Free Affidavit - District Court of Federal Claims - federal

Case 1:05-cv-00231-EJD

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Filed 07/17/2007

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(Page 138, line 21)

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Would you give any advice to clients as to timing of exiting? I think that was - well. onlv from an investment standvoint. Obviouslv. if they were making money, stay in. If thev were losine money. let's look at alternatives. In terms of tax benefits, though? No. I mean, this was an investment for the client. So our advice was centered around if you're going to - if you believe this is a ~ o o investment and it makes d sense. stay in. Continue to do, you know. to do the digital tradina. do the foreirm currency tradinp. If it doesn't make sense. let's think about exiting and how should

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Do you know if clients withdrew from [the Add-On LLC]? Yes. I do know clients withdrew from it. Do you know what the basis would have been for withdrawing from it? Lackoforofit.

(Pagc 142, line 9 )

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When you were determining the entrance, . . . [hlow would you calculate what their contribution would be? I think a lot was dictated on how much percentage profits that they wanted in the fund, and how much they felt comfortable with contributing. What are the types of assets that they were contributing? If I remember the fund, the fund was a digital, foreign currency digital program. . . . Where did they get the options from? Well. the digital o ~ t i o n were ourchased as Dart of their. from the investment s standooint, as part of their alternative investment. vou know. that was iust Dart of their investing.

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Case 1:05-cv-00231-EJD

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Are you aware of any of the listed transactions that your clients engaged in prior to them being listed? [Looking at Notice 2001-511 Yes. Do you know which ones? CDS, I think, just got listed, if I remember right, is a listed transaction, the swap transaction. . . . Are you familiar with any of the other ones?. . . What about No. 11, the Notice 2000-44? Inflating the basis of partnership interests? I don't think we did any inflation of partnershiv interest.

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I'm going to get off the list of transactions and ask whether at any time did you ever consult an E&Y database for strategy? An E&Y database for strategy. Trying to think. Database. We have - if the client asked for a - trying to think what an example would be - an engagement letter, then we would have - there is a repository for engagement letters so that we wouldn't have to duplicate that effort. . . . W e r e would that be? That is in a just - I think it's a general PFC database. And you're talking to someone that's administratively, again, very weak in this. . . . So, yeah, I do think there's a PFC database that would have engagement letters there. Would there be a database where after you renew, say, the currency, the fund, where you could let everyone out there in the country know that hey, this is a good vehicle for your clients if you have someone that wants it? Other than email? I don't know. I mean, if a client - see. evervthinp. was driven from the client's versuective. So if the client came to the client service professional and said, vou know, we've got this that's - vou know. got this fact pattern. or whatever. and then they call the subiect matter exvert, the subicct matter exoert said send them an email. look. this has been done for another client and. you know. the fact oattern sounds similar. vou may want to investigate this varticular

deall.l

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Case 1:05-cv-00231-EJD

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[Tlake just a digital currency option trade as an example, would that fit into the definition of a solution? That would be a one off tax stratew. So. in other words. there would be no database or this thing formed for d i d a l option because it was a one off investment fund that was produced bv a third partv that came to us. Most of our solutions, I think almost all the solutions are internally developed. So a solution is just a way that Emst & Young has been doing a service, it needs to be standardized. If it was a tax strategy that was brought to us by a third-party vendor, that's not a solution per se. We used to call it just, you know, a tax strategy. Did Emst &Young create its own tax strategies? Unfortunately, no. We - the onlv. I mess. strateeies. per se. a [Mr. X1 would have broueht to us.

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Would - back to the fund, the [Company XI fund . . . -the eight to ten that you actually were involved in . . . did each client approach E&Y to engage in the fund? For financial vlannine assistance. Thev would have come to their relationshie person and said. vou know. for whatever reason I've pot this fact pattern. And then the relationship oerson would say. "Hev, Brian. vou know, this is the fact oattern." Well. if I was aware this fund was being offered, I'd sav. "Well. look. vou need to probably check with [Mr. XI. see if the facts of this make sense for vou." If it was professional that had done an asset allocation. said we need an investment ~lanning to look at a hedae fund. vou know. [Mr. Xl's hedee fund at that time would have been one that thev probably would have considered. So it reallv iust. YOU know. it reallv de~ended uDon the risk tolerance of the client from an investment perspective and whether a hedge fund fit in their asset allocation.

