tax opinion 
on any tax subject that is going to be useful to a client to 
defend against penalties.
    The other thing is, foreign gifts are reportable on Form 
3520 and all distributions from a foreign trust, regardless of 
whether they are taxable or not, are reportable to the Internal 
Revenue Service on Form 3520.
    So my point in concluding this opening statement is that in 
the last decade, the tax law has changed very dramatically, 
partially because of Congressional changes, but largely because 
of the Internal Revenue Service's changes in regulations and 
forms and enforcement. So today, in today's environment, it is 
unusual for a foreign trust to be designed effectively to save 
taxes for a U.S. person. Foreign trusts today are largely used 
more for asset protection purposes or for foreign investment 
purposes where certain foreign investments are not available to 
U.S. parties because foreign parties offering investments don't 
want to run the risk of being regulated by State regulators and 
Securities and Exchange Commission regulators and so on, so 
they will issue such investments to foreign entities or U.S.--
--
    Chairman Coleman. May I ask you to conclude your oral 
testimony, Mr. Chatzky?
    Mr. Chatzky. Thank you, Mr. Chairman.
    Chairman Coleman. Thank you very much. Mr. Barrie.

  TESTIMONY OF JOHN P. BARRIE, BRYAN CAVE LLP, WASHINGTON, DC

    Mr. Barrie. Thank you, Mr. Chairman. I am a partner in 
Bryan Cave. I have been a partner since 1993. As the 
Subcommittee is aware, we were introduced to Matt Krane, the 
long-time tax advisor of Mr. Saban, in May or June of the year 
2001. The introduction was by Quellos and that resulted in our 
engagement by Mr. Saban to provide tax advice and counsel with 
respect to a very complex set of transactions that involved the 
POINT transaction.
    I am here today to provide testimony to you with respect to 
the role of U.S. tax lawyers in connection with the evaluation 
of tax advantaged transactions. These are very complex areas. I 
will do my best to respond to your questions. Thank you.
    Chairman Coleman. Thank you, Mr. Barrie.

 TIMONY OF LEWIS R. STEINBERG, FORMER PARTNER, CRAVATH, SWAINE 
               AND MOORE LLP, NEW YORK, NEW YORK

    Mr. Steinberg. Thank you, Mr. Chairman. Mr. Chairman, 
Senator Levin, my name is Lewis Steinberg. From 1991 until 
2004, I was a partner in the tax department of Cravath, Swaine 
and Moore, having started there as an associate in 1984. I 
earned my J.D. degree from NYU School of Law in 1984, later 
earned a LLM in tax from NYU. I am a former Chair of the Tax 
Section of the New York State Bar Association, and since 1993, 
I have been the adjunct professor at NYU, teaching a course in 
advanced corporate tax problems.
    As I understand it, I have been asked to appear today to 
address legal advice I provided 6 or more years ago to several 
clients, Quadra Capital Management, now called Quellos Group, 
and certain individual taxpayers. As I am sure you understand, 
an attorney owes to his clients, including his former clients, 
a duty of confidentiality. I will endeavor to answer all 
questions today as completely as possible, consistent with that 
duty. At times, I may be unable to answer particular questions 
because they call for information protected by the attorney-
client privilege or otherwise involve client confidences.
    I have retained counsel to assist me in addressing any 
issues of privilege that may arise and I ask for your 
indulgence if I need from time to time to consult with my 
counsel. Doing so will enable me to provide as much information 
as possible to the Subcommittee without breaching my duty to my 
former clients.
    My practice at Cravath primarily involved legal questions 
in the area of corporate taxation, particularly mergers and 
acquisitions and certain other commercial transactions. In 
1999, I was asked by my client Quadra Capital Management to 
provide legal advice regarding a transaction structure that 
came to be known as POINT. I was asked to analyze the proposed 
structure to assess any tax consequences under the Internal 
Revenue Code.
    From the beginning, I understood that if I were to 
determine that the proposed structure met standards set forth 
in the code, I would be asked to prepare written legal opinions 
to a small number of individual investors regarding those tax 
consequences. This is what occurred, and I provided legal 
opinions to five individual investors in four transactions over 
the next several months. I understand that those opinions have 
been provided to the Subcommittee.
    I should also note that there has been much mention this 
morning of large fees paid to professional advisors in this 
transaction. In the case of the Johnson transaction, the fees 
received by Cravath were $25,000. The same fee was received 
with respect to the other four taxpayers in the other three 
transactions, $125,000 in total.
    All of this happened at least 6 years ago. I recently 
reviewed those legal opinions in anticipation of appearing 
today and I can assure the Subcommittee that I believe they 
represent sound legal analysis based upon reasonable reliance 
on information provided by the clients. At all times, I viewed 
my role as providing and did provide straightforward legal 
advice about the tax consequences of the proposed structure 
using my many years of legal experience and expertise, and I 
would be happy to answer any of your questions.
    Chairman Coleman. Thank you, Mr. Steinberg.

 TIMONY OF CHARLES W. BLAU,\1\ MEADOWS, OWENS, COLLIER, REED, 
                COUSINS AND BLAU, DALLAS, TEXAS

    Mr. Blau. Chairman Coleman, Ranking Member Levin, and 
Members of the Subcommittee, my name is Charles Blau. I am a 
partner in the Dallas law firm of Meadows, Owens, Collier, 
Reed, Cousins and Blau. By agreement with the Subcommittee, I 
am appearing here today as the designated representative of our 
firm.
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    \1\ The prepared statement of Mr. Blau appears in the Appendix on 
page 158.
