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SEATTLE — A federal grand jury has indicted three people in what prosecutors described as one of the largest tax-fraud schemes in U.S. history, a complicated shelter that helped philanthropist Robert Wood Johnson IV, Hollywood media mogul Haim Saban and a few other wealthy clients avoid paying taxes on $1.3 billion in capital gains.
The charges came three years after a congressional report questioned the practices of Seattle-based investment firm Quellos Group LLC. The clients — who prosecutors said were misled about the nature of the shelter — have already paid the $400 million they owed, plus interest.
Jeffrey I. Greenstein, the former chief executive of Quellos, and Charles H. Wilk, a tax attorney and principal of the firm, face charges that include conspiracy to defraud the Internal Revenue Service, tax evasion and counseling false tax filings. Los Angeles attorney Matthew Krane, who represented Saban, is accused of directing him to Quellos in exchange for a $36 million kickback.
"We are keenly aware of the difference between aggressive tax planning and blatant tax fraud," Eileen Mayer, IRS criminal investigation chief, told a news conference Thursday. "We know what's going on and we're going to stop it."
Greenstein, 47, of Mercer Island, has extensive experience dealing with complex financial transactions and founded Quellos as Quadra Capital Management in 1994, according to the indictment unsealed Thursday. Wilk, 51, of Seattle, had previously worked for PriceWaterhouseCoopers, heading up the firm's "wealth transfer solutions" practice in the Southwest.
Prosecutors say the two took advantage of financial secrecy rules in foreign locales, including Austria and the Isle of Man, as they created sham transactions on behalf of their clients in 2000 and 2001. The transactions were designed to show the clients lost money — offsetting whatever capital gains they had, and thus reducing or eliminating their tax liability on those transactions. Quellos collected a 2 percent fee on whatever "loss" the client wanted to show, an amount that came to tens of millions of dollars.
A Senate subcommittee published a report called "Tax Haven Abuses: The Enablers, the Tools and the Secrecy" in 2006. It detailed Quellos' practices, and said Robert Wood Johnson IV used the firm's POINT — portfolio optimized investment transaction — strategy to offset capital gains he made from selling securities. Johnson's purchase of the New York Jets in 1999 was in part financed by the proceeds of those sales.
Saban used Quellos to help offset a $1.5 billion profit he made when he sold his stake in Fox Family Worldwide Inc.
The indictment alleged Greenstein lied when he testified to the Senate subcommittee about the company's practices. Greenstein's attorney, Jeff Robinson of Seattle, did not immediately return a call seeking comment, but told The Seattle Times the transactions in question were "vetted by world-class professionals, including numerous tax experts upon whom Mr. Greenstein, who is not a tax professional, relied in his role as CEO of Quellos."
Wilk's attorney, John Keker, insisted his client is innocent.
"The evidence will show that while working with Quellos colleagues and with advisers and clients in the structuring of these complex transactions, Mr. Wilk obtained and provided appropriate information and advice," Keker said in a written statement.
Wilk and Greenstein are expected to make initial appearances in U.S. District Court in Seattle on June 18. Krane is detained at the Federal Detention Center in Los Angeles awaiting trial on passport fraud charges.