(Title 18, United States Code, Section 1001),

Case 1:05-cv-00231-EJD

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Filed 07/17/2007

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COUNT FOUR

(False Statements To The IRS) The Grand Jury further charges:
77.

The allegations set forth in paragraphs 1 through 65 and 71 are repeated and

realleged as if fully set forth herein.

78.

On or about June 20,2002, in the Southern District of New York and

elsewhere, ROBERT COPLAN, the defendant, in a matter within the jurisdiction of the executive branch of the Government of the United States, unlawfully, wilfully, and knowingly made materially false, fictitious and fraudulent statements and representations, to wit, in connection with an examination by the IRS of tax shelters marketed by Ernst & Young, COPLAN gave the false testimony underlined below: (Page 24, line 10) Who produced the materials [to be distributed to clients] for the [Company X AddOn] transaction. . . . a description of the transaction that you would give to investors before they invest -Yeah. On the [Company XI transaction, there were no materials given. That was just explained. . . . I believe 1 office did produce something, and it was on their own and without national involvement. . What office was it? Seattle. Did you review any of those materials? 1 did after I became aware of them, but not for distribution. In other words, I basically said, these are not to be distributed. And why did you say they were not to he distributed? We didn't see the need to, and anything - or even show it to clients. We didn't to think the transaction was that com~licated. be honest with you, so we onlv really had it for internal Dumoses.

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Case 1:05-cv-00231-EJD

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And who was the counterparty in most of these [CDS Add-On transactions]? I believe it was [Financial Institution] in both transactions. And [Financial Institution] is a U.S. entity? Again, I've become aware there was some confusion about that . . . . On the [Company XI transaction, it was really being - all the investments aspects of it were being done in connection with the existing partnerships. And those existing partnerships had trading accounts that were doing exotic option trading and other trading, and so - and Emst & Young had nothing really to do with the operation of that partnershig. M-hm. So [Company XI was the asset manager. [Company XI was not necessarily at the time, but they became the general partner also of those accounts during the period in question. And so they were leading the investment decisions of who to use, and they were using a trader who specialized in these type of currency options. And so we really didn't -we, Emst & Young, reallv didn't have involvement in the decisions that the general oartner made as to who to use to do the trading. how to structure those trades. It was really their investment decision and their decision as general partner. They didn't have to ask us anything.

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What were the risks on the tax transaction? That the IRS would disagree, that you had basis in the partnership. What did you think the IRS would -just on the basis issue alone, that's what you tliought the issue would be? Yeah. But I think in the explanations that have been put forth of the facts and amnesty disclosures, et cetera, on this transaction, the surrounding facts were such that when we analyzed it, we looked at the fact that the oartnershius were existing partnershi~s.they had been doing some of this trading. and that there was going to be a transfer of a portion of the trading accounts to this [Financial Advisor1 outfit for management. and he said. I'm not going to manage a whole bunch of these little accounts. I'm going to put all of these things into an LLC so I can do 1 account

Case 1:05-cv-00231-EJD

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tradinn for these options. And it was 1 of those circumstances where his t x a olanner - as we say, we're aware of this idea that's out there. We hear about the concevt of transfemne a lone and a short option that aren't matched and getting basis and not havine to reduce it for the liabilitv. and so here was kind of a into an fortuitous circumstance where if these accounts are goins to be transfel~ed entitv anvwav. that it's a matter of taking the tax position, because along with that transfer, if someone felt appropriate to do it.

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So how did [Company XI get involved in the option transaction? [Company XI got involved -this was later on afler [name of co-conspirator] brought the idea to us. So in other words, we had the idea. That's why I said at some point, we kind of married an idea with facts in the [Company XI transaction, so that it was what we did with [Company XI. But we had the idea at some previous time from [name of co-conspirator]. Okay. So maybe I asked this: How did [Company XI actually come to do the transaction? Did you have- is this based on a preexisting relationship with [Company XI? Yeah. I mean, I said we - [Company XI was involved in the swap partnerships. Okay. And so they were involved as the asset allocators and the investment folks. And they were dealing with these trading-type people like [Financial Advisor] is the 1 involved. And so we're the tax advisors, and we said. hev. if vou are havvening to be forming these - transferring these trading accounts over to rFinancial Advisor1 and he's goine to put them in an LLC. we know this tax idea. That's kind of what I said before.

