Full Tilt Poker Ponzi Scheme?

Yesterday, the news of the Department of Justice amending its complaint against the Poker Companies to add three individual defendants made national headlines. Read the official press release from the U.S. Attorney’s Office here, and the amended complaint here. Preet Bharara, the U.S. Attorney for the Southern District of New York, asserts that Full Tilt Poker was “a global Ponzi scheme.”

The new allegations add much fuel to the already massive fire that has been burning Full Tilt Poker since Black Friday. Players still haven’t received any of their frozen monies back. It has not appeared as unlikely to happen as it does now. Authorities claim that Full Tilt was $330 million short in funds owed to players in March.

I’ve written before about possible tax consequences for U.S players who don’t receive their funds back. With the Ponzi scheme allegations surfacing, additional tax consequences may arise. In light of the Madoff investment scandal, the IRS created rules for taxpayers who experienced Ponzi scheme losses.

Whether or not players with Full Tilt balances qualify for Ponzi scheme losses is not immediately clear. Russ Fox agrees. Indeed, Full Tilt may not have been engaged in a Ponzi Scheme. Remember, we’re talking about allegations. So, let’s not jump to conclusions. I’ll be sure to revisit these issues when we learn more facts.

Not So Safe

We all know why people keep a safe in their homes. We also all know that a safe doesn’t completely protect one’s valuables from damage, destruction, or theft. Criminal defense attorney Stanley Needleman not only lost valuables stored in his safe, but also will very likely lose something invaluable: His freedom.

Yesterday, Mr. Needleman pleaded guilty in federal court to income tax evasion and structuring financial transactions, and consented to disbarment. Needleman practiced law in Maryland.

Needleman implemented the following billing structure with his clients: He required a one-time, up front “engagement fee” for representation. The fee was not tailored to the amount of work involved.

The “engagement fee” is not the same as a “retainer fee.” The difference is that the funds from the latter are typically applied to invoices as services are provided. If, at the conclusion of the matter, a balance of the retainer fee remains, the client may obtain a refund. The engagement fee, at least in the case of Mr. Needleman, however, was a nonrefundable payment up front.

Clearly, Needleman was required to report as income his “engagement fee” upon receipt. The problem: He often didn’t.

According to authorities, Needleman vastly underreported his income earned from engagement fees, and took steps to conceal the income. Instead of living a lavish lifestyle with his underreported income, he stored large amounts of the cash in a safe in his basement. In addition, over several years, he made various bank deposits in amounts slightly less than $10,000 in order to avoid the bank from issuing Currency Transaction Reports. That is known as “structuring,” and is against the law.

Ultimately, he broke the law (by structuring cash transactions) in an attempt to avoid getting caught for breaking another law (income tax evasion). That’s quite the lose-lose situation for a criminal defense attorney. Actually, it’s lose-lose-lose in this case, as he can no longer practice law.

Needleman faces up to five years of imprisonment for income tax evasion, and up to ten years for structuring financial transactions. His sentencing is scheduled for December 15.

(Hat Tip: The Blog of LegalTimes)

It’s a (Dysfunctional) Family Affair

Today I tell the story of Thomas Parenteau of Hilliard, Ohio. Earlier today, he was sentenced to 22 years in prison for conspiring to commit tax fraud and money laundering, to obstruct justice, and to tamper with witnesses.

His co-conspirators? His wife, his accountant, and his mistress. All four are now serving time.

Mr. Parenteau was in the business of selling luxury homes. Of course, one can conduct such a business with clean hands. Unfortunately, Parenteau’s hands were so dirty that he used those closest to him as rags to share his filthy conduct.

Together, the four falsely inflated the purchase prices of the homes Parenteau built and sold, and gave kickbacks to the buyers after their purchases.

Parenteau, together with his accountant, prepared false income tax returns for the mistress, who received more than $850,000 in fraudulent tax refunds. To where did the refunds go? Back to Parenteau, of course. I’ll venture to guess he spent some of that money on his two children. The mother? His mistress, obviously.

A significant portion of the illicitly obtained funds were used to make premium payments towards several life insurance policies on the life of Parenteau’s father. The court ordered Parenteau to forfeit nearly $15 million, which includes the policies.