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    I would like to spend just a moment to talk to you about 
what we do at Meadows, Owens, and what we are. We are a 31-
member law firm with a practice concentration in taxation. The 
firm was established in 1983 and historically provided clients 
with legal services in essentially three areas, and those areas 
would be tax litigation, tax planning, and estate planning. The 
firm's tax practice has expanded and we also now do tax 
litigation centering on representation of clients who have 
controversies both civilly and criminally with the Internal 
Revenue Service. The tax planning practice generally involves 
advising clients about the tax implications of financial and 
business transactions. The estate practice is obviously 
concentrated in assisting clients in planning their estates.
    Over the course of the 23-year existence, we have expanded 
beyond this original scope to include real estate, corporate 
securities, white collar legal defense, and commercial 
litigation. Meadows, Owens does not, has not structured, 
promoted, or provided opinions to promoters in connection with 
listed transactions as identified by the Internal Revenue 
Service. We do, however, have a large litigation practice in 
controversies with the Internal Revenue Service both civilly 
and criminally, and some of our clients are tax shelter 
clients.
    Most of the attorneys of the firm who have practiced in 
this area have advanced degrees in taxation. Approximately 12 
of our attorneys have LLMs in tax. Seven attorneys are 
certified under the Texas Board of Legal Specialization as 
certified in tax, and eight attorneys are non-practicing 
Certified Public Accountants.
    As previously communicated to the Members of the 
Subcommittee, Meadows, Owens' formers clients, the Wylys, 
through its counsel--or through their counsel, I should say, 
have instructed the firm to maintain and protect the attorney-
client work product privileges. Accordingly, as dictated by the 
law and the applicable rules of professional conduct in the 
State of Texas, we must at all times endeavor to uphold and 
respect our former clients' instructions. While we strictly are 
going to honor these instructions, obviously, we have 
diligently attempted to assist the Subcommittee with this 
inquiry to the extent that we are ethically permitted to do so.
    Additionally, we would ask this Subcommittee to take notice 
of the fact that the attorney who oversaw and directed the 
majority of Meadows, Owens' legal work with our former clients 
passed away on July 25, 2003. His passing creates obvious 
difficulties for us in researching the background and details 
of these specific transactions and inquiries made by the staff.
    These obstacles notwithstanding, I can tell you that 
Meadows, Owens was engaged from time to time by the clients in 
a variety of legal matters within the area in which we 
practice. The first of these engagements occurred on or about 
mid-1997. At this time, we no longer represent the clients. Our 
representation terminated when it became apparent to us that a 
conflict might exist because of the possibility of members of 
the firm might be witnesses in this matter. When we learned of 
this potential conflict, we informed the clients of our need to 
withdraw from further representation.
    I would say from my standpoint in trying to review all of 
these matters that we were involved with that during the period 
of our representation, I believe that the legal services 
performed were appropriate and in compliance with the 
applicable governing laws, principles guiding such matters at 
the time.
    And again, I hope to be able to answer your questions, but 
I may have some difficulties under the current circumstances of 
getting into any of the details of the legal advice that we 
provided these clients because of the privilege issue.
    Chairman Coleman. Thank you, Mr. Blau, and we appreciate 
you being here today and certainly understand.
    For all counsel, we appreciate and respect the attorney-
client privilege, but there are some things that this 
Subcommittee would like to know and hopefully you can be 
helpful.
    Mr. Barrie and Mr. Steinberg, Mr. Greenstein from Quellos 
indicated that the POINT transaction was one that had tax 
deferral--I want to make sure I don't incorrectly paraphrase 
him--and from his perspective, there was a potential for 
profit. What did you understand the purpose of POINT to be?
    Mr. Barrie. Let me speak first. My understanding of POINT 
was it was a tax deferral strategy. The securities that were 
put into the strategy, the basket of securities had a built-in 
loss. My understanding is there was an investment aspect of the 
securities in terms of picking securities that had the 
potential to make a gain in a very short period of time. But it 
was primarily a tax advantaged strategy.
    Chairman Coleman. Mr. Steinberg.
    Mr. Steinberg. I would generally agree with that. My 
understanding is that these were high-basis assets and so there 
was a pre-tax economic potential as well as a desire to 
preserve the high basis in the securities that were in the 
partnerships.
    Chairman Coleman. When you talk about the pre-tax economic 
potential, does that create concerns from an IRS perspective? 
Doesn't there have to be some real potential of economic gain 
here?
    Mr. Steinberg. Yes, and my understanding is that there were 
two potential sources of gain. One would be the return on the 
warrant premium, and the second would be the fact that the 
stocks--they were tech stocks. It was pretty volatile, and that 
there was, particularly in 2000, a realistic possibility they 
were going to go up.
    Chairman Coleman. Was it your understanding that the 
warrant premiums would be unwound as soon as the loss was 
recognized?
    Mr. Steinberg. I think the opinion says that likely would 
occur. I think we said that in the opinion. So I think that we 
were fully aware and did reflect that, that the warrant might 
be unwound. When that event occurred, obviously, might be very 
relevant to the profit analysis.
    Chairman Coleman. It would be more than relevant. In fact, 
it makes the profit analysis a pretext.
    Mr. Steinberg. If, in fact, the profit analysis, you would 
want to do over the period of the anticipated holding period of 
the underlying stock.
    Chairman Coleman. Mr. Barrie, were you aware that the 
warrants would be unwound as soon as the loss was recognized?
    Mr. Barrie. Yes, we were, and we actually focused more on 
the basket of stocks in terms of whether or not there was a 
profit potential. In the Subcommittee's documents, there is at 
least one e-mail from Quellos to us describing the potential 
profitability with a collar at 100 percent and 108 percent and 
it had set forth various fees, which at the time we believed 
were the fees that were related to the transaction and included 
Quellos fees. Based upon that collar, it appeared to us that 
there was a potential to make a profit with the collar and with 
the unwind of the position.
    Chairman Coleman. Were you told that no shares were 
involved, that this was simply a book entry transaction?
    Mr. Barrie. No, sir.
    Chairman Coleman. Mr. Steinberg.
