[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
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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
U.S. GOVERNMENT PRINTING OFFICE
29-760 PDF WASHINGTON : 2006
------------------------------------------------------------------
For sale by Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
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Washington, DC 20402-0001
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\
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\1\ See Exhibit 64 which appears in the Appendix on page 1310.
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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.
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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\
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\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.''
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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.
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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?
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\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.
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\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.''
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\1\ The prepared statement of Mr. Saban appears in the Appendix on
page 139.
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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.
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\1\ The prepared statement of Mr. French appears in the Appendix on
page 140.
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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.
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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.
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\1\ See Exhibit 10 which appears in the Appendix on page 732.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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\1\ The prepared statement of Mr. Greenstein appears in the
Appendix on page 142.
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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.
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\1\ The prepared statement of Mr. Conn appears in the Appendix on
page 147.
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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.
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\1\ The prepared statement of Mr. Wendler appears in the Appendix
on page 155.
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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\
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\1\ See Exhibit 5 which appears in the Appendix on page 677.
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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?
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\1\ See Exhibit 60b which appears in the Appedix on page 1190.
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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?
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\1\ See Exhibit 21a which appears in the Appendix on page 777.
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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.
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\1\ See Exhibit 5 which appears in the Appendix on page 677.
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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\
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\2\ See Exhibit 49d which appears in the Appendix on page 1078.
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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?
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\1\ See Exhibit 54 which appears in the Appendix on page 1138.
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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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.]
A P P E N D I X
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