Something tells me this family won’t have quite as much fun together behind bars as they did while breaking the law. But families always stick together through both the good and the bad, right? Just ask any parenteau.

Robbie’s Lottery Robbed by DOJ

The Department of Justice continues to expend resources relating to offshore gambling. Reported by the Wall Street Journal, this time the DOJ is involved with an alleged illegal gambling operation in the Dutch Caribbean.

Yesterday, a federal judge issued a restraining order against three UBS accounts in Miami that resulted in freezing over $28 million apparently tied to Robertico Alejandro dos Santos, who Curacao authorities are investigating for tax fraud, forgery, and money laundering.

Allegedly, dos Santos has sold millions of dollars in forged lottery tickets out of his popular gambling lottery business, “Robbie’s Lottery.” If true, he has essentially been stealing from his customers’ pockets. This time, “Robbie’s Lottery” gets a taste of its own medicine, with the DOJ robbing dos Santos of his $28 million.

The federal government’s interest here seems at least in part similar to that of the recently indicted offshore online poker companies: Cracking down on money laundering in the United States. A key difference is that in this matter, the Curacao public prosecutor’s office reached out to the DOJ for assistance. The DOJ’s pursuit of the offshore online gambling sites, however, was initiated by federal authorities, as far as we know.

There’s no reason to believe the DOJ will stop pursuing individuals committing bank fraud and money laundering in the U.S. while running their operations offshore, gambling-related or not. Whether or not the underlying operation violates U.S. laws, the DOJ has a strong interest in the moving of funds related to those operations that does break the law.

Money for Nothing

As much as we attorneys don’t like to acknowledge it, let’s face it: Some of us are crooked. Perhaps none are more crooked than Thomas Frey of Edison, NJ.

Frey had attempted to collect legal fees from various individuals, including two police officers, to handle an IRS investigation. What Frey didn’t tell them, however, was that he fabricated the entire matter. Last week, a federal grand jury indicted Mr. Frey with multiple charges. He’s now facing up to 140 years in prison if convicted on all counts. The Department of Justice press release is here, and the indictment is here.

Frey’s co-conspirator communicated to the victims that IRS agents approached him at a property owned by one of the victims as part of a criminal investigation. To corroborate the story, Frey showed to the victims business cards of the IRS agents, claiming he received them during the questioning. According to the indictment, Frey had obtained these cards while representing another client in an unrelated tax matter many years prior.

Frey set up the plot, and sought to score. He told the victims (again, who were police officers) that if they each paid him $10,000, he could utilize a “special relationship” with one of the IRS agents in order to have the criminal investigation converted to a mere desk audit. Frey also represented that a family member of his is an IRS employee who would enable Frey to obtain a more favorable outcome. Under the direction of law enforcement, one of the victims provided to Frey the $10,000 in a tape recorded meeting.

Frey’s alleged conduct is unethical on so many levels. First, fabricating a story to obtain funds for legal services is obviously grounds for immediate and permanent disbarment. Second, if the story were true, he’d be conspiring with a government employee to reach a more favorable outcome for his clients.

When I read a story like Mr. Frey’s, I find myself dumbfounded. Mr. Frey dedicated at least three years of his life to obtain a legal education, and earned the right to practice law after passing the New Jersey bar exam. He’d been practicing law since 1989.

Why risk throwing away all of the hard work for roughly fifty grand? There had to be another way out of whatever mess Mr. Frey got himself involved in. Whatever valuable experience and sound judgment Mr. Frey had accumulated over the years, if any, it certainly wasn’t on display here.

To my attorney readers, please don’t try this at home. To those who seek to hire an attorney, be careful whom you choose.

Congratulations! Your Lottery Winnings Don’t Exist

Imagine a new e-mail landing in your inbox. The sender is someone who works for the “Tourism Malaysia Lottery Program,” and claims that you, the e-mail recipient, have just won a $1 million prize from the program. In order to redeem this prize, you are first required to deposit $500 to open a bank account in Malaysia in order to facilitate the transfer of funds.

I’m fairly certain that both you and I would immediately proceed to click the “Delete” button, well-knowing that we would never see a dime. In a complaint recently filed by the U.S. Department of Justice, we learn the story of two individuals who deposited not only the initial required amount but also several hundred thousand dollars in order to redeem their alleged prize. Unfortunately, our instincts were accurate.