    Mr. Steinberg. Because of attorney-client privilege, I 
can't directly answer that question, but what I would say is 
the opinion set forth my understanding of the facts and that 
referred to a transfer of shares.
    Chairman Coleman. Let me then rephrase the question without 
this particular case. If you had such a transaction where, in 
fact, there were no shares involved, if this was simply book 
entry, a flow-through, would that have caused you to have some 
concerns about the nature of this transaction?
    Mr. Steinberg. Chairman Coleman, I don't want to quibble. 
If it were real shares but they were just transferred by book 
entry, that might or might not. That is a fairly standard 
process. If what you are asking me hypothetically is that there 
were no shares, obviously, that would give me some concern.
    Chairman Coleman. Mr. Barrie.
    Mr. Barrie. That would give me great concern.
    Chairman Coleman. Let me ask you about the importance of 
understanding who owned Barnville and Jackstones. Would it be 
important for you in a transaction like this, where you are 
looking at $9.6 billion of reported transactions, to know who 
the folks were behind the entities involved in these 
transactions? Mr. Steinberg, and then Mr. Barrie?
    Mr. Steinberg. Mr. Chairman, not necessarily. The reason is 
that the tax analysis really would not have turned on who the 
current owner of the shares were. So I am not sure that would 
have been particularly relevant to my----
    Chairman Coleman. And maybe I am misphrasing it. The 
concern we have--if we can get Exhibit 6,\1\ please--is what we 
label as phantom trades, the transactions between Jackstones 
and Barnville. There is no cash, nothing. There is no economic 
substance there. That structure, were you aware that this was 
the structure involved in POINT?
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    \1\ See Exhibit 6 which appears in the Appendix on page 722.
---------------------------------------------------------------------------
    Mr. Steinberg. Can I just ask my counsel about attorney-
client privilege on that one issue?
    Chairman Coleman. I am not asking you about advice, just 
whether you were aware that this was involved.
    Mr. Steinberg. To the best of my recollection, the answer 
is no.
    Chairman Coleman. Mr. Barrie.
    Mr. Barrie. Not to my knowledge, either.
    Chairman Coleman. Mr. Chatzky, I appreciate the 
dissertation on changes in tax policy. But one of the principal 
concerns here is control. In spite of all the changes in tax 
law, if I understand, that these trusts are non-grantor trusts. 
So, in other words, is it fair to say that they have some tax 
advantages for the individual who set up the trusts? Is that a 
fair statement?
    Mr. Chatzky. It depends on the facts. For example, if a 
foreigner sets up a foreign trust and retains a grantor trust 
power over the trust and it is recognized----
    Chairman Coleman. If a U.S. citizen sets up a grantor 
trust----
    Mr. Chatzky. Right.
    Chairman Coleman [continuing]. Would they have greater tax 
liabilities than if they had set-up a non-grantor trust?
    Mr. Chatzky. Well, to answer your question specifically, if 
a U.S. person sets up a trust and the trust is a grantor trust, 
then the U.S. person setting up the trust remains taxable on 
the assets transferred to the trust.
    Chairman Coleman. Mr. Blau, do you agree with that 
interpretation?
    Mr. Blau. I am not a trust expert in this area, but I would 
generally say these things are factually driven and it depends 
on the time that they take place. There are different tax 
regimes for different years and the rules change.
    Chairman Coleman. I think it is fair to state that if the 
grantor retains control of the trust, then, in fact, the trust 
would be determined to be a grantor trust even in 2000.
    Mr. Chatzky. May I be a little bit more specific, because 
the law is more complicated than that. If you have a domestic 
trust, a trust that is administered in the United States and a 
U.S. citizen funds that trust and retains a grantor trust power 
over that trust, the U.S. person is taxable on the income of 
the trust. If it is a foreign trust funded by a U.S. person, 
even if the U.S. person surrenders all control over the foreign 
trust, the U.S. person nevertheless remains fully taxable on 
the assets transferred to the trust until the U.S. person dies. 
That is because that is what Section 679 says, which may be of 
questionable constitutionality, but it is in the Internal 
Revenue Code and it is enforced.
    Chairman Coleman. I know the laws have changed several 
times, but if a grantor directs a trust protector to tell the 
trustee when to sell stock, when to buy stock, when to sell 
options, when to buy options, what furniture, what jewelry, and 
what real estate to buy, and in each and every instance the 
trust protector relays the information to the trustee who 
complies, does that raise any concerns with you about whether 
that individual grantor is exercising some control over that 
trust? Does that raise----
    Mr. Chatzky. Are you asking me?
    Chairman Coleman. Yes, Mr. Chatzky.
    Mr. Chatzky. Yes. I mean, and again, I don't want to relate 
this to the Wylys----
    Chairman Coleman. I am not relating it. I am just asking 
that hypothetical. Does that raise a concern with you?
    Mr. Chatzky. As a general principle, I would say, yes, it 
raises a concern because it raises an issue. And as Mr. Blau 
correctly pointed out on another point recently, it is very 
factual-driven. For example, if a U.S. person makes a 
suggestion as to how the trust assets should be invested and 
the trustee has the power to accept or reject that suggestion, 
that is legally permissible.
    It has been approved by the tax court in a case called 
Goodwyn. Goodwyn actually is a case where Mr. Goodwyn formed a 
trust, relinquished all legal control over the trust, had 
independent trustees, but the trust existed for many years, 
probably a quarter of a century, and the trustees testified 
that they always followed Mr. Goodwyn's advice, without any 
exception.
    If Mr. Goodwyn said, don't do it, they didn't do it. If Mr. 
Goodwyn said, do it, they did. And the tax court said that 
doesn't matter, because at any point in time, the trustees had 
the legal power to reject the advice. It was merely influential 
advice. It wasn't compelling.