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Were clients concerned about the large capital gain at the end of the [CDS] transaction in that they would have a large amount to pick up in income that year? That was -well, thev weren't sure that that would haoven. because they had to

Case 1:05-cv-00231-EJD

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Q. A.

make a decision on the economic side to -they would have to decide to earlvterminate the swao. because the swao was scheduled to run for 18 months. And so a decision was reauired on their oart or the countemarties' art to terminate the swao orior to the maioritv. Otherwise, you'd have ordinary income on the back end. Did -do you know, did all the partnerships terminate early? I believe they did.

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Was there a reason why [the Add-On transaction] was done through an LLC and not for the Jenkens partnerships for lack of a better description? Well, as I think I explained, the - well, the Jenkens came first. They were done with individual folks forming a partnership. And they did their ... currency contracts and contributed them to partnerships. The [Add-On1 transaction wasn't reallv done that way. It was done based on the fact that the oartnershios were transfening their trade - I mean. it reallv was a fact that existed vrior to the tax idea. In other words. the LLC was formed as an LLC because of Mr. TK'sl interest in forming an LLC for all those tradine accounts. . . . For the - for all those partnerships that were doing this type of trading that [Company X] said, we can't use [Financial Institution] anymore to do this kind of trading, we've got to move the trading account to [Financial Advisor]. And so thev movcd it and he said. if I'm eoing to do this trading for you. I'm going to have all these accounts in 1

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Who would pay E and Y fees [for PICO], the individual or the S Corp? We had an engagement letter with the individual. Thc individual was responsible for paying the fees? We were paid by the individual. We also received a fee from lCom~anv for Z1 consulting with them on the transaction. . . . We were advising them on the tax aspects of the results of investors investing in these hues of S comorations.

(Title 18, United States Code, Section 1001).

Case 1:05-cv-00231-EJD

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Filed 07/17/2007

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COUNTS FIVE THROUGH SEVEN

(Tax Evasion) The Grand Jury fwther charges:

79.

The allegations set forth in paragraphs 5 1 through 65 are repeated and

realleged as if fully set forth herein.

80.

From in or about 2000, through at least in or about 2003, in the

Southern District of New York and elsewhere, ROBERT COPLAN, MARTIN NISSENBAUM, and RICHARD SHAPIRO, the defendants, unlawfully, wilfully and knowingly did attempt to evade and defeat a substantial part of the income tax due and owing by each of them to the United States of America for calendar year 2000, by various means, including among others: a) structuring and then implementing a tax shelter transaction which they

knew had no reasonable possibility of generating a profit; b) using that tax shelter to generate tax losses they knew could not properly

be deducted on their respective tax returns; c) creating entities that served no legitimate business purpose, but were

used merely to obtain tax benefits; d) preparing and executing false and fraudulent documents intended to

deceive the IRS, including but not limited to transactional documents and a Certificate of Facts; e) preparing and causing to be prepared, signing and causing to be signed,

and filing and causing to be filed a false and fraudulent US. Individual Income Tax Return, Form 1040, which substantially understated each defendant's taxable income and tax due and owing; and

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f)

taking various steps to conceal from the IRS the true facts relating to the

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tax shelter, including providing false information in response to IDRs sent by the IRS. Approx. Amount of Fraudulent Underpayment
$ 291,913

Count
5

Defendant ROBERT COPLAN MARTIN NISSENBAUM

Return 2000Form1040 2000 Foml 1040 2000 F o m 1040

Approx. Filing Date April 15,2001

6
7

$ 340,262

April 16,2001
August 16,2001

RICHARD SHAPIRO

$201,565

(Title 26, United States Code, Section 7201)

COUNT EIGHT
(Obstruction of the IRS) The Grand Jury further charges:
8 1.

The allegations set forth in paragraphs 5 1 through 65 are repeated and

realleged as if fully set forth herein. 82.
On or about September 25,2003, in the Southern District of Ncw York and

elsewhere, MARTIN NISSENBAUM, the defendant, unlawfully, wilfully, and knowingly did comptly obstruct and impede, and did endeavor to obstruct and impede, the due administration of the Internal Revenue Code; to wit, in response to IDR #2, NISSENBAUM caused the false and

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misleading statements set forth in paragraph 65, above, to be submitted to the IRS on behalf of himself and ten other E&Y partners. (Title 26, United States Code, Section 7212).

P I I u z 4sFOREPERSON MICHAEL J. GARCIA United States AUorney