To perpetrate the scams, the culprits had each of their victims comply with several requests made beginning in late 2007 through early 2010. The e-mails claimed that in order to retrieve their prizes, certain fees and taxes must first be paid by wire transfer to overseas banks. One victim was under the belief that his money was being used to pay the IRS.

Please take note: I cannot immediately conjure up any circumstances by which a taxpayer situated in the U.S. would satisfy any U.S. income tax obligation by wire transfer to an overseas account. Further, as far as I know, one does not satisfy an income tax liability on lottery winnings by paying the liability out-of-pocket before receiving the winnings. If anything, the lottery payer may be required to withhold a portion of the winnings for remittance to the IRS; alternatively, there may be no withholding and the taxpayer is solely responsible for paying the tax liability directly to the IRS.

As a result of these scams, one victim is now out-of-pocket $428,758, and another $868,438. You’d think that someone who makes a transfer or two of a few thousand dollars would realize something is amiss after not receiving anything. These two victims, however, kept sending more. Approximately 111 wires were sent to 56 accounts among three countries.

The complaint asks for a forfeiture of more than $1.2 million held in various accounts. Similar to poker players with frozen funds on online gambling sites, an individual can file a legal claim for an interest in the funds. Apparently, no such claims have been filed.

(Hat tip: The Blog of LegalTimes)

Latest Victims of Operation Offshore

Reuters is reporting that several overseas bankers and advisers were charged today in the Southern District of New York with assisting wealthy Americans evade millions in U.S. taxes. In 2008, Beda Singenberger, who is among the charged, allegedly told his clients that U.S. authorities were closing in on UBS, a giant Swiss bank, for assisting account holders with U.S. tax evasion, and helped them move their hidden funds elsewhere. Interest holders of “Lucky Funds Overseas,” one of the sham entities set up by Singenberger, seem to have won the reverse lottery.

This action is only a small piece to the large pie of U.S. taxpayers and their advisers who the Department of Justice and Internal Revenue Service have sought for hiding income-producing assets offshore. Don’t expect U.S. authorities to slow down anytime soon. I expect the opposite to occur in the near future, as informational reporting requirements for offshore accounts and assets are expanding.

Update: Thanks to Jack Townsend at his blog Federal Tax Crimes, here is a copy of the indictment against Beda Singenberger.

Filing A Claim For Frozen Online Poker Funds

The Poker Player’s Alliance (PPA) is an American nonprofit organization “to speak with one voice to promote the game and and protect the right to play poker in all its forms.” Among recent PPA efforts includes coverage of the Department of Justice’s seizure of three offshore online casinos back in April and the freezing of funds held in player’s accounts on the sites.

The PPA has a legal team, and recently posted a legal guide regarding players’ funds entitled “Legal Rights of Players with Unpaid Account Balances: A PPA Information Guide.” On page 5, the PPA states:

Third-party claims filed in civil forfeiture proceedings must be filed within 60 days of the Government’s first publication of notice of intent to seek forfeiture. With respect to the April 15th cases, the government’s notice was first published on May 16, 2011, and so the deadline to file claims is July 15, 2011.

I am not an expert of civil forfeiture proceedings. I cannot comment on likelihood of success, and am not recommending whether or not a poker player with frozen funds should or should not file a claim. It is clear that what’s best for one player may very well be different for another. As stated several times in the PPA guide, one should consult an attorney to consider particular facts and circumstances. I. Nelson Rose, professor of gaming law, also recommends such.

Both the PPA guide and Mr. Rose mention possible tax-related issues that may arise from filing a claim. I’ll note that the Department of Justice very likely already has access to names of poker players who frequented the seized sites. Furthermore, the IRS is already involved to some extent with the DOJ’s crackdown on offshore online gambling.

That said, a poker player who files a legal claim for seized funds may stick out to authorities. Social security numbers, home addresses, etc., would suddenly become far more easily accessible to the DOJ, IRS, and state tax agencies. In addition, according to the PPA legal guide, an individual who files such claim is subject to questioning under oath “very shortly” after the claim is filed. Answers to these questions could be held against the individual in future proceedings.

The bottom line here: Tread carefully.