    Chairman Coleman. These are certainly, again, factual 
issues, and I am respecting the attorney-client privilege by 
not raising the specifics in this case.
    But I will say, Mr. Chatzky, that if, in fact, that is the 
case, and you have a case where an individual each and every 
time directs a trust protector regarding what to do, gives 
complex discussions to the protector about what type of 
securities transactions are to be involved, and the protectors 
can fire the trustees if they say no, and there is a threat 
that will happen, then a loophole is still there, and we had 
better change it. It flies in the face of common sense to 
suggest there isn't control. And if that loophole is there, 
then we have a problem.
    There is an ongoing investigation in the case of the Wylys, 
but as I sit here from this vantage point and look at this 
record, it is very hard for me to understand how it is not very 
clear that control is being exercised.
    Mr. Chatzky. Well, let me just make this additional point. 
That is that irrespective of tax objectives or tax purposes, it 
is very common for a trustee to communicate with a beneficiary 
about proposed investments and it is equally very common for a 
beneficiary of a trust to communicate with the trustee about 
what the beneficiary would like to do. The trustee, though, has 
the power to reject the recommendations. So, I mean, again, it 
is very factual.
    If you have a situation where the whole thing is a sham, if 
the trustee is nothing more than a conduit or an agent and 
isn't exercising independent responsibilities, that is 
something as a lawyer I would be very concerned about.
    However, I am also very concerned about the opposite side 
of the coin, which is the trustee of a trust established for 
the benefit of beneficiaries has legally enforceable fiduciary 
duties to those beneficiaries.
    So if, for example, I am the beneficiary of a trust and I 
go to the trustee and I say, I want you to invest the trust 
corpus in Microsoft stock and that investment, let us assume, 
is not to the interest of the other beneficiaries of the trust, 
the trustee who is making that decision has responsibility to 
the other beneficiaries and might be sued for breach of 
fiduciary duty if that type of investment were improper. 
Probably wouldn't be, but----
    Chairman Coleman. Absolutely, but there are hundreds of 
examples in the record where on each and every occasion the 
instructions given by the grantor or given by the beneficiary, 
and this is the Wylys, were followed by the trustees. Some of 
these instructions were very clear and very explicit, and the 
record shows that, in fact, when there was some resistance by 
the trustees, additional pressure was put on them, I think you 
have a problem.
    I will turn to my Ranking Member and come back to the 
questioning. Senator Levin.
    Senator Levin. I sure agree with the Chairman. I don't know 
how you can possibly say where you have hundreds of directions 
from the grantor that are just funneled right through and 
carried out by trustees on the Isle of Man, who I think you 
know and I know are basically there to carry out instructions 
of others and not to act independently, I don't know how you 
can say there is much doubt about who should be taxed on the 
income of this trust or who is directing the trust. I don't 
quite get it.
    Mr. Chatzky. Let me say this. In the 1970s, the Internal 
Revenue Service said almost in the exact same language that you 
just stated that same argument in two cases. They are both 
Goodwyn's cases. One was an income tax case, and one was an 
estate tax case.
    Senator Levin. Both in tax havens?
    Mr. Chatzky. No, they were both domestic trusts. They were 
trusts where Mr. Goodwyn----
    Senator Levin. So they knew--they were able to get their 
hands on the trustees. They could find out what actions the 
trustees took and why, right?
    Mr. Chatzky. Well, what I am saying is the trustees 
stipulated, I mean, they admitted in the tax court and the 
testimony that during the entire term of their being the 
trustees--during the entire term of their administering the 
trust that they always took the recommendations of the grantor, 
Mr. Goodwyn, the late Mr. Goodwyn, and they always followed 
them. And if Mr. Goodwyn says, don't do something, they 
wouldn't do it. If Mr. Goodwyn said, do it, they did it. There 
are no exceptions.
    Senator Levin. Did they argue that they were independent?
    Mr. Chatzky. Yes. They said that we are independent, and 
the IRS took your argument. And it would have said, how can you 
be independent when you are always, invariably, following the 
advice of Mr. Goodwyn?
    Senator Levin. And I added the tax haven there, where you 
can't get your hands on the trustees.
    Shouldn't there be a presumption in a tax haven where your 
trustees are always carrying out the instructions of the 
grantor, shouldn't there at least be a presumption that in tax 
havens, secrecy jurisdictions that the grantor should be 
responsible for paying the taxes? Doesn't something change 
because of all the secrecy here?
    Mr. Chatzky. Well, two points to answer the question. One 
is the tax court in Goodwyn specifically said that the IRS's 
argument was rejected and they went along with the taxpayer's 
argument. They said that the point is not that Mr. Goodwyn in 
fact made recommendations to the trustees which were always 
followed. The point is that the trustees had the legal power to 
reject the recommendations. In fact, I am a lawyer----
    Senator Levin. And is it not true that they argued they 
were independent?
    Mr. Chatzky. Yes. They argued they were independent.
    Senator Levin. Can you even find out what the argument is 
of the trustees here on the Isle of Man?
    Mr. Chatzky. Well, my point is that in your hypothetical 
where you have a U.S. person setting up a foreign trust in a 
jurisdiction like the Isle of Man, which has confidentiality 
and secrecy provisions----
    Senator Levin. Right.
    Mr. Chatzky [continuing]. That it doesn't matter, that it 
doesn't matter because the law presently says--Form 3520 says 
if you are a U.S. person and you set up a foreign trust in a 
place like the Isle of Man, you are responsible for the tax 
consequences of that foreign trust as long as that foreign 
trust has or is capable of having at least one U.S. 
beneficiary. So if I set up a trust for the benefit of you and 
you are a U.S. person, I have to report it.
    Senator Levin. But is it not true that in those cases, the 
trustee argued that they were independent regardless of the 
fact that they followed the recommendations of the grantor?
    Mr. Chatzky. That is absolutely true.