Shell-Shocked in Wyoming

Cheyenne is the capital and largest city of the state of Wyoming.  Although I can’t tell you much else about the city, earlier today we learned quite a bit more courtesy of a Reuters investigation:

At a single address in this sleepy city of 60,000 people, more than 2,000 companies are registered. The building, 2710 Thomes Avenue, isn’t a shimmering skyscraper filled with A-list corporations. It’s a 1,700-square-foot brick house with a manicured lawn, a few blocks from the State Capitol.

Kelly Carr/Reuters

The address serves as the headquarters for Wyoming Corporate Services, that, according to the article, “establishes firms which can be used as ‘shell’ companies, paper entities able to hide assets.”  The owner of one company at the address may sound familiar to my gambling readers: Ira Rubin.

Ira Rubin was one of eleven individuals recently indicted in connection with the Department of Justice seizure of offshore online gambling sites.  According to the indictment, Rubin processed payments for offshore online gambling companies by disguising the payments as payments to phony internet merchants.  A New York judge denied bail for Rubin on June 8.

Today’s Reuters article exposing the implications of shell and shelf companies cannot be ignored.  No one can deny some individuals are using these paper entities in order to hide transactions for purposes of evading taxes or laundering money, among other things.  At the same time, however, these types of entities can serve legitimate purposes.  Let’s not get carried away by demanding an immediate shutdown of Wyoming Corporate Services.  It seems that the people behind WCS are intelligent and are taking complete advantage of the soft corporate governance laws in the state of Wyoming.  We just don’t know at this time whether or not WCS knows or should know of the illicit activities engaged by companies registered at the address.

To me, the immediate takeaway here is that we have just another one of many indications that it’s not all too difficult to move around money for illicit purposes.  I certainly applaud the seemingly significant increase in enforcement efforts to crack down on such behavior.  But that’s not where the problem can most likely be addressed.  It has to occur in state legislatures with a tightening of laws governing these entities.  Unfortunately, the rule of politics says we won’t see any significant changes on that front anytime soon.

IRS to Investigate Operators of Internet Gambling Businesses

I have to admit I recently fell victim, at least on this one occasion, to a Twitter-induced habit:  Reading the headline of a “breaking news” press release, and merely skimming the release itself.  Yep, I overlooked some juicy information in a “breaking news” press release from last week until earlier today.

A synopsis of the press release:

Last Monday, the U.S. Attorney’s Office for the District of Maryland unsealed two indictments charging two gambling businesses and three defendants with conducting an illegal gambling business and money laundering.  In addition, the domains of ten internet gambling sites were seized as part of a multiple U.S. government agency investigation.

I doubt anyone following the online gambling industry was surprised to learn of this news, considering the similar actions taken by the Department of Justice in the middle of April.  Earlier today, however, I found myself somewhat surprised after stumbling across this article, which mentions this portion of the press release:

“Internet gambling, along with other types of illegal e-commerce, is an area of great interest to IRS Criminal Investigation,” said IRS Special Agent in Charge Rebecca A. Sparkman. “Laundering money from illegal activity such as illegal internet gambling is a crime. Regardless of how the money changes hands – via cash, check, wire transfers or credit cards – and regardless of where the money is stored – in a United States financial institution or an offshore bank – we will trace the funds. IRS Criminal Investigation will vigorously investigate and recommend prosecution against the owners and operators of these illegal enterprises to the fullest extent possible.”

To my knowledge, this statement is the first public announcement revealing IRS involvement in this year’s series of indictments and seizures of internet gambling businesses.  It’s not that I’m surprised the IRS is involved.  It’s that I’m surprised this component to the press release hasn’t received much attention, if at all.

Some strong words delivered by the IRS Special Agent in Charge.  It remains to be seen whether this is merely a scare tactic or the so-called vigorous investigations are already underway.  A couple of points immediately come to mind suggesting the latter may be more likely: (1) Income earned pursuant to an illegal gambling operation is taxable income; and (2) The IRS has a marked history of aggressively pursuing U.S. taxpayers who earn substantial income abroad and don’t report it.

If the evidence isn’t strong enough to obtain convictions (or guilty pleas) for operating illegal gambling businesses, an alternative may be to pursue those indicted with charges of income tax evasion.  Sounds rather similar to the downfall of famous gangster Al Capone.