    Senator Levin. That is not true here. It is a big 
distinction. These are secrecy jurisdictions. They are not 
arguing anything.
    The other distinction is this. With domestic trusts, the 
trusts pay taxes, don't they?
    Mr. Chatzky. It is complicated because of the way you folks 
write the law----
    Senator Levin. Somebody pays taxes, don't they?
    Mr. Chatzky. Not necessarily. If you have a domestic----
    Senator Levin. Someone should pay taxes on income, 
shouldn't they?
    Mr. Chatzky. Generally speaking----
    Senator Levin. Generally speaking. But in tax havens, no 
one pays taxes. That is the whole point, isn't it?
    Mr. Chatzky. No. If you are a U.S. person and you--in a tax 
haven, and I will define a tax haven just for the purpose of 
discussion as a jurisdiction that does not impose taxes on the 
trust or any part of the trust----
    Senator Levin. Or on anybody.
    Mr. Chatzky. On anybody. But I am saying that is the tax 
haven jurisdictions on tax law.
    Senator Levin. Right.
    Mr. Chatzky. But if you are a U.S. person and you are 
funding that foreign trust, then under U.S. tax law, even 
though the trust is administered offshore, you are taxable 
until your death.
    Senator Levin. OK.
    Mr. Chatzky. That is Section 679 of the Internal Revenue 
Code.
    Senator Levin. OK. Let me now go back to the other 
witnesses here.
    First of all, Mr. Barrie, let me start with you. You 
indicated that you would be very concerned, I believe was your 
word, if there were no shares involved in those transfers 
between those two corporations on the Isle of Man, is that 
correct?
    Mr. Barrie. That is correct.
    Senator Levin. Did you understand, or were you informed by 
Quellos that as a matter of fact, there would be no transfer of 
real shares?
    Mr. Barrie. We were not so informed.
    Senator Levin. Did you hear the testimony here today?
    Mr. Barrie. I did.
    Senator Levin. Well, I think the testimony was that they 
did inform you----
    Mr. Barrie. My recollection is that I was never informed of 
the lack of shares. We always understood that there were 
shares, there was a real purchase. We had some issues as to how 
to verify that from Mr. Saban's perspective.
    And, by the way, I am very pleased Mr. Saban, as a lawyer, 
has allowed me to come here today to talk about this----
    Senator Levin. And we are, too, by the way.
    Mr. Barrie [continuing]. That we spent time with trying to 
find out, did they own the shares? We saw some of the 
documents, and if we saw all the documents, the documents on 
their face appeared to be ones where they actually owned the 
shares.
    We ended up going to seek representations that they 
actually purchased the shares. There was, I believe, an 
accountant's report to verify that the shares were owned, which 
was something that was of great concern to us as Mr. Saban's 
counsel.
    Senator Levin. Did you have any idea to the scope of the 
alleged cash that transferred here, $9 billion between----
    Mr. Barrie. No, sir.
    Senator Levin. Would that raise a concern for you if you 
knew about it?
    Mr. Barrie. I was told that the portfolio of the Barnville 
fund was very large and that they had culled out a basket of 
tech stocks that had high basis, low value. My concern from Mr. 
Saban's perspective was whether or not those shares were, in 
fact, real and whether or not he acquired them with a high tax 
basis.
    Senator Levin. OK. And why was it relevant to you that 
there would be real stock? It was important to you, but why was 
it important?
    Mr. Barrie. The transaction is a tax-advantaged 
transaction. It allows for the purchase of a partnership 
interest that has embedded in it stock with high basis, low 
value. If the stock wasn't real, Mr. Saban couldn't sell 
anything. If the basis wasn't there, there would be no losses. 
He would have spent a lot of money for nothing.
    Senator Levin. So that if the stock wasn't real, you would 
have recommended against his participating in this transaction?
    Mr. Barrie. If it turned out that the stock wasn't real but 
there were book entries, if there was something that justified 
it, we would have to research that and make a decision as to 
whether or not we felt a comfort level for that, given the size 
of this portfolio.
    Senator Levin. All right. But if you knew that the stock 
was not real, you would have recommended against it?
    Mr. Barrie. Yes, sir.
    Senator Levin. And the letter which we received here from 
Euram which says the following--it is Exhibit 54 if you want to 
follow that.\1\ This is on page 5. I read this before, near the 
bottom, about the third paragraph from the bottom.
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    \1\ See Exhibit 54 which appears in the Appendix on page 1138.
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    Mr. Barrie. Yes, a letter dated July 6, 2006, from the 
Subcommittee to Mr. Saban?
    Senator Levin. No, this is Exhibit 54, page 5.
    Mr. Barrie. Yes.
    Senator Levin. And then where it says, ``Because the 
transactions were conducted in this manner--'' Do you see that 
paragraph near the bottom?
    Mr. Barrie. Yes, I do.
    Senator Levin. And the second sentence. ``No transactions 
took place over any exchange and no cash transfers passed 
between bank accounts of the two companies. This, however, was 
always understood to be the case. Euram obtained assurances 
from Quellos that the book entry nature of these transactions 
had been known by the counsel with whom they developed the 
strategy and that it would be disclosed to any client advisor 
and opinion provider involved in any subsequent 
implementation.'' Was it?
    Mr. Barrie. Not to my recollection.
    Chairman Coleman. With you, Mr. Steinberg?
    Mr. Steinberg. Not to my recollection, either.
    Senator Levin. Mr. Steinberg, you have written an opinion, 
which is Exhibit 62d. Before I ask you that, would it have been 
important to you to have known that there was no actual 
transfer of real stock here, Mr. Steinberg? Had you known that 
at the time, would you have recommended the purchase of this?
    Mr. Steinberg. Senator Levin, let me answer the question in 
two pieces, if I may. From the point of view, as I said 
earlier, if in giving this opinion, if someone had said to me, 
we will tell you as a matter of fact there is no stock, that 
would have been very troubling to me and could very well have 
meant that I could not give that opinion.
    Senator Levin. And there was no cash transferring.
    Mr. Steinberg. I mean, again, without going through 
details, the entire transaction. The other thing, though, which 
may be a distinction between my role and Mr. Barrie's role, is 
because I had looked at the transaction for Quadra, now 
Quellos, I felt that my role should be limited to passing on 
the transaction and that other regular advisors--tax advisors, 
etc.--for the individual clients should be involved in looking 
at suitability issues, looking at making sure the opinion they 
felt was correct and complete, that the facts were accurate.
    So there may be a slight difference in the role here 
between myself and Mr. Barrie, given my prior representation of 
Quadra.
    Senator Levin. OK. So you had previously represented Quadra 
before Quellos took over?
    Mr. Steinberg. Yes.
    Senator Levin. And then you were representing Mr. Johnson?
    Mr. Steinberg. Correct.
    Senator Levin. So to avoid a conflict, is that what you are 
talking about----
    Mr. Steinberg. Correct.
    Senator Levin [continuing]. You make that distinction that 
you just made?
    Mr. Steinberg. Correct.
    Senator Levin. Now go to Exhibit 62d,\1\ page 7, if you 
would. This is your opinion here.
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    \1\ See Exhibit 62d which appears in the Appendix on page 1202.
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    Mr. Steinberg. Yes.
    Senator Levin. Where you say: ``A remote possibility of 
pre-tax profit or the possibility of pre-tax profit that is 
unreasonably small when compared to the tax benefits 
attributable to the transaction is insufficient to satisfy this 
test.'' Do you stand by that?
    Mr. Steinberg. Yes.
    Senator Levin. Do you know what the pre-tax profit 
possibility was in this transaction for your client?
    Mr. Steinberg. We would have looked at that, yes.
    Senator Levin. What was it?
    Mr. Steinberg. To be frank, I don't remember, Senator.
    Senator Levin. Do you know what the profit was, or the 
loss, the cost? Do you know what the cost was to your client?
    Mr. Steinberg. The actual profit earned on the transaction?
    Senator Levin. Yes.
    Mr. Steinberg. No. To the best of my recollection, no, I 
don't know that.
    Senator Levin. Do you know now after paying his fees 
whether he made any profit, other than this huge tax loss?
    Mr. Steinberg. My understanding during interview with the 
Senate staff is that I believe they said Mr. Johnson made a 
loss. I don't know if that is the case.
    Senator Levin. Do you know, Mr. Barrie, whether your client 
had any profit at all, other than that huge tax loss that he 
bought?
    Mr. Barrie. My understanding at the time was that he made a 
small profit at the time he disposed of his shares in November 
2001. I understand that what the Subcommittee report indicates 
and what Mr. Saban has said is that there was a loss on the 
transaction.
    Senator Levin. Whether there was a loss or a small profit 
on that transaction, it was, would you not say, tiny compared 
to the tax loss which he was acquiring?
    Mr. Barrie. It was a small loss, yes. The comparison of----
    Senator Levin. So it would have been a few million compared 
to a billion-and-a-half?
    Mr. Barrie. Absolutely, yes.
    Senator Levin. OK. So now if Mr. Steinberg's opinion is 
correct, that a remote possibility of a pre-tax profit, or the 
possibility of a pre-tax profit that is unreasonably small, or 
I will add nonexistent, when compared with the tax benefits 
attributable to the transaction is insufficient to satisfy that 
test, do you agree with that?
    Mr. Barrie. Based upon the projections that we were given, 
that with a 108 percent collar there was the possibility of 
making a moderate profit from a percentage standpoint, 
certainly from a dollar standpoint----
    Senator Levin. What would that be, a moderate profit?
    Mr. Barrie. The figures that I have seen--I recall seeing 
is a 9 percent profit at 108 percent. That is in the exhibit, I 
think July 2001.
    Senator Levin. OK. Would that pass the test, even if you 
could make up to 9 percent, compared to 100 percent tax loss? 
Would you say that that is not small, relatively, compared to 
the tax benefits attributed to the transaction?
    Mr. Barrie. The tax benefits were significantly larger. 
What concerned me----
    Senator Levin. At a minimum, I think your numbers are 
wrong. It is ten times larger.
    Mr. Barrie. They were----
    Senator Levin. Eleven times larger.
    Mr. Barrie. I agree with you.
    Senator Levin. Is there going to be an additional round 
here?
    Chairman Coleman. Senator Levin, why don't you continue. I 
am not going to do an additional round. I am going to say a 
couple of words before you close.
    Senator Levin. OK, thank you.
    Let me just make sure that both of you agree with what I am 
saying, or if you do not, then you have an opportunity to say 
you disagree.
    If you knew then that there was no real stock, there was no 
cash that went between those two Isle of Man corporations, and 
if you knew that the profit that was maximum to your client 
would have been 9 percent, and I think that is high in your 
case, Mr. Barrie, or in your case, Mr. Steinberg, a few million 
dollars compared to a $150 billion tax loss, would you have 
recommended that your clients acquire this tax shelter? Mr. 
Barrie.
    Mr. Barrie. As to your first question, if the transaction 
involving the shares was a sham, as is indicated in the report, 
we would have advised against doing the transaction.
    Senator Levin. A sham being no real stock, and no cash----
    Mr. Barrie. No real stock, no cash, not being a real 
transaction, we would have advised not to go into the 
transaction.
    Senator Levin. And if you, in fact, had the potential 
maximum profit of 9 percent of tax loss, is that, in your 
judgment, sufficient to address the IRS concerns about whether 
you are buying a tax loss or whether there is a real economic 
transaction? Is 9 percent sufficient in your book?
    Mr. Barrie. It is done on a----
    Senator Levin. That is maximum. It is maximum profit.
    Mr. Barrie. Well, that number was based upon a hypothetical 
put to us prior to the transaction. I hate to pick a number, 
but what I can say is that we would analyze that in terms of 
the potential for profit versus the amount. I think on this 
transaction, as the code existed, you could have a very minute 
business purpose and still satisfy the requirements of the 
code. The law was changed to prevent what I will call the 
trafficking in losses in the partnership context.
    Senator Levin. Mr. Steinberg.
    Mr. Steinberg. Yes, Senator Levin. Let me take that again 
in two pieces, and let me also just say again, I think the 
issue for me would not be recommending to the client, since 
that was not my role.
    Senator Levin. Would you recommend to a client under these 
circumstances.
    Mr. Steinberg. Well, let us take it in two pieces. If, in 
fact, we assume that there were no shares, I would find it 
impossible to recommend a client to do that transaction. If 
what you are saying to me is, assume for a second that taking 
into account transaction costs you were guaranteed a loss, I 
don't think that satisfies the law.
    Senator Levin. How about guaranteed a profit which at the 
most would be 5 percent of the tax loss?
    Mr. Steinberg. That, I don't know. I mean, I would have to 
think about that in the context of the overall transaction.
    Senator Levin. If it is all right, Mr. Chairman, just a 
couple of questions to Mr. Blau about offshore corporations. 
Who was the client of your law firm? Was it the Wylys or was it 
the offshore entities?
    Mr. Blau. It depended on the representation matter that we 
were asked to deal with. Some cases, it was Sam Wyly. Some 
cases, it was Charles Wyly. Some cases, it was other members of 
their family.
    Senator Levin. Did you ever bill the offshore corporations?
    Mr. Blau. Yes, we did.
    Senator Levin. You did bill them? Would you say that a 
significant percentage of your billing relative to those 
transactions would have gone to the offshore corporations?
    Mr. Blau. If the transaction dealt with, let us just say an 
offshore-related manner, generally, we were instructed to bill 
it toward that entity, the offshore entity.
    Senator Levin. Would that have happened frequently?
    Mr. Blau. I can't sit here today and give you whether it 
was frequent or infrequent, but just on a general review of our 
bills over the period of representation, we did bill the 
foreign entity probably more than we billed the individual 
client. But within that, you have to understand that there are 
a lot of different representation matters.
    Senator Levin. My staff is reminding me that it wasn't the 
actual corporation, it was the Irish Trust that I----
    Mr. Blau. That is correct, and I stand corrected, as well. 
I understood your question.
    Senator Levin. All right. Mr. Chatzky, why were the option 
swaps originally structured to be with the Nevada corporations 
if they were immediately going to assign the options and 
annuity contracts on to corporations of the same name in the 
Isle of Man?
    Mr. Chatzky. Well, I would assume that any answer I would 
give to that question would violate the attorney-client 
privilege.
    Senator Levin. Why?
    Mr. Chatzky. Because it would be concerned with legal 
advice which was given.
    Senator Levin. This was legal advice that you gave them 
that they were following?
    Mr. Chatzky. Well, I mean, I can't really discuss the 
situation----
    Senator Levin. I am not asking you to tell us the legal 
advice. I am saying, why would somebody----
    Mr. Chatzky. Why would someone use a Nevada corporation----
    Senator Levin. Yes.
    Mr. Chatzky [continuing]. Instead of a foreign----
    Senator Levin. As a pass-through to an Isle of Man 
corporation, same exact same annuities----
    Mr. Chatzky. The reason it existed at the time was actually 
a non-reason or a non-issue, but what it was is there was a 
technical concern that Internal Revenue Code Section 4371, 
which imposes an excise tax on annuities issued by a foreign 
insurance company on the life of a U.S. person, might apply if 
a foreign entity that is not an insurance company issues the 
annuity.
    Ultimately, it was discovered through additional research 
that wasn't the case. It had to be an insurance company for 
that excise tax to apply. But because of that concern, out of 
an abundance of caution, one might use a domestic entity to 
avoid that particular excise tax.
    Senator Levin. Thank you.
    Mr. Chatzky. You are welcome.
    Chairman Coleman. Thank you, Senator Levin. I want to again 
compliment your staff, Senator Levin, and my own staff for the 
tremendous amount of work that has been done.
    I do want to say, and I want to make it clear, I am a 
former prosecutor, and the Wylys aren't here and they have 
exercised their Fifth Amendment privilege and I take that 
seriously.
    I think it is important to state that we are not here to 
judge guilt or innocence. We have no exculpatory information 
that has been presented. Attorney-client privilege prevents us 
from getting that. So I want to make it clear, we only have 
part of the record here and I understand that. Others will make 
judgments about criminal liability.
    But I do want to say this, the concern I have in looking at 
the Wyly case is that more than $140 million in loans were 
authorized by offshore trusts set up by the Wylys to advance 
Sam and Charles Wyly's personal business interests; $85 million 
was authorized by offshore trusts set up by the Wylys to 
purchase real estate in the United States that the Wylys are 
able to use, live in and enjoy; and nearly $30 million was 
authorized by an offshore trust to purchase artwork, 
furnishings, and jewelry that members of the Wyly family are 
able to use and enjoy as their own.
    So regardless of the legality or illegality of this, there 
is something wrong with our system if this kind of money can 
come back into the United States and not be taxed.
    And if, in fact, the legal arguments prevail and there is 
no legal liability, we still have to address this situation 
because it is outrageous and it is offensive, and it hurts 
average taxpayers. And so it was fascinating to listen to the 
discussion between Mr. Chatzky and the Ranking Member, and I am 
sure others will have this same discussion.
    Regardless of the legality of the transactions we have 
discussed, common sense dictates that if individuals can 
control assets and use them for their personal benefit in a way 
that allows them to simply avoid tax liability, we should 
change the system.
    Senator Levin, I look forward to working with you to make 
sure we accomplish that goal.
    Mr. Chatzky. Excuse me, Senator. May I make a comment on 
that, please?
    Chairman Coleman. Yes. Very briefly.
    Mr. Chatzky. Very briefly, OK. I once was in another 
country and I talked to someone who lived there about their tax 
system, which was a flat tax, just a pure flat tax. The same 
tax rate applied to everyone. And I asked him, I said, are 
people in your country satisfied with that tax system, and he 
said, absolutely. I said, well, do people in your country ever 
do any tax planning, and he said, normally, no. But if a 
transaction can be structured so that it takes place outside of 
our country, therefore it would not be subject to the taxation, 
then it sometimes occurs. Then he said that the people in our 
country are very content. We have had this tax system in place 
for many years and it has worked very well. It is very simple, 
straightforward, and fair.
    Not that you are not aware of a flat tax or other kinds of 
alternative proposals that might make the system both fair and 
equitable and easy to enforce, but my suggestion is that if you 
consider a system like that, then the issues that Senator Levin 
and I are talking about, and Senator Coleman and I are talking 
about would, I think, largely be resolved. I think that would 
go a long ways to having greater enforcement and greater 
respectability of the tax laws.
    Chairman Coleman. I appreciate that, because that is the 
first argument you have made today, Mr. Chatzky, that would put 
you out of business. [Laughter.]
    Mr. Chatzky. Well, that is OK. I still have asset 
protection to handle.
    Senator Levin. If I could just have one minute----
    Chairman Coleman. Senator Levin.
    Senator Levin. Mr. Chairman, thank you again for all you 
have done to make this possible here today, and your staff and 
my staff have been utterly extraordinary. The two cases that we 
have discussed today demonstrate basically that these offshore 
tax havens and these secrecy jurisdictions are totally out of 
control.
    As I said before, and I mean this, I believe those tax 
havens that operate in secrecy have declared economic warfare 
on the taxpayers of the United States. We are talking here 
perhaps $100 billion. The estimates vary, but it is somewhere 
between $40 and $100 billion per year. One of the reasons you 
don't know more precisely is because of the secrecy.
    The grease that these wheels operate with is secrecy in 
these tax havens and we have to just simply not accept it. 
Create the presumption that if you want to transfer assets to 
tax havens, that you are going to be taxed on any income from 
those assets. You are going to be responsible to the IRS just 
as though you transferred it to a non-tax haven, into a non-
secrecy jurisdiction. We have to reverse that presumption. 
Otherwise, we are going to be here a year, 5 years, or 10 years 
from now.
    Today, what we saw in our report illustrates in great 
detail, starting with the Wylys, $190 million of stock options 
moved offshore, no taxes paid for years and maybe will never be 
paid on parts of it. Fifty-eight offshore trusts and 
corporations established to cash in these options, use the cash 
for investments that are directed by the Wylys.
    And, by the way, Enron established 440 shell corporations 
in one offshore jurisdiction.
    And back to what we heard today, $2 billion in capital 
gains erased--at least you thought you guys erased them--by 
fake stock trades between shell corporation whose owners are 
hidden. Nobody knows the owners of those two shell 
corporations. You can't find that out. And we have lawyers who 
engage in contortions, as far as I am concerned, legally and 
stayed blinded from what the real facts are, blinded themselves 
from the real facts in order to write opinions that are more 
likely than not going to justify these sham trusts and shell 
corporations and fake economic transactions which we see here 
today.
    So, Mr. Chairman, I again want to thank you. I think you 
have hit the nail on the head with the bill that you and I have 
introduced maybe a year ago now which would make transactions 
in tax havens taxable in the United States. We have to end this 
charade, and we are not going to be able to do it, frankly, 
with nuanced new regulations.
    We are going to have to do it by taking this bull--and I 
cut short the word that I really should say, a longer word than 
``bull,'' but it starts with the same four letters--we have got 
to end this, take this bull by the horns and just simply put 
these tax havens out of business as far as American taxpayers 
are concerned when there is no transparency and they hide these 
sham transactions in shell corporations and will not disclose 
to the IRS what is going on and who runs them.
    So we had a lot of good testimony today, which I think was 
very helpful. We do appreciate, as our Chairman has said, those 
who did appear and did not exercise their rights under the 
Constitution. Those that did had a right to do so. This 
Subcommittee has always accepted that. But those who did show 
up here to attempt to answer questions, it seems to me do at 
least deserve our thanks for coming here, even though, frankly, 
I must tell you, I am utterly mystified how some of these 
opinions could in good conscience be written. It mystifies me.
    You have seen your clients here today, your clients today 
had to come before this Subcommittee and say that they have 
either had to return, give the IRS all of the taxes that would 
have been owed but for these legal opinions, plus interest. Mr. 
Saban is now negotiating with the IRS to do the same thing.
    When I asked Mr. Greenstein, how did he feel about his 
clients, there was no reaction, basically. Well, the process 
worked, he said. If this is the process and if it is working 
and if that is the result, we have really got to change the 
process.
    But I also hope that you, as lawyers--and I am a lawyer--
would also look at these clients that appear here today and ask 
yourself, did I really want to find out everything that would 
allow me to write an opinion which would really guide my 
clients in ways that would put them on a straight path instead 
of the ones that they now find themselves on, going head up, 
against the IRS? So I would hope that you folks would ask 
yourselves some questions, not just listen to our questions and 
try to answer, but ask yourselves some questions, and then I 
hope you would be troubled by the answers. Thank you.
    Chairman Coleman. Thanks, Senator Levin.
    The record in this hearing will remain open for 10 days.
    With that, again, this hearing is now adjourned.
    [Whereupon, at 2:16 p.m., the Subcommittee was adjourned.